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Becoming “SO-Friendly”: The Advantages of Courting Supporting Organization Relationships

Planned Giving Today

Originally Published in Planned Giving Today.

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Congress has given what is probably its last, temporary reprieve for private foundations, in the form of an extension of the provision exempting gifts of publicly traded securities from the harsh “reduce-to-basis” rule. The legislation has once again focused attention on the many disadvantages of the private foundation format itself, which have been summarized in these pages. (See “How to Entice Your Entrepreneurial Donors,” by Gerry Treacy, February 1994.)

Planners throughout the nation are now looking around for a more tax-favored alternative to the private foundation, and many are recommending the supporting organization. This is a golden opportunity for the alert planned giving officer.

June 30 Deadline

The Taxpayer Relief Act of 1997 once more, and likely for the last time, temporarily rescued gifts of “qualified appreciated stock” made to private foundations from the draconian “reduce-to-basis” rule that applies to gifts of all other types of appreciated assets. [I.R.C. Section 170(e)(5)(D)] Until June 30, 1998, a gift to a private foundation of publicly traded securities not subject to Rule 144 restrictions is deductible at its full fair market value, up to 20 percent of the donor’s adjusted gross income, with a five-year carryover. After that date, the deductibility of such a gift to a private foundation will be limited to the donor’s cost basis, the amount he or she paid for the stock.

For example, assume that Donor D purchased shares of, say, Microsoft stock at $1,000, and that, on July 1, 1998, the fair market value of D’s stock is $25,000. If D contributes the stock to her private foundation on that date, her income tax deduction will be limited to $1,000, her cost basis, resulting in a “waste” of $24,000 of potential deductibility simply because D made her gift to a private foundation rather than to a supporting organization or other “public” charity. (This unpleasant result would be the same right now, incidentally, if D were to donate any other appreciated asset to her private foundation. A gift of land which D purchased years ago at a cost of $1,000 with a current fair market value of $25,000 is now deductible only up to $1,000–and that rule continues in effect after June 30, 1998.)

Permanent Lock

So how does this unfortunate development for private foundations potentially help your public charity? In brief, your charity is in a far more secure grant-receiving position if it is named as a “supported organization” in a supporting organization’s governing instrument. The supported public charity enjoys a permanent “lock” on distributions from the supporting organization.

A charitable bequest in a prospect’s will can be amended; the charitable remainder beneficiary in a CRT can be changed; a private foundation is perfectly free to switch its support regularly from one public charity to another. In contrast, a supporting organization can afford one of the few secure sources of distributions to the lucky public charities named as supported organizations.

While it is certainly true that private foundations must make grants to public charities to maintain their tax-exempt charitable status, a private foundation is not required to be strategically linked to any one particular public charity. The fact that you were able to land a sizable grant from a private foundation for your public charity this year is no guarantee that any funds will be forthcoming from the private foundation next year–or the year after. In contrast, a supporting organization must “support” the purposes and activities of the one or more supported public charities designated in advance and (usually) permanently in its organizing instrument.

Although supporting organizations have been recognized by Congress since 1969—the same year Congress articulated the private foundation rules and the CRT rules—they are still a relatively unknown form of charitable entity. Not for long! While arguably private foundations and supporting organizations began on somewhat of a par back in 1969, Congress has slowly but surely chipped away at the advantages of the private foundation. The supporting organization, heretofore a real “sleeper” in the law, is finally awakening.


In brief summary, the supporting organization affords the founding family these distinct advantages over the private foundation, among others: (1) highest, 50 percent and 30 percent deductibility rates for contributions; (2) relief from the “reduce-to-basis” rule; (3) freedom from the “excise” (i.e., penalty) taxes imposed on private foundations, including the taxes on net investment income, self-dealing, excess business holdings and jeopardy investments; and (4) opportunity to carry on charitable activities directly, in addition to more passive grant-making.

The “price” exacted by Congress and the IRS for these benefits is that the supporting organization must “support” one or more designated public charities (good for your institution!), and its board must be “independent” of family control (i.e., if the founding husband and wife serve on the board, there must be three non-family members also serving).

Three Types

The supporting organization must demonstrate its “support” of the designated public charity in one of three ways: (1) the supported charity appoints a majority of its board “Type I”); (2) the board of the supported charity is also the board of the supporting organization (“Type II”); or (3) the board is appointed by the family, and the supporting organization either: (a) pays at least 85 percent of its net income to or for the benefit of the public charity, or (b) carries on its own activities which, but for the involvement of the supporting organization, the public charity itself would likely carry on (“Type III”).

Type II supporting organizations are relatively rare. Type I supporting organizations offer great flexibility, but are sometimes unattractive to families who wish to maintain the power to appoint their own board. Type III tends to be the most attractive alternative for those who would otherwise likely have created a private foundation, and more and more public charities are making it their business to court these Type III relationships around the country. A very nice ancillary aspect of Type III supporting organizations from the planned giving officer’s perspective is that they are not generally permitted to remove or add public charities on the initial list of supported organizations. Thus, the supporting organization gift is one which truly “keeps on giving” to the designated public charity.

Win-Win Opportunity

Supporting organizations, then, provide a “win-win” opportunity for donors and public charities. How can the planned giving officer actively encourage supporting organization relationships? In several ways, including the following:

  • Alerting private foundations in your area as to the impending June 30 deadline, and as to the advantages of supporting organization status;
  • Training the ancillary professionals in your area–attorneys, CPAs, CLUs, CFPs and trust officers–as to the opportunities afforded by the supporting organization format;
  • Educating the boards of private foundations which have been good supporters as to the advantages of a tax-free “507 rollover” from private foundation status to supporting organization status (and, of course, the designation of your institution as the supported public charity);
  • Developing and publicizing a specific policy statement as to the circumstances under which your public charity will accept supported organization status;
  • Communicating the advantages of supporting organizations through mailings and seminars; and
  • Enlightening your board members as to the symbiotic advantages of supporting organization status.

Market supporting organizations as you have successfully marketed your pooled income fund or CRT program. Your good efforts will not go unrewarded.

Community Foundations:

While certainly all public charities are excellent candidates for designation by a supporting organization, community foundations can offer significant additional advantages to the founding family. One of the most felicitous features of a private foundation is that the family can select from a virtually unlimited pool of public charities to support. If a supporting organization names a community foundation as supported charity, then the family enjoys a potentially and equivalently unlimited class of ultimate charitable beneficiaries, through a donor-advised fund or similar fund within the community foundation. Several community foundations (such as the Seattle Foundation here in the Pacific Northwest) have pioneered the promotion of supporting organization relationships by their open-armed, “SO – friendly” policies.

In conclusion, consider making your own institution “SO – friendly.” Congress has set a veritable deadline on the usefulness of private foundations as recipients of gifts of stock, and you should by all means utilize this June 30 drop-dead date as your impetus to actively solicit good supporting organization relationships. If you don’t take advantage of this golden opportunity, your competition surely will.

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.

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