IRS & Treasury Clarify Guidance around Supporting Organizations

The IRS and the US Department of the Treasury recently introduced final regulations clarifying the definition of a controlling donor and prohibitions on giving to Type I and Type III supporting organizations, and providing guidance around certain requirements for Type III supporting organizations.

What is a Supporting Organization?

A supporting organization is a tax-exempt entity that operates similarly to a public charity. Its primary purpose is to assist one or more other non-profit organizations. To maintain its status, a supporting organization must predominantly function to benefit, execute the responsibilities of, or fulfill the goals of the non-profits it supports.

Supporting organizations are classified into three categories: Type I, Type II, and Type III. Type IIIs are further subdivided into “functionally integrated” and “non-functionally integrated,” with each subdivision subject to specific rules.

Background

From 2007 to 2016, the Treasury and the IRS introduced a series of regulations concerning Type III organizations. These regulations primarily addressed modifications stemming from the Pension Protection Act (PPA) and sought to resolve issues identified in earlier rules.

On October 16, 2023, the two agencies introduced final regulations providing clarification on who is prohibited from making gifts or contributions to Type I and Type III supporting organizations and guidance for how Type III organizations should operate.

Who can donate

The 2016 regulations state that Type I or Type III supporting organizations are prohibited from accepting gifts or contributions from individuals who control the governing body of the organizations they support. However, “control” was left undefined. Under the updated rules, an individual (or connected group) is deemed to be in control of a supported if they have more than 50% voting power or veto rights. Even if an individual does not meet that test, they may still be regarded as controlling the governing body if they are shown to directly or indirectly control the supported organization.

Updates for Type III Organizations

Integrated Systems Not Limited to Hospital Systems

The 2016 proposed guidance stated that the “supporting organization and its supported organizations must be part of an integrated system (such as a hospital system).” The updated regulations clarify that a Type III entity can be considered “functionally integrated” if it is the parent of a network of non-profits and has a significant say over them. “Hospital system” is just one example, and not intended to be exclusive to other types of institutions, such as private schools and universities, continuing care retirement communities, and residential rehabilitation facilities.

Government Entities

The updated regulations clarify how a supporting organization can meet its objectives when supporting multiple governmental entities by specifying that a “governmental unit” encompasses all its agencies, departments, and divisions. The regulations also note that when assessing if a supporting organization majorly aids the goals of its government-supported organizations, all relevant facts will be considered. An added example clarifies that a supporting organization aiding multiple governmental entities can meet the criteria if it significantly supports the mission of at least one of them.

Donation Rules

The new regulations require that Type III non-functionally integrated supporting organizations must distribute an amount equaling or exceeding its “distributable amount” to its supported organizations and permit expenses related to soliciting contributions to be counted towards this distribution requirement.

However, this is only when the funds are directly received by a supported organization under certain conditions and limits. The regulations also detail the timing for applying these limits annually and state that the supporting organization can provide evidence of these contributions with a yearly written statement as long as each solicitation’s resulting amount is separately listed.

Are You Involved with a Supporting Organization?

If you are involved with or donate to a supporting organization and have questions, we encourage you to reach out to us. Our expert accountants can help you understand the new regulations and to what extent they affect you. Contact us today.