Special computation period for new organizations.
A newly created organization may need several years to establish
its normal sources of support. Organizations generally are allowed a
5-year period to establish that they meet the section 509(a)(2)
support test. This is called the advance ruling period. If an
organization can reasonably be expected to meet the support test by
the end of its advance ruling period, the IRS may issue it an advance
ruling or determination letter. See Advance rulings for newly
created organizations, later. This will permit the organization
to be treated as a section 509(a)(2) organization for its advance
ruling period.
An advance ruling or determination is not a ruling that
the organization will meet the requirements of section 509(a)(2)
during the advance ruling period. An organization that receives an
advance ruling or determination letter must, at the expiration of the
advance ruling period, establish that it satisfies the section
509(a)(2) support requirements for the years covered by the advance
ruling, or the organization will be presumed to be a private
foundation under section 508(b).
Unusual grants.
An unusual grant may be excluded from the support test computation
if it:
- Was attracted by the publicly supported nature of the
organization,
- Was unusual or unexpected in amount, and
- Would, because of its size, adversely affect the status of
the organization as normally meeting the one-third support test. (The
organization must otherwise meet the test in that year without benefit
of the grant or contribution.)
Characteristics of an unusual grant.
A grant or contribution will be considered an unusual grant if the
above 3 factors apply and it has all of the following characteristics.
If these factors and characteristics apply, then even without the
benefit of an advance ruling, grantors or contributors have assurance
that they will not be considered responsible for substantial and
material changes in the organization's sources of support.
- The grant or contribution is not made by a person (or
related person) who created the organization or was a substantial
contributor to the organization before the grant or
contribution.
- The grant or contribution is not made by a person (or
related person) who is in a position of authority, such as a
foundation manager, or who otherwise has the ability to exercise
control over the organization. Similarly, the grant or contribution is
not made by a person (or related person) who, because of the grant or
contribution, obtains a position of authority or the ability to
otherwise exercise control over the organization.
- The grant or contribution is in the form of cash, readily
marketable securities, or assets that directly further the
organization's exempt purposes, such as a gift of a painting to a
museum.
- The donee organization has received either an advance or
final ruling or determination letter classifying it as a
publicly-supported organization and, except for an organization
operating under an advance ruling or determination letter, the
organization is actively engaged in a program of activities in
furtherance of its exempt purpose.
- No material restrictions or conditions have been imposed by
the grantor or contributor upon the organization in connection with
the grant or contribution.
- If the grant or contribution is intended for operating
expenses, rather than capital items, the terms and amount of the grant
or contribution are expressly limited to one year's operating
expenses.
Ruling request.
If there is any doubt that a grant or contribution may be excluded
as an unusual grant, the grantee organization may request a ruling,
submitting all of the necessary information for making a determination
to its EO area manager. The IRS has the sole discretion of issuing a
ruling, but if a favorable ruling is issued, it may be relied on by
the grantor or contributor for purposes of a charitable contributions
deduction and by the organization for purposes of the exclusion for
unusual grants. The organization should follow the procedures set out
in Revenue Procedure 2001-4 (or later update).
In addition to the characteristics listed above, the following
factors may be considered by the IRS in determining if the grant or
contribution is an unusual grant.
- Whether the contribution was a bequest or a transfer while
living. A bequest will ordinarily be given more favorable
consideration than a transfer while living.
- Whether, before the contribution, the organization carried
on an actual program of public solicitation and exempt activities and
was able to attract a significant amount of public support.
- Whether the organization may reasonably be expected to
attract a significant amount of public support after the contribution.
Continued reliance on unusual grants to fund an organization's current
operating expenses may be evidence that the organization cannot
attract future support from the general public.
- Whether the organization met the one-third support test in
the past without the benefit of any exclusions of unusual
grants.
- Whether the organization has a representative governing
body.
Example 1.
In 1995, Y, an organization described in section 501(c)(3), was
created by Marshall Pine, the holder of all the common stock in M
corporation, Lisa, Marshall's wife, and Edward Forest, Marshall's
business associate. Each of the three creators made small cash
contributions to Y to enable it to begin operations. The purpose of Y
was to sponsor and equip athletic teams composed of underprivileged
children of the community. Between 1995 and 1998, Y was able to raise
small amounts of contributions through fundraising drives and selling
admission to some of the sponsored sporting events.
For its first year of operations, it was determined that Y was
excluded from the definition of private foundation under the
provisions of section 509(a)(2). Marshall made small contributions to
Y from time to time. At all times, the operations of Y were carried
out on a small scale, usually being restricted to the sponsorship of
two to four baseball teams of underprivileged children.
In 1999, M recapitalized and created a first and second class of 6%
nonvoting preferred stock, most of which was held by Marshall and
Lisa. Marshall then contributed 49% of his common stock in M to Y.
Marshall, Lisa, and Edward continued to be active participants in the
affairs of Y from its creation through 1999. Marshall's contribution
of M's common stock was 90% of Y's total support for 1999. Although Y
could satisfy the one-third support test on the basis of the 4 tax
years before 1999, a combination of the facts and circumstances
preclude Marshall's contribution of M's common stock in 1999 from
being excluded as an unusual grant. Marshall's contribution in 1999
was a substantial and material change in Y's sources of support and on
the basis of the 5-year period (1995 to 1999), Y would not be
considered as normally meeting the one-third support test
for the tax years 1999 (the current tax year) and 2000 (the
immediately following tax year).
Example 2.
M, an organization described in section 501(c)(3), was organized to
promote the appreciation of ballet in a particular region of the
United States. Its principal activities will consist of erecting a
theater for the performance of ballet and the organization and
operation of a ballet company. The governing body of M consists of
nine prominent unrelated citizens living in the region who have either
an expertise in ballet or a strong interest in encouraging
appreciation of ballet. To provide sufficient capital for M to begin
its activities, X, a private foundation, makes a grant of $500,000 in
cash to M. Although Albert Cedar, the creator of X, is one of the nine
members of M's governing body, was one of M's original founders, and
continues to lend his prestige to M's activities and fundraising
efforts, Albert does not, directly or indirectly, exercise any control
over M. By the close of its first tax year, M also has received a
significant amount of support from a number of smaller contributions
and pledges from members of the general public. Upon the opening of
its first season of ballet performances, M expects to charge admission
to the general public. Under these circumstances, the grant by X to M
may be excluded as an unusual grant.
Advance rulings for newly created organizations.
Newly created organizations generally are allowed an advance ruling
period of 5 years.
An organization that is claiming on its Form 1023 (or other section
508(b) notice) to be described under section 509(a)(2) must have
operated for at least 1 tax year consisting of at least 8 months
before the IRS will make a final determination of its status. However,
if an organization can show that it can reasonably be expected to
qualify under section 509(a)(2), the IRS will issue an advance ruling
or determination letter on the organization's private foundation
status. Generally, an advance ruling or determination provides that an
organization will be treated as an organization described in section
509(a)(2) for an advance ruling period of 5 years.
A newly created organization may request a ruling or determination
that it will be treated as a section 509(a)(2) organization for its
first 5 tax years. This request must be filed with a consent to extend
the statute (Form 872-C) that in effect states the organization
will be subject to private foundation taxes (under section 4940) if it
fails to qualify as not a private foundation during the
5-year advance ruling period.
In determining whether an organization can meet the support tests,
the basic consideration is whether its organizational structure,
proposed programs or activities, and intended method of operation will
attract the type of broadly based support from the general public,
public charities, and governmental units that is necessary to meet the
tests. The facts that are relevant to this determination and the
weight accorded each fact may differ from case to case. A favorable
determination will not be made when the facts indicate that an
organization is likely to receive less than one-third of its support
from permitted sources or to receive more than one-third of its
support from gross investment income and unrelated business taxable
income.
All pertinent facts and circumstances are taken into account in
determining whether the organizational structure, programs or
activities, and method of operation of an organization will enable it
to meet the tests for its advance ruling period (discussed earlier).
Some pertinent factors considered are:
- Whether the organization has or will have a governing body
that is composed of persons having special knowledge in the particular
field in which the organization is operating or of community leaders,
such as elected officials, members of the clergy, and educators, or,
in the case of a membership organization, of individuals elected under
the organization's governing instrument or bylaws by a broadly based
membership,
- Whether a substantial part of the organization's initial
funding is to be provided by the general public, by public charities,
or by government grants rather than by a limited number of grantors or
contributors who are disqualified persons with respect to the
organization,
- Whether a substantial proportion of the organization's
initial funds are placed, or will remain, in an endowment and whether
the investment of those funds is unlikely to result in more than
one-third of its total support being received from gross investment
income and from unrelated business taxable income in excess of the tax
imposed on that income,
- Whether an organization that carries on fundraising
activities has developed a concrete plan for solicitation of funds on
a community or area-wide basis,
- Whether an organization that carries on community service
activities has a concrete program to carry out its work in the
community,
- Whether membership dues for individual (rather than
institutional) members of an organization that carries on education or
other exempt activities for or on behalf of members have been fixed at
rates designed to make membership available to a broad cross section
of the public rather than to restrict membership to a limited number
of persons, and
- Whether an organization that provides goods, services, or
facilities is or will be required to make its services, facilities,
performances, or products available (regardless of whether a fee is
charged) to the general public, public charities, or governmental
units rather than to a limited number of persons or
organizations.
Reliance period.
The reliance period for a ruling or determination letter begins
with the inception of the organization and ends 90 days after the
advance ruling period. The reliance period will be extended until a
final determination is made of the organization's status only if the
organization submits, within the 90-day period, the necessary
information to determine whether it meets the requirements for a
section 509(a)(2) organization.
However, this reliance period does not apply to the section 4940
excise tax on net investment income. Therefore, if it is later
determined that the organization was a private foundation from its
inception, the tax on net investment income will be due without regard
to the ruling or determination letter.
Grantors or contributors.
If a ruling or determination letter is terminated before the
expiration of the reliance period, the status of a charitable
contribution deduction of a grantor or contributor will not be
affected until notice of change of status is made public (such as by
publication in the Internal Revenue Bulletin).
However, this rule will not apply if the grantor or
contributor is responsible for, or aware of, the act or failure to act
that resulted in the organization's loss of section 509(a)(2) status,
or if a grantor or contributor acquires knowledge that the IRS had
given notice of the loss of status to the organization.
Failure to obtain advance ruling.
See the corresponding discussion under Failure to obtain
advance ruling on page 32.
Gifts, contributions, and grants distinguished from gross receipts.
In determining whether an organization normally receives more than
one-third of its support from permitted sources, include all gifts,
contributions, and grants received from permitted sources in the
numerator of the support fraction in each tax year. However, gross
receipts from admissions, sales of merchandise, performance of
services, or furnishing facilities, in an activity that is not an
unrelated trade or business, are includible in the numerator of the
support fraction in any tax year only to the extent that the amounts
received from any person or from any bureau or similar agency of a
governmental unit are not more than the greater of $5,000 or 1% of
support.
Gifts and contributions.
Any payment of money or transfer of property without adequate
consideration is considered a gift or contribution. When payment is
made or property is transferred as consideration for admissions, sales
of merchandise, performance of services, or furnishing facilities to
the donor, the status of the payment or transfer under section 170(c)
determines whether and to what extent the payment or transfer is a
gift or contribution as distinguished from gross receipts from related
activities.
The amount includible in computing support from gifts, grants, or
contributions of property or use of property is the fair market or
rental value of the property at the date of the gift or contribution.
Example.
P is a local agricultural club and is an organization described in
section 501(c)(3). It makes awards at its annual fair for outstanding
specimens of produce and livestock to encourage interest and
proficiency by young people in farming and raising livestock. Most of
these awards are cash or other property donated by local businessmen.
When the awards are made, the donors are given recognition for their
donations by being identified as the donor of the award. The
recognition given to donors is merely incidental to the making of the
award to worthy youngsters. For these reasons, the donations are
contributions. The amount includible in computing support is equal to
the cash contributed or the fair market value of other property on the
dates contributed.
Grants.
Grants often contain certain terms and conditions imposed by the
grantor. Because of the imposition of terms and conditions, the
frequent similarity of public purposes of grantor and grantee, and the
possibility of benefit to the grantor, amounts received as grants
for carrying on exempt activities are sometimes difficult
to distinguish from amounts received as gross receipts from
carrying on exempt activities.
In distinguishing the term gross receipts from the term
grants, the term gross receipts means amounts received from
an activity that is not an unrelated trade or business, if a specific
service, facility, or product is provided to serve the direct and
immediate needs of the payor rather than primarily to confer a direct
benefit on the general public. In general, payments made primarily to
enable the payor to realize or receive some economic or physical
benefit as a result of the service, facility, or product obtained will
be treated as gross receipts by the payee.
For example, a profit-making organization, primarily for its own
betterment, contracts with a nonprofit organization for a service from
that organization. Any payments received by the nonprofit organization
(whether from the profit-making organization or from another
nonprofit) for similar services are primarily for the benefit of the
payor and are therefore gross receipts, rather than grants.
Research leading to the development of tangible products for the
use or benefit of a payor generally will be treated as a service
provided to serve the direct and immediate needs of the payor, while
basic research or studies carried on in the physical or social
sciences generally will be treated as primarily to confer a direct
benefit upon the general public.
Medicare and Medicaid payments are gross receipts from the exercise
or performance of an exempt function. The individual patient, not a
governmental unit, actually controls the ultimate recipient of these
payments. Therefore, Medicare and Medicaid receipts for services
provided each patient are included as gross receipts to the extent
they are not more than the greater of $5,000 or 1% of the
organization's total support for the tax year.
Membership fees distinguished from gross receipts.
The fact that a membership organization provides services,
admissions, facilities, or merchandise to its members as part of its
overall activities will not, in itself, result in the classification
of fees received from members as gross receipts subject to the $5,000
or 1% limit rather than membership fees. However, if an organization
uses membership fees as a means of selling admissions, merchandise,
services, or the use of facilities to members of the general public
who have no common goal or interest (other than the desire to buy the
admissions, merchandise, services, or use of facilities), the fees are
not membership fees but are gross receipts.
On the other hand, to the extent the basic purpose of the payment
is to provide support for the organization rather than to buy
admissions, merchandise, services, or the use of facilities, the
payment is a membership fee.
Bureau defined.
The term any bureau or similar agency of a governmental unit
for determining amounts subject to the $5,000 or 1% limit means a
specialized operating unit of the executive, judicial, or legislative
branch of government in which business is conducted under certain
rules and regulations. Since the term bureau refers to a unit
functioning at the operating, as distinct from the policy-making,
level of government, it normally means a subdivision of a department
of government. The term would not usually include those levels of
government that are basically policy-making or administrative, such as
the office of the Secretary or Assistant Secretary of a department,
but would consist of the highest operational level under the
policy-making or administrative levels.
Amounts received from a unit functioning at the policy-making or
administrative level of government are treated as received from one
bureau or similar agency of the unit. Units of a governmental agency
above the operating level are combined and considered a separate
bureau for this purpose. Thus, an organization that has gross receipts
from both a policy-making or administrative unit and an operational
unit of a department will be treated as having gross receipts from two
bureaus. For this purpose, the Departments of Air Force, Army, and
Navy are separate departments and each has its own policy-making,
administrative, and operating units.
Example 1.
The Bureau for Africa and the Bureau for Latin America are
considered separate bureaus. Each is an operating unit under the
Administrator of the Agency for International Development, a
policy-making official. If an organization had gross receipts from
both of these bureaus, the amount of gross receipts from each would be
subject to the greater of $5,000 or the 1% limit.
Example 2.
A bureau is an operating unit under the administrative office of
the Executive Director. The subdivisions of the bureau are Geographic
Areas and Project Development Staff. If an organization had gross
receipts from these subdivisions, the total gross receipts from these
subdivisions would be considered gross receipts from the same bureau
and would be subject to the greater of $5,000 or the 1% limit.
Grants from public charities.
For purposes of the one-third support test, grants received from a
section 509(a)(1) organization (public charity) are generally
includible in full in computing the numerator of the support fraction
for that tax year.
However, if the amount received is considered an indirect
contribution from one of the public charity's donors, it will retain
its character as a contribution from the donor, and if, for example,
the donor is a substantial contributor to the ultimate recipient, the
amount is excluded from the numerator of the support fraction. If a
public charity makes both an indirect contribution from its donor and
an additional grant to the ultimate recipient, the indirect
contribution is treated as made first.
An indirect contribution is one that is expressly or impliedly
earmarked by the donor as being for, or for the benefit of, a
particular recipient rather than for a particular purpose.
Method of accounting.
An organization's support is determined solely on the cash receipts
and disbursements method of accounting. For example, if a grantor
makes a grant to an organization payable over a term of years, the
grant will be includible in the support fraction of the grantee
organization only when and to the extent amounts payable under the
grant are received by the grantee.
Gross receipts from a related activity.
When the charitable purpose of an organization described in section
501(c)(3) is accomplished through furnishing facilities for a rental
fee or loans to a particular class of persons, such as aged, sick, or
needy persons, the support received from those persons will be
considered gross receipts from a related exempt activity rather than
gross investment income or unrelated business taxable income.
However, if the organization also furnishes facilities or loans to
persons who are not members of a particular class and furnishing the
facilities or funds does not contribute importantly to accomplishing
the organization's exempt purposes, the support received from
furnishing the facilities or funds will be considered rents or
interest and will be treated as gross investment income or unrelated
business taxable income.
Example.
X, an organization described in section 501(c)(3), is organized and
operated to provide living facilities for needy widows of deceased
servicemen. X charges the widows a small rental fee for the use of the
facilities. Since X is accomplishing its exempt purpose through the
rental of the facilities, the support received from the widows is
considered gross receipts from a related exempt activity. However, if
X rents part of its facilities to persons having no relationship to
X's exempt purpose, the support received from these rentals will be
considered gross investment income or unrelated business taxable
income.
Section 509(a)(3) Organizations
Section 509(a)(3) excludes from the definition of private
foundation those organizations that meet all of the three following
requirements.
- The organization must be organized and at all times
thereafter operated exclusively for the benefit of, to perform the
functions of, or to carry out the purposes of one or more specified
organizations (which can be either domestic or foreign) as described
in section 509(a)(1) or 509(a)(2). These section 509(a)(1) and
509(a)(2) organizations are commonly called publicly-supported
organizations.
- The organization must be operated, supervised, or controlled
by or in connection with one or more of the organizations described in
section 509(a)(1) or 509(a)(2).
- The organization must not be controlled directly or
indirectly by disqualified persons (defined later) other than
foundation managers and other than one or more organizations described
in section 509(a)(1) or 509(a)(2).
Section 509(a)(3) differs from the other provisions of section 509
that describe a publicly-supported organization. Instead of describing
an organization that conducts a particular kind of activity or that
receives financial support from the general public, section 509(a)(3)
describes organizations that have established certain relationships in
support of section 509(a)(1) or 509(a)(2) organizations. Thus, an
organization may qualify as other than a private foundation even
though it may be funded by a single donor, family, or corporation.
This kind of funding ordinarily would indicate private foundation
status, but a section 509(a)(3) organization has limited purposes and
activities and gives up a significant degree of independence.
The requirement in (2) above provides that a supporting (section
509(a)(3)) organization have one of three types of relationships with
one or more publicly- supported (section 509(a)(1) or 509(a)(2))
organizations. It must be:
- Operated, supervised, or controlled by a publicly-supported
organization,
- Supervised or controlled in connection with a
publicly-supported organization, or
- Operated in connection with one or more publicly-supported
organizations.
More than one type of relationship may exist between a
supporting organization and a publicly-supported organization. Any
relationship, however, must insure that the supporting organization
will be responsive to the needs or demands of, and will be an integral
part of or maintain a significant involvement in, the operations of
one or more publicly-supported organizations.
The first two relationships, operated, supervised, or
controlled by and supervised or controlled in connection
with, are based on an existence of majority control of the
governing body of the supporting organization by the
publicly-supported organization. They have the same rules for meeting
the tests under requirement (1) and are discussed as Category one
in the following discussion. The operated in connection
with relationship requires that the supporting organization be
responsive to and have operational relationships with
publicly-supported organizations. This third relationship has
different rules for meeting the requirement (1) tests and is discussed
separately as Category two, later.
Category one.
This category includes organizations either operated,
supervised, or controlled by or supervised or controlled in
connection with organizations described in section 509(a)(1) or
509(a)(2).
These kinds of organizations have a governing body that either
includes a majority of members elected or appointed by one or more
publicly-supported organizations or that consists of the same persons
that control or manage the publicly-supported organizations. If an
organization is to qualify under this category, it also must meet an
organizational test, an operational test, and not be controlled by
disqualified persons. These requirements are covered later in this
discussion.
Operated, supervised, or controlled by.
Each of these terms, as used for supporting organizations,
presupposes a substantial degree of direction over the policies,
programs, and activities of a supporting organization by one or more
publicly-supported organizations. The relationship required under any
one of these terms is comparable to that of a parent and subsidiary,
in which the subsidiary is under the direction of and is accountable
or responsible to the parent organization. This relationship is
established when a majority of the officers, directors, or trustees of
the supporting organization are appointed or elected by the governing
body, members of the governing body, officers acting in their official
capacity, or the membership of one or more publicly-supported
organizations.
A supporting organization may be operated, supervised, or
controlled by one or more publicly-supported organizations even though
its governing body is not made up of representatives of the specified
publicly-supported organizations for whose benefit it is operated.
This occurs only if it can be demonstrated that the purposes of the
publicly-supported organizations are carried out by benefiting the
specified publicly-supported organizations (discussed, later, under
Specified organizations).
Supervised or controlled in connection with.
The control or management of the supporting organization must be
vested in the same persons that control or manage the
publicly-supported organization. In order for an organization to be
supervised or controlled in connection with a publicly-supported
organization, common supervision or control by the persons supervising
or controlling both organizations must exist to insure that the
supporting organization will be responsive to the needs and
requirements of the publicly-supported organization.
An organization will not be considered supervised or controlled in
connection with one or more publicly-supported organizations if it
merely makes payments (mandatory or discretionary) to the
publicly-supported organizations. This is true even if the obligation
to make payments is legally enforceable and the organization's
governing instrument contains provisions requiring the distribution.
These arrangements do not provide a sufficient connection between the
payor organization and the needs and requirements of the
publicly-supported organizations to constitute supervision or control
in connection with the organizations.
Organizational and operational tests.
To qualify as a section 509(a)(3) organization (supporting
organization), the organization must be both organized and
operated exclusively for the purposes set out in
requirement (1) at the beginning of this section. If an organization
fails to meet either the organizational or the operational test, it
cannot qualify as a supporting organization.
In the case of supporting organizations created before 1970, the
organizational and operational tests apply as of January 1, 1970.
Therefore, even though the original articles of organization did not
limit its purposes to those in requirement (1), and even though it
operated before 1970 for some purpose other than those in requirement
(1), an organization will satisfy the organizational and operational
tests if, on January 1, 1970, and at all times thereafter, it is so
constituted as to comply with these tests.
Organizational test.
An organization is organized exclusively for one or more of the
purposes specified in requirement (1) only if its articles of
organization:
- Limit the purposes of the organization to one or more of
those purposes,
- Do not expressly empower the organization to engage in
activities that are not in furtherance of those purposes,
- Specify (as explained, later, under
Specified organizations) the publicly-supported
organizations on whose behalf the organization is operated, and
- Do not expressly empower the organization to operate to
support or benefit any organization other than the ones specified in
item (3).
In meeting the organizational test, the organization's purposes as
stated in its articles may be as broad as, or more specific than, the
purposes set forth in requirement (1) at the beginning of the
discussion of Section 509(a)(3) Organizations. Therefore,
an organization that by the terms of its articles is formed for
the benefit of one or more specified publicly-supported
organizations will, if it otherwise meets the other requirements, be
considered to have met the organizational test.
For example, articles stating that an organization is formed to
perform the publishing functions of a specified university are enough
to comply with the organizational test. An organization operated,
supervised, or controlled by, or supervised or controlled in
connection with, one or more publicly-supported organizations to carry
out the purposes of those organizations, will be considered to have
met these requirements if the purposes set forth in its articles are
similar to but no broader than the purposes set forth in the articles
of its controlling organizations. If, however, the organization by
which it is operated, supervised, or controlled is a
publicly-supported section 501(c)(4), 501(c)(5), or 501(c)(6)
organization, the supporting organization will be considered to have
met these requirements if its articles require it to carry on
charitable, etc., activities within the meaning of section 170(c)(2).
Limits.
An organization is not organized exclusively for the purposes
specified in requirement (1) if its articles expressly permit it to
operate, to support, or to benefit any organization other than the
specified publicly-supported organizations. It will not meet the
organizational test even though the actual operations of the
organization have been exclusively for the benefit of the specified
publicly-supported organizations.
Specified organizations.
In order to meet requirement (1), an organization must be organized
and operated exclusively to support or benefit one or more specified
publicly-supported organizations. The manner in which the
publicly-supported organizations must be specified in the articles
will depend on whether the supporting organization is operated,
supervised, or controlled by or supervised or controlled in
connection with the organizations or whether it is operated
in connection with the organizations.
Generally, the articles of the supporting organization must
designate each of the specified organizations by name, unless:
- The supporting organization is operated, supervised, or
controlled by or supervised or controlled in connection
with one or more publicly-supported organizations and
the articles of organization of the supporting organization
require that it be operated to support or benefit one or more
beneficiary organizations that are designated by class or purpose and
include:
- The publicly-supported organizations referred to above
(without designating the organizations by name), or
- Publicly-supported organizations that are closely related in
purpose or function to those publicly-supported organizations,
or
- A historic and continuing relationship exists between the
supporting organization and the publicly-supported organizations, and
because of this relationship, a substantial identity of interests has
developed between the organizations.
If a supporting organization is operated, supervised, or controlled
by, or is supervised or controlled in connection with, one or more
publicly-supported organizations, it will not fail the test of being
organized for the benefit of specified organizations solely because
its articles:
- Permit the substitution of one publicly-supported
organization within a designated class for another publicly-supported
organization either in the same or a different class designated in the
articles,
- Permit the supporting organization to operate for the
benefit of new or additional publicly-supported organizations of the
same or a different class designated in the articles, or
- Permit the supporting organization to vary the amount of its
support among different publicly-supported organizations within the
class or classes of organizations designated by the articles.
See also the rules considered under the Organizational
test, in the later discussion for organizations in Category
two.
Operational test - permissible beneficiaries.
A supporting organization will be regarded as operated exclusively
to support one or more specified publicly-supported organizations only
if it engages solely in activities that support or benefit the
specified organizations. These activities may include making payments
to or for the use of, or providing services or facilities for,
individual members of the charitable class benefited by the specified
publicly-supported organization.
For example, a supporting organization may make a payment
indirectly through another unrelated organization to a member of a
charitable class benefited by a specified publicly-supported
organization, but only if the payment is a grant to an individual
rather than a grant to an organization. Similarly, an organization
will be regarded as operated exclusively to support or benefit one or
more specified publicly-supported organizations if it supports or
benefits a section 501(c)(3) organization, other than a private
foundation, that is operated, supervised, or controlled directly by or
in connection with a publicly-supported organization, or an
organization that is a publicly-owned college or university. However,
an organization will not be regarded as one that is operated
exclusively to support or benefit a publicly-supported organization if
any part of its activities is in furtherance of a purpose other than
supporting or benefiting one or more specified publicly-supported
organizations.
Operational test - permissible activities.
A supporting organization does not have to pay its income to the
publicly-supported organizations to meet the operational test. It may
satisfy the test by using its income to carry on an independent
activity or program that supports or benefits the specified
publicly-supported organizations. All such support, however, must be
limited to permissible beneficiaries described earlier. The supporting
organization also may engage in fundraising activities, such as
solicitations, fundraising dinners, and unrelated trade or business,
to raise funds for the publicly-supported organizations or for the
permissible beneficiaries.
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