Private foundations are subject to a number of specialized rules depending on whether they are operating or non-operating private foundations. A tax-exempt charitable organization can avoid being treated as a private foundation—and thus be treated as a public charity—if it falls within one of several categories of permitted operations. One such category consists of supporting organizations under IRS Code Sec. 509(a)(3). The IRS has issued final, temporary, and new proposed regulations regarding the requirements to qualify as a Type III supporting organization described in Code Sec. 509(a)(3).
The final and temporary regulations make revisions to various provisions in the 2009 proposed regulations, including:
- The IRS intends to issue proposed regulations that will provide a definition of control as it relates to the prohibition on receiving gifts or contributions from persons that control the governing body of a supported organization.
- The final regulations will provide transition relief for meeting the notification requirement.
- An example has been modified in the final regulations to better illustrate options for satisfying the significant voice responsiveness test.
- The final regulations reserve a provision for a special rule for supporting organizations related to governmental-supported organizations.
- The previously proposed regulations provide that a non-functionally integrated (“NFI”) Type III supporting organization would have to annually dispense a “distributable amount” equal to 5% of the fair market value of its non-exempt-use assets. The IRS has significantly changed this requirement in the temporary regulations. It requires NFI Type III supporting organizations to annually dispense a “distributable amount” equal to the greater of 85% of adjusted net income or 3.5% of the fair market value of the supporting organization’s non-exempt-use assets. (Reg. § 1.509(a)-4T(i)(5)(ii)(B))
- The final regulations make various changes to the transition rules, as reflected in Reg. § 1.509(a)-4(i)(11).
Both the final and temporary regulations were effective and applicable on December 28, 2012.
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