The Internal Revenue Service (IRS) recently released long-awaited proposed regulations regarding the requirements to qualify as a Type III supporting organization operated in connection with one or more supported organizations. The deadline for providing comments on the proposed regulations is December 23, 2009.

A Type III supporting organization that fails to meet the requirements of the proposed regulations, once they are published as final or temporary regulations, will be classified as a private foundation. Affected organizations should consider what measures should be taken now to avoid reclassification.


Organizations described in section 501(c)(3) of the Internal Revenue Code are classified as either private foundations or public charities. To be classified as a public charity, an organization must meet the requirements of section
509(a)(1), (2), (3), or (4). An organization may be classified as a "supporting organization" of another organization by providing support to one or more such other organizations described in section 509(a)(1) or (a)(2), if it meets the requirements of section 509(a)(3), including an organizational test, an operational test, a relationship test, and a disqualified person control test.

Different Types of Supporting Organizations

Generally, there are three types of supporting organizations:

  1. A supporting organization operated, supervised, or controlled by one or more supported organizations is known as a Type I supporting organization. The relationship of a Type I supporting organization with its supported organization is similar to that of a corporate parent-subsidiary.

  2. A supporting organization supervised or controlled in connection with one or more controlled supported organizations is known as a Type II supporting organization. The relationship of a Type II supporting organization with its supported organization is similar to a corporate brother-sister relationship.

  3. A supporting organization operated in connection with one or more supported organizations is commonly known as a Type III supporting organization.

Proposed Regulations Implement Legislative Changes

In the Pension Protection Act of 2006 (PPA), the IRS made several changes to the requirements for an organization to qualify as a Type III supporting organization. In 2007, the IRS released an advance notice of proposed rulemaking (ANPRM) entitled "Payout Requirements for Type III Supporting Organizations that Are not Functionally Integrated," describing proposed rules to implement the PPA changes to Type III supporting organization requirements. The ANPRM solicited comments regarding those proposed rules. The proposed regulations recently released are in response to the comments received on the ANPRM.

General Requirements

Generally, the proposed regulations provide that every Type III supporting organization:

  • Satisfy certain notification requirements. A Type III supporting organization must provide to each of its supported organizations certain information to ensure that the supporting organization is responsive to the needs or demands of the supported organization.

  • Meet a responsiveness test set forth in the regulations. All Type III supporting organizations must demonstrate the necessary relationship between its officers, directors, or trustees and those of the supported organization and show that the relationship results in those individuals of the supported organization having a significant vote in the operations of the supporting organization. Unlike the ANPRM, the proposed regulations do not contain a special rule for trusts.

  • Meet an Integral Part Test. Each Type III supporting organization must   demonstrate that it is an "integral part" of one or more supported organizations by satisfying either the requirements for "functionally integrated Type III supporting organizations" or the requirements for "non-functionally integrated Type III supporting organizations" set forth in the proposed regulations.

Functionally Integrated

Under the proposed regulations, a Type III supporting organization is "functionally integrated" if it either (1) engages in activities substantially all of which directly further the exempt purposes of the supported organization to which it is responsive by performing the functions, or carrying out the purposes, of such supported organization and which, but for the involvement of the supporting organization, would normally be engaged in by the supported organization; or (2) is the parent of each of its supported organizations.

Non-Functionally Integrated

A Type III supporting organization is non-functionally integrated if it satisfies a distribution requirement equal to five percent of the fair market value of its non-exempt use assets and an "attentiveness requirement." The five percent distribution requirement is based on the supporting organization's non‑exempt use asset values measured over the preceding tax year (based generally on monthly averages). For example, the Type III organization must distribute by the end of its taxable year 2012 for the use of its supported organization, at least five percent of the aggregate fair market value of its non-exempt-use assets based on the values measured for the 2011 taxable year (the "annual distributable amount").

The attentiveness requirement also requires distribution of at least one-third of the supporting organization's annual distributable amount, to one or more supported organizations that are "attentive" to the supporting organization. A supported organization is "attentive" if the supporting organization provides (1) at least 10 percent of the supported organization's total support; (2) support necessary to avoid the interruption of a function or activity of the supported organization; or (3) support that is a "sufficient part" of a supported organization’s total support, based on facts and circumstances, including the number of supported organizations, the length and nature of the relationship between the supporting and the supported organization, and the purpose to which the funds are put.

Prohibitions for Supporting Organizations

A supporting organization:

  • Cannot support a supported organization that is organized outside of the United States

  • Is prohibited from accepting a gift or contribution from a person who, together with certain related persons, directly or indirectly controls the governing body of a supported organization.

If you have any questions regarding the proposed regulations for Type III supporting organizations and how they are likely to affect your organization or require advice concerning any other issues relating to nonprofit organizations, please contact: 




Jeffrey R. Davine


Jean C. Hemphill





Copyright © 2009 by Ballard Spahr LLP.
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