The Internal Revenue Service (IRS) has modified Form 990, Schedule A with regard to public support status for the type of public charity organizations known as “supporting organizations.” Schedule A’s purpose is to identify an organization’s public charity status and compute its public support if required. The revised Schedule A for 2014 specifically expands the reporting for supporting organizations with two new Parts: Part IV that must be completed by all supporting organizations and Part V that must be completed by those that are so called Type III – Non-functionally integrated supporting organizations. These new parts include different sections that are specific to each type of supporting organization. The new questions in the form seek to clarify and confirm that the supporting organization is meeting the required organizational and operational tests described below.
Affiliated tax-exempt organization groups are often structured with various components of a central overall mission delegated among the organizations in the group. One specific type of organization that may be created in conjunction with an affiliated group of tax-exempt organizations is what the IRS refers to as a "supporting organization." A supporting organization is defined under Internal Revenue Code (IRC) Section 509(a)(3) as "Organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations…"
The supporting organization may be structured in various ways which the IRS identifies by type.
- Type I supporting organizations are operated, supervised, or controlled by the supported organization(s). The control is usually established by the supported organization retaining the right to elect the supporting organization's board members. This is generally a parent-subsidiary relationship between the supported and supporting organizations.
- Type II supporting organizations may be supervised or controlled in connection with a supported organization(s) through common management. This is generally a brother-sister relationship between the supported and supporting organizations.
- Type III supporting organizations may be either functionally integrated or non-functionally integrated. This Type has the loosest connection with its supported organization(s) and must satisfy additional tests to maintain its tax-exempt status.
Historically, the IRS has been most concerned with Type III supporting organizations given the relatively loose affiliation permitted between the supporting organization and the organization(s) it supports. In particular, the so-called non-functionally integrated Type III organizations have raised considerable concerns and scrutiny on the part of the IRS. Not surprisingly, the new 2014 Form 990, Schedule A requires two pages of responses for all supporting organizations (Part IV) and two additional pages of responses specifically for the non-functionally integrated Type III supporting organizations (Part V). The following provides an overview of Type III supporting organizations and differentiation between the functionally integrated and non-functionally integrated varieties.
A Type III functionally integrated supporting organization must:
- Meet the notification test. The supporting organization must provide its supported organizations with written notice describing the type and amount of all support it provided during the previous tax year, a copy of its most recent Form 990, and a copy of its governing documents (and any amendments) to the extent not previously supplied.
- Meet the responsiveness test which has both a relationship and a significant voice component. The relationship component may be satisfied by the supporting organization maintaining one or more officers, directors, or trustees of the supported organization on its board. To satisfy the significant voice component, the officers, directors, or trustees of the supported organization must have significant input in the investment policies, grant-making decisions, use of income and assets, etc., of the supporting organization.
- Meet the “but for” integral part test by engaging in activities substantially all of which directly further the exempt purpose(s) of one or more supported organizations. These activities must be ones that the supported organizations would undertake themselves if not for the presence of the supporting organization.
A Type III non-functionally integrated supporting organization must meet the notification requirement and responsiveness test noted above, but also has a different integral part test that must be met, as follows:
- Distribution requirement. The organization must distribute to or for the use of one or more of its supported organizations an amount equal to the greater of 85 percent of the organization's adjusted gross income for the prior taxable year or 3.5 percent of the excess of the aggregate fair market value of the organization's non-exempt use assets over the acquisition indebtedness of such assets (with certain adjustments).
- Attentiveness requirement. The attentiveness requirement focuses on the amount provided to supported organizations. It may be met, for example, by the supporting organization providing at least 10 percent of the supported organization's total support for the year, or by providing enough funds for a program carried on by a supported organization that could not exist without the supporting organization's funding.
All non-profit organizations that are either supporting organizations or that have supporting organizations within their affiliated group should prepare now for the additional IRS Schedule A inquiries. Specifically, in preparation for completion of the 2014 Form 990, Schedule A organizations should:
- Gather and review organizational documents and prepare to respond to questions regarding compliance with the “organizational tests.” Be prepared to provide copies of organizational documents to preparers of the Form 990.
- Be prepared to respond to questions regarding compliance with operational tests. Be prepared to provide support that operations are consistent with governance and operations identified within the application for exemption for the supporting organization.
Baker Tilly will be providing additional guidance as the 2014 filing season commences.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.