Non-Profit Supporting Organizations:
Mastering the Exempt Rules of IRC 509(a)(3)
Understanding Life Cycle and Tax Issues of Supporting Organizations
TUESDAY, OCTOBER 20, 2015, 1:00-2:50 pm Eastern
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Non-Profit Supporting Organizations
Oct. 20, 2015
Rebekuh Eley
Jake Cook
BDO
BDO
reley@bdo.com
jcook@bdo.com
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
Supporting Organizations and
Schedule A
Jake Cook, CPA
Tax Manager
616-802-3493
jcook@bdo.com
Rebekuh Eley, CPA, MST
Regional Director of Nonprofit Tax Services
312-239-9227
reley@bdo.com
October 20, 2015
BDO USA, LLP, a Delaware limited liability partnership, is the U.S.
member of BDO International Limited, a UK company limited by
guarantee, and forms part of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
BIOGRAPHY
Rebekuh Eley, CPA, MST
Regional Director
Nonprofit Tax Services
reley@bdo.com
Direct: +312 239 9227
Mobile:+630 546 7197
BDO USA, LLP
330 N. Wabash Ave.
Suite 3200
Chicago, IL 60611
www.bdo.com
Rebekuh serves as the Central Region Practice leader for
Nonprofit Tax Services. Rebekuh has spent her entire
career as a consultant to tax exempt organizations
specializing in hospitals and health systems, higher
education institutions, cultural institutions, health and
welfare organizations, private foundations, trade
associations, and membership organizations. Although
Rebekuh specializes in the tax issues facing exempt
organizations, she has a broad tax background
encompassing corporate, partnership and individual tax
technical knowledge and experience.
Rebekuh is a national speaker at various forums where
she speaks on topics impacting exempt organizations
including the AICPA and Illinois CPA Society. Rebekuh
also serves as a member on the Illinois CPA Society Notfor-Profit Committee, Great Lakes Area TE/GE Council,
and an associate member of the AICPA Tax Division
Exempt Organizations Technical Resource Panel.
Rebekuh is a member of BDO’s National Nonprofit &
Education Industry Task Force. She has written articles
for BDO’s nonprofit industry newsletter, the Nonprofit
Standard, and the BDO Blog.
Supporting Organizations and Schedule A
Page 7
7
BIOGRAPHY
Jake Cook, CPA
Nonprofit Tax Manager
jcook@bdo.com
Direct: +616-802-3493
Mobile: +616-443-6156
BDO USA, LLP
200 Ottawa Avenue NW
Suite 300
Grand Rapids, MI 49503
www.bdo.com
Supporting Organizations and Schedule A
Page 8
Jake is a tax manager in BDO’s Grand Rapids office,
specializing in BDO’s tax-exempt practice. His
clients are primarily nonprofit organizations
including charities, foundations, trade associations,
social welfare organizations, and hospitals and
healthcare organizations.
Jake is part of BDO’s nonprofit industry team and
responsible for engagements throughout BDO’s
Midwest and Atlantic regions. He attends multiple
nonprofit technical trainings annually and presents
at BDO national trainings on nonprofit topics. He
has five years of public accounting experience.
Jake is a graduate of Michigan State University. He
currently serves as a Trustee on the Board of the
Grand Rapids Jaycees Foundation. He is also a
member of the AICPA and MICPA.
Agenda

Types of 501(c)(3) Organizations

Supporting Organizations Overview

Types of Supporting Organizations

Special Rules for Supporting Organizations

Schedule A
Supporting Organizations and Schedule A
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Types of 501(c)(3) Organizations

Religious

Institutions
•

Medical research, hospital, school
Publicly supported
•
509(a)(1), 509(a)(2)

Supporting organizations

Private foundations
Supporting Organizations and Schedule A
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Types of 501(c)(3) Organizations
Classifications and
definitions originated in the
Tax Reform Act of 1969
“New” classifications and
consequences were created
in the Pension Protection
Act of 2006
Supporting Organizations and Schedule A
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Supporting Organizations



Organization that carries out its exempt purposes by
supporting other exempt organizations.
Not required to pass public support test
2006 Act codified 4 types of supporting organizations
• Type I
• Type II
• Type III
o Functionally integrated
o Non-functionally integrated
Supporting Organizations and Schedule A
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Supporting Organizations
Tests to Determine Type




Organizational Test
Operational Test
Control Test
Relationship test
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Supporting Organizations
Organizational test:

Organized and operated for the benefit of, to perform functions of,
or to carry out the purposes of one or more specified 509(a)(1) or
(2) organizations

Supported organizations must be specified in governing instruments
• Class or purpose (Type I or II)
• By name (exception: historic relationship) (Type III)

Type I and II may support organization outside United States;
Type III cannot
Supporting Organizations and Schedule A
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Supporting Organizations
Operational test:

Must engage solely in activities that support or benefit its
supported organization(s)
Control Test

Cannot be controlled directly or indirectly by disqualified
persons (§4946 private foundation test) other than foundation
managers
Supporting Organizations and Schedule A
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Supporting Organizations
Relationship Test:

Type I:
parent-subsidiary

Type II:
brother-sister

Type III: “operated in connection with”
•
Functionally integrated
•
Non-functionally integrated
Supporting Organizations and Schedule A
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Supporting Organizations
Type I:
“operated, supervised or controlled by;”

Supported organization(s) has the power to regularly appoint or elect a
majority of the directors or trustees of the supporting organization.

Parent-subsidiary relationship
Type II:
“supervised or controlled in connection with;”

Majority of the supported organizations directors or trustees serve as a
majority of the directors or trustees of the supporting organization

Brother-sister relationship

Type II that accept contributions from persons that control governing
body of supported organization subject to excess business holding rules
under §4943
Supporting Organizations and Schedule A
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Supporting Organizations
Type III: additional
requirements

Notification requirement

Responsiveness test

Integral part test
Supporting Organizations and Schedule A
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Supporting Organizations
Responsiveness test – Type III




Supported organization may appoint at least one officer, director, or
trustee of the supporting organization,
At least one member of the governing body of the supported
organization also serves on the governing body of the supporting
organization, or
Close and continuous working relationship between governing bodies
of both organizations, and
Relationship results in supported organization having a “significant
voice” in how the supporting organization manages and uses its
assets.
Supporting Organizations and Schedule A
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Supporting Organizations
Integral part test – Type III

Functionally Integrated
• Must satisfy one of three
alternative tests

Non-functionally integrated
• Distribution Requirement
• Attentiveness Requirement
Supporting Organizations and Schedule A
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Supporting Organizations
Functionally integrated:

Less restrictive than non-functionally integrated
organization
Non-Functionally Integrated:

Grants from private foundations are not qualifying
distributions to the private foundation and are taxable
expenditures if expenditure responsibility is not exercised

Subject to excess business holding rules under §4943

Must meet annual payout requirements
Supporting Organizations and Schedule A
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Consequences of Supporting Organization Status
Excess business holdings rules:

Non-functionally integrated Type III

Type II organizations: if accept contributions from persons (other
than public charities) that control governing body of supported
organization
§509(f)(2) prohibits Type I and Type III supporting
organizations from accepting a gift or contribution from
persons that control governing body of supported organization

Loses its status as supporting organization

Files Form 990-PF unless qualifies under §509(a)(1) or (2)
Supporting Organizations and Schedule A
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Consequences of Supporting Organization Status
Excess benefit transactions - All Types


Any grant, loan, compensation or similar payment to a
substantial contributor (or relative) is treated as an
automatic excess benefit transaction (Schedule A, Part IV,
Section A, Line 7)
Any loan to a disqualified person is treated as an automatic
excess benefit transaction
Supporting Organizations and Schedule A
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Schedule A

Parts IV and V have been added for §509(a)(3)
supporting organizations to demonstrate
compliance with the applicable regulations
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QUESTIONS?
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Conclusion

Supporting Organization rules are complex

Resource: https://www.irs.gov/Charities-&-NonProfits/Section-509(a)(3)-Supporting-Organizations

Review governing documents and operations for compliance
Supporting Organizations and Schedule A
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