Northwest Planned Giving Roundtable Annual Conference

Sunrise View of Portland, Oregon from Pittock Mansion.

The 2016 Northwest Planned Giving Roundtable Annual Conference in Portland, Oregon on September 16 features several notable speakers including NEO Of Counsel Brigit Kavanagh, who will be co-presenting a session on Why Donor Advised Funds and Supporting Organizations are a Gift Planner’s Friend with Wendy Chou, senior philanthropic advisor with The Oregon Community Foundation.

Donor advised funds and supporting organizations are increasingly familiar features in philanthropic planning and represent an opportunity for gift planners to think creatively about ways these vehicles can be mutually beneficial to donors and charities alike. Too often, gift planners view these giving vehicles as competitors to the would-be recipient of a charitable gift. This does not have to be and is not usually the case. This session will give context to these two giving vehicles and familiarize gift planners with them, including why they may be compelling gift options for donors. Using a series of case studies, the presenters will demonstrate how donors are using donor advised funds and supporting organizations to achieve their philanthropic objectives, dispel some myths about these giving vehicles, and discuss ways that how gift planners can work with donors to secure gifts from donor advised funds and supporting organizations.

Development and governance consultant Alan Cantor, a frequent contributor to The Chronicle of Philanthropy, is delivering the opening keynote: Building Assets or Deferring Impact? How Our Infatuation with Charitable Endowments is Hurting the Very People and Causes We’re Trying to Help. Read Cantor’s article on The False Allure of Charitable Endowments here. Cantor’s strong opinions, including on donor-advised funds, should make for provocative discussion at the Conference!


2009 Western Conference on Tax-Exempt Organizations – Day One

I attended the 2009 WCTEO in Los Angeles last Thursday and
Friday. It’s always a great conference for professionals in the nonprofit and tax-exempt sector:   impressive and knowledgeable speakers, interesting topics, and a chance to meet
with peers and people you greatly admire.   My only and very minor criticism is that the scope of some of the programs is geared more toward people with little familiarity with the topics than those who are hoping to drill deeper.   As a result, for regular attendees of these EO (exempt organizations) conferences, a couple of the programs felt a little repetitive.

As is customary with EO conferences, the opening programs were presented by the regulators.  It was intriguing to hear Sara Hall Ingram, Commissioner of the Tax Exempt and Government Entities Division of the IRS, discuss her passion for governance.  Despite the vocal objection of many attorneys in field, it looks like the IRS intends to continue to lay down and enforce rules on governance, an area governed by state laws.  IRS reps also discussed the increase in user fees for exemption applications next year and the Cyber Assistant release, which will "guide" the preparation of exemption applications.  

Belinda Johns, Senior Assistant Attorney General of California, provided an update of the AG's charitable trusts section, including cuts affecting the division.  The AG's focus continues to be on diversion of assets, board failure, fundraising abuses, and governance.  One recent action that illustrates this focus is the complaint filed by the AG against L.B. Research & Education Foundation.  Johns also described the AG's new registry search, which indicates when a charity is suspended for being delinquent in its filings with the AG.  Presumably, when a charity is suspended, it is no longer able to engage in charitable solicitations in the state.  A failure to register initiative will be developed when the budget allows.

Philip Hackney of the IRS and EO attorney David Wheeler Newman discussed supporting organizations and donor-advised funds.  The focus of this program was on the proposed regulations regarding Type III supporting organizations released on September 24.  The comment period ends December 23.  Great session, highlighted by Newman's critical questions about the proposed regulations.  I would have liked to have heard more about donor-advised funds, but this may be a focus next year if proposed regulations come out by such time.

Connie Collingsworth, general counsel for the Bill and Melinda Gates Foundation, spoke during lunch about her enviable position and some of the strategies of the Gates Foundation.  One fascinating project funded by the Foundation:  the development of repellents that inhibit the olfactory senses of mosquitoes to detect humans.

Next was a program on mergers, dissolution, and other forms of restructuring presented by EO attorneys Lisa Runquist and LaVerne Woods. They provide four hypotheticals and
discussed how each might be approached.  Runquist described how a disappearing corporation in a merger might set up a "shell corporation" with minimal activity as part of a contingency plan if the merger doesn't work out.  Woods noted that in a dissolution, a private foundation need not always choose to terminate private foundation status.

Douglas Mancino and Nancy Shelmon discussed legal, accounting and financial issues triggered by the economic downturn.  Mancino cautioned against relying on the diversity provided by fund of funds alternative investments.  The speakers both discussed broken pledges, and the possible duty of boards to seek enforcement.  Reynolds Cafferata's article – Should Pledges Be Enforceable? – is a recommended resource. 

The final program on Thursday, Civil and Criminal Penalties Affecting Exempt Organization, was presented by panelists Michael Blumenfeld and Mark Weiner, both from the IRS, and Charles Rettig.  Failure to file a return and willful failure to collect and pay over employment taxes received particular attention.  The opinion in the American Friends of Yeshivat Ohr Yerushalayim, Inc. case earlier this year was included in the handouts (read also Charity Governance's description of the case here).

Read my post on Day Two of the WCTEO here.

Suspension Lifted on Certain Type III Supporting Organization Exemption Applications

The issuance of determination letters to organizations seeking "functionally integrated Type III supporting organization" status has been lifted as of September 24, 2007.  A Type III supporting organization may receive a determination letter from the IRS if it agrees to meet the criteria set forth in the Advance Notice of Proposed Rulemaking (ANPRM), 72 Fed.Reg. 42335 (Aug. 2, 2007).  After the initial determination, the organization must meet the final regulations that define functionally integrated supporting organizations when they are promulgated.

Read the Memorandum for Manager, EO Determinations issued by Robert Choi, Director EO Rulings and Agreements, here.

Read the ANPRM here.

CoF Advanced Legal Seminar – Supporting Organizations

Council on Foundations Vice President and General Counsel Janne Gallagher provided an update on supporting organizations after the Pension Protection Act of 2006 (the "PPA").

As a result of the PPA, private foundations and sponsoring organizations of donor-advised funds must determine: (1) whether a charity to which they are making a grant is a "supporting organization" described by Section 509(a)(3) of the Internal Revenue Code; and (2) if it is a supporting organization, whether it is a Type I, Type II, Type III that is functionally integrated, or Type III that is not functionally integrated.  Grantmakers may determine whether a charity is a supporting organization either by:  (1) examining the charity’s IRS determination letter, or (2) by reviewing the IRS Business Master File ("BMF").  Notice 2006-109.  It is permissible to use a third party (e.g., Guidestar) to access information from the BMF if the third party information meets certain requirements.  These determinations are necessary for grantmakers to comply with the following requirements under the PPA: 

Private foundations must exercise expenditure responsibility for grants to: (1) a Type III supporting organization that is not functionally integrated; and (2) any type of supporting organization for which a disqualified person with respect to the private foundation (e.g., director, officer) controls the supporting organization or its supported organization. Moreover, such grants are not counted toward the minimum distribution requirement of a private nonoperating foundation.

Sponsoring organizations of donor-advised funds must exercise expenditure responsibility for grants to: (1) a Type III supporting organization that is not functionally integrated; and (2) any type of supporting organization for which a donor advisor (including related parties) of a donor-advised fund controls an organization that the supporting organization supports.


Determination of Supporting Organization Status, Council on Foundations (4/10/07)

Pension Protection Act of 2006 Revises EO Tax Rules, IRS

The Dixie and Anne Leavitt Foundation – A Type III Supporting Organization

Health and Human Services Secretary Mike Leavitt and his relatives claimed millions of dollars in tax deductions through a type of charitable foundation they created that until recently paid out very little in actual charity, tax records show.

Instead, much of the foundation’s money has been invested or lent to the family’s business interests and real estate holdings, or contributed to the Leavitt family genealogical society.

– The Washington Post, July 21, 2006

The charitable foundation referenced in The Washington Post article quoted above is The Dixie and Anne Leavitt Foundation (the "Leavitt Foundation"), which was formed in 2000 as a Type III supporting organization.  This category of public charities has received notoriety over recent years because of the use of Type III supporting organizations in several high profile tax scams, but they remain a valuable vehicle for charitable giving, particularly as an alternative to a private foundation or donor-advised fund.

You can download my case study on the Leavitt Foundation:

Download type_iii_supporting_organizations_leavitt_foundation.doc .

The Scope of 501(c)(3) Supporting Organizations – Urban Institute

The nonpartisan Urban Institute prepared a research report on "The Scope and Activities of 501(c)(3) Supporting Organizations" dated May 31, 2005.  The following are excerpts from the report:


Supporting organizations provide a broad array of services, including grants and other financial benefits, to the organizations they support.  This study found that nearly 92 percent of the large supporting organizations with no apparent grants in our sample did, in fact, provide significant financial services and benefits to their supported organizations.  Complex business and legal reasons similar to those found in the for-profit world appear to lie behind the activities of most of these organizations.


  • [N]early 11 percent of all 501(c)(3) public charities – more than 30,000 in all – identified themselves as either supporting organizations on either their IRS Form 1023 … or on their most recent annual IRS Form 990s.  These organizations account only 7.5 percent of public charity revenues but a significantly larger percentage of public charities’ total assets (16.8%) and net assets (17.6%).
  • Over 60 percent of supporting organizations are relatively small with less than $1,000,000 in assets.  They generate only 6.5 percent of total revenues and control less than two percent of the total and net assets of supporting organizations.  …  At the other end of the spectrum, organizations with more than $100 million in total assets – the two largest categories – account for only 1.4 percent of the organizations but receive almost 46 percent of revenues and control 62.6 percent of the total assets and 57.6 percent of the net assets.


  • There is a misconception that supporting organizations are solely grantmaking organizations that raise contributions from the general public or other sources and then make grants to their designated supported organizations.  An examination of the IRS Forms 990 for the largest supporting organizations … shows that 25 percent reported no grants on their Forms 990 – or at least not in the locations that most people would expect.  This statistic has been compared to private foundation payout rates to suggest that the supporting organizations are failing to provide justifiable levels of support to their supported organizations.
  • There is some concern that supporting organizations are established at the behest of donors primarily to sidestep private foundation payout requirements.  However, there are also more benign structural and operational explanations.  Supporting organizations can be used to help shield the assets of the supported organization from liability.  Sometimes a nonprofit hospital may establish a separate fundraising support organization that conducts capital campaigns or manages endowments.  This permits major donors to exercise leadership at a board level in determining investment policies and fundraising strategies while keeping the leadership of the operating hospital separate.  This arrangement seems like a reasonable approach to taking advantage of the strengths of major donors while minimizing their lack of expertise in, say, hospital management.


  • Leading the list of specific operating activities is the pooling and managing of investments and endowments for supported organizations.  Seventy-two percent of the supporting organizations provided this service to their supported organizations.  From a management perspective, there are likely to be efficiencies in pooling investment assets and managing them centrally when the assets from more than one supported organization are pooled together.
  • Another major activity is real estate.  Nearly 42 percent of the organizations held real estate for one or more supported organizations.  More than one-quarter (28%) provided rental property management or facilities management services for their supported organizations.  Thirty percent provided in-kind support by giving their supported organizations exclusive use of property or facilities at little or no charge.


  • Comparing [supporting] organizations to private foundations leads us to assume that the best supporting organizations are the ones that have the highest payouts.  However, if the "endowment/investment manager" model is used as a frame of reference, then the best supporting organization may be the one that keeps its expenses and distributions to a minimum.  Instead success is measured by the extent to which its net assets can be increased to the level where it provides a reasonable cushion against a downturn in the economy or a platform for expansion.

Click here for the full report.

Issue: Type III Supporting Organizations


"Some promotors have encouraged individuals to establish and operate supporting organizations described in section 509(a)(3) [Type III SOs] for their own benefit.  there are a variety of methods of abuse, but a common theme is a "charitable" donation of an amount to the supporting organization, and a return of the donated amounts to the donor, often in the form of a loan.  To disguise the abuse, the transaction may be routed through one or more intermediary organizations controlled by the promoter."  – Excerpted from "Section 509(a)(3) Supporting Organizations" on the IRS website.

Senate Finance Committee

"Eliminate Type III supporting organizations.  This has been an area of significant abuse.  Donor Advised Funds can effectively substitute to serve legitimate purposes of such organizations."  – Excerpted from Staff Discussion Draft released by the Senate Finance Committee (p.2).

Recommendations to Congress from the Panel on the Nonprofit Sector:

"Type III supporting organizations add value to the charitable sector that cannot and should not be replaced by other types of organizations.  To curb abuse in these organizations, Congress should establish minimum distribution requirements, prohibit payments to or for the benefit of donors or any related party, and institute rules to increase the voice of the supported organizations in the governance of the Type III organization.  A Type III supporting organization should be prohibited from supporting more than five qualified entities or from supporting any organization that is controlled by the donor or a related party.  It should be required to provide certain document to, and confirm the agreement of, its supported organizations at the time it files for recognition as a 501(c)(3) organization and when it files its annual Form 990 returns.  Every supporting organization should be required to indicate on its Form 990 whether it is operating as a Type I, II, or III supporting organization."  – Excerpted from Strengthening Transparency Governance Accountability of Charitable Organizations – a final report to Congress and the Nonprofit Sector, June 2005 (see also pages 45-48).

Recommendations from Council on Foundations:

  • Do not abolish Type III supporting organizations ("SOs")
  • Require new Type III SOs to obtain a statement from the supported organization ("SD") attesting that the SD has consented to be named as such and describing the support each named organization will receive
  • Require Type III SOs to obtain a statement from the SD attesting to the level of support each year and include that statement with the SO’s Form 990
  • Require the IRS to issue a revenue procedure that sets forth guidance on how Type III SOs can substantiate their relationship with the SD or, in the alternative, that an annual accounting of support or the reasons for no support be provided to the SD and to the IRS as part of the Form 990
  • Require the IRS to issue a revenue procedure delineating the process by which a SD may notify the IRS of its withdrawal of consent to be named as a SD
  • Bar loans from a Type III SO to the founder or any other "disqualified person"

          – See "Key Recommendations from Council on Foundations Comments on Donor-Advised Funds and Supporting Organizations"

Public Charities: Supporting Organizations

"Supporting organizations are public charities that carry out their exempt purpose by supporting one or more other exempt organizations, usually public charities.  The category can cover many types of entities including university endowment funds and organizations that provide essential services for hospital systems.  The classification is important because it is one means by which a charity can avoid classification as a private foundation, a status that is subject to a much more restrictive regulatory regime.  The key feature of a supporting organization is a strong relationship with an organization it supports.  The strong relationship enables the supported organization to oversee the operations of the supporting organization.  Therefore, the supporting organization is classified as a public charity, even though it may be funded by a small number of person[s] in a manner that is similar to a private foundation."  – IRS website, "Section 509(a)(3) Supporting Organizations"

Internal Revenue Code Section 509(a)(3) provides an exception to classification of a Section 501(c)(3) organization as a private foundation to an organization which –

(A) is organized, and at all time therefore is operated, exclusively for the benefit of, or to carry out the purposes of one or more specified organizations described in Section 509(a)(1) or (a)(2) (Organizational and Operational Tests);

(B) is operated, supervised, or controlled by or in connection with one or more organizations described in Section 509(a)(1) or (a)(2) (Nature of Relationship Test); and

(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in Section 4946) other than foundation managers and other than one or more organizations described in Section 509(a)(1) or (a)(2) – (Lack of Outside Control Test).

Note that for purposes of Section 509(a)(3), an organization described in Section 509(a)(2) shall be deemed to include an organization described in Section 501(c)(4) (social welfare organizations), (c)(5) (labor, agricultural or horticultural organizations), or (c)(6) (business leagues, chambers of commerce) which would be described in Section 509(a)(2) if it were an organization described in Section 501(c)(3).  In other words, the "supported organization" may be a Section 501(c)(4), (c)(5) or (c)(6) organization if it otherwise meets the public support test and restrictions imposed by Section 509(a)(2).  See Treas. Reg. 1.509(a)-4(k).

Collectively, the excepted organizations under Section 509(a)(3) are referred to as "supporting organizations" or "SOs."  The IRS has carved out the language of the statute to come up with three distinct types of supporting organizations:

Type I SOs are "operated, supervised, or controlled by" the supported organization ("SDs").  Sufficient control may exist if a majority of the SO’s board is appointed by the SD.  The relationship is somewhat akin to a parent-subsidiary relationship.

Type II SOs are "supervised or controlled in connection with" the SD.  Generally, in a type II relationship, the SO and the SD are under common control.  The relationship is somewhat akin to sister corporations.

Type III SOs are "operated in connection with" the SD.  Since Type III relationships are less formal than a Type I or Type II relationship, Type III organizations must meet a responsiveness test and an integral part test.  Section 1.509(a)-4(i)(2) and (3) of the Income Tax Regulations.  These tests are designed to ensure that the SO is responsive to needs of a public charity and that the public charity oversees the operations of the SO.  Finally, the SO must not be controlled directly or indirectly by disqualified persons, who generally are substantial contributors and their family members.

Organizational Test.  Pursuant to Treas. Reg. 1.509(a)-4(c) and (d), the SO’s articles must:
(a) Limit purposes to Section 509(a)(3)(A) purposes;
(b) Not expressly empower the SO to engage in activities not in furtherance of (a);
(c) State the specified SDs on whose behalf such SO is to be operated*; and
(d) Not expressly empower the SO to support or benefit any SD other than those referred to in (c).

     * Note, however, that the Type I or Type II SO need not designate the SD by name so long as it designates the SD "by class or purpose."  See Treas. Reg. 1.509(a)-4(d)(2)(i)(b).  With respect to a Type III SO, the SO need not designate the SD by name only if there is a "historic and continuing relationship between the SO and SD, which may not be possible if the SO is a new entity.

Operational Test.  Treas. Reg. 1.509(a)-4(e) provides that an SO will be regarded as "operated exclusively" to support one or more SDs only if it engages solely in activities which support or benefit the specified SDs.  In its support of the SD, the SO may make grants to the SD, make expenditures directly for the benefit of the individuals and causes served by the SD, or provide services or facilities to the beneficiaries served by the SD.

Nature of Relationship Test.  Treas. Reg. 1.509(a)-4(g) provides that each of the items "operated by," "supervised by," and "controlled by," as used in IRC Sec. 509(a)(3)(B), presupposes a substantial degree of direction over the policies, programs and activities of a SO by one or more SD, comparable to the relationship between a parent and its subsidiary, where the subsidiary is under the direction of, and accountable or responsible to, the parent.  This relationship is established by the fact that a majority of the officers, directors or trustees of the SO 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 SDs.

     Type I:  Treas. Reg. 1.509(a)-4(g)(ii) provides that an SO may be "operated, supervised, or controlled by" an SD even though its governing board is not comprised of representatives of the specified SDs for whose benefit the SO is operated.  However, it must be demonstrated that the purposes of the SO are carried out by benefiting the SD.

     Type II:  Treas. Reg. 1.509(a)-4(h) provides that an SO will be considered to be supervised or controlled in connection with an SD if there only if there is common supervision or control by the persons supervising or controlling both the SO and the SD to insure that the SO will be responsive to the needs and requirements of the SD.  In order to meet this requirement, the control or management of the SO must be vested in the same persons that control or manage the SD.  The requirement is not met if the SD merely makes payments (mandatory or discretionary) to the SO.

     Type III:  Treas. Reg. 1.509(a)-4(i) provides that an SO will be considered to be "operated in connection with" an SD only if it meets the Responsiveness Test and the Integral Part Test described below.

Responsiveness Test.  Treas. Reg. 1.509(a)-4(i)(2) provides that a SO will be considered to meet the Responsiveness Test if it is responsive to the needs or demands of the SO, as evidenced by one of the following (assuming the SO is not a charitable trust):

     (a) One or more officers, directors or trustees of the SO are elected or appointed by the officers, directors, trustees or membership of the SD; or

     (b) One or more members of the governing body of the SD are also officers, directors or trustees of, or hold other important offices in, the SO; or

     (c) The officers, directors or trustees of the SO maintain a close or continuous working relationship with the officers, directors or trustees of the SD; AND

     (d) By reason of (a), (b) or (c), the officers, directors or trustees of the SD have a significant voice in the investment policies of the SD, the timing of grants, the manner of making them, and the selection of recipients by such SO, and in otherwise directing the use of the income or assets of such SO.

If the SO is a charitable trust, (i) each specified SD must be a named beneficiary under the trust’s governing instrument; and (ii) the beneficiary SD must have the power to enforce the trust and compel an accounting under State law.

Integral Part Test.  Treas. Reg. 1.509(a)-4(i)(3) provides the general rule that a SO will be considered to meet the Integral Part Test if it maintains a significant involvement in the operations of one or more SDs and such SDs are in turn dependent upon the SO for the type of support which it provides.  This requirement is met if either of the following are satisfied:

     (1) The activities engaged in for or on behalf of the SDs are activities to perform the functions of, or to carry out the purposes of, the SDs, and but for the involvement of the SO, would normally be engaged in by the SDs themselves.


     (2)(a) The SO makes payments of substantially all of its income to or for the use of one or more SDs and the amount of support received by one or more SDs is sufficient to insure the attentiveness of such SDs to the operations of the SO.  In addition, a substantial amount of the total support of the SO must go to those SDs which meet the attentiveness requirement with respect to such SO.  Except as provided in (b) below, the amount of support received by SD must represent a sufficient part of the SD’s total support so as to insure attentiveness.

         (b) Even where the amount of support received by an SD does not represent a sufficient part of the SD’s total support, the amount of support received from a SO may be sufficient to meet the requirements above if it can be demonstrated that in order to avoid the interruption of the carrying on of a particular function or activity, the SD will be sufficiently attentive to the operations of the SO.  This may be the case where either the SO or the SD earmarks the support received from the SO for a particular program or activity, even if such program or activity is not the SD’s primary program or activity so long as such program or activity is a substantial one.

All pertinent factors, including the number of beneficiaries, the length and nature of the relationship between the SD and SO, and the purpose to which the funds are put, will be considered in determining whether the amount of support received by the SD is sufficient to insure its attentiveness to the operations of the SO.  As the attentiveness of a SD is normally motivated by reason of the amounts received from the SO, the more substantial the amount involved, in terms of a percentage of the SD’s total support, the greater the likelihood that the required degree of attentiveness will be present.  Evidence of actual attentiveness by the SD "is of almost equal importance."

Lack of Outside Control Test.  Treas. Reg. 1.509(a)-4(j) reiterates that a SO may not be controlled directly or indirectly by one or more disqualified persons other than foundation managers and other than one or more SDs.  If a person who is a disqualified person with respect to a SO, such as a substantial contributor to the SO, is appointed or designated as a foundation manager of the SO by a SD to serve as the representative of such SD, then such person will be regarded as a disqualified person, rather than as a representative of the SD. 

The SO will be considered "controlled" for the purposes of this test, if the disqualified persons, by aggregating their votes or positions of authority, may require the SO to perform any act which significantly affects its operations or may prevent the SO from performing such act.  This includes, but is not limited to, the right of any substantial contributor or his or her spouse to designate annually the recipients, from among the SDs of the income attributable to the contributor’s contribution to the SO. 

Except as provided below, a SO will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of such persons is 50% or more of the total voting power of the SO’s governing body or if one or more of such persons have the right to exercise veto power over the actions of the SO.  However, all pertinent facts and circumstances, including the nature, diversity and income yield of an organization’s holdings, the length of time particular stocks, securities or other assets are retained, and its manner of exercising its voting rights with respect to stocks in which members of its governing body also have some interest, will be taken into consideration in determining whether a disqualified person does in fact indirectly control an organization.

Notwithstanding the above provisions regarding the Lack of Outside Control Test, an organization shall be permitted to establish to the satisfaction of the Commissioner that disqualified persons do not directly or indirectly control it.

For more information about Supporting Organizations, see IRS Publication "Public Charity or Private Foundation Status – Issues under IRC 509(a)(1)-(4), 4942(j)(3), and 507" (2003 EO CPE Text), pp. 116-145.