February 28, 2014
Authored by: Stephanie Moll and Keith Kehrer
With research and drafting assistance provided by our extern from Washington University School of Law, Rachael Lynch.
As we discussed in our prior post, Review of Income Tax Deduction Rules for Charitable Gifts, an income tax deduction up to fifty percent (50%) of the taxpayer’s adjusted gross income is allowed for gifts to public charities of non-capital gain property and up to thirty percent (30%) for gifts of capital gain property. These same contribution limits apply to gifts to supporting organizations.
What is a supporting organization? Supporting organizations are described in Section 509(a)(3) of the Internal Revenue Code as charities that carry out their exempt purposes by supporting other public charities. A supporting organization generally warrants public charity status because it has a relationship with its supported organization sufficient to ensure that the supported organization is effectively supervising or paying particular attention to the operations of the supporting organization.
In order to qualify as a supporting organization, the organization must meet the following three requirements:
(A) be organized (“organizational test”) and continue to operate (“operational test”) exclusively for the benefit of, to perform the functions of, or to carry out the purposes of public charities, as defined in Section 509(a)(1) or (2);
(B) be (i) operated, supervised, or controlled by one or more public charities (“Type I”), (ii) supervised or controlled in connection with one or more public charities (“Type II”), or (iii) operated in connection with one or more public charities (“Type III”) (“relationship test”); and
(C) not be controlled (directly or indirectly) by any disqualified persons (click here for a definition of “disqualified persons”), other than foundation managers and any one or more public charities (“control test”).
For the purposes of setting out the requirements of qualifying as a supporting organization, Section 4946 of the Internal Revenue Code defines “disqualified persons” as one of the following:
1. A substantial contributor to the charity;
2. An officer, director, or trustee of a private foundation;
3. An owner of more than 20% of the (a) voting interest in a corporation, (b) profits interest in a partnership, or (c) beneficial interest in a trust, that is a substantial contributor to the charity;
4. A family member of any of the people described above;
5. A corporation of which more than 35% of the voting interest is owned by the people described above;
6. A trust or estate of which more than 35% of the beneficial interest is held by the people described above.