Page 33 - December 2019 Bar Journal

EXTRA FEATURE

THE SUPPORTING ORGANIZATION

DON’T OVERLOOK THIS ALTERNATIVE TO

PRIVATE FOUNDATIONS

BY MATTHEW A. KALIFF

ndividuals who want to establish a personal or Code Section 4946; i.e., substantial contributors all aspects of a supporting organization’s operation
family charitable enterprise often think first and related persons) other than persons who and governance is essential to maintaining public
of setting up a private foundation. A distinct are solely foundation managers. charity status and avoiding potential penalties.
identity, close family control, and name Section 509(a)(3) classifies a supporting A supporting organization may have broad
I recognition make private foundations very organization as Type I, Type II or Type III based latitude in charitable grantmaking. Because a
appealing and the right solution for some donors. on the extent of control of the supported public supporting organization must “operate for the
However, being your own philanthropist comes charity. Type I supporting organizations are benefit of, perform the functions of, or carry out
with at a price: administration, tax consequences, analogous to a parent-subsidiary relationship as the the purposes of” its supported public charity,
minimum distribution requirements and reporting supporting organization is “operated, supervised the extent of the charity’s purposes marks the
obligations, to name a few. For their clients whose or controlled” by the public charity. Public outer limit of the supporting organization’s
goals include a philanthropic presence, legacy charities such as community foundations will grant purposes. However, grants are subject
and family engagement, practitioners should typically use the Type I model for their supporting to the general tax law limitations applicable to
remember to consider the supporting organization organization programs. Type II and Type III have charitable grantmaking entities. Grants must
option. It has the features of a separate charitable lesser degrees of control and supervision from
grantmaking entity with the tax and administrative the supported public charity. They are subject to
efficiencies of a public charity. greater scrutiny and are generally not relevant
options for individual donors.
Supporting Organizations Generally A supporting organization may be established Want to
A supporting organization is a separately as either a nonprofit corporation or as a trust
incorporated entity that is defined in Internal under state law. The governing documents will
Revenue Code Section 509(a)(3) as a Section provide that the supported public charity elects take center
501(c)(3) organization that qualifies as a public a majority of the supporting organization’s board
charity through its close connection to one or of directors or trustees. The donor or his or her
more 501(c)(3) public charities. The supporting representatives (usually family members) elects stage at
organization’s “public charity” status results the balance of the board. The minority status of the
from the close relationship to the supported donor trustees is necessary because the supporting
charity. Some public charities refer to their organization’s classification as a “public charity” the CMBA?
affiliated supporting organizations as “supporting rather than a “private foundation” is based upon
foundations.” As discussed below, it is this the fact that substantial contributors and persons
public charity status that can leverage significant related to them do not “control” the supporting
efficiencies over private foundations. organization.
A supporting organization must meet the Despite their minority status, the donor-elected
following three elements: trustees have their place at the table and may
1. It must be organized and at all times operated actively participate in the affairs of the supporting
exclusively for the “benefit of, to perform the organization. They may be elected as officers.
functions of, or to carry out the purposes of” They may recommend and vote on charitable Chairing a program or
one or more other specified public charities grants. They may participate in crafting mission
described in IRC Section 509(a)(1) or (2) statements and setting investment and spending speaking at CMBA CLE is
(qualified public charities); policies. Like a private foundation, the supporting a great way to build your
2. It must be operated, supervised, or controlled organization provides a platform for multiple exposure! Email your
by or in connection with one or more qualified generations of the donor’s family to engage in the name and CLE idea to
public charities; and family’s charitable mission and long-term legacy CLE@CleMetroBar.org.
3. It must not be controlled, directly or indirectly, plan. However, demonstrated adherence to the
by one or more “disqualified persons” (see IR formalities of control by the supported charity in

DECEMBER 2019 CLEVELAND METROPOLITAN BAR JOURNAL | 33