Supporting Organizations: Options for Meeting Section 501(c)(3)'s Public Support Test

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A key element of public charity status under Section 501(c)(3) is satisfying the ongoing “public support” requirement. Supporting organizations, however, are a special subset of public charities that are not required to directly satisfy this public support test. Rather, they secure their tax-exempt status by virtue of their relationship with another public charity. What exactly is a “supporting organization”? How does it fit into the taxonomy of 501(c)(3) organizations? And how are they practically utilized by nonprofits?

Under the Internal Revenue Code, all Section 501(c)(3) organizations are presumed to be private foundations, supported through a single donor or small group of donors, unless they can qualify as a public charity. The term “public charity” covers an enormous range of nonprofit organizations, including certain organizations that qualify categorically by their own nature, such as houses of worship, schools, and hospitals. An organization may also qualify as a public charity based on significant “related” exempt function revenue (also known as a Section 509(a)(2) organization). And still more organizations qualify for public charity status based on their financial revenue sources, through either (a) significant charitable support beyond a single or small group of donors (i.e., a broad base of charitable contributions) or (b) a “supporting organization” relationship with another public charity.

Supporting organizations are essentially a subset of public charities, included within them as a special type, defined not by the nature of their activities but rather by the nature of their connection to another public charity. Supporting organizations are somewhat of a “second best” type of nonprofit for tax-exemption purposes, not as tax advantageous as a Section 509(a)(1) or 509(a)(2) public charity but more tax advantageous than a private nonoperating foundation. They are second best because they rely on another organization – known, not surprisingly, as a “supported organization.” In other words, they inherently exist only in tandem with another organization.

An Example: Do Good NFP Public Charity

Consider “Do Good NFP,” a charitable outreach organization that raises significant funds in order to operate its programs. Do Good NFP is a Section 501(c)(3) public charity, standing on its own two tax legs. Do Good NFP meets the “public support” test (as set forth in corresponding Sections 509(a)(1) and 170(b)(1)(A)(vi) of the Tax Code) because it normally receives at least a third of its support from the general public or the government. Schedule A of the IRS Form 990 annual return calls for each Section 501(c)(3) public charity to identify how it meets the public support test, so Do Good will check the appropriate box and then complete the corresponding “public support” test.

Fast forward a few years: Do Good NFP flourishes, so its leaders decide to purchase significant real estate to conduct its charitable operations. For risk management and other purposes, the leadership decides to form a new nonprofit corporation called “Do Good Property Services.” This new entity’s entire focus is to manage the real estate for Do Good NFP’s benefit, with its funding coming entirely in the form of space-sharing or rental payments from Do Good NFP.

How can Do Good Property Services qualify as a Section 501(c)(3) public charity? The supporting/supported organization framework provides a great answer![1

“Supporting Organization” Defined

In IRS tax parlance, the term “supporting organization” describes organizations that derive their tax-exempt public charity status from other charitable organizations for which they provide support. Most commonly, these organizations cannot satisfy the public support test on their own but instead qualify as public charities because of their close connection with other organizations.

In our example, Do Good Property Services receives all of its funding from space sharing or rental payments, which are not donations from a broad base of donors nor fees for charitable services under 509(a)(2). Do Good Property Services can serve as a supporting organization to its supported organization Do Good NFP, with Do Good NFP’s Section 501(c)(3) public charity status imputed to Do Good Property Services. In other words, but for Do Good NFP, Do Good Property Services will not qualify for Section 501(c)(3) public charity status.

Is that it? No, the Tax Code requires more. To qualify as a supporting organization to Do Good NFP, Do Good Property Services must meet three tests. First, Do Good Property Services must be both organized and operated for the benefit of, to perform the functions of, or to carry out the purposes of Do Good NFP. Second, Do Good Property Services must not be controlled by certain disqualified persons.[2] Third, Do Good Property Services must meet a “relationship” test, described further below in conjunction with the types of supporting organizations.

The Relationship Test: Three Types of Supporting Organizations

The relationship test requires that a supporting organization maintain a certain level of connection, control, and responsiveness to the public charity it is supporting. These levels can be manifested in all sorts of unique situations and structures depending on the nonprofits involved but are broadly categorized into three categories for tax purposes: Type I, Type II, or Type III supporting organizations.

Type I

A Type I supporting organization is operated, supervised, or controlled by the organization it supports (the “supported organization”). Put otherwise, a Type I supporting organization is a subsidiary of its parent supported organization. In our example, Do Good NFP must have a substantial degree of control over the supporting organization, such as through the appointment and removal of at least a majority of Do Good Property Services’ board members and other reporting and control mechanisms. The structure of a Type I supporting organization is the easiest to maintain, and it is most easily recognized as tax-exempt by the IRS.

So in our example, Do Good Property Services could be a subsidiary of Do Good, with Do Good maintaining control over Do Good Property Services’ operations. Do Good Property Services should then qualify as a Type I supporting organization and Section 501(c)(3) public charity, despite the fact that its activities are not in and of themselves “charitable.”

Type II

A Type II supporting organization is supervised or controlled in connection with its supported organization. The organizations are “sister” organizations. Common supervision and control must exist among the governing bodies of the organizations, such as through the use of overlapping boards with several directors in common between the two organizations. If a Type II supporting organization is not careful to maintain the appropriate overlap, it may run the risk of no longer being qualified as a supporting organization. The organizations thus will need to create mechanisms for ensuring that the necessary overlap is maintained.

In our example, Do Good Property Services could be a Type II supporting organization supervised or controlled in connection with Do Good NFP. The governing documents of Do Good Property Services should require provision of services to Do Good NFP and that its board be made up primarily of individuals who are also directors of Do Good NFP. If Do Good Property Services follows its governing documents, it should be in good shape to meet the relationship test and qualify as a Type II supporting organization.

Type III

Type III supporting organizations have a more attenuated relationship with their supported organizations. They are only operated in connection with their supported organizations. This means they may be operating to support other public charities, but without the specific control mechanisms of Type I and Type II supporting organizations. Because of the loose connection to their supported organizations, Type III supporting organizations must provide additional specific evidence of meeting the relationship test. The relevant IRS tests for Type III organizations are very difficult to meet, and Type III is the most scrupulously reviewed by the IRS. Some Type III organizations are also required to make certain mandatory distributions to their supported organizations. The specific requirements are beyond the scope of this article.

Additional Practical Applications

These varying relationship tests and resulting legal subclassifications get fairly technical and need to be carefully structured at the front end. But once the legal relationship between the supporting organization and supported organization is established (typically through the bylaws), the ongoing legal compliance is often less burdensome than for other publicly supported charities that are required to meet the public support test calculation on an annual basis.

1.   Swiss Army Knife

Further, because supporting organizations are multi-faceted, they are also multi-functional and hence the perfect tool for addressing a variety of common situations in multi-entity structuring. This includes as an endowment or investment holding organization, to hold real property or other valuable intellectual property, to oversee a nonexempt function of a larger charitable endeavor, or simply to isolate or separate a long-term particular grant or program project. Think of supporting organizations as the duct tape or swiss-army knife of public charity classifications.

2.   Activities Limited to Benefiting the Supporting Organization

In planning for the use of one or more supporting organizations, some final practical considerations should be addressed. An assessment should be made as to how the funds or activities will flow between the supporting organization and supported organization. This assessment is important because too much funding from the supporting organization to the supported organization may negatively impact the supported organization’s ability to meet the public support test. Additionally, supporting organizations are required to meet an operational test that only permits certain “permissible activities” that support or benefit the supporting organization or the charitable class that the supporting organization is organized to serve. While the complexities of this test are beyond the scope of this article, the important point here is that limitations exist as to what types of activities a supporting organization may conduct.

3.   Potential Control by, or Transactions with, Substantial Contributors

Second, organizers should be mindful that the role substantial contributors (and their family and business relationships) may play in a supporting organization are subject to more stringent restrictions than in other public charities and private foundations. A substantial contributor’s role in a supporting organization and potential transactions that may arise thus need to be carefully structured. In many cases, it is wise to have a special conflict of interest policy for the supporting organization that helps the board and officers identify these potential transactions and prevent unintentional excise tax liability resulting from these transactions.

Concluding Remarks

These final warnings and limitations are important but by no means outweigh the diversity of benefits and uses a supporting organization classification can provide in the right circumstances. Creative nonprofit leaders should be aware of this important utility tax-exempt tool and work closely with legal counsel to identify if and when a supporting organization may be the right option. If selected, make sure the governing documents, policies, and operations are in full compliance with IRS requirements and whether this structure makes sense considering relevant state law and practical operational considerations.


[1] Another option could be a Section 501(c)(2) title-holding nonprofit, but its utility is quite limited. See our blog on Tax-Exempt Title Holding Corporations.

[2] “Disqualified persons” here include substantial contributors, certain owners of businesses that are substantial contributors, family members of such substantial contributors or owners, and certain entities controlled by the foregoing individuals.