Organizations, Sections 501(c)(3) and 509(a)(3)
E. Kenneth Whitney
2005 - Consider the case of Thelma Taxpayer, a widow with
a passion for collecting vintage European race cars. Thelma
is proud of her small collection, and has frequent visitors
to see the vehicles. She is concerned with what will happen
to her collection after she dies. The collection has a fair
market value of $1 million. Thelma has been in the highest
tax bracket, and will continue to be for the rest of her life.
fits the profile for an IRC section 509(a)(3) supporting
organization that could obtain a charitable deduction for
the fair market value of her collection and remove the value
from her estate while she continues to control and manage
the showing and maintenance of these assets.
organizations can be used by anyone in the high-income tax
bracket who wishes to retain control of assets within the
family. They can receive a 50% adjusted gross income (AGI)
deduction for removing the asset ownership from their estate,
yet maintain virtually the same control they had as fee-simple
owners. Control can be passed down to successive generations
Supporting Organizations Work
places the collection in a charitable trust. She then partners
the trust with a publicly supported organization. This could
be any 501(c)(3) type organization; a community foundation
is a common choice, but it could also be a municipality,
a church, a hospital, a university, a museum, or some other
charitable trust. Family members are named as managers,
and the publicly supported organization is involved in selecting
trustees. As the supported organization partner, a community
foundation would see that the 990 return and audit requirements
are met. This arrangement allows the supporting organization
to avoid the public support test. The government has some
assurance that the advantage to the general public of a
supporting organization, operated by a committed private
source, would exceed any financial benefit to the individual
donors. Such supporting organizations are described by Treasury
Regulations section 1.509(a)-(4)(c)(1)iii; other types of
supporting organizations described in the regulations fit
organizations are not subject to excise taxes on related-party
transactions or to limitations on investments, nor do they
have to deal with minimum distribution questions. A supporting
organization is allowed the 50% AGI maximum charitable contribution
[the same as 501(c)(3) gifts], as compared to the 30% limitation
of private foundations. There are fewer regulatory and filing
requirements for supporting organizations. The donor family
can craft a management contract that allows it to continue
to control the presentation of the collection. While the
family may not be involved directly with trustee appointments,
as long as it keeps the trustees-supported organization
informed with timely financial and management reports, the
day-to-day decisions of what collections to show and how
to show them are their sole prerogative. The family can
buy, trade, scrap, and maintain specific properties without
interference by the trustees or the supported organization.
Any salaries paid to donors or their families must be reasonable
foundations have embraced these hybrid organizations. They
work with the donors to appoint board members and trustees
recommended by the donor. There may be many public-supported
organizations that share a donor’s passion.
a supporting organization has been found, a donor should
complete the following checklist:
Coordinate with the supporting organization’s legal
representative to form a charitable trust that will be
mutually acceptable and follow the language required in
Treasury Regulations section 1.509(a)-4.
Prepare a management contract for the donor family that
is satisfactory to both parties.
Prepare agreeable guidelines for selecting trustees.
Request an employee identification number (EIN) for the
trust from the IRS.
Open a bank account for operations.
Complete and file Form 1023, requesting tax-exempt status.
Kenneth Whitney, CPA, is with Anderson and Whitney,
P.C., Greeley, Colo.