Supporting Organizations, Sections 501(c)(3) and 509(a)(3)

By E. Kenneth Whitney

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FEBRUARY 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.

Thelma 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.

Supporting 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 if desired.

How Supporting Organizations Work

Thelma 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 different profiles.

Supporting 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 and supervised.

Community 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.

Once 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.

E. Kenneth Whitney, CPA, is with Anderson and Whitney, P.C., Greeley, Colo.




















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