Nonoperating Foundations and Supporting Organizations
- Many charitably inclined individuals form private nonoperating
foundations (PNOF) funded with long-term qualified appreciated
stock (QAS). QAS includes any stock that is capital gain property
and for which market quotations are readily available on an
established securities market. The donor receives a charitable
deduction for the fair market value of the QAS contributed
and does not have to pay a capital gains tax on the appreciation.
The PNOF will pay a maximum excise tax of 2% on the appreciation
upon the sale of the QAS, using the donor’s cost.
can also form a supporting organization (SO) to satisfy
other charitable intentions. While both PNOFs and SOs are
exempt under IRC section 501(c)(3), SOs fall under the public
charity guidelines of IRC section 509(a)(3) because of their
relationship with other public charities under section 509(a)(1)
or (2). As a result, cash contributions made to a PNOF are
limited to 30% of the donor’s adjusted gross income
(AGI), while cash contributions made to an SO are limited
to 50% of the donor’s AGI. Contributions of QAS made
to a PNOF are limited to 20% of the donor’s AGI, while
contributions of long-term capital gain securities (not
just QAS) made to an SO are limited to 30% of the donor’s
receive the same percentage limitations as contributing
to a public charity or an SO, a PNOF can elect pass-through
status, which is the same as being treated as a public charity
for that year. Private pass-through foundations are described
in IRC section 170(b)(1)(E)(ii). They must distribute to
public charities all of the contributions they receive during
the year—including the current year’s distributable
amount and the prior year’s undistributed amount,
if any—no later than two-and-a-half months following
their year-end. If the PNOF has excess distributions from
prior years, it can use that amount toward the required
would a donor with an existing PNOF form an SO? Donors to
an SO can make a charitable contribution using a higher
percentage of AGI, are not subject to the excise tax on
net investment income, and do not need to make minimum qualifying
distributions of at least 5% of the average investment asset
value annually. In addition, an SO is not restricted in
holding more than 20% (35% in some circumstances) of a single
business enterprise, which is a restriction for PNOFs. Finally,
an SO is not subject to self-dealing rules applicable to
PNOFs but is subject to intermediate sanctions.
a donor owns securities other than QAS, the only way to
secure a deduction for the fair market value of those securities
is to: 1) give them to public charities; 2) give them to
an SO; or 3) elect pass-through status for the PNOF. An
appraisal is required if the security is not tradable on
an established securities exchange (such as the donor’s
personal holding company).
an SO may be a foreign organization as long as it qualifies
as a publicly supported entity.
SO must pass four tests:
It must be operated, supervised, or controlled by or in
connection with one or more organizations described in
IRC section 509(a)(1) or (2).
must be organized and operated exclusively for the benefit
of, to perform the functions of, or to carry out the purposes
of one or more organizations described in IRC section
509(a)(1) or (2).
must not be controlled directly or indirectly by one or
more disqualified persons, other than foundation managers
and one or more organizations described in IRC section
509(a)(1) or (2). Disqualified persons include substantial
contributors and their families and related entities.
relationship between the SO and the supported organizations
will indicate the ease or difficulty of meeting the other
tests of IRC section 509(a)(3). Any relationship, however,
must ensure that the SO will be responsive to the needs
or demands of, and will be an integral part of or maintain
a significant involvement in, the operations of one or
more publicly supported organizations.
are three types of SOs based on the SO’s relationship
to the public charity or charities it supports:
A Type I SO must be operated, supervised, or controlled
by the supported organization. The supported organization
must maintain a substantial degree of direction over the
A Type II SO must be supervised or controlled in connection
with the supported organization; that is, by the same
A Type III SO must be operated in connection with the
supported organization. The responsiveness and integral-part
requirements become very important in demonstrating a
Type III relationship.
Treasury Regulations section 1.509(a)-4(i)(3)(iii), the
supported organization must be attentive to the activities
of the SO. The SO must make payments of most of its income
(at least 85%) to or for the use of the supported organization.
In addition, the amount of support must be sufficient to
ensure the attentiveness of the supported entity (it must
approach 10% of annual support), or the funds must be earmarked
for a substantial program or activity of the supported entity
(contributions made to a donor-advised fund would not qualify).
an SO has many advantages over a PNOF, it gives donors less
control and less flexibility in grant making. Both entities
can be used to satisfy different charitable goals.
have come under scrutiny from regulators and lawmakers.
It is believed that SOs are used more extensively for tax
planning purposes than to benefit charities. Several SOs
are being examined to see if they have violated the current
tax laws. Only time will tell what regulators decide on
the future of the SO.
Lepkowski, CPA, CFP, is a senior manager at Anchin,
Block & Anchin LLP, New York, N.Y.