Highlights from the IRS Regulations for Type III Supporting Organizations
By: Crystal Stasyszen, HoganTaylor Tax Staff
On December 23, 2015, the IRS issued the final regulations regarding the changes to reporting requirements for supporting organizations that originated in the Pension Protection Act of 2006. Additional guidance for Type III supporting organizations can be found in the proposed regulations the IRS released on February 19th, 2016. Type III supporting organizations are required to pass a responsiveness test, an integral part test, and meet a notification requirement or they could be classified as a private foundation.
Type III supporting organizations are required to be responsive to the needs of a supported organization. To pass this test a supporting organization must meet one of these two conditions:
- The supported organization may appoint one or more officers, directors, or trustees of the supporting organization, and one or more members of the governing body of the supported organization will also serve as an officer, director, or trustee of a supporting organization.
- The officers, directors, or trustees of a supporting organization and of the supported organization maintain a close and continuous working relationship, and the supported organization has a significant voice in how the supporting organization manages and uses its assets.
Integral Part Test
Depending on how a Type III supporting organization meets the integral parts test, it could be considered functionally integrated or non-functionally integrated.
- Functionally Integrated Type III organizations must meet one of these three alternative integral part tests:
A. The Activities test – substantially all of the supporting organization’s activities must be direct furtherance activities that the supported organization would normally be involved in, but for the supporting organization’s involvement.
B. The Parent of Supported Organization test – the supporting organization has to have the power to appoint most of the officers, directors or trustees of the supported organization and the supporting organization must have a significant degree of direction over the policies, programs and activities of the supported organization.
C. Supporting a government entity test – The supporting organization must support a government entity. (Final regulations under section 509 regarding have not been published for this test.)
- Non-functionally Integrated Type III organizations must meet the following requirements:
A. Distribution requirement – the supporting organization must distribute the greater of 85% of the supporting organization’s net income for the prior taxable year or 3.5% of the aggregate fair market value of the organization’s non-exempt use assets (certain adjustments are detailed on Form 990 – Schedule A). Distributions in excess of these amounts can be carried forward to for up to 5 years.
B. Attentiveness requirement – Distributions from a supporting organization have to equal at least 10% of the supported organization’s total support from the prior year, be required to maintain a particular substantial activity of the supported organization, or be vital enough to the supporting organization to ensure attentiveness based on all facts and circumstances.
A Type III supporting organization must provide certain documents to each of its supported organizations every year. The information must be electronically transmitted or postmarked by the last day of the fifth month following after the close of the taxable year in which the information was generated.
- A written notice detailing the type and amount of support provided by the supporting organization to the supported organization during the taxable year prior to the year in which the notification is being sent.
- A copy of the supporting organization’s most recently filed Form 990 or Form 990-EZ.
- A copy of the most recent version of the supporting organization’s governing documents; if the most recent version (including any amendments) has not already been provided.