The Treasury’s holiday gift to taxpayers for the 2012 season came in the form of final and temporary regulations for supporting organizations (SOs), published on Dec. 28, 2012.1 While a few provisions relate to other varieties of SOs, the bulk of the new regulations relate to Type III SOs “operated in connection with” publicly supported organizations,2 an area of special focus for the Internal Revenue Service for the last decade or so.3 The regulations are the climax of the IRS’ determination to curb what it perceived as abusive practices involving SOs, particularly Type III SOs. These practices prompted new restrictions under the Pension Protection Act of 2006 and proposed regulations issued in 2009.4 While the new regulations adopt many of the provisions in the 2009 proposed regulations, they also introduce novelties and nuances of their own. (For more information about the different types of SOs, see “Three Varieties of SOs,” p. 26.)


Effect of Donor Control

Under one of the few provisions in the new regulations aimed at Type I SOs,5 as well as at Type III SOs, an organization loses its SO status for any taxable year in which it accepts a contribution from a person who’s directly or indirectly in control of the governing body of a supported organization.6 Also included in this sensitive class is a member of the family of such an individual, as defined in Internal Revenue Code Section 4958(f)(4), as well as a 35 percent controlled entity, as defined in IRC Section 4958(f)(3).7 These provisions expressly exclude organizations described in IRC Sections 509(a)(1), (2) and (4) that are in “control” of the supported organization8 from which SOs may accept contributions.   

A subsection in the new regulations entitled “Meaning of Control” is expressly “Reserved.”9 The Treasury notes that a definition of “control” would be beneficial and says that it intends to issue proposed regulations in the near future that will provide one.10


Notification Requirement

Type III SOs with governing instruments that name a number of supported organizations, not all of which receive support from the SO, face a new challenge in the form of a notification requirement. For each of its taxable years, a Type III SO must now provide the following documents to each of its supported organizations, including those that have received little or no support over the years (or indeed may not even be aware that an SO has named them as a supported organization):  (1) a written notice describing the type and amount of support provided by the SO to the supported organization during the previous taxable year; (2) a copy of the SO’s Form 990 (or equivalent return) most recently filed as of the date of the notice; and (3) a copy of the SO’s governing documents in effect on the date of the notice.11 The SO is permitted to redact the names and addresses of any contributors to the SO from its Form 990 provided to the supported organizations, to maintain donors’ privacy.12 The SO need not keep sending the same governing instruments to the supported organizations year after year, unless there have been amendments or modifications in the interim.13 The notice must be postmarked or electronically transmitted by the last day of the fifth calendar month following the close of the SO’s taxable year (that is, by May 31 in the case of calendar-year SOs).14 The term “electronic media” includes an Internet link.15 The Type III SO must provide the notification packet to “the principal officer” of the supported organization.16 As the definition of “principal officer” is a bit ambiguous and could conceivably apply to more than one officer, the Type III SO is well advised to send the notification packet to the president or chairperson of the supported organization, as well as to the Treasurer or chief financial officer. 


Responsiveness Test  

Type III SOs have long been required to meet a responsiveness test. Under the new regulations, this test consists of two prongs: the relationship prong and the significant voice prong. A Type III SO only meets the relationship prong if one of the following three elements is met: (1) one or more officers, directors or trustees of the SO are elected or appointed by the supported organization’s officers, directors, trustees or members; (2) one or more members of the supported organization’s governing body are also officers, directors or trustees of, or hold important offices in, the SO; or (3) the SO’s officers, directors or trustees maintain a close and continuous working relationship with the supported organization’s officers, directors or trustees.17 The significant voice prong is met if, by reason of satisfying the relationship prong, the supported organization’s officers, directors or trustees have a significant voice in: (1) the SO’s investment policies; (2) the timing of the SO’s grants; (3) the manner of the SO’s making of grants; (4) the SO’s selection of grant recipients; and (5) otherwise directing the use of the SO’s income or assets.18

An example provided in the new regulations treats the responsiveness test as satisfied when the SO’s trustee and an officer of the supported organization have quarterly face-to-face or telephonic meetings, in which they discuss the supported organization’s projected needs and how the supported organization would like the SO to use its income and invest its assets, in addition to regular communication regarding the SO’s investments and distribution plans. In the example, the SO’s trustee also provides the supported organization’s officer with quarterly investment statements and an annual accounting statement.19

Another example illustrates how an SO can flunk the responsiveness test. A charitable trust with a bank as trustee makes annual cash payments to its supported organizations. Once a year, the trustee sends the cash payment, the “notification” information and an accounting statement to the supported organizations. These are deemed insufficient to pass the responsiveness test.20

By far, the most alarming comment in the new regulations package is the brief observation that the Treasury and the IRS intend to issue proposed regulations “in the near future,” which would amend the responsiveness test by “clarifying that Type III supporting organizations must be responsive to all of their supported organizations.”21 For many Type III SOs, particularly older ones whose governing instruments name a number of supported organizations, some of which haven’t received support as yet from the SO, this proposal will be extremely difficult to satisfy, unless the proposed regulation expressly permits Type III SOs to amend their governing instruments to remove named supported organizations.  


Integral Part Test  

The most complicated provisions of the new regulations are those relating to the integral part test, which Type III SOs must meet. This test is divided into two very different sets of requirements. One sets applies to functionally integrated (“but for”) Type III SOs, and another set applies to non-functionally integrated (grantmaking) Type III SOs, dubbed “NFIs” in the Explanation section accompanying the new regulations.22

A functionally integrated Type III SO meets the integral part test if it satisfies any of the following three elements: (1) it engages in activities, substantially all of which directly further the exempt purposes of one or more supported organizations; (2) it’s the parent of each of its supported organizations; or (3) it supports a governmental organization.23 A functionally integrated Type III satisfies the tricky “directly further” element if it engages in activities, substantially all of which: (1) directly further the exempt purposes of one or more supported organizations to which the SO is responsive, by performing the functions of, or carrying out the purposes of, these supported organizations; and (2) but for the SO’s involvement, would normally be engaged in by such supported organizations.24 A functionally integrated Type III SO is considered the “parent” of a supported organization if the SO exercises a substantial degree of direction over the supported organization’s policies, programs and activities, and a majority of the supported organization’s officers, directors or trustees are appointed or elected (directly or indirectly) by the SO’s governing body, members of such body or officers (acting in their official capacity).25

As to NFIs, the integral part test includes a distribution or payout requirement.26 On or before the end of each taxable year, an NFI must distribute to, or for the use of, one or more of its supported organizations, an amount at least equal to the NFI’s distributable amount for the taxable year.27 Under a new temporary regulation, the distributable amount is ordinarily an amount equal to the greater of: (1) 85 percent of the SO’s adjustable net income for the immediately preceding taxable year; or (2) the SO’s minimum asset amount for such year.28 An SO’s “minimum asset amount” is defined under a new temporary regulation as 3.5 percent of the excess of: the aggregate fair market value of the SO’s non-exempt-use assets for the immediately preceding taxable year over the acquisition indebtedness as to such non-exempt-use assets, as determined under IRC Section 514(c)(1), plus: 


(1) amounts received or accrued during the immediately preceding taxable year as repayments of amounts taken into account by the SO to meet its distribution requirement for any taxable year; 


(2) amounts received or accrued during the immediately preceding taxable year from the sale or disposition of property to the extent the SO took into account the acquisition of such property to meet its distribution requirement for any taxable year; and 


(3) any amount set aside under Treasury Regulations Section 1.509(a)-4(i)(6)(v), to the extent it’s determined during the immediately preceding taxable year that this amount is unnecessary for the original set-aside purposes, and the SO took into account such amount to meet the distribution requirement for any taxable year.29


The distribution requirement for the first year an SO is treated as an NFI is, mercifully, zero.30 The Treasury may provide, via publication in the Internal Revenue Bulletin, for a temporary reduction in the distribution amount in case of a disaster or emergency.31 The new regulations also provide for reasonable cause relief.32 To qualify for such relief, the NFI must establish to the Secretary’s satisfaction that: (1) the failure was due solely to unforeseen events or circumstances beyond the SO’s control, a clerical error or an incorrect asset valuation; (2) the failure was due to reasonable cause, rather than willful neglect; and (3) the distribution requirement was met within 180 days after the SO was first able to distribute its distributable amount.33

In addition to meeting its distribution requirement, to meet the integral part test, the NFI Type III SO must also distribute one-third or more of its distributable amount to one or more of the supported organizations that are attentive to the operations of the SO and to which the SO is responsive.34 A supported organization is considered attentive to the SO’s operations during a taxable year if, within that taxable year, at least one of the following conditions is satisfied: (1) the SO distributes amounts equal to at least 10 percent of the supported organization’s total support received during the supported organization’s last taxable year ending before the beginning of the SO’s taxable year; (2) the amount of support received from the SO is necessary to avoid the interruption of the carrying on of a particular function or activity of the supported organization, including a substantial (though not necessarily primary) program or activity of the supported organization; or (3) based on all pertinent facts, including the number of supported organizations, the length and nature of the relationship between the supported organization and SO and the purpose to which the funds are put, the amount of support received from the SO constitutes a sufficient part of the supported organization’s total support, as to ensure attentiveness.35 Under the regulations, the greater the amount of support received, the more likely the supported organization will be considered to be attentive to the SO.36 Evidence of actual attentiveness is said to be of “almost equal importance.”37 The practitioner may well wonder why actual attentiveness, seemingly the very touchstone at which the regulations should be pointing, is given a back seat to the merely theoretical attentiveness arrived at via satisfaction of the regulations’ complicated tests. An SO’s distributions to a donor advised fund are disregarded for purposes of satisfying the attentiveness test.38

The new regulations provide extended guidance as to the specific types of distributions that are treated as counting toward the distribution requirement.39 These include: (1) any amount paid to a supported organization to accomplish its exempt purposes; (2) any amount paid to perform an activity which satisfies the “substantially all activities which directly further exempt purposes” provisions applicable to functionally integrated Type III SOs,40 but only to the extent such amount is greater than any income the SO derives from the activity;  (3) any “reasonable and necessary” administrative expenses paid to accomplish the supported organization’s exempt purposes, not including expenses incurred in the production of investment income; (4) any amount paid to acquire an “exempt-use asset” described in the temporary regulations;41 and (5) any amount set aside for a specific project accomplishing the exempt purposes of a supported organization to which the SO is responsible.42

The new regulations afford an SO a five-year carryover of its distributions that are in excess of its distribution requirement.43 This five-year carryover can aid an SO in meeting its distribution requirement in future years.

Assets, including investment assets, which aren’t considered exempt-use assets are treated as “non-exempt-use assets” under the new temporary regulations, which provide details relating to valuation of such assets under the principles of the IRC Section 4942 regulations.44

New transition rules45 relate to the notification requirement, the integral part test and judicial proceedings to reform instruments.46


Coping With New Regulations

For many Type III SOs, particularly NFIs, these new regulations present considerable challenges and will often require significant changes in how the SOs currently satisfy the applicable requirements. At stake for an SO that fails to meet the new requirements is the bitter pill of potential reclassification as a private foundation.47 While the new regulations may finally satisfy the IRS that any perceived abuses of Type III SOs are now effectively eliminated, these new regulations can be expected to spur a new wave of Type III bailouts, in the form of conversions to Type I or II status, or outright dissolution and termination. The potential loss of large numbers of fully functioning SOs wouldn’t appear to very effectively serve the Congressional intent to promote charitable giving.                   



1. Treasury Decision 9605. The new regulations, together with an “Explanation,” are reproduced online at

2. Internal Revenue Code Section 509(a)(3)(B)(iii).

3. For a review of earlier developments regarding supporting organizations (SOs), see Gerald B. Treacy, Jr., “What’s Left of SOs?” Trusts & Estates (October 2006) at p. 28.

4. The 2009 proposed regulations are discussed in Gerald B. Treacy, Jr., “Not SO Bad—Proposed SO Regulations,” Trusts & Estates (December 2009), at p. 54.

5. IRC Section 509(a)(3)(B)(i).

6. Treasury Regulations Section 1.509(a)-4(f)(5)(i)(A).

7. Treas. Regs. Section 1.509(a)-4(f)(5)(i)(B), (C).

8. Treas. Regs. Section 1.509(a)-4(f)(5)(i)(A).

9. Treas. Regs. Section 1.509(a)-4(f)(5)(ii).

10. Explanation 2. Gifts from Controlling Donors, Treasury Decision 9605.

11. Treas. Regs. Section 1.509(a)-4(i)(2)(iii).

12. Explanation 3. Requirement to Notify Supported Organizations, T.D. 9605.

13. Treas. Regs. Section 1.509(a)-4(i)(2)(C).

14. Treas. Regs. Section 1.509(a)-4(i)(2)(iii).

15. Supra note 12.

16. Treas. Regs. Section 1.509(a)-4(i)(2)(iv).

17. Treas. Regs. Section 1.509(a)-4(i)(3)(ii)(A)-(C).

18. Treas. Regs. Section 1.509(a)-4(i)(3)(iii).

19. Treas. Regs. Section 1.509(a)-4(i)(3)(iv), Example 1.

20. Treas. Regs. Section 1.509(a)-4(i)(3)(iv), Example 2.

21. Ibid.

22. Explanation 5. Integral Part Test—Non-Functionally Integrated Type III Supporting Organizations.

23. Treas. Regs. Section 1.509(a)-4(i)(4)(i).

24. Treas. Regs Section 1.509(a)-4(i)(4)(ii).

25. Treas. Regs. Section 1.509(a)-4(i)(4)(iii).

26. Treas. Regs. Section 1.509(a)-4(i)(5).

27. Treas. Regs. Section 1.509(a)-4(i)(5)(ii)(A).

28. Temp. Reg. Section 1.509(a)-4T(i)(5)(ii)(B).

29. Temp. Reg. Section 1.509(a)-4T(i)(5)(ii)(C).

30. Treas. Regs. Section 1.509(a)-4(i)(5)(ii)(D).

31. Treas. Regs. Section 1.509(a)-4(i)(5)(ii)(E).

32. Treas. Regs. Section 1.509(a)-4(i)(5)(ii)(F).

33. Treas. Regs. Section 1.509(a)-4(i)(5)(ii)(F)(1)-(3).

34. Treas. Regs. Section 1.509(a)-4(i)(5)(iii)(A).

35. Treas. Regs. Section 1.509(a)-4(i)(5)(iii)(B)(1)-(3).

36. Treas. Regs. Section 1.509(a)-4(i)(5)(iii)(B)(3).

37. Ibid.

38. Treas. Regs. Section 1.509(a)-4(i)(5)(iii)(C).

39. Treas. Regs. Section 1.509(a)-4(i)(6).

40. See Treas. Regs. Section 1.509(a)-4(i)(4)(ii).

41. See Temporary Treas. Regs. Section 1.509(a)-4T(i)(8)(ii).

42. Treas. Regs. Section 1.509(a)-4(i)(6).

43. Treas. Regs. Section 1.509(a)-4(i)(7).

44. Temp. Treas. Reg. Section 1.509(a)-4T(i)(8).

45. Treas. Regs. Section 1.509(a)-4(i)(11).

46. Treas. Regs. Section 1.509(a)-4(i)(11)(ii)(E).

47. Explanation 7. Consequences of Failure to Meet Requirements.