Absence of control by disqualified persons.   The third requirement an organization must meet to qualify as a supporting organization requires that the organization not be controlled directly or indirectly by one or more disqualified persons (other than foundation managers or one or more publicly-supported organizations).

Disqualified persons.    For the purposes of the rules discussed in this publication, the following persons are considered disqualified persons:

1. All substantial contributors to the foundation.
2. All foundation managers of the foundation.
3. An owner of more than 20% of:
   1. The total combined voting power of a corporation that is (during such ownership) a substantial contributor to the foundation,
   2. The profits interest of a partnership that is (during such ownership) a substantial contributor to the foundation, or
   3. The beneficial interest of a trust or unincorporated enterprise that is (during such ownership) a substantial contributor to the foundation.
4. A member of the family of any of the individuals just listed.
5. A corporation of which more than 35% of the total combined voting power is owned by persons just listed.
6. A partnership of which more than 35% of the profits interest is owned by persons described in (1), (2), (3), or (4).
7. A trust, or estate, of which more than 35% of the beneficial interest is owned by persons described in (1), (2), (3), or (4).

Remember, however, that foundation managers and publicly-supported organizations are not disqualified persons for purposes of the third requirement under section 509(a)(3).

If a person who is a disqualified person with respect to a supporting organization, such as a substantial contributor, is appointed or designated as a foundation manager of the supporting organization by a publicly-supported beneficiary organization to serve as the representative of the publicly-supported organization, that person is still a disqualified person, rather than a representative of the publicly-supported organization.

An organization is considered controlled for this purpose if the disqualified persons, by combining their votes or positions of authority, may require the organization to perform any act that significantly affects its operations or may prevent the organization from performing the act. This includes, but is not limited to, the right of any substantial contributor or spouse to designate annually the recipients from among the publicly-supported organizations of the income from his or her contribution. Except as explained under Proof of independent control, next, a supporting organization will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of those persons is 50% or more of the total voting power of the organization's governing body, or if one or more of those persons have the right to exercise veto power over the actions of the organization.

Thus, if the governing body of a foundation is composed of five trustees, none of whom has a veto power over the actions of the foundation, and no more than two trustees are at any time disqualified persons, the foundation is not considered controlled directly or indirectly by one or more disqualified persons by reason of this fact alone. However, all pertinent facts and circumstances (including the nature, diversity, and income yield of an organization's holdings, the length of time particular stocks, securities, or other assets are retained, and its manner of exercising its voting rights with respect to stocks in which members of its governing body also have some interest) are considered in determining whether a disqualified person does in fact indirectly control an organization.

Proof of independent control.   An organization is permitted to establish to the satisfaction of the IRS that disqualified persons do not directly or indirectly control it. For example, in the case of a religious organization operated in connection with a church, the fact that the majority of the organization's governing body is composed of lay persons who are substantial contributors to the organization will not disqualify the organization under section 509(a)(3) if a representative of the church, such as a bishop or other official, has control over the policies and decisions of the organization.

Category two.   This category includes organizations operated in connection with one or more organizations described in section 509(a)(1) or 509(a)(2).

This kind of section 509(a)(3) organization is one that has certain types of operational relationships. If an organization is to qualify as a section 509(a)(3) organization because it is operated in connection with one or more publicly-supported organizations, it must not be controlled by disqualified persons (as described earlier) and it must meet an organizational test, a responsiveness test, an integral-part test, and an operational test.

Organizational test.   This test requires that the organization, in its governing instrument:

1. Limit its purposes to supporting one or more publicly-supported organizations,
2. Designate the organizations operated, supervised, or controlled by, and
3. Not have express powers inconsistent with these purposes.

These tests apply to all supporting organizations.

In the case of an organization that is operated in connection with one or more publicly-supported organizations, however, the designation requirement under the organizational test can be satisfied using either of the following two methods.

Method one.   If an organization is organized and operated to support one or more publicly-supported organizations and it is operated in connection with that type of organization or organizations, then, its articles of organization must designate the specified organizations by name to satisfy the test. But a supporting organization that has one or more specified organizations designated by name in its articles will not fail the organizational test solely because its articles:

1. Permit a publicly-supported organization, that is designated by class or purpose rather than by name, to be substituted for the publicly-supported organization or organizations designated by name in the articles, but only if the substitution is conditioned upon the occurrence of an event that is beyond the control of the supporting organization, such as loss of exemption, substantial failure or abandonment of operations, or dissolution of the organization or organizations designated in the articles,
2. Permit the supporting organization to operate for the benefit of an organization that is not a publicly-supported organization, but only if the supporting organization is currently operating for the benefit of a publicly-supported organization and the possibility of its operating for the benefit of other than a publicly-supported organization is remote, or
3. Permit the supporting organization to vary the amount of its support between different designated organizations, as long as it meets the requirements of the integral-part test (discussed later) with respect to at least one beneficiary organization.

If the beneficiary organization referred to in (2) is not a publicly-supported organization, the supporting organization will not meet the operational test. Therefore, if a supporting organization substituted a beneficiary other than a publicly-supported organization and operated in support of that beneficiary, the supporting organization would not be one described in section 509(a)(3).

Method two.   If a historic and continuing relationship exists between the supporting organization and the publicly-supported organizations, and because of this relationship, a substantial identity of interests has developed between the organizations, then the articles of organization will not have to designate the specified organization by name.

Responsiveness test.    An organization will meet this test if it is responsive to the needs or demands of the publicly-supported organizations. To meet this test, either of the following must be satisfied.

1. The publicly-supported organizations must elect, appoint, or maintain a close and continuous working relationship with the officers, directors, or trustees of the supporting organization. (Consequently, the officers, directors, or trustees of the publicly-supported organizations have a significant voice in the investment policies of the supporting organization, the timing of grants and the manner of making them, the selection of recipients, and generally the use of the income or assets of the supporting organization.)
2. The supporting organization is a charitable trust under state law, each specified publicly-supported organization is a named beneficiary under the trust's governing instrument, and the beneficiary organization has the power to enforce the trust and compel an accounting under state law.

For an organization that was supporting or benefiting one or more publicly-supported organizations before November 20, 1970, additional facts and circumstances, such as a historic and continuing relationship between organizations, may be taken into account in addition to the factors described earlier to establish compliance with the responsiveness test.

Integral-part test.    The organization will meet this test if it maintains a significant involvement in the operations of one or more publicly-supported organizations and these organizations are in turn dependent upon the supporting organization for the type of support that it provides. To meet this test, either of the following must be satisfied (unless transitional rules, discussed later, apply):

1. The activities engaged in for, or on behalf of, the publicly-supported organizations are activities to perform the functions of or to carry out the purposes of the organizations, and, but for the involvement of the supporting organization, would normally be engaged in by the publicly-supported organizations themselves, or
2. The supporting organization makes payments of substantially all of its income to, or for the use of, publicly-supported organizations, and the amount of support received by one or more of these publicly-supported organizations is enough to insure the attentiveness of these organizations to the operations of the supporting organization.

If item (2) is being relied on, a substantial amount of the total support of the supporting organization also must go to those publicly-supported organizations that meet the attentiveness requirement with respect to the supporting organization. Except as explained in the next paragraph, the amount of support received by a publicly-supported organization must represent a large enough part of the organization's total support to insure such attentiveness. In applying this, if the supporting organization makes payments to, or for the use of, a particular department or school of a university, hospital, or church, the total support of the department or school must be substituted for the total support of the beneficiary organization.

Even when the amount of support received by a publicly-supported beneficiary organization does not represent a large enough part of the beneficiary organization's total support, the amount of support received from a supporting organization may be large enough to meet the requirements of item (2) of the integral-part test if it can be demonstrated that, in order to avoid the interruption of a particular function or activity, the beneficiary organization will be sufficiently attentive to the operations of the supporting organization. This may occur when either the supporting organization or the beneficiary organization earmarks the support received from the supporting organization for a particular program or activity, even if the program or activity is not the beneficiary organization's primary program or activity, as long as the program or activity is a substantial one.

All factors, including the number of beneficiaries, the length and nature of the relationship between the beneficiary and supporting organization, and the purpose to which the funds are put, will be considered in determining whether the amount of support received by a publicly-supported beneficiary organization is large enough to insure the attentiveness of the organization to the operations of the supporting organization.

Normally, the attentiveness of a beneficiary organization is motivated by the amounts received from the supporting organization. Thus, the more substantial the amount involved, in terms of a percentage of the publicly-supported organization's total support, the greater the likelihood that the required degree of attentiveness will be present. However, in determining whether the amount received from the supporting organization is large enough to insure the attentiveness of the beneficiary organization to the operations of the supporting organization (including attentiveness to the nature and yield of the supporting organization's investments), evidence of actual attentiveness by the beneficiary organization is of almost equal importance.

Imposing this requirement is merely one of the factors in determining whether a supporting organization is complying with the attentiveness test. The absence of this requirement will not preclude an organization from classification as a supporting organization if it complies with the other factors.

However, when none of the beneficiary organizations are dependent upon the supporting organization for a large enough amount of their support, the requirements of item (2) of the integral-part test will not be satisfied, even though the beneficiary organizations have enforceable rights against the supporting organization under state law.

If an organization cannot meet the requirements of item (2) of the integral-part test for its current tax year solely because the amount received by one or more of the beneficiaries from the supporting organization is no longer large enough, it can still qualify under the integral-part test if it can establish that it has met the requirements of item (2) of the integral-part test for any 5-year period and that there has been an historic and continuing relationship of support between the organizations between the end of the 5-year period and the tax year in question.

Transitional rule.   A charitable trust created before November 20, 1970, will meet the integral-part test if for tax years beginning after October 16, 1972, the trustee makes annual written reports to all publicly-supported beneficiary organizations giving a description of the trust assets (including a detailed list of the assets and the income produced by them) and if the following five conditions have been met continuously since November 20, 1970.

1. All the unexpired interests in the trust are devoted to charitable purposes.
2. The trust did not receive any grant, contribution, bequest, or other transfer on or after November 20, 1970.
3. The trust is required by its governing instrument to distribute all its net income currently to designated publicly-supported beneficiary organizations.
4. The trustee does not have discretion to vary either the beneficiaries or the amounts payable to the beneficiaries.
5. None of the trustees would be disqualified persons (other than foundation managers) with respect to the trust if the trust were treated as a private foundation.

Operational test.   The requirements for meeting the operational test for organizations operated, supervised, or controlled by publicly-supported organizations (discussed earlier, beginning on page 29, under Qualifying As Publicly Supported) have limited applicability to organizations operated in connection with one or more publicly-supported organizations. This is because the operational requirements of the integral-part test, just discussed, generally are more specific than the general rules found for the operational test in the preceding category. However, a supporting organization can fail both the integral-part test and the operational test if it conducts activities of its own that do not constitute activities or programs that would, but for the supporting organization, have been conducted by any publicly-supported organization named in the supporting organization's governing instrument. A similar result occurs for such activities or programs that would not have been conducted by an organization with which the supporting organization has established an historic and continuing relationship.

An organization operated in conjunction with a social welfare organization, labor or agricultural organization, business league, chamber of commerce, or other organization described in section 501(c)(4), 501(c)(5), or 501(c)(6), may qualify as a supporting organization under section 509(a)(3) and therefore not be classified as a private foundation if both the following conditions are met.

1. The supporting organization must meet all the requirements previously specified (the organizational tests, the operational test, and the requirement that it be operated, supervised, or controlled by or in connection with one or more specified organizations, and not be controlled by disqualified persons).
2. The section 501(c)(4), 501(c)(5), or 501(c)(6) organization would be described in section 509(a)(2) if it was a charitable organization described in section 501(c)(3). This provision allows separate charitable funds of certain noncharitable organizations to be described in section 509(a)(3) if the noncharitable organizations receive their support and otherwise operate in the manner specified by section 509(a)(2).

Special rules of attribution.    To determine whether an organization meets the not-more-than-one-third support test in section 509(a)(2), amounts received by the organization from an organization that seeks to be a section 509(a)(3) organization because of its support of the organization are gross investment income (rather than gifts or contributions) to the extent they are gross investment income of the distributing organization. (This rule also applies to amounts received from a charitable trust, corporation, fund, association, or similar organization that is required by its governing instrument or otherwise to distribute, or that normally does distribute, at least 25% of its adjusted net income to the organization, and whose distribution normally comprises at least 5% of its adjusted net income.) All income that is gross investment income of the distributing organization will be considered distributed first by that organization. If the supporting organization makes distributions to more than one organization, the amount of gross investment income considered distributed will be prorated among the distributees.

Also, treat amounts paid by an organization to provide goods, services, or facilities for the direct benefit of an organization seeking section 509(a)(2) status (rather than for the direct benefit of the general public) in the same manner as amounts received by the latter organization. These amounts will be treated as gross investment income to the extent they are gross investment income of the organization spending the amounts. An organization seeking section 509(a)(2) status must file a separate statement with its annual information return, Form 990 or 990-EZ, listing all amounts received from supporting organizations.

Relationships created for avoidance purposes.   If a relationship between an organization seeking section 509(a)(3) status and an organization seeking section 509(a)(2) status is established or availed of after October 9, 1969, and one of the purposes of establishing or using the relationship is to avoid classification as a private foundation with respect to either organization, then the character and amount of support received by the section 509(a)(3) organization will be attributed to the section 509(a)(2) organization for purposes of determining whether the latter meets the support tests under section 509(a)(2). If this type of relationship is established or used between an organization seeking 509(a)(3) status and two or more organizations seeking 509(a)(2) status, the amount and character of support received by the former organization will be prorated among the latter organizations.

In determining whether a relationship exists between an organization seeking 509(a)(3) status (supporting organization) and one or more organizations seeking 509(a)(2) status (beneficiary organizations) for the purpose of avoiding private foundation status, all pertinent facts and circumstances will be taken into account. The following facts may be used as evidence that such a relationship was not established or availed of to avoid classification as a private foundation.

1. The supporting organization is operated to support or benefit several specified beneficiary organizations.
2. The beneficiary organization has a substantial number of dues-paying members who have an effective voice in the management of both the supporting and the beneficiary organizations.
3. The beneficiary organization is composed of several membership organizations, each of which has a substantial number of members, and the membership organizations have an effective voice in the management of the supporting and beneficiary organizations.
4. The beneficiary organization receives a substantial amount of support from the general public, public charities, or governmental grants.
5. The supporting organization uses its funds to carry on a meaningful program of activities to support or benefit the beneficiary organization and, if the supporting organization were a private foundation, this use would be sufficient to avoid the imposition of the tax on failure to distribute income.
6. The operations of the beneficiary and supporting organizations are managed by different persons, and each organization performs a different function.
7. The supporting organization is not able to exercise substantial control or influence over the beneficiary organization because the beneficiary organization receives support or holds assets that are disproportionately large in comparison with the support received or assets held by the supporting organization.

Effect on 509(a)(3) organizations.   If a beneficiary organization fails to meet either of the support tests of section 509(a)(2) due to these provisions, and the beneficiary organization is one for whose support the organization seeking section 509(a)(3) status is operated, then the supporting organization will not be considered to be operated exclusively to support or benefit one or more section 509(a)(1) or 509(a)(2) organizations and therefore would not qualify for section 509(a)(3) status.

Classification under section 509(a).   If an organization is described in section 509(a)(1), and is also described in either section 509(a)(2) or 509(a)(3), it will be treated as a section 509(a)(1) organization.

Reliance by grantors and contributors.    Once an organization has received a final ruling or determination letter classifying it as an organization described in section 509(a)(1), 509(a)(2), or 509(a)(3), the treatment of grants and contributions and the status of grantors and contributors to the organization will generally not be affected by reason of a later revocation by the IRS of the organization's classification until the date on which notice of change of status is made to the public (generally by publication in the Internal Revenue Bulletin) or another applicable date, if any, specified in the public notice. In appropriate cases, however, the treatment of grants and contributions and the status of grantors and contributors to an organization described in section 509(a)(1), 509(a)(2), or 509(a)(3) may be affected pending verification of the continued classification of the organization. Notice to this effect will be made in a public announcement by the IRS. In these cases, the effect of grants and contributions made after the date of the announcement will depend on the statutory qualification of the organization as an organization described in section 509(a)(1), 509(a)(2), or 509(a)(3).

The preceding paragraph shall not apply if the grantor or contributor:

1. Had knowledge of the revocation of the ruling or determination letter classifying the organization as an organization described in section 509(a)(1), 509(a)(2), or 509(a)(3), or
2. Was in part responsible for, or was aware of, the act, the failure to act, or the substantial and material change on the part of the organization that gave rise to the revocation.

Section 509(a)(4) Organizations

Section 509(a)(4) excludes from classification as private foundations those organizations that qualify under section 501(c)(3) as organized and operated for the purpose of testing products for public safety. Generally, these organizations test consumer products to determine their acceptability for use by the general public.

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