The Scope and Activities of 501(c)(3) Supporting Organizations

The Scope and Activities of 501(c)(3) Supporting Organizations By Thomas H. Pollak and Jonathan D. Durnford National Center for Charitable Statistics at the Urban Institute May 31, 2005 SUMMARY OF FINDINGS Supporting organizations provide a broad array of services, including grants and other financial benefits, to the organizations they support. This study found that nearly 92 percent of the large supporting organizations with no apparent grants in our sample did, in fact, provide significant financial services and benefits to their supported organizations. Complex business and legal reasons similar to those found in the for-profit world appear to lie behind the activities of most of these organizations. OVERVIEW In section 509(a)(3) of the Internal Revenue Code, Congress established a category of public charities commonly referred to as “supporting organizations” that are operated “exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more [public charities].” The implementing regulations written by the Treasury Department are extensive. They include numerous definitions and examples and span more than eight pages of small type in a popular version of federal tax regulations. (See I.R.C. § 1.509(a)-4 in RIA Federal Tax Regulations.) The law and its corresponding regulations give broad latitude to the types of support that such organizations may provide to their supported organizations. Supporting organizations are grouped by statute into three types, conveniently called Types I, II, and III. Types I and II are closely controlled by their supported organization or organizations. Type I supporting organizations are “operated, supervised or controlled by” their “parent” supported organizations. Typically, the board of the supported organization controls the board of the supporting organization. Type II supporting organizations are “supervised or controlled in connection with” their supported organization. They stand in a “sibling” relationship to their supported organization. To take a simplified example, the organizations were both created by the same philanthropist and board members on one organization sit on the other’s as well. Type III organizations are “operated in connection with” their supported organizations. Thus, there is no The Scope and Activities of 501(c)(3) Supporting Organizations Page 2 requirement for formal control by their supported organizations. It is these Type III organizations that have been the object of most concern to policymakers and regulators.1 The Application for Recognition of Exemption (IRS Form 1023) that new public charities must complete requires that supporting organizations identify their type. Unfortunately, the IRS does not include type in its databases so there is no way, short of sampling the original Form 1023s, to know how many organizations of each type exist. Table 1: Operating and Supporting Public Charities, 2003 (Dollars are in millions) Number Total revenue Total assets Net assets Supporting orgs 30,56610.6%$74,3377.5%$301,22016.8%$191,60417.6%Other public charities 258,71789.4%919,26492.5%1,490,17883.2%894,14582.4%Total 289,283100.0%993,601100.0%1,791,398100.0%1,085,749100.0%Source: National Center for Charitable Statistics Core Public Charity File, Fiscal Year circa 2003. Note: Supporting organizations include all organizations that identified themselves as supporting organizations in either their initial IRS Form 1023 application for exemption or on their most recent annual IRS Form 990. Table 1 shows that nearly 11 percent of all 501(c)(3) public charities—more than 30,000 in all—identified themselves as supporting organizations on either their IRS Form 1023 (the initial application for exemption) or on their most recent annual IRS Form 990s. These organizations account only 7.5 percent of public charity revenues but a significantly larger percentage of public charities’ total assets (16.8%) and net assets (17.6%). Table 2: Major Types of Supporting Organizations, 2003 (Dollars are in millions) Number Total revenue Total assets Net assets Arts, culture, and humanities 1,441 4.7% $1,272 1.7%$7,110 2.4% $6,184 3.2%Education 8,077 26.4% 11,848 15.9%52,679 17.5% 38,699 20.2%Environment 497 1.6% 573 0.8%3,185 1.1% 2,126 1.1%Health 5,769 18.9% 41,206 55.4%126,582 42.0% 64,861 33.9%Human services 5,218 17.1% 7,334 9.9%23,495 7.8% 13,800 7.2%Other 9,564 31.3% 12,103 16.3%88,170 29.2% 65,935 34.4%Total 30,566 100.0% 74,337 100.0%301,220 100.0% 191,604 100.0% Source: National Center for Charitable Statistics Core P