If a donor would like the deduction benefits associated with a supporting organization, but wishes to fund different charities from year to year, a supporting organization could be established for a community foundation. Even though the donor (and any designated appointees) may have only a minority presence on the board of the supporting organization, the donor would have the ability to both propose and review requests for funding/grants. If grants are made to qualified 501(c)(3) organizations, the community foundation usually approves the grants.

Control of the Organization: The supported charity must "control" the supporting organization. Under IRS rules, the majority of the supporting organization’s board of directors are to be appointed by the supported charity. Additionally, the board cannot be controlled by people who would be "disqualified persons" if the organization were a private foundation (for example, substantial contributor, manager of the supporting organization). The articles of incorporation must include a liquidation clause indicating that the supporting organization’s assets are to be distributed to the supported charity on termination.

There are other means of establishing the required "control" of the supporting organization, but these are more difficult to prove. What the IRS is looking for is assurance that the supported charity will appropriately supervise the supporting organization. The IRS has accepted indirect control. For example, in situations where the supporting organization provides essentially all the funding for a specific charity (i.e., the supported charity could not function without the supporting organization), the IRS has concluded that the charity has indirect control of the supporting organization.

The donor (or his/her appointees) can be on the supporting organization’s board, but cannot control the board. Although the supported charity has the technical right to control the supporting organization, restrictions regarding the programs to be funded may be included in the supporting organization’s articles of incorporation. The board of the supporting organization would be bound by these restrictions. In this way, a supporting organization could make distributions to specific programs conducted by the supported charity (rather than unrestricted donations to the supported charity).

Distribution of Funds: The supporting organization’s net income need not be distributed annually to the charity -- the income may be retained for use in the future. This is an important feature if the organization is funding a building or other capital improvement project. Additionally, distributions can be paid to third parties on behalf of the charity (a typical arrangement when the supported organization is a community foundation).

When to Consider a Supporting Organization: For donors who are considering donating assets other than publicly traded stock to a private foundation, donating the assets to a supporting organization could be a better alternative. The donor would receive a charitable deduction for the fair market value of assets donated to the supporting organization (subject to the percent of AGI limitation). If the assets were donated to a private foundation, the deduction would be limited to the donor’s cost basis in the assets. The estate tax deduction is unlimited for donations to both private foundations and supporting organizations.

Obtain Tax-Exemption Letter: It is not difficult to obtain tax-exempt status for a supporting organization provided (1) the selected charity is willing to be associated with the supporting organization, and (2) the articles of incorporation include the control provisions discussed above. In most cases, a substantial donation to a supporting organization should not be made before receiving a tax-exemption letter from the IRS. It can take several months to obtain the letter; therefore, establishing a supporting organization should not be a year-end tax planning activity.

Converting Private Foundations: By making changes to the articles of incorporation, a private foundation could be converted to a supporting organization for public charities. IRS approval would be required after such conversions to recognize the change in status.