On Aug. 17, 2006, President Bush signed the Pension Protection Act (PPA) of 2006 (aka HR 4) into law. The highly complex law includes a number of charitable reforms. It effectively modifies the Internal Revenue Code (IRC) so that, among other things, payments on grants or contracts by non-operating private foundations such as Sierra Health Foundation to supporting organizations, known as 509(a)(3) organizations, do not count as qualifying distributions – a vital consideration when foundations award grants and contracts.
All 501(c)(3) nonprofits that are not private foundations have a secondary IRC coding that identifies the organization as a public charity. These codes are 509(a)(1), (2) or (3). Further, 509(a)(3) public charities (supporting organizations) actively function in a supporting relationship to one or more IRC 509(a)(1) or (2) organizations (supported organizations). Supported organizations are tax-exempt organizations that receive funds or services from a supporting organization.
Under the PPA of 2006, supporting organizations are classified into Type I, II and III supporting organizations. Type I supporting organizations are operated, supervised or controlled by one or more IRC 509(a)(1) or (2) organizations. Type II supporting organizations are supervised or controlled in connection with one or more IRC 509(a)(1) or (2) organizations. Type III supporting organizations are operated in connection with one or more IRC 509(a)(1) or (2) organizations.
In addition, the law classifies Type III supporting organizations into the two categories: Type III supporting organizations that are not functionally integrated or functionally integrated Type III supporting organizations. Unfortunately, the IRC does not clearly define the differences between functionally integrated or the Types I, II and III, and applicant organizations and private foundations await further clarification from the IRS.
Until final guidance is issued that defines functionally integrated, private foundation funders are not considering funding requests from 509(a)(3) supporting organizations. To assist you in determining whether or not your organization is a 509(a)(3) supporting organization, you may refer to your original IRS Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code copy for information about the type, intent and purpose of your organization when the tax status was determined.
If your organization is identified as a 509(a)(3) supporting organization and you believe it should not be, contact the IRS at (877) 829-5500. The IRS will direct you to forms on its Web site that you can complete and submit back to the IRS along with required documentation for their reconsideration.
We have worked with 509(a)(3) supporting organizations that have successfully received new coding documentation from the IRS.