Supporting Organizations Under 509(a)(3) – Pay Attention!

Do you remember what you were doing in 2006? We have staff accountants here who were just starting high school, few people had heard of Bernie Madoff and there were no iPhones (2007). In 2006 the Pension Protection Act of 2006 was signed into law by President Bush. The final 100 or so pages of the Act included several topics impacting the tax status of nonprofits, in particular Supporting Organizations qualifying as publicly supported charities under 509(a)(3).

To say this has moved at a glacial pace is not giving glaciers enough credit. With zero fanfare, eight years later the IRS has finally issued the revised Form 990 Schedule A to accommodate the Act. The first three pages of Schedule A are virtually identical to prior years. After that it gets interesting. For any organization that is recognized by the IRS as a 509(a)(3) Supporting Organization, you have five new pages to fill out. The questions and schedules are designed to flesh out an organization’s claim to be qualified under 509(a)(3).

The reason for the lengthy new form; it became evident that 509(a)(3) was fertile ground for abuse. A typical scheme allowed for an initial substantial contribution, which was then loaned back to the “donor” at a nominal interest rate. The 509(a)(3) would then contribute the interest payment to the supported organization. The “donor” got a big tax write off while retaining control over the funds. In many cases the supported organization did not even know of the existence of the organization which was supposedly set up specifically to support it – all perfectly legal although clearly beyond the bounds of what a charitable deduction should be. Most organizations that qualified under 509(a)(3) did so prior to 2006 – the form is now designed to make sure those organizations are valid Supporting Organizations under the “new” regulations.

Although this has been in the works for quite a while, the questions are somewhat arcane and require a fair amount of knowledge to answer correctly. If you have questions on the new form, please don’t hesitate to contact us.

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