CPA Writes to IRS on Supporting Organizations

We realize you are working hard to revise instructions for the Form 990 series and write guidance for organizations impacted by provisions of the Pension Protection Act of 2006. We write to share our client memorandum entitled Functionally Integrated -- Finding a Definition written to aid our supporting organizations who wish to so qualify themselves.

SELF-ASSESSMENT by SOs: We also write to urge you to endorse the recommendation of the Council on Foundations that would allow a private foundation to rely on the "written good faith representation of a grantee" with respect to its supporting organization classification or, as noted below, other public charity status.

As you know, a majority of support organizations are genuine charitable entities. In our practice, most exist to hold real property and investment assets for section 509(a)(1) and (a)(2) public charities. Many are created with a separately-controlled board rather than being controlled by the supported organization(s). This structure has been recommended by professionals in our area for years to provide a corporate veil to protect the assets. Now the Type III status resulting from that organizational structure presents a serious fundraising burden to those SOs. In view of this problem, we have a number of Type III SOs that have already changed, or plan to change, their governance structure to be eligible for Type I or II classification.

NEW DETERMINATION LETTERS: A surprising number of our private foundation clients today have this classic Type III supporting organization on their pending grants list. To compound the difficult consequences of the new rules, we have discovered many clients that file as, and hold determination letters that reflect, section 509(a)(1) and (2) status incorrectly identified with coded 17, or support organizations, on the IRS Master List. It appears the list has not been updated for changes submitted with Form 990s in the past or even for organizations that were issued new determination letters.

We hope that you may assign a group of Cincinnati agents knowledgeable about this issue to expeditiously issue new determinations letters for organizations whose classification needs to be changed. Meanwhile, we hope you can provide guidance to allow private foundations to use a "good faith" self assertion by potential grantees of their public charity classification.

We appreciate the incredible burden these new tax provisions place on your agency and thank you for your enlightened service to our sector.