Supporting organization (charity)

A supporting organization, in the United States, is a public charity that operates under the U.S. Internal Revenue Code in 26 USCA 509(a)(3). A supporting organization either makes grants to, or performs the operations of, a public charity similar to a private foundation. However, unlike donations to a private foundation, donations to a supporting organization garner the same higher deduction rate as donations to public charities. However, supporting organizations allow less control over the organization to the founders than private foundations. The Internal Revenue Code calls a public charity that relies on a supporting organization a "supported organization".

The Tax Reform Act of 1969 created private foundations and imposed greater restrictions on this classification, including excise taxes and lower donor deductions for contributions. This Act created supporting organizations as an exception to private foundations—because they are organized, operated, and controlled in the public interest. Supporting organizations are not subject to the problems and abuses found in foundations that led to the creation and associated restrictions on private foundations.

Mostly large and medium-sized donors created supporting organizations in order to retain some control over their donated assets. Type III supporting organizations comprised the sort of supporting organization with the least surveillance by the supported organizations, which meant greater donor control, and so Type III supporting organizations quickly became the favored form.

Despite this flexibility, few donors outside of high and middle-high value donors created supporting organizations due to complex regulations and tax code provisions governing the formation and operation of supporting organizations. This entailed high transaction costs. Further, the demands of the tax code and associated regulations required the Type III supporting organizations to make such great relative donations of activity or grants to assure the attentiveness of the supported organizations.

As a consequence, supporting organizations (particularly Type III) proved attractive to high and middle-high value donors with anecdotal evidence of their widespread abuse.

Supporting organizations became subject to much criticism upon two perceived abuses.

One perceived abuse related to control. Senators Baucus and Grassley argued that supporting organizations, particularly Type III, allowed donors to retain too much control over their assets.

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