Congress, in the Pension Protection Act of 2006 (the “PPA”), directed the
Internal Revenue Service to issue regulations imposing payout requirements for
certain Type III supporting organizations. These regulations are to apply to
Type III supporting organizations that are not “functionally integrated” within
the meaning of the PPA and were to ensure that a “significant amount” is paid to
such organizations. On August 2, 2007, the IRS issued proposed regulations that
impose a new minimum payout on Type III supporting organizations and address
other provisions of the PPA applicable to supporting organizations. The text of
the proposed regulations can be found on the
Definition of “Functionally Integrated”
The proposed regulations define the term “functionally integrated,” which is
key to determining whether a number of provisions of the PPA apply to a Type III
supporting organization. A functionally integrated Type III organization is one
that is not required to make payments to supported organizations because the
activities of the organization are related to performing the functions, or
carrying out the purposes of, such supported organizations.
These proposed criteria will replace the integral part test in the existing
regulations. The functionally integrated category will encompass organizations
that meet the “but for” test in existing Treas. Reg. §1.509(a)-4(i)(3)(ii), an
expenditure test consistent with Code §4942(j)(3)(A), and an assets test
consistent with Code §4941(j)(3)(B)(i).
New Five-Percent Payout Requirements for Non-Functionally Integrated Type
Type III supporting organizations that are not functionally integrated Type
IIIs, under the proposed regulations, will be required to meet a new minimum
payout requirement and may only support a limited number of organizations.
Similar to the private foundation minimum distribution rules, the payout
requirement will require an annual distribution of at least 5 percent of the
aggregate fair market value of all of an organization’s assets. In order to meet
this requirement and maintain the same level of endowment, an organization may
need an actual investment return of 8 or 9 percent in order to offset inflation
and investment management expenses.
The number of publicly supported organizations that a non-functionally
integrated Type III supporting organization may support will be limited to no
more than 5 publicly supported organizations. One exception is made for
organizations already in existence, which may support more than 5 organizations,
but only if the supporting organization distributes at least 85 percent of its
total required payout to organizations to which it is responsive.
In accordance with the provisions of the PPA applicable to charitable trusts
classified as Type III supporting organization, the proposed regulations no
longer allow for a charitable trust to qualify as a Type III supporting
organizations if it only satisfies the responsiveness test because it is a
charitable trust under state law, the supported organization is a beneficiary of
the trust, and the supported organization has the power to enforce the trust and
compel an accounting under applicable state law.
These charitable trusts must now satisfy the responsiveness test under
Treasury Regulation §1.509(a)-4(i)(2)(ii). Thus, a trust must show that the
trustees have a close, continuous working relationship with the officers,
directors, or trustees of its supported organization, and that this relationship
results in the officers, directors, or trustees of such organization having a
significant voice in the operations of the trust.
In Notice 2008-6 released on January 22, 2008, the IRS announced transitional
relief for existing charitable trusts affected by this change. Under this
relief, charitable trusts that became private foundations as of August 17, 2007
should continue to file Form 990 for tax years beginning before 2008 and will
not be required to pay any excise taxes on net investment income un
Information Supplied to Supported Organization
The PPA requires Type III supporting organizations to provide their supported
organization(s) with certain information to ensure that it is responsive to the
needs of such organization. The proposed regulations provide new guidance as to
the form, content, and timing of the required information.