IRS Definitions of 509(a)(1), 509(a)(2), or 509(a)(3) Organizations
Every organization described in IRC 501(c)(3) is further classified under IRC 509(a) as either 1) a private foundation, or 2) other than a private foundation if it qualifies under IRC 509(a)(1), (2), (3), or (4).
- Private foundations typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources). Organizations that are qualified under IRC 509(a)(1) include churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, and organizations that have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities. Organizations qualified under IRC 509(a)(2) receive income from the conduct of activities in furtherance of the organization’s exempt purposes. Organizations qualified under IRC 509(a)(3) actively function in a supporting relationship to one or more IRC 509(a)(1) or (2) organizations.
- An organization may request IRC 509(a)(3) status either 1) when it initially files a Form 1023 application for IRC 501(c)(3) exemption, or 2) subsequently, by requesting a determination letter that changes its existing foundation status. A nonexempt charitable trust described in IRC 4947(a)(1) may also request a determination that it is described in IRC 509(a)(3), even though it is has not been recognized as an IRC 501(c)(3) organization, pursuant to Revenue Procedure 72-50, 1972-2 I.R.B. 830. For information about Rev. Proc. 72-50, see FY 1980 Continuing Professional Education text entitled General Explanation of Trusts Subject to Section 4947 of the Internal Revenue Code.
- The Pension Protection Act of 2006 (PPA of 2006) modified the statutory scheme applicable to supporting organizations to address concerns that some supporting organizations were being used to inappropriately benefit private interests. This guide sheet inquires about supporting organization arrangements that lend themselves to private benefit abuses, including situations where a supporting organization makes loans, grants, or compensation payments to or for the benefit of donors or donors’ families and businesses. The guide sheet also inquires about situations where the supporting organization is a recipient of closely held stock, personal residences, partnership interests, sole proprietorships, or insurance policies, as these asset types may be manipulated for the benefit of donors or donors’ families and businesses. In these circumstances, one needs to consider possible denial of IRC 501(c)(3) exemption, or possible denial of IRC 509(a)(3) supporting organization status.