use of one or more supported organizations amounts equaling or exceeding its annual distributable amount on or before the last day of the year involved. These supporting organizations are required to annually distribute an amount equal to the greater of 85 percent of adjusted net income or 3.5 percent of the fair market value of the supporting organization's non-exempt-use assets.479 This payout approach includes a form of set-aside.
Pursuant to the attentiveness requirement, a supporting organization generally must distribute at least one-third of its annual distributable amount to one or more supported organizations that are attentive to the operations of the supporting organization and to which the supporting organization is responsive. An alternative way to meet this test is for the organization to be a trust that, on November 20, 1970, met and continues to meet various requirements if, for years beginning after October 16, 1972, the trustee makes annual written reports containing certain information to the supported organization.480
For purposes of the distribution requirement, the amount of a distribution made to a supporting organization is the fair market value of the property as of the date the distribution is made.481 This amount is determined using the cash receipts and disbursements method of accounting. Distributions that qualify for the distribution requirement include an amount (1) paid to a supported organization to accomplish its exempt purposes, (2) paid to acquire an asset used (or held for use) to carry out the exempt purposes of the supported organization(s), and (3) expended by the supporting organization for reasonable and necessary administrative expenses.
Generally, if with respect to a year an excess distribution amount is created, the excess amount may be used to reduce the annual distributable amount in any of the five years immediately following the year in which the excess amount was created.482 An excess amount is created where the total distributions made by a supporting organization to its supported organization(s) for a year exceed the supporting organization's annual distributable amount for the year.
The tax regulations include extensive rules for ascertaining whether an asset is used or held for use to carry out exempt purposes of a supporting organization, determining the fair market value of various types of non-exempt-use assets of a supporting organization, and the timing of valuations.483
The private foundation excess business holdings rules484 are applicable to Type III supporting organizations, other than functionally integrated Type III supporting organizations.485 A functionally integrated Type III supporting organization is a Type III supporting organization that is not required by the tax regulations486 to make payments to supported organizations.487 These business holdings rules also apply to a Type II supporting organization if the organization accepts a contribution from a person (other than a public charity, not a supporting organization) who controls, either alone or with family members and/or certain controlled entities, the governing body of a supported organization of the supporting organization.488 Nonetheless, the IRS has the authority to not impose the excess business holdings rules on a supporting organization if the organization establishes that the holdings are consistent with the organization's tax-exempt status.489
A nonoperating private foundation may not treat as a qualifying distribution490 an amount paid to a Type III supporting organization that is not a functionally integrated Type III supporting organization or to any other type of supporting organization if a disqualified person with respect to the foundation directly or indirectly controls the supporting organization or a supported organization of the supporting organization.491 An amount that does not count as a qualifying distribution under this rule is regarded as a taxable expenditure.492
A supporting organization can be created to support and benefit one or more tax-exempt social welfare organizations,493 labor or agricultural organizations,494 or business leagues (trade, business, or professional associations),495 as long as the supported organization (or organizations) meets the one-third support test of the rules concerning the service-provider type of publicly supported organization.496
A supporting organization must not be controlled directly or indirectly by one or more disqualified persons (other than foundation managers), excluding public charitable organizations.497
The Department of the Treasury was directed by Congress to undertake a study on the organization and operation of supporting organizations, to consider whether (1) the deductions allowed for income, estate, or gift taxes for charitable contributions to supporting organizations are appropriate in consideration of the use of contributed assets or the use of the assets of such organizations for the benefit of the person making the charitable contribution and (2) these issues are also issues with respect to other forms of charitable organizations or charitable contributions.498
(b) Other Nonprivate Foundations
Three other categories of charitable organizations499 are treated as entities other than private foundations for purposes of the law of charitable giving. This means that contributions to these entities may be deductible up to the 50 percent limitation.500 These categories are:
1 Private operating foundations.501 This type of private foundation is an organization that would be a standard private foundation but for the fact that most of its earnings and much of its assets are devoted directly to the conduct of its charitable activities.502
2 Conduit foundations.503 This type of private foundation makes timely qualifying distributions (usually grants)504 that are treated as distributions out of corpus, in an amount equal in value to all contributions received in the year involved, whether as cash or property.505
3 Common fund foundations.506 This type of private foundation pools contributions received in a common fund but allows donors to retain the right to designate annually the organizations to which the income attributable to the
