In a tightly written plain English opinion, the D.C. Circuit Court of Appeals in Polm Family Foundation v. U.S. explained an important requirement of Type II supporting organizations.
To be a Type II supporting organization, a charity must satisfy three tests:
- the organizational test set forth in IRC Section 509(a)(3)(A),
- the relationship test set forth in IRC Section 509(a)(3)(B)(ii), and
- the control test set forth in IRC Section 509(a)(3)(C).
While the district court concluded that the charity failed both the relationship test and the control test, the Court of Appeals based its decision on the failure to satisfy the organizational test. The Court said that this test was the most straightforward.
All supporting organizations must satisfy the organizational test – to be organized and operated exclusively for the benefit, functions and purposes of one or more "specified" public charities.
The regulations permit a Type II supporting organization to satisfy the specification requirement by designating a "readily identifiable" class of supported charities, but need not identify them by name.
The problem with this charity was that its certificate of incorporation designated as supported organizations,
"the class of organizations . . . which support, promise and/or perform public health and/or Christian objectives, including but not limited to Christian evangelism, edification and stewardship."
The court agreed with the IRS that this formulation does not make the supported organizations "readily identifiable" – there is no limit on geographic area and no limit on types, such as churches or seminaries. Therefore, it is not a public charity but a private foundation.
It is not clear what level of specificity would have been satisfactory. It is clear, however, that charities should attempt to iron out the parameters with the IRS rather than go through the expense and agony of litigation.
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