"Some promotors have encouraged individuals to establish and operate supporting organizations described in section 509(a)(3) [Type III SOs] for their own benefit. there are a variety of methods of abuse, but a common theme is a "charitable" donation of an amount to the supporting organization, and a return of the donated amounts to the donor, often in the form of a loan. To disguise the abuse, the transaction may be routed through one or more intermediary organizations controlled by the promoter." – Excerpted from "Section 509(a)(3) Supporting Organizations" on the IRS website.
Senate Finance Committee
"Eliminate Type III supporting organizations. This has been an area of significant abuse. Donor Advised Funds can effectively substitute to serve legitimate purposes of such organizations." – Excerpted from Staff Discussion Draft released by the Senate Finance Committee (p.2).
Recommendations to Congress from the Panel on the Nonprofit Sector:
"Type III supporting organizations add value to the charitable sector that cannot and should not be replaced by other types of organizations. To curb abuse in these organizations, Congress should establish minimum distribution requirements, prohibit payments to or for the benefit of donors or any related party, and institute rules to increase the voice of the supported organizations in the governance of the Type III organization. A Type III supporting organization should be prohibited from supporting more than five qualified entities or from supporting any organization that is controlled by the donor or a related party. It should be required to provide certain document to, and confirm the agreement of, its supported organizations at the time it files for recognition as a 501(c)(3) organization and when it files its annual Form 990 returns. Every supporting organization should be required to indicate on its Form 990 whether it is operating as a Type I, II, or III supporting organization." – Excerpted from Strengthening Transparency Governance Accountability of Charitable Organizations – a final report to Congress and the Nonprofit Sector, June 2005 (see also pages 45-48).
Recommendations from Council on Foundations:
- Do not abolish Type III supporting organizations ("SOs")
- Require new Type III SOs to obtain a statement from the supported organization ("SD") attesting that the SD has consented to be named as such and describing the support each named organization will receive
- Require Type III SOs to obtain a statement from the SD attesting to the level of support each year and include that statement with the SO’s Form 990
- Require the IRS to issue a revenue procedure that sets forth guidance on how Type III SOs can substantiate their relationship with the SD or, in the alternative, that an annual accounting of support or the reasons for no support be provided to the SD and to the IRS as part of the Form 990
- Require the IRS to issue a revenue procedure delineating the process by which a SD may notify the IRS of its withdrawal of consent to be named as a SD
- Bar loans from a Type III SO to the founder or any other "disqualified person"
– See "Key Recommendations from Council on Foundations Comments on Donor-Advised Funds and Supporting Organizations"