Supporting organization loses tax-exempt status

By Stephen M. Clarke, J.D., Washington, D.C.; Melanie A. McPeak, CPA, Tampa, Fla.; Cal Hoke, Raleigh, N.C.; and Morgan Moran, E.A., Pittsburgh

Editor: Susan Minasian Grais, CPA, J.D., LL.M.

The IRS recently revoked the tax-exempt status of a Sec. 501(c)(3) entity previously recognized as a Sec. 509(a) (3) supporting organization (Letter from IRS Exempt Organizations Examinations, Number 202238018, released Sept. 23, 2022). It is uncommon for the Service to revoke the tax-exempt status of a supporting organization, despite the complexity and relatively unforgiving nature of the supporting organization requirements in the Code and regulations. The revocation notice sheds light on how the IRS determines qualification as a supporting organization under Sec. 509(a)(3).

After describing the organization in question and summarizing the pertinent law, this item discusses the IRS’s revocation decision and its implications.


Because the decision to revoke tax-exempt status turned on the facts, some details about the organization are necessary. According to the IRS’s revocation notice, the organization’s purpose was to operate exclusively for the benefit of, and in connection with, its supported organization — a public charity recognized under Sec. 501(c) (3) — by organizing local interviews for applicants to the supported organization and hosting receptions for accepted applicants. The organization’s articles of incorporation also stated that the organization would raise funds for the supported organization to establish and award scholarships.

The organization’s bylaws did not require the organization’s trustees or board members to be members of the supported organization or that the supported organization control or supervise the organization.

The organization’s activities included holding a certain number of meetings each calendar year. Meetings were held (1) to welcome those who were admitted to the supported organization; (2) for group dinners, travel, and sporting events; and (3) for a year-end picnic. Dues paid to the organization did not provide any specific benefits but were to help pay for these activities to benefit the supported organization.

On a recent information return, the organization indicated that none of its officers, directors, or trustees were appointed or elected by the supported organization or served on the supported organization’s governing board. In response to a question on an IRS form asking how the organization maintained a close relationship with the supported organization, the organization simply wrote “facts and circumstances test” without explaining those facts or circumstances. The supporting organization also stated on the return that the supported organization did not “have a significant voice” in the supporting organization’s investment policies or in directing the use of its income or assets. The IRS revocation letter states that the organization’s treasurer acknowledged that the organization did not qualify as a supporting organization under Sec. 509(a)(3), but “does qualify as a not-for-profit charitable organization, fully supported by contributions and investment earnings, benefiting [redacted] with its activities, and spending only to further its goals in promoting education.”


Under Regs. Sec. 1.509(a)-4(b)(1), to qualify as a supporting organization, a Sec. 509(a)(3) organization must be both organized and operated exclusively “for the benefit of, to perform the functions of, or carry out the purposes of … one or more specified publicly supported organizations.”

Further, a Type III supporting organization that is operated in connection with (as opposed to a Type I or II supporting organization that is supervised or controlled by, or in connection with) one or more supported organizations must satisfy the requirements of the “responsiveness test” under Regs. Sec. 1.509(a)-4(i)(3) by being responsive to the needs or demands of its supported organization(s). A supporting organization can satisfy this requirement only if (1) at least one of its officers, directors, or trustees was elected or appointed by the supported organization’s officers, directors, trustees, or membership; (2) at least one member of the supported organization’s governing body is an officer, director, trustee, or other important individual in the supporting organization; or (3) its officers, directors, or trustees maintain a close, continuous working relationship with the supported organization’s officers, directors, or trustees (Regs. Sec. 1.509(a)-4(i)(3)(ii)).

Finally, for a Type III supporting organization to meet the responsiveness test, the officers, directors, or trustees of the supported organization must “have a significant voice in the investment policies of the supporting organization, the timing of grants, the manner of making grants, and the selection of grant recipients by [the] supporting organization, and in otherwise directing the use of the income or assets of the supporting organization” (Regs. Sec. 1.509(a)-4(i)(3)(iii)).

IRS conclusion

The IRS revoked the supporting organization’s Sec. 501(c)(3) and Sec. 509(a) (3) tax-exempt supporting organization status because it did not satisfy the Type III supporting organization responsiveness test and did not operate exclusively for charitable purposes. The organization failed the responsiveness test because none of its officers, directors, or trustees were elected or appointed by the supported organization; the two organizations had no officers, directors, or trustees in common; the supporting organization’s officers, directors, and trustees did not maintain a close, continuous working relationship with their counterparts in the supported organization; and the supported organization did not have a significant voice in the entity’s investment policies or grantmaking activities. The IRS explained that the organization was not operated exclusively for charitable purposes because its activities were more social than charitable in nature. In fact, the IRS suggested that the organization should consider applying for IRS recognition of exemption as a Sec. 501(c)(7) social club.


The revocation notice in this case sheds some light on the IRS’s review process for determining qualification as a supporting organization under Sec. 509(a) (3). For instance, the IRS analyzed whether this organization met the Type III responsiveness test but did not include an analysis in the letter regarding whether or how it met the Type III integral-part test or other supporting organization requirements. Rather, the IRS suggested in the revocation letter that this organization would be more likely to qualify under Sec. 501(c)(7) as a social club — that is, a club organized and operated exclusively “for pleasure, recreation, and other nonprofitable purposes.” This revocation underscores the need for careful planning to ensure that an organization is both organized and operated exclusively for tax-exempt charitable purposes before applying for IRS recognition of Sec. 501(c)(3) tax-exempt status or otherwise claiming that status.

Editor Notes

Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C. Contributors are members of or associated with Ernst & Young LLP. For additional information about these items, contact Ms. Grais at 202-327-8788 or

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