Schedule D. Section 509(a)(3) — 1224 Inst 1023 (PDF)

Supporting organizations are described in section 509(a)(3). The term “supported organization” refers to an organization that a supporting organization benefits. A supporting organization may support more than one supported organization.

It meets one of three required relationship tests (Type I, Type II, or Type III) with the supported organization(s); and
It isn’t controlled by “ disqualified persons,” directly or indirectly. See Appendix C for a definition of a “ disqualified person .”

An organization qualifies as a supporting organization (for purposes of classification under section 509(a)(3)) if:

It is organized and at all times thereafter is operated exclusively for the benefit of, to perform the function of, or to carry out the purposes of one or more public charities described in section 509(a)(1) or 509(a) (2);
The charge in excess of the amounts generally billed (AGB) wasn’t made or requested as a pre-condition of providing medically necessary care to the FAP-eligible individual;

Line 3. Relationship test. To qualify under section 509(a)(3), you must show that you meet one of three relationship tests with your supported organization(s). Select the option that best describes your relationship with your supported organization(s).

Type I (“operated, supervised, or controlled by” relationship; comparable to a parent–subsidiary relationship): A majority of your governing board or officers are elected or appointed by the governing body, members of the governing body, officers acting in their official capacity, or the membership of your supported organization(s).
Type II (“supervised or controlled in connection with” relationship; comparable to a brother–sister relationship): Your control or management is vested in the same persons who control or manage your supported organization(s).
Type III (“operated in connection with” relationship; responsive to the needs or demands of, and having significant involvement in the affairs of, the supported organization(s)): (a) One or more of your officers, directors, or trustees are elected or appointed by the officers, directors, trustees, or membership of your supported organization(s); (b) One or more of your officers, directors, trustees, or other important office holders are also members of the governing body of your supported organization(s); or (c) Your officers, directors, or trustees maintain a close and continuous working relationship with the officers, directors, or trustees of your supported organization(s).

If you don't meet one of these

TIP three relationship tests, you aren't

described in section 509(a)(3) and should review the other foundation classification options in Part VII, line 1.

Line 4. Describe how your governing board and officers are selected, including where (if applicable) this information is in your governing document, bylaws, or other internal rules and regulations.

As of the time of the charge, the FAP-eligible individual hadn’t submitted a complete FAP application and hadn’t otherwise been determined by the hospital facility to be FAP eligible for the care; and,
If the individual subsequently submits a complete FAP application and is determined to be FAP-eligible for care, the hospital facility refunds any amount that exceeds the amount they are determined to be personally responsible for paying as a FAP-eligible individual, unless such excess amount is less than $5.

Line 10d. Answer “Yes,” if the hospital facility has, or will have at the beginning of operation, either a separate written billing and collections policy, or include in a written FAP:

A description of any actions that the hospital facility (or other authorized party) may take related to obtaining payment of a bill for medical care, including, but not limited to, any extraordinary collection actions (ECAs);
The process and time frames the hospital facility (or other authorized party) uses in taking those actions (including, but not limited to, the reasonable efforts it will make to determine whether an individual is FAP-eligible before engaging in ECAs); and
The office, department, committee, or other body with the final authority or responsibility for determining that the hospital facility has made reasonable efforts to determine whether an individual is FAP-eligible and may therefore engage in ECAs against the individual.

A supporting organization can also support the charitable purposes of organizations that are exempt under sections 501(c)(4), (5), or (6).

Specific Line Items

Line 1. List the name, address, and EIN of each organization you support.

Line 2. Answer “Yes,” if each supported organization has a letter from the IRS recognizing it as a public charity under section 509(a)(1) or 509(a)(2).

Before you file your application,

TIP use Tax Exempt Organization

Search on IRS.gov to confirm whether each of your supported organizations is currently recognized as exempt and is classified as a public charity.

Line 2a. Answer “Yes,” if any supported organization you listed on line 1 received a letter from the IRS stating that it’s exempt under sections 501(c)(4), (5), or (6) and meets the public support test under section 509(a)(2). See Pub. 557 for information on the public support test for section 509(a)(2).

If you answer “No,” describe how each organization you support is a public charity under section 509(a)(1) or 509(a)(2). For example, if you support a church or foreign organization that hasn’t received a determination letter recognizing it as a public charity, you should describe how this organization qualifies as a public charity under section 509(a)(1) or 509(a) (2). See Pub. 557 for information on public charities under sections 509(a)(1) and 509(a)(2).

Have authority to affect significant decisions, such as power over your

If applicable, for Type III organizations describe how your officers, directors, or trustees maintain a close and continuing relationship with the officers, directors, or trustees of your supported organization(s).

Line 5. Prohibited control by disquali- fied person. You can’t be described in section 509(a)(3) if you’re directly or indirectly controlled by disqualified persons . You are controlled if disqualified persons:

Can exercise 50% or more of the total voting power of your governing body;

investment decisions, or power over your charitable disbursement decisions; or

Can exercise veto power over your actions.

Although control is generally demonstrated where disqualified persons have the authority over your governing body to require you to take an action or refrain from taking an action, indirect control by disqualified persons will also disqualify you as a supporting organization.

See Appendix C for a description of the terms “ disqualified person,” “ family,” “ foundation manager,” and “ business relationship .”

Public charities and foundation

TIP managers who otherwise are

disqualified persons only because they are foundation managers aren't disqualified persons for this purpose.

Line 7. Organizational test. If you answered “No,” and you are a Type III supporting organization, you must amend your organizing document to specify your supported organization(s) by name; or you won’t meet the organizational test under section 509(a)(3) and need to reconsider your requested public charity classification in Part VII, line 1.

Line 7a. If you answered “No,” you won’t meet the organizational test under section 509(a)(3) unless you amend your organizing document to specify your supported organization(s) by name, class, or purpose and need to reconsider your requested public charity classification in Part VII, line 1.

Line 8. When responding to this question, don’t include donors that are section 509(a)(1), (2), or (4) organizations.

This prohibition on contributions

TIP from controlling donors only

applies to Type I and Type III supporting organizations.

Line 9. Type III responsiveness test. Answer “Yes,” if, because of your relationship described in line 3, each of your supported organizations has a significant voice in your investment policies, making and timing of grants, and directing the use of your income and assets, and explain how each of your supported organizations is involved in these matters.

Line 10. Type III notification require- ment. A Type III supporting organization must provide the notice described in this question. If you’re a Type III supporting organization, you’ll be required to answer this question annually on your annual information return (Schedule A of Form 990 or 990-EZ).

A Type III supporting organization must annually provide the following to each of its supported organizations: (a) a written notice addressed to a principal officer of the supported organization describing the type and amount of all of the support, including any amounts counting toward the distribution requirement you provided to the supported organization during the immediately preceding tax year and including a brief narrative description of the support provided and sufficient financial detail to identify the types and amounts of support being reported, (b) a copy of your most recently filed Form 990-series return or notice, and (c) a copy of your governing documents and any amendments, if not previously provided.

Lines 11–13. Type III integral part test. An organization seeking classification as a Type III supporting organization must meet an integral part test, which is satisfied by maintaining significant involvement in the operations of one or more supported organizations and providing support on which the supported organization(s) are dependent. A Type III supporting organization may be functionally integrated (lines 11–12) or non-functionally integrated (lines 13 and 13a-c) depending on the manner in which it meets the integral part test. Functionally integrated Type III supporting organizations are subject to fewer restrictions and requirements than nonfunctionally integrated Type III supporting organizations.

Line 11. Answer “Yes” and explain if you’re the parent of each of your supported organizations because:

You and your supported organizations are part of an integrated system (for example, a hospital system);
You direct the overall policies, programs, and activities of each of your supported organizations (for example, coordinating the activities of the supported organizations and engaging in overall planning, policy development, budgeting, and resource allocation); and
Your governing body, members of your governing body or your officers (acting in their official capacities) appoint or elect directly or indirectly, a majority of

Lines 11–12, Integral part test – Func- tionally integrated. To be a functionally integrated supporting organization you must meet one of the following:

You are the parent of each of your supported organization(s) (Line 11);
You support only governmental supported organizations (Line 11); or
Substantially all your activies directly further the exempt purposes of your supported organization(s) (Line 12).

the officers, directors, or trustees of each of your supported organizations and have the power to remove and replace such directors, officers, or trustees, or otherwise have an ongoing power to appoint or elect such director, officers or trustees with reasonable frequency.

For example, N, an organization described in section 501(c)(3), is the parent organization of a healthcare system consisting of two hospitals (Q and R) and an outpatient clinic (S), each of which is described in section 509(a)(1), and a taxable subsidiary (T). N is the sole member of each of Q, R, and S. Under the charter and bylaws of each of Q, R, and S, N appoints all members of the board of directors of each corporation. N engages in the overall coordination and supervision of the healthcare system’s exempt subsidiary corporations Q, R, and S in approval of their budgets, strategic planning, marketing, resource allocation, securing tax-exempt bond financing, and community education. N also manages and invests assets that serve as endowments of Q, R, and S.

Also answer “Yes” and explain if you qualify as a functionally integrated supporting organization because you support a governmental supported and;

You only support one or more governmental supported organizations;
A substantial part of your activities directly further the exempt purposes of at least one governmental supported organization; and
If you support more than one governmental supported organization, all of the governmental supported organizations either operate in the same city, country, or metropolitan area, or they work in close coordination or collaboration together to conduct a service, program, or activity you support.

Line 12. Answer “Yes,” if substantially all of your activities directly further the exempt purpose of one or more supported organizations by performing the functions of, or carrying out the purposes of, such supported organization(s), and but for your involvement, your supported organization(s) would normally engage in such activities. Describe the activities that you conduct.

Holding title to and managing assets that are used (or held for use) directly in carrying out the exempt purposes of your supported organization (exempt-use assets) are activities that directly further the exempt purposes of your supported organization. Conversely, with certain exceptions, fundraising, making grants (whether to the supported organization or to third parties), and investing and managing non-exempt-use assets aren’t activities that directly further the exempt

Instructions for Form 1023 21

purposes of the supported organization. See Regulations section 1.509(a)-4(i)(4) (ii) for more information.

Line 13. Integral part test non-func- tionally integrated. To satisfy the integral part test as a nonfunctionally integrated supporting organization, you must distribute at least 85% of your annual net income or 3.5% of the aggregate fair market value of all of your non-exempt-use assets (whichever is greater) to your supported organization(s). You can use Part V of Schedule A (Form 990 or 990-EZ) to help determine your answer to this question.

The distributable amount for the

TIP first tax year an organization is

treated as a nonfunctionally integrated Type III supporting organization is zero.

For purposes of this line, “net income” has the same meaning as the term “ adjusted net income .” In general, “adjusted net income” is the excess of gross income, including gross income from any unrelated trade or business, determined with certain modifications, reduced by total deductions. Gross income doesn’t include gifts, grants, or contributions. See Appendix C.

For purposes of this line, “non-exempt-use assets” are all assets of the supporting organization other than:

Assets described in Regulations section 53.4942(a)(2)(c)(2)(i) through (iv), and
Exempt-use assets, which are assets that are used (or held for use) directly in carrying out the exempt purposes of your supported organization. See Regulations section 1.509(a)-4(i)(8) for more information.

Line 13a. List the total amount you distribute(d) annually to each supported organization. Also, indicate how each amount will vary from year to year.

Line 13b. List the total annual income for each supported organization. If you distribute your income to, or for the use of, a particular department or program of an organization, list the annual revenue of the supported department or program.

Line 13c. Answer “Yes,” if your funds are “ earmarked ” for a particular program or activity conducted by your supported organization.