Treasury Assistant Secretary for Legislative Affairs Kevin I. Fromer has thanked Oklahoma lawmakers for their suggestion that a proposed 5% minimum annual payout for non-functionally integrated Type III supporting organizations be reduced to 3.5%.

Full Text:

March 24, 2008

The Honorable Tom Cole
U.S. House of Representatives
Washington, DC 20515

Dear Mr. Cole:

Thank you for your letter to Secretary Paulson regarding the payout requirement proposed in a recent advance notice of proposed rulemaking relating to certain Type III supporting organizations (the "Advance Notice"). After consulting with the Office of Tax Policy, I would like to provide the following response to your letter.

"Supporting organizations" that provide support to certain section 501(c)(3) exempt organizations are classified for Federal tax purposes as public charities, rather than as private foundations. Private foundations are subject to more stringent rules than public charities, including a payout requirement. In the Pension Protection Act of 2006 (the "Act"), Congress directed the Treasury Department to promulgate new regulations with a payout requirement for so-called "non-functionally integrated" Type III supporting organizations. The payout requirement described in the Advance Notice would require a non-functionally integrated Type III supporting organization to distribute annually to its supported organizations an amount equal to 5 percent of the fair market value of the organization's assets, similar to the payout requirement for private foundations. This payout requirement is consistent with the explanation of the Act published by the Joint Committee on Taxation on August 3, 2006, which references the 5-percent payout requirement for non-operating private foundations.

The Advance Notice requests comments on the payout requirement and on transition rules for existing organizations. The Treasury Department and the Internal Revenue Service ("IRS") are evaluating comments received in response to the Advance Notice and will take those comments into consideration as we develop proposed regulations. In particular, the Treasury Department and the IRS will work to ensure that the payout requirement for non-functionally integrated Type III supporting organizations appropriately reflects the objective of the Act to ensure that significant amounts are paid to beneficiary charities and also takes into account your concern about potential disruption of the charitable operations of affected supporting organizations and the charitable programs they support.

Thank you for your interest in this important matter.

Original Correspondence:

February l5, 2008

Hon Henry M. Paulson
Secretary of the Treasury
1500 Pennsylvania Ave., NW
Washington DC 20220

Dear Secretary Paulson:

In section 1241(d) of the Pension Protection Act of 2006 (PPA), Congress directed the Treasury Department to draft regulations requiring certain type III supporting organizations to distribute "a percentage of either income or assets to [their] supported organizations . . . in order to ensure that a significant amount is paid to such organizations." This provision was intended to prevent donors from contributing non-performing assets to supporting organizations that provided little, if anything, to charities. We are concerned, however, that the Department's proposal to impose the private foundation payout requirement on supporting organizations could harm many legitimate organizations and the vital charitable programs they support. Studies show a high probability that a 5% annual payout is unsustainable over the long run, eroding the value of a supporting organization's endowment and endangering its ability to continue to provide its charities with the same real level of support (undiminished by inflation) that it currently provides. Therefore, we are writing to urge you to set the minimum annual payout requirement for non-functionally integrated type III supporting organizations at a level that is both significant and sustainable.

A payout requirement of 3.5% of a supporting organization's endowment is significant and satisfies the PPA's mandate to stop the identified abuse of supporting organizations. Treasury Regulations already recognize an expenditure of 3.5% of a charity's endowment as "significant" in the context of a charitable organization that is devoted to a particular charitable purpose. For example, a medical research organization is considered to have expended a "significant percentage" of its endowment for its exempt purposes if it spends 3.5% annually. (In contrast, a supporting organization identified as abusive by the Senate Finance Committee had distributed only 0.3% of its assets to charity.)

Type III supporting organizations, unlike private foundations, are committed to particular charitable programs and specified public charities. They cannot be controlled by their donors and are bound instead to the charities they support, often in perpetuity. A type III supporting organization must name its supported organizations in its governing documents. In addition, the leadership of the supporting organization and at least one of its supported public charities must have a close and continuous relationship that provides the supported charity with a "significant voice" in the supporting organization's operations. The regulations also require the funding provided by a supporting organization either to be a significant part of the charity's budget or to be designated for important programs that might not exist otherwise. Charities providing critical health care and social services, college scholarships and other essential programs depend on the steady funding stream provided by supporting organizations, especially when they do not have endowments of their own. We must not jeopardize the long-term existence of these much needed programs and organizations in our efforts to stop the abusive practices of a few individuals.

We ask a great deal of our nation's charities, particularly in uncertain economic times like these. For many years, type III supporting organizations have been a source of permanent and continuing support for a wide range of indispensable public charities. We urge to you to develop regulations that appropriately balance the need to stop potential abuse with the need to ensure that public charities can continue to rely on supporting organization funding, both now and in the future. A 3.5% payout rate is sufficient to prevent abuses and provide significant support to charities now, while at the same time allowing endowment growth that will sustain future funding for essential charitable programs.

Sincerely,

[signatures]
Washington, DC

Sen. Tom Coburn;  Rep. Tom Cole;  Rep. Frank D. Lucas;  Rep. Mary Fallin; Rep. Dan Boren;  Rep. John Sullivan; Sen. James Inhofe