GuideStar.org's Charity Check cuts through IRS red tape

 By John Flanagan

Whether a 501(c)(3) nonprofit was classified as a “public charity” or as a “supporting organization” didn’t used to seem to matter much. All 501(c)(3)s are tax-exempt and considered to be private foundations unless they qualify as public charities or as supporting organizations. Supporting organizations qualify as charities because they support anther public charity or the charitable activities of a 501(c)(4), (5) or (6).

So, here at HANO we were surprised by an urgent phone call from one of our generous foundations with news that HANO wouldn’t be receiving a grant we had been awarded because our tax exempt determination letter classified us as a supporting organization under 509(a)(3).

Could this be true? We checked our IRS determination letter and unfortunately it was. The first paragraph of the letter said we were tax exempt under Section 501(c)(3). That was what we cared about and, therefore, we’d never paid much attention to the next paragraph – the one that said we were also a 509(a)(3).

Lucky for us, the IRS was prepared to process our rush request to reclassify HANO as a 509(a)(2) public charity and we received a new determination letter in less than a month that set things right. The check from the foundation, we’re told, is now in the mail.

Why was this suddenly a Big Deal? Well, it became a big deal because of the Pension Protection Act of 2006, a law with a misleading name that includes charitable reform provisions that have nothing to do with pensions. Those reforms defined three types of supporting organizations. They also imposed excise taxes on foundations that make grants to supporting organizations under certain conditions.

To avoid paying the excise tax, foundations giving grants to supporting organizations must determine which of type of supporting organization the grantee is: Type I, Type II, Type III or “Functionally integrated Type III.” Not surprisingly, many foundations simply decided not to make grants to supporting organizations until and unless this fog of confusion clears up.

Now, why is this confusing item in the “New Resources” section of the HANO newsletter? It is because GuideStar.org, bless them, rushed into the fog and created an online resource, Charity Check, that is sanctioned by the IRS for foundations to use to determine if a nonprofit grantee is a supporting organization under 509(a)(3). If they didn’t have access to a resource like this, foundations could become liable to pay excise tax penalties.

Charity Check is a tremendously helpful new resource for the nonprofit sector. The service is described in the May edition of the online GuideStar.org newsletter by Bob Ottendorf, its CEO. Come to think of it, the recently revised and upgraded GuideStar.org web site and its monthly newsletter are themselves terrific nonprofit resources that are largely free. Click here to sign up.

John Flanagan is president and CEO of the Hawaii Alliance of Nonprofit Organizations.