The supporting organization to its 501(c)(3) parent arts organization has transferred funds to the parent supported organization to cover costs. Although the transfer is shown as a contribution made on the supporting organization's Form 990 tax information return, the "supported" organization does plan to pay it back so the supported organization shows it as a liability on its financial statement. Can the parent organization transfer funds to its supporting organization?
A supporting organization is a charity that avoids private foundation status, even though it does not receive sufficient public support, because it has a specified close relationship with one or more public charities or governmental units. It must operate exclusively for the benefit of or to carry out the purposes of the supported group(s), and must be (1) operated, supervised, or controlled by, (2) supervised or controlled in connection with, or (3) operated in connection with one or more such organizations. Qualification requires meeting a complex test, but basically its status comes from its relationship with the public charity it “supports.”
Supporting organizations frequently transfer funds to their supported organizations and supported organizations occasionally transfer funds to the supporting organization. The accounting treatment for the two organizations should be parallel, however. When the supporting organization considers a transfer as a contribution, it should be recognized as a contribution by the supported organization and not treated as a separate liability when it isn’t.
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