## Facts

- A charitable scholarship fund was created by will to provide college scholarships for students in Oregon.
- The governing instruments expressed a preference for students attending Northwest Christian College (a publicly supported organization), but did not mandate that scholarships be limited to Northwest students.
- The fund’s board of trustees had seven seats; one seat was reserved for Northwest’s president.
- A scholarship committee operated on Northwest’s campus and made recommendations to the trustees.
- In practice, over 90% of the fund’s expenditures went to Northwest-related scholarships, and about 9% of Northwest’s students received scholarships.
- The IRS treated the fund as a private foundation and asserted deficiencies and excise taxes under the private-foundation rules.
- The fund petitioned the Tax Court, asserting it should be classified as a § 509(a)(3) supporting organization with respect to Northwest.

## Issues

1. Whether the fund was organized and operated exclusively to benefit, perform the functions of, or carry out the purposes of one or more publicly supported organizations under I.R.C. § 509(a)(3)(A).
2. Whether the fund was “operated in connection with” Northwest under the applicable Treasury regulations, including the responsiveness and integral-part requirements.
3. Whether the fund’s governance and operating relationship with Northwest provided Northwest a meaningful voice and established the required level of functional interdependence.

## Decision

- The Tax Court held the fund qualified as a § 509(a)(3) supporting organization with respect to Northwest.
- The court rejected the IRS’s classification of the fund as a private foundation for the years at issue.
- Deficiencies and excise taxes premised on private-foundation status were not sustained.

## Legal Principles

- Supporting-organization status under § 509(a)(3) depends on both organizational purpose and actual operations, not solely on whether governing instruments legally compel support to a single named public charity.
- The “operated in connection with” requirement is satisfied where the supported organization has a meaningful voice in the supporting organization’s decisions (responsiveness), such as through governance participation and embedded grantmaking processes.
- The integral-part requirement may be met when the supporting organization provides substantial, consistent support that is functionally important to the supported organization’s exempt activities, even if the supported organization is not absolutely dependent for survival.
- In determining § 509(a)(3) status, the court emphasized a substance-based analysis grounded in the supporting organization’s consistent pattern of support and institutional ties to the supported organization.

## Conclusion

The Tax Court classified the scholarship fund as a § 509(a)(3) supporting organization because its operations overwhelmingly benefited Northwest and Northwest had a meaningful role in the fund’s governance and scholarship process, defeating the IRS’s attempt to apply private-foundation excise tax rules.


Cockerline Mem'l Fund v. Comm'r, 86 T.C. 53 (1986)