## Facts

- Lapham Foundation, Inc. (the Foundation) was formed in 1998 by Charles and Maxine Lapham as a Michigan nonprofit intended to support the American Endowment Foundation (AEF).
- AEF was a § 501(c)(3) organization classified as publicly supported under § 509(a)(1) and operated a donor-advised fund program.
- The Foundation’s organizing documents stated it would operate exclusively for the benefit of AEF and sought classification as a § 509(a)(3) supporting organization.
- The Foundation’s principal asset was a promissory note payable by the Laphams.
- The Foundation planned to contribute about $7,600 to AEF and to recommend (nonbinding) that AEF use those funds for charitable projects in southeastern Michigan.
- AEF received contributions exceeding $7 million annually and retained full discretion over the timing, manner, and recipients of distributions from its donor-advised program; donors could advise but AEF was not required to follow recommendations.
- The IRS determined the Foundation was a private foundation under § 509; the Foundation sought declaratory relief in the Tax Court.

## Issues

1. Whether the Foundation qualified as a supporting organization under I.R.C. § 509(a)(3) by being “operated in connection with” AEF and satisfying the “integral part” test in Treas. Reg. § 1.509(a)-4(i)(3).
2. Whether the Foundation failed the § 509(a)(3)(C) control test due to control by disqualified persons (raised by the Commissioner but not reached if the relationship test failed).

## Decision

- The Tax Court held the Foundation did not qualify as a § 509(a)(3) supporting organization.
- The court sustained the IRS determination that the Foundation was a private foundation.
- The court concluded the Foundation failed the “integral part” requirement of the “operated in connection with” relationship test.
- Because the Foundation failed the integral-part test, the court did not decide whether it also failed the disqualified-person control test.

## Legal Principles

- To avoid private-foundation status as a § 509(a)(3) supporting organization, an organization must meet organizational and operational requirements and satisfy a qualifying relationship to the supported public charity (including, when applicable, the “operated in connection with” and “integral part” requirements).
- Under Treas. Reg. § 1.509(a)-4(i)(3), an organization claiming “operated in connection with” status must show it is an integral part of the supported organization’s operations; making grants that are not significant to the supported organization generally does not satisfy this requirement.
- Contributions accompanied only by nonbinding donor advice, where the recipient charity retains full distribution discretion, do not establish the functional relationship required by the integral-part test.
- A claimed supporting organization’s limited or localized charitable preferences do not establish integration with a large, independent public charity absent evidence that the public charity depends on that support to conduct its programs.

## Conclusion

The Tax Court classified the Foundation as a private foundation because its planned, relatively small contributions to AEF’s donor-advised program—paired with only nonbinding distribution recommendations and no operational interdependence—did not make it an “integral part” of AEF under the § 509(a)(3) “operated in connection with” regulations.


Lapham Found., Inc. v. Comm’r, T.C. Memo. 2002-293, 82 T.C.M. (CCH) 586 (2002)