Rule2023-22286
Requirements for Type I and Type III Supporting Organizations
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 16, 2023
Effective
October 16, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations providing guidance on the prohibition on certain gifts or contributions to Type I and Type III supporting organizations from persons who control a supported organization and on certain other requirements for Type III supporting organizations. The regulations reflect changes to the law made by the Pension Protection Act of 2006. The regulations affect certain Type I and Type III supporting organizations and their supported organizations.
Full Text
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<title>Federal Register, Volume 88 Issue 198 (Monday, October 16, 2023)</title>
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[Federal Register Volume 88, Number 198 (Monday, October 16, 2023)]
[Rules and Regulations]
[Pages 71287-71301]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-22286]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 53
[TD 9981]
RIN 1545-BJ53
Requirements for Type I and Type III Supporting Organizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations providing guidance on
the prohibition on certain gifts or contributions to Type I and Type
III supporting organizations from persons who control a supported
organization and on certain other requirements for Type III supporting
organizations. The regulations reflect changes to the law made by the
Pension Protection Act of 2006. The regulations affect certain Type I
and Type III supporting organizations and their supported
organizations.
DATES:
Effective date: These regulations are effective on October 16,
2023.
Applicability date: For dates of applicability, see Sec. 1.509(a)-
4(I).
FOR FURTHER INFORMATION CONTACT: Michael Gruccio at (202) 317-4541 or
Don Spellmann at (202) 317-4086.
SUPPLEMENTARY INFORMATION:
Background
I. Overview
This document amends the Income Tax Regulations (26 CFR part 1) by
adding final regulations under section 509(a) of the Internal Revenue
Code (Code). These final regulations amend Sec. 1.509(a)-4 to provide
guidance on amendments to the Code enacted by section 1241 of the
Pension Protection Act of 2006 (PPA), Public Law 109-280, 120 Stat. 780
(August 17, 2006).
An organization described in section 501(c)(3) of the Code is
classified as either a private foundation or a public charity. To be
classified as a public charity, an organization must be described in
section 509(a)(1), (2), or (3). Organizations described in section
509(a)(3) are known as ``supporting organizations.'' Supporting
organizations achieve their public charity status by providing support
to one or more organizations described in section 509(a)(1) or (2),
which, in this context, are referred to as ``supported organizations.''
To be described in section 509(a)(3), an organization must satisfy
(1) an organizational test, (2) an operational test, (3) a relationship
test, and (4) a disqualified person control test. The organizational
and operational tests require that a supporting organization be
organized, and at all times thereafter operated, exclusively for the
benefit of, to perform the functions of, or to carry out the purposes
of one or more supported organizations. The relationship test requires
a supporting organization to establish one of three types of
relationships with one or more supported organizations. A supporting
organization that is operated, supervised, or controlled by one or more
supported organizations is known as a ``Type I'' supporting
organization. The relationship of a Type I supporting organization with
its supported organization(s) is comparable to that of a corporate
parent-subsidiary relationship. A supporting organization that is
supervised or controlled in connection with one or more supported
organizations is known as a ``Type II'' supporting organization. The
relationship of a Type II supporting organization with its supported
organization(s) involves common supervision or control by the persons
supervising or controlling both the supporting organization and the
supported organization(s). A supporting organization that is operated
in connection with one or more supported organizations is known as a
``Type III'' supporting organization and is discussed further in the
remainder of this preamble. Finally, the disqualified person control
test requires that a supporting organization not be controlled directly
or indirectly by certain disqualified persons.
Sections 1241 through 1243 of the PPA revised the requirements for
supporting organizations. These final regulations under Sec. 1.509(a)-
4 address section 1241's five changes to the requirements an
organization must satisfy to qualify as a Type III supporting
organization.
II. PPA Changes to Type III Supporting Organizations
The PPA made the following five changes to the requirements an
organization must satisfy to qualify as a Type III supporting
organization:
(1) Section 1241(c) of the PPA removed the ability of a charitable
trust to rely on the special rule under Sec. 1.509(a)-4(i)(2)(iii) as
then in effect, which allowed a trust to satisfy the attentiveness
requirement of the integral part test for non-functionally integrated
Type III supporting organizations if the supported organization was a
beneficiary of the trust and state law allowed the beneficiary to
enforce the trust and compel an accounting of the trust;
(2) Section 1241(d) of the PPA directed the Secretary of the
Treasury or her delegate (Secretary) to promulgate regulations under
section 509 that establish a new distribution requirement for Type III
supporting organizations that are not ``functionally integrated'' (a
non-functionally integrated (NFI) Type III supporting organization) to
ensure that a ``significant amount'' is paid to supported
organizations; for this purpose, the term ``functionally integrated''
means a Type III supporting organization that is not required under
regulations to make payments to supported organizations, because the
supporting organization engages in activities that relate to performing
the functions of, or carrying out the purposes of, its supported
organization(s);
(3) Section 1241(b) of the PPA required a Type III supporting
organization to provide annually to each of its supported organizations
the information required by the Department of the Treasury (Treasury
Department) and the IRS (referred to in Sec. 1.509(a)-4(i)(2) as the
notification requirement)
[[Page 71288]]
to ensure that the supporting organization is responsive to the needs
or demands of its supported organization(s);
(4) Section 1241(b) of the PPA also prohibited a Type III
supporting organization from supporting any supported organization not
organized in the United States; and
(5) Section 1241(b) of the PPA additionally prohibited a Type I or
Type III supporting organization from accepting any gift or
contribution from a person who, alone or together with certain related
persons, directly or indirectly controls the governing body of a
supported organization of the Type I or Type III supporting
organization.
III. Prior Rulemaking
On August 2, 2007, the Treasury Department and the IRS published in
the Federal Register (72 FR 42335) an advanced notice of proposed
rulemaking (ANPRM) (REG-155929-06) in response to the PPA. The ANPRM
described proposed rules to implement the changes made by the PPA to
the Type III supporting organization requirements and solicited
comments regarding those proposed rules.
On September 24, 2009, the Treasury Department and the IRS
published a notice of proposed rulemaking (REG-155929-06) in the
Federal Register (74 FR 48672) proposing regulations regarding certain
requirements to qualify as a Type III supporting organization under the
PPA (2009 proposed regulations). The 2009 proposed regulations set
forth those proposed requirements in Sec. 1.509(a)-4(i).
On December 28, 2012, the Treasury Department and the IRS published
a Treasury Decision (TD 9605) in the Federal Register (77 FR 76382)
containing final and temporary regulations under Sec. 1.509(a)-4
regarding the requirements to qualify as a Type III supporting
organization (2012 TD). Also on December 28, 2012, the Treasury
Department and the IRS published a notice of proposed rulemaking (REG-
155929-06) in the Federal Register (77 FR 76426) containing proposed
regulations that incorporated the text of the temporary regulations in
the 2012 TD by cross-reference. The temporary regulations in the 2012
TD made significant changes to the distribution requirement for NFI
Type III supporting organizations. The 2012 TD adopted other aspects of
the 2009 proposed regulations with some changes in response to comments
and provided transition relief for Type III supporting organizations in
existence on December 28, 2012, that met and continued to meet the test
under former Sec. 1.509(a)-4(i)(3)(ii), known as the ``but for'' test,
as in effect prior to December 28, 2012, treating them as functionally
integrated until the first day of their second taxable year beginning
after December 28, 2012. Upon expiration of this relief period, the
2012 TD requires these organizations to meet the same rules as all
other supporting organizations to be considered functionally
integrated. The preamble to the 2012 TD also identified issues for
possible future rulemaking and requested comments.
On January 6, 2014, the Treasury Department and the IRS published
Notice 2014-4, 2014-2 I.R.B. 274, to provide additional transition
relief for any Type III supporting organization (1) supporting at least
one supported organization that is a governmental entity to which the
supporting organization is responsive (within the meaning of Sec.
1.509(a)-4(i)(3)) and (2) engaging in activities for or on behalf of
the governmental supported organization that perform the functions of,
or carry out the purposes of, the governmental supported organization
and that, but for the involvement of the supporting organization, would
normally be engaged in by the governmental supported organization
itself. Notice 2014-4 stated that such an organization will be treated
as a functionally integrated Type III supporting organization until the
earlier of the date final regulations under Sec. 1.509(a)-4(i)(4)(iv)
are published in the Federal Register or the first day of the
organization's third taxable year beginning after December 31, 2013.
On December 23, 2015, the Treasury Department and the IRS published
a Treasury Decision (TD 9746) in the Federal Register (80 FR 79684)
containing final regulations under Sec. 1.509(a)-4(i) regarding the
distribution requirement for NFI Type III supporting organizations,
finalizing the rule in the 2012 proposed and temporary regulations with
very minor changes (2015 final regulations). The preamble to the 2015
final regulations indicated that additional proposed regulations would
be forthcoming to provide additional guidance for Type III supporting
organizations, including specific rules under Sec. 1.509(a)-
4(i)(4)(iv) for Type III supporting organizations that support
governmental supported organizations; the 2012 TD had reserved Sec.
1.509(a)-4(i)(4)(iv). In addition, the preamble to the 2015 final
regulations indicated that supporting organizations that support a
governmental supported organization could continue to rely on Notice
2014-4 until the date of publication of the new proposed regulations.
On February 19, 2016, the Treasury Department and the IRS published
a notice of proposed rulemaking (REG-118867-10) in the Federal Register
(81 FR 8446) containing proposed regulations under Sec. 1.509(a)-4(f)
and (i) regarding the prohibition on certain contributions to Type I
and Type III supporting organizations and the requirements for Type III
supporting organizations (2016 proposed regulations). The 2016 proposed
regulations addressed issues identified in the preamble to the 2012 TD
as well as the comments (six in total) on the 2012 TD and Notice 2014-
4.
The Treasury Department and the IRS received six comments in
response to the 2016 proposed regulations. The comments are available
for public inspection at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request.
No public hearing was requested. After considering the comments
received, the Treasury Department and the IRS adopt the 2016 proposed
regulations in these final regulations with certain revisions described
in the Summary of Comments and Explanation of Revisions.
Summary of Comments and Explanation of Revisions
I. Overview
This Summary of Comments and Explanation of Revisions addresses the
comments that the Treasury Department and the IRS received in response
to the 2016 proposed regulations and describes the revisions adopted in
these final regulations. As described in this Summary of Comments and
Explanation of Revisions, these final regulations define the term
``control'' for purposes of section 509(f)(2), which prohibits a Type I
or Type III supporting organization from accepting any gift or
contribution from any person who controls the governing body of the
supported organization(s). These final regulations also set forth
additional rules and requirements for Type III supporting
organizations, including (1) additional requirements to meet the
responsiveness test for all Type III supporting organizations; (2)
additional rules regarding the qualification of an organization as a
functionally integrated Type III supporting organization under Sec.
1.509(a)-4(i)(4), including specific rules for supporting organizations
that support governmental supported organizations; and (3) additional
rules regarding the required annual distributions under Sec. 1.509(a)-
4(i)(5) by an NFI Type III supporting organization.
[[Page 71289]]
II. Contributions From Controlling Donors--Meaning of Control
Section 509(f)(2) and Sec. 1.509(a)-4(f)(5) prohibit Type I and
Type III supporting organizations from accepting any gift or
contribution from any person (other than an organization described in
section 509(a)(1), (2), or (4)) who, alone or together with certain
related persons (as described in Sec. 1.509(a)-4(f)(5)(i)(B) or (C)),
directly or indirectly controls the governing body of a supported
organization of the Type I or Type III supporting organization, or from
persons related to a person possessing such control. Section 509(f)(2)
does not define ``directly or indirectly controls.'' The 2012 TD
reserved Sec. 1.509(a)-4(f)(5)(ii), titled ``Meaning of control,'' for
future proposed regulations.
The 2016 proposed regulations proposed defining ``control''
consistently with the definition of control in Sec. 1.509(a)-4(j),
which relates to control by disqualified persons for purposes of the
disqualified person control test in section 509(a)(3)(C) and Sec.
1.509(a)-4(a)(4). In general, under the 2016 proposed regulations, the
governing body of a supported organization is considered ``controlled''
by a person if that person, alone or by aggregating his or her votes or
positions of authority with certain related persons described in Sec.
1.509(a)-4(f)(5)(i)(B) or (C), may require the governing body of the
supported organization to perform any act that significantly affects
its operations or may prevent the governing body of the supported
organization from performing any such act.
These final regulations adopt the definition of ``control''
proposed in the 2016 proposed regulations with minor changes to add
clarity. These final regulations make clear that control exists if one
or more persons described in Sec. 1.509(a)-4(f)(5)(i)(A), (B), or (C)
hold 50 percent or more of the total voting power of the governing body
or have the right to exercise veto power over the actions of the
governing body. These final regulations also incorporate language from
Sec. 1.509(a)-4(j)(1) to make clear that even if persons do not have
control by virtue of having 50 percent or more of the voting power or a
veto power, all pertinent facts and circumstances will be taken into
consideration in determining whether such persons do in fact directly
or indirectly control the governing body of a supported organization.
One commenter stated that if a parent supporting organization
controls a supported organization, section 509(f)(2) would prohibit
Type I and Type III supporting organizations of that controlled
supported organization from accepting any gift or contribution from the
parent supporting organization. To allow these contributions, the
commenter recommended excluding from the definition of control the
control a parent supporting organization exercises over its supported
organizations.
Section 509(f)(2) only excepts gifts or contributions from
organizations described in section 509(a)(1), (2), and (4). Congress
did not provide an exception for section 509(a)(3) organizations. For
this reason, the commenter's recommendation is not consistent with
section 509(f)(2), and these final regulations do not adopt it.
III. Type III Supporting Organization Relationship Test
Section 1.509(a)-4(i)(1) provides that, for each taxable year, a
Type III supporting organization must satisfy (i) a notification
requirement, (ii) a responsiveness test, and (iii) an integral part
test provided in the regulations. The 2016 proposed regulations
proposed additional rules regarding each of these requirements. These
final regulations adopt the 2016 proposed rules with the modifications
described in this part III.
A. Notification Requirement
Section 509(f)(1)(A) provides that an organization will not be
considered a Type III supporting organization unless the organization
provides to each supported organization, for each taxable year, such
information as the Secretary may require to ensure that the
organization is responsive to the needs or demands of the supported
organizations. To satisfy this notification requirement, Sec.
1.509(a)-4(i)(2) requires a Type III supporting organization to provide
to each of its supported organizations for each taxable year: (1) A
written notice addressed to a principal officer of the supported
organization describing the type and amount of all of the support it
provided to the supported organization during the supporting
organization's preceding taxable year; (2) a copy of the supporting
organization's most recently filed Form 990, Return of Organization
Exempt from Income Tax, or other annual information return required to
be filed under section 6033; and (3) a copy of the supporting
organization's governing documents, including any amendments (unless
previously provided and not subsequently amended). The 2016 proposed
regulations proposed clarifying that for NFI Type III supporting
organizations the description of support in the written notice must
include all of the distributions described in Sec. 1.509(a)-4(i)(6) to
the supported organization. These final regulations adopt this
clarification.
Section 1.509(a)-4(i)(2)(iii) requires that the notification be
transmitted by the last day of the fifth calendar month following the
close of ``that taxable year.'' Due to the lack of clarity regarding
the reference to ``that taxable year,'' the 2016 proposed regulations
proposed amending Sec. 1.509(a)-4(i)(2) to clarify that a supporting
organization must deliver the required documents to each of its
supported organizations by the last day of the fifth month of the
supporting organization's taxable year after the taxable year in which
it provided the support it is reporting. The preamble to the 2016
proposed regulations stated that the proposed change is intended to
reduce confusion but does not substantively change the due date or the
content of the required notification. The preamble also stated that the
date of delivery is determined by applying the general principles of
section 7502. The final regulations adopt this proposed amendment
without change.
One commenter requested clarification that the annual written
notice may summarize all the programs and services a supporting
organization performs for its supported organization. The Treasury
Department and the IRS agree that a supporting organization may
summarize its activities directly furthering the exempt purpose of the
supported organization as long as that summary provides sufficient
notice to the supported organization on the character of the activity
and its related costs. The report must include a brief narrative
description of the support provided and sufficient financial detail for
the recipient to identify the types and amounts of support being
reported.
B. Responsiveness Test
Section 1.509(a)-4(i)(3)(i) provides that a supporting organization
meets the responsiveness test if it is ``responsive to the needs or
demands of a supported organization.'' To meet this responsiveness
test, an organization must satisfy two elements--the ``relationship
requirement'' and the ``significant voice requirement.'' Under the
relationship requirement, described in Sec. 1.509(a)-4(i)(3)(ii), the
officers, directors, or trustees of the organization must have one of
three specified relationships with the officers, directors, or trustees
(and in some cases the members) of the supported organization. Under
the significant voice requirement, described in Sec. 1.509(a)-
4(i)(3)(iii), the
[[Page 71290]]
officers, directors, or trustees of the supported organization, by
reason of their relationships described in Sec. 1.509(a)-4(i)(3)(ii),
must have a significant voice in the investment policies of the
supporting organization, the timing of grants, the manner of making
grants, and the selection of grant recipients by the supporting
organization, and in otherwise directing the use of the income or
assets of the supporting organization.
The preamble to the 2012 TD stated that, in determining the
appropriate distribution amount for NFI Type III supporting
organizations, the Treasury Department and the IRS considered the
required relationship between a supporting organization and its
supported organizations, and that the Treasury Department and the IRS
intended to issue proposed regulations in the future that would amend
the responsiveness test by requiring a Type III supporting organization
to be responsive to all of its supported organizations.
In response to this proposal in the preamble to the 2012 TD, one
commenter stated that a supporting organization should not be required
to be responsive to all of its supported organizations because the
resulting administrative burden would effectively limit the total
number of organizations a supporting organization could support. The
commenter suggested alternatives under which a supporting organization
would be responsive to only a subset of its supported organizations
that would vary from year to year.
As stated in the preamble to the 2016 proposed regulations, the
distinguishing characteristic of Type III supporting organizations, and
the basis for their public charity classification, is that they are
responsive to and significantly involved in the operations of their
publicly supported organizations. See Sec. 1.509(a)-4(f)(4). Unless a
Type III supporting organization is responsive to each of its supported
organizations, the supported organizations cannot exercise the
requisite level of oversight of and engagement with the supporting
organization. Limiting the responsiveness requirement to fewer than all
of the supported organizations may result in the necessary oversight
and accountability being present for less than all of a supporting
organization's operations. Consistent with this view, the 2016 proposed
regulations proposed revising Sec. 1.509(a)-4(i)(3)(i) to require a
supporting organization to be responsive to the needs and demands of
each of its supported organizations to meet the responsiveness test.
In addition, to illustrate how concerns about potential
administrative burdens may be addressed consistent with the revised
responsiveness test, the 2016 proposed regulations proposed a new
Example 3 in Sec. 1.509(a)-4(i)(3)(iv) to demonstrate one way in which
a Type III supporting organization that supports multiple organizations
may satisfy the responsiveness test in a manner that can be cost-
effective. The Example shows that a supporting organization can meet
the relationship requirement in Sec. 1.509(a)-4(i)(3)(ii) in different
ways with respect to each of its supported organizations. The Example
also shows how a supporting organization can organize and hold regular
meetings, provide information, and encourage communication to help
ensure that its supported organizations have a significant voice in the
operations of the supporting organization.
As noted in the preamble to the 2016 proposed regulations, another
commenter in response to the preamble of the 2012 TD requested
additional guidance regarding the ability of trusts to satisfy the
significant voice requirement of the responsiveness test. The new
Example 3 in the 2016 proposed regulations provides further
illustration of how Type III supporting organizations, including
charitable trusts, might satisfy the significant voice requirement of
the responsiveness test. The Treasury Department and the IRS note that
although the examples in the regulations relating to the responsiveness
test may involve a Type III supporting organization that is organized
as either a corporation or a trust, the applicable law and relevant
regulatory provisions, as modified by the final regulations, are
applicable to all Type III supporting organizations in the same manner,
whether they are organized as corporations or trusts.
As the preamble to the 2016 proposed regulations stated, the
Treasury Department and the IRS anticipate that Type III supporting
organizations may be able to demonstrate that they satisfy the
responsiveness test in a variety of ways, and that the determination
will be based on all the facts and circumstances.
As a result of the proposed changes to the responsiveness test, the
2016 proposed regulations also include conforming changes to examples
and other regulatory provisions, specifically, removing references to
``supported organizations to which the supporting organization is
responsive'' since the supporting organization is to be responsive to
each supported organization.
Two commenters to the 2016 proposed regulations address the
responsiveness test, agreeing with the proposed amendments to Sec.
1.509(a)-4(i)(3)(i) and the new example in Sec. 1.509(a)-4(i)(3)(iv).
Thus, these final regulations adopt these proposed amendments without
change.
C. Integral Part Test--Functionally Integrated Type III Supporting
Organizations
Section 1.509(a)-4(i)(1)(iii) provides that, for each taxable year,
a Type III supporting organization must satisfy the integral part test.
The integral part test under Sec. 1.509(a)-4(i)(1)(iii) is satisfied
by maintaining significant involvement in the operations of one or more
supported organizations and providing support on which the supported
organizations are dependent. To satisfy this test, a Type III
supporting organization must meet the requirements either for a
functionally integrated Type III supporting organization or for an NFI
Type III supporting organization, as set forth in Sec. 1.509(a)-
4(i)(4) or (5), respectively.
One commenter to the 2016 proposed regulations stated that the
cross reference in Sec. 1.509(a)-4(d)(4)(i)(C) to the integral part
test should be corrected to conform to the amendments made by the 2012
TD. The final regulations adopt this recommendation and revise Sec.
1.509(a)-4(d)(4)(i)(C) to reference the requirements of the integral
part test set forth in Sec. 1.509(a)-4(i)(1)(iii).
A Type III supporting organization is functionally integrated under
Sec. 1.509(a)-4(i)(4) if it (1) engages in activities substantially
all of which directly further the exempt purposes of one or more
supported organizations and otherwise meets the requirements described
in paragraph (i)(4)(ii) of that section, (2) is the parent of each of
its supported organizations as described in paragraph (i)(4)(iii) of
that section, or (3) supports a governmental supported organization and
otherwise meets the requirements of paragraph (i)(4)(iv) of that
section.
1. ``Substantially All'' Test
Section 1.509(a)-4(i)(4)(ii)(B) provides that all pertinent facts
and circumstances will be taken into consideration in determining
whether substantially all of a supporting organization's activities
directly further the exempt purposes of its supported organization(s).
One commenter to the 2016 proposed regulations requested that
supporting organizations be given the option of meeting the
``substantially all'' test on average over a three- or five-year
period. The commenter also
[[Page 71291]]
recommended that transition relief be provided if an organization does
not meet the test over the most recent three or five years before the
promulgation of final regulations.
The 2012 TD adopted the substantially all test in Sec. 1.509(a)-
4(i)(4)(ii). The 2012 TD also provided transition relief in Sec.
1.509(a)-4(i)(11)(ii) for existing organizations to adjust to the new
rules. The 2016 proposed regulations did not include any substantive
changes to Sec. 1.509(a)-4(i)(4)(ii). Furthermore, the substantially
all test in Sec. 1.509(a)-4(i)(4)(ii)(B) takes into consideration all
pertinent facts and circumstances, which allows for some consideration
of year-to-year changes in activities. Finally, the Treasury Department
and the IRS note that the commenter's proposed multi-year averaging
test would be complex, create uncertainty about a supporting
organization's functionally integrated status at the close of each
taxable year, and would be difficult to administer. For these reasons,
the final regulations do not adopt this recommendation.
2. Parent of Each Supported Organization
Under Sec. 1.509(a)-4(i)(4)(iii), a supporting organization is the
parent of a supported organization, and thus is deemed to be
functionally integrated, if the supporting organization exercises a
substantial degree of direction over the policies, programs, and
activities of the supported organization and a majority of the
officers, directors, or trustees of the supported organization is
appointed or elected, directly or indirectly, by the governing body,
members of the governing body, or officers (acting in their official
capacities) of the supporting organization.
As the 2009 proposed regulations noted, the classification of a
parent organization as functionally integrated was intended to ``apply
to supporting organizations that oversee or facilitate the operation of
an integrated system, such as hospital systems.'' To more fully
accomplish this objective, the 2016 proposed regulations proposed a
revision to Sec. 1.509(a)-4(i)(4)(iii) clarifying that for a
supporting organization to qualify as the parent of each of its
supported organizations, the supporting organization and its supported
organizations must be part of an integrated system (such as a hospital
system), and the supporting organization must engage in activities
typical of the parent of an integrated system. The 2016 proposed
regulations stated that examples of these activities include (but are
not limited to) coordinating the activities of the supported
organizations and engaging in overall planning, policy development,
budgeting, and resource allocation for the supported organizations.
One commenter requested that the final regulations provide
additional examples of integrated systems, such as private schools and
universities, continuing care retirement communities, and residential
rehabilitation facilities. The parenthetical in the 2016 proposed
regulations--such as a hospital system--is stated as only one example
and is not exclusive. This section of the regulations applies to any
type of integrated system of which the parent organization and its
supported organizations are a part. The test is whether the structure
is that of an integrated system and whether the requirements of Sec.
1.509(a)-4(i)(4)(iii) are satisfied, not whether the system is in a
particular industry. The Treasury Department and the IRS conclude that
it is unnecessary to add other examples of industries that may have
integrated systems; doing so at this time may indicate that any
industries not specifically mentioned in the final regulations are
excluded. Accordingly, the final regulations do not adopt the
commenter's request to provide additional examples. Nevertheless, in
response to the comment and to make clear that a hospital system is
just one example of an integrated system, the final regulations revise
the parenthetical in the 2016 proposed regulations to read as follows:
(such as, for example, a hospital system).
The commenter also recommended including additional examples of
activities that are typical of a parent of an integrated system and
suggested that the examples might include financial planning and
forecasting, legal services, human resources, information management,
billing and collection services, marketing, and community outreach and
education. The Treasury Department and the IRS note that the list of
activities in the 2016 proposed regulations was only illustrative of
how a parent directs the overall policies, programs, and activities of
the supported organizations within the integrated system and was not
exclusive. Thus, the absence of any particular activity, such as
financial planning, from this list is not determinative. The final
regulations clarify that a parent of an integrated system of supported
organizations must direct the overall policies, programs, and
activities of the supported organizations (such as, for example,
coordinating the activities of the supported organizations and engaging
in overall planning, policy development, budgeting, and resource
allocation). The Treasury Department and the IRS note that a parent of
an integrated system may also perform system-wide administrative
services, such as the examples provided by the commenter, in
conjunction with directing the overall policies, programs, and
activities of the supported organizations. For clarity, these final
regulations omit the defined term ``activities typical of a parent'' in
proposed Sec. 1.509(a)-4(i)(4)(iii). The 2016 proposed regulations
proposed to retain the requirement in Sec. 1.509(a)-4(i)(4)(iii) that
the governing body, members of the governing body, or officers of a
parent supporting organization must appoint or elect a majority of the
officers, directors, or trustees of the supported organization. The
preamble to the 2016 proposed regulations stated that the use of the
phrase ``appointed or elected, directly or indirectly'' means the
supporting organization could qualify as a parent of a second-tier (or
lower) subsidiary. Thus, for example, if the directors of supporting
organization A appoint a majority of the directors of supported
organization B, which in turn appoints a majority of the directors of
supported organization C, the directors of supporting organization A
will be treated as appointing the majority of the directors of both
supported organization B and supported organization C. One commenter
agreed with this interpretation and requested that it be addressed in
the final regulations. These final regulations adopt this
recommendation.
As stated in the preamble to the 2016 proposed regulations, the
Treasury Department and the IRS interpret the existing requirement
under Sec. 1.509(a)-4(i)(4)(iii) that the parent organization have the
power to appoint or elect a majority of the officers, directors, or
trustees of each supported organization to include the requirement that
the parent organization also have the power to remove and replace such
officers, directors, or trustees, or otherwise have an ongoing power to
appoint or elect with reasonable frequency. One commenter requested
that language reflecting this interpretation be specifically added to
Sec. 1.509(a)-4(i)(4)(iii). The final regulations adopt this
commenter's recommendation.
3. Supporting a Governmental Supported Organization
The 2012 TD reserved Sec. 1.509(a)-4(i)(4)(iv) for future guidance
on how a Type III supporting organization can qualify as functionally
integrated by supporting a governmental entity. As
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interim guidance, Notice 2014-4 provided that a Type III supporting
organization will be treated as functionally integrated if it (i)
supports a supported organization that is a governmental entity to
which the supporting organization is responsive; and (ii) engages in
activities for or on behalf of that governmental supported organization
that perform the functions of, or carry out the purposes of, that
governmental supported organization and that, but for the involvement
of the supporting organization, would normally be engaged in by the
governmental supported organization itself. This interim guidance was
subsequently extended by the 2015 final regulations. The 2016 proposed
regulations proposed new rules under which a Type III supporting
organization would qualify as functionally integrated by supporting
governmental supported organizations. These final regulations adopt the
proposed Sec. 1.509(a)-4(i)(4)(iv), with the modifications discussed
in the following paragraphs.
The 2016 proposed regulations proposed that a supporting
organization that only supports governmental supported organizations
would be considered functionally integrated if a substantial part of
its total activities directly further the exempt purposes of its
governmental supported organizations and, if the supporting
organization supports more than one governmental supported
organization, all of its governmental supported organizations either:
(1) Operate within the same geographic region (defined as a city,
county, or metropolitan area); or (2) work in close coordination or
collaboration with each other to conduct a service, program, or
activity that the supporting organization supports. The 2016 proposed
regulations proposed defining a governmental supported organization as
a governmental unit described in section 170(c)(1), or an organization
described in section 170(c)(2) and (b)(1)(A) (other than in clauses
(vii) and (viii)) that is an instrumentality of one or more
governmental units described in section 170(c)(1). To satisfy the close
coordination or collaboration requirement, the proposed regulations
proposed requiring a supporting organization to maintain on file a
letter from each of the governmental supported organizations (or a
joint letter from all of them) describing their coordination or
collaboration efforts with respect to the particular service, program,
or activity. The 2016 proposed regulations proposed an exception to
this rule for certain pre-existing organizations that support no more
than one non-governmental supported organization along with one or more
governmental supported organizations, as well as a transition rule for
pre-existing organizations that continue to meet the requirements of
Notice 2014-4.
Two commenters recommended that Type III functionally integrated
supporting organizations should not be limited to only supporting
governmental supported organizations. One commenter proposed that a
supporting organization which supports both governmental and non-
governmental supported organizations should qualify as functionally
integrated if the supporting organization (i) conducts activities that
perform the functions of or carry out the purposes of its governmental
supported organization(s), (ii) its non-governmental supported
organizations operate in the same geographic region or work in close
coordination or collaboration with the governmental supported
organization(s), and (iii) substantially all of the supporting
organization's activities directly further the exempt purposes of its
governmental supported organization(s).
The other commenter recommended replacing the requirement that all
supported organizations be governmental supported organizations with a
new requirement that substantially all the activities of the supporting
organization either (i) directly further the purposes of the
governmental supported organizations, or (ii) consist of grantmaking,
fundraising, or investing for governmental supported organizations that
meet either the same geographic region or close coordination and
collaboration requirements in the 2016 proposed regulations.
A third commenter requested that, when a supporting organization
supports more than one governmental supported organization, the
governmental supported organizations should only be required to work in
close coordination or collaboration. The commenter requested deleting
the requirement that the governmental supported organizations conduct a
service, program, or activity that the supporting organization
supports.
The 2016 proposed regulations proposed allowing certain Type III
supporting organizations that support governmental supported
organizations to be classified as functionally integrated on the basis
that the involvement of the governmental supported organizations in the
supporting organization's activities would minimize the potential for
abuse. As stated in the preamble to the 2016 proposed regulations,
requiring close cooperation and collaboration on a common service,
program, or activity that the supporting organization supports helps
ensure that the governmental supported organizations will provide
sufficient input to and oversight of the supporting organization.
Moreover, the coordination and collaboration between the governmental
supported organizations would be greatly diminished if they engaged in
different services, programs, or activities. Furthermore, governmental
input and oversight would be diluted if the definition of functionally
integrated were expanded to permit these supporting organizations to
support and be responsive to non-governmental supported organizations
as well. Additionally, for the reasons discussed later in this
preamble, the Treasury Department and the IRS utilize the substantial
part test for supporting governmental supported organizations (instead
of the substantially all test) but specifically exclude grant making
and other financial activities from the definition of activities that
directly further the exempt purposes of the governmental supported
organizations. Accordingly, these final regulations do not adopt these
recommendations. For clarity, these final regulations omit the defined
term ``geographic region'' contained in proposed Sec. 1.509(a)-
4(i)(4)(iv)(C).
As noted previously in this preamble, the 2016 proposed regulations
proposed that, for simplicity and administrability, the term
``governmental supported organization'' be defined using an existing
Code definition of governmental unit. Three commenters stated their
support for this definition. Thus, the final regulations adopt the
definition in the 2016 proposed regulations with the clarification
described in the following paragraph.
The preamble to the 2016 proposed regulations noted that, because a
governmental unit described in section 170(c)(1) includes all of the
agencies, departments, and divisions of that governmental unit, all
such agencies, departments, and divisions will be treated as one
governmental supported organization for purposes of Sec. 1.509(a)-
4(i)(4)(iv). One commenter stated its support for this position and
requested that it be specifically written into the regulations. These
final regulations adopt this commenter's recommendation. The final
regulations specifically state that a governmental unit includes all of
its agencies,
[[Page 71293]]
departments, and divisions, and that they will be treated as one
governmental supported organization for these purposes.
One commenter on the 2016 proposed regulations requested that an
instrumentality of a governmental supported organization and the
governmental supported organization with respect to which it is an
instrumentality should be treated as one governmental supported
organization. The final regulations do not adopt this recommendation
because, unlike an agency, department, or division of a governmental
unit, an instrumentality described in Sec. 1.509(a)-4(i)(4)(iv)(B)(2)
is a separate legal entity.
The 2016 proposed regulations also proposed that supporting
organizations that support only governmental supported organizations
may qualify as functionally integrated only if a ``substantial part''
of their activities directly furthers the exempt purposes of their
governmental supported organization(s). The 2016 proposed regulations
proposed using the same definition of ``directly further'' contained in
Sec. 1.509(a)-4(i)(4)(ii)(C), the integral part test for functionally
integrated Type III supporting organizations, as promulgated in the
2012 TD. This definition provides that fundraising, making grants, and
investing and managing non-exempt-use assets are not activities that
directly further the exempt purposes of the supported organization.
One commenter recommended that fundraising, making grants, and
investing and managing non-exempt-use assets should be considered
activities that directly further the exempt purposes of a governmental
supported organization. The Treasury Department and the IRS determined
that a Type III supporting organization should qualify as functionally
integrated only if the supporting organization itself conducts
activities that perform the functions of or carry out the purposes of
its supported organization (as distinguished from providing financial
support for the activities carried out by the supported organization).
As the 2012 TD stated, fundraising, making grants, and investing and
managing non-exempt-use assets relate to producing and distributing
income to finance the charitable activities directly carried out by the
supported organization. The 2016 proposed regulations did not adopt
comments seeking to apply a different definition of ``directly
further'' to supporting organizations that support governmental
supported organizations. These final regulations do not adopt the
commenter's proposal because using a different definition of ``directly
further'' for governmental supported organizations would undermine a
fundamental distinction that Sec. 1.509(a)-4(i)(4) makes between
functionally integrated and NFI Type III supporting organizations,
i.e., directly conducting charitable activities versus financing
charitable activities. The Treasury Department and the IRS also note
the complexity and administrative difficulty of applying different
definitions of ``directly further'' under the integral part test.
These final regulations adopt the requirement in the 2016 proposed
regulations that a substantial part of the supporting organization's
total activities must directly further the exempt purposes of its
governmental supported organizations. These final regulations also add
a new example to clarify that a supporting organization can meet this
requirement and still make grants to one of its governmental supported
organizations as a substantial part of its activities. As the preamble
to the 2016 proposed regulations stated, the ``substantial part'' test
in Sec. 1.509(a)-4(i)(4)(iv) allows these supporting organizations to
conduct more fundraising and other financial activities, if certain
requirements are met, than is permitted under the ``substantially all''
test of Sec. 1.509(a)-4(i)(4)(ii) that applies generally to be a
functionally integrated Type III supporting organization. One commenter
requested confirmation concerning the identity of these certain
requirements that must be met. Under Sec. 1.509(a)-4(i)(4) as
promulgated by the 2012 TD and amplified by these final regulations in
providing the rules for supporting governmental supported
organizations, the organization must meet the annual notification
requirement in Sec. 1.509(a)-4(i)(2) and the responsiveness test in
Sec. 1.509(a)-4(i)(3), in addition to the specific requirements in
Sec. 1.509(a)-4(i)(4)(iv), in order to be a functionally integrated
Type III supporting organization by virtue of supporting governmental
supported organizations.
One commenter recommended providing a clear definition of what
constitutes a substantial part of a supporting organization's total
activities for purposes of meeting Sec. 1.509(a)-4(i)(4)(iv). Another
commenter recommended not adopting a bright line rule to measure the
quantity of activities that equal a substantial part, but requested a
statement in the final regulations that all pertinent facts and
circumstances will be taken into account. This commenter also requested
more examples of activities that directly further the exempt purpose of
the governmental supported organization and clarification in the
regulations to require that a substantial part of a supporting
organization's activities directly further the exempt purposes of ``at
least one'' (as opposed to all) of its governmental supported
organizations when the governmental supported organizations share a
common geographic region.
In response to these comments, the final regulations revise
proposed Sec. 1.509(a)-4(i)(4)(iv) to provide that, in determining
whether a substantial part of a supporting organization's total
activities directly further the exempt purposes of its governmental
supported organization(s), all pertinent facts and circumstances will
be taken into consideration. This approach is consistent with the
approach in Sec. 1.509(a)-4(i)(4)(ii)(B), which determines
``substantially all'' for the general test of being functionally
integrated by considering all pertinent facts and circumstances. The
final regulations also revise proposed Sec. 1.509(a)-4(i)(4)(iv)(A)
and add a new example in Sec. 1.509(a)-4(i)(4)(v) to make clear that a
supporting organization that supports more than one governmental
supported organization as described in Sec. 1.509(a)-4(i)(4)(iv)(A)
satisfies the substantial part test if a substantial part of its
activities directly furthers the exempt purpose of at least one of its
governmental supported organizations.
One commenter stated that proposed Sec. 1.509(a)-
4(i)(4)(iv)(A)(1)(ii), which uses the phrase ``close coordination or
collaboration,'' should be made consistent with proposed Sec.
1.509(a)-4(i)(4)(iv)(D), which uses the phrase ``close cooperation or
coordination.'' The final regulations adopt this recommendation and
make the provisions consistent by changing the phrasing in Sec.
1.509(a)-4(i)(4)(iv)(C) of the final regulations to ``close
coordination or collaboration.'' No substantive change is intended by
this revision.
The 2016 proposed regulations proposed an exception to the general
rule for supporting organizations that support governmental supported
organizations. The exception would treat a Type III supporting
organization in existence on or before February 19, 2016 (the date of
the issuance of the 2016 proposed regulations), as functionally
integrated if: (1) It supports one or more governmental supported
organizations and no more than one supported organization that is not a
governmental supported organization; (2) it designated each of its
supported organizations as provided in Sec. 1.509(a)-
[[Page 71294]]
4(d)(4) on or before February 19, 2016; and (3) a substantial part of
its total activities directly furthers the exempt purposes of its
governmental supported organization(s). One commenter stated that the
proposed exception would allow it and similar organizations currently
to qualify as functionally integrated. The final regulations adopt the
proposed exception without change.
The 2016 proposed regulations also proposed further extending the
transition relief provided in Notice 2014-4 and extended in the
preamble to the 2015 final regulations. Under the 2016 proposed
regulations, a Type III supporting organization in existence on or
before February 19, 2016, that met and continues to meet the
requirements of Notice 2014-4 would be treated as functionally
integrated until the earlier of the first day of the organization's
first taxable year beginning after the date final regulations are
published under Sec. 1.509(a)-4(i)(4)(iv) or the first day of the
organization's second taxable year beginning after February 19, 2016.
The Treasury Department and the IRS did not receive any comments about
the transition rule or any requests to extend the transition period in
the 2016 proposed regulations, which now has expired. The Treasury
Department and the IRS therefore conclude supporting organizations have
had sufficient time to adjust to the new rules and further transition
relief is not necessary. Accordingly, these final regulations do not
provide a further extension of the transition relief proposed in the
2016 proposed regulations.
D. Integral Part Test--Non-Functionally Integrated Type III Supporting
Organizations
Section 1.509(a)-4(i)(5) provides that a supporting organization
meets the integral part test to be an NFI Type III supporting
organization if it satisfies the distribution requirement of Sec.
1.509(a)-4(i)(5)(ii) and the attentiveness requirement of Sec.
1.509(a)-4(i)(5)(iii), or the pre-November 2, 1970, trust requirements
of Sec. 1.509(a)-4(i)(9). Section 1.509(a)-4(i)(5)(ii) provides that,
with respect to each taxable year, a supporting organization must
distribute to or for the use of one or more supported organizations an
amount equaling or exceeding its ``distributable amount.'' Section
1.509(a)-4(i)(6) provides the amount of a distribution made to a
supported organization is the amount of cash or the fair market value
of the property distributed.
The 2016 proposed regulations proposed revising Sec. 1.509(a)-
4(i)(5)(ii) to state that a supporting organization must make
distributions as described in Sec. 1.509(a)-4(i)(6) in a total amount
equaling or exceeding the supporting organization's distributable
amount to satisfy the distribution requirement, and proposed revising
Sec. 1.509(a)-4(i)(6) to describe in detail what distributions count
toward satisfying the distribution requirement. These final regulations
adopt these proposed revisions, explained as follows, without change.
1. No Reduction of Distributable Amount for Taxes Subtitle A Imposes
Section 1.509(a)-4(i)(5)(ii)(B) provides that the distributable
amount is equal to the greater of 85 percent of an organization's
adjusted net income for the immediately preceding taxable year (as
determined by applying the principles of section 4942(f) of the Code
and Sec. 53.4942(a)-2(d)) or its minimum asset amount for the
immediately preceding taxable year, reduced by the amount of taxes
imposed on the supporting organization under subtitle A of the Code
(subtitle A) during the immediately preceding taxable year.
Because the taxes under subtitle A are imposed on a supporting
organization's unrelated business taxable income (pursuant to section
511 of the Code) and the activity that produces the unrelated business
taxable income does not further the supported organization's exempt
purposes, the preamble to the 2016 proposed regulations stated that
these taxes should not be treated as the functional equivalent of an
amount distributed to a supported organization. The 2016 proposed
regulations, therefore, proposed removing the provision in Sec.
1.509(a)-4(i)(5)(ii)(B) that reduces the distributable amount by the
amount of taxes subtitle A imposed on a supporting organization during
the immediately preceding taxable year.
One commenter stated that the distributable amount should be
reduced by the amount of taxes imposed on the supporting organization's
unrelated business income, as section 4942(d) provides for private
foundations. In advocating to retain the reduction in the distributable
amount, the commenter suggested that only the supporting organization's
after-tax income from unrelated business activities should be
considered available for distribution to its supported organizations.
A supporting organization's adjusted net income under Sec.
1.509(a)-4(i)(5)(ii)(B) includes gross income from all sources,
including investment income that is not subject to tax under section
511. The 2012 TD and the 2015 final regulations, therefore, stated it
was necessary to revise the distribution requirement to ensure that NFI
Type III supporting organizations distribute significant amounts to
their supported organizations, as Congress directed in the PPA. As
stated in the 2015 final regulations, the 85 percent of adjusted net
income test makes it more likely that supported organizations will
timely benefit from higher returns received by their supported
organizations. Reducing the distributable amount by any taxes on the
income would be counter to this objective.
The Treasury Department and the IRS further note that section
4942(d) only applies to private non-operating foundations. As the
preamble to the 2012 TD recounted, a number of commenters to the 2009
proposed regulations stated that NFI Type III supporting organizations
should not be subject to the higher payout for private non-operating
foundations because they are distinguishable from them. These
commenters stated that NFI Type III supporting organizations are more
similar to private operating foundations and medical research
organizations and therefore should be subject to their lower payout
requirements. The 2012 TD and the 2015 final regulations adopted this
recommendation, providing lower payout requirements for NFI Type III
supporting organizations than for private non-operating foundations.
Private operating foundations and medical research organizations are
not able to reduce their payout requirements by the taxes imposed by
subtitle A. See Sec. 1.170A-9(d)(2)(v)(B); Sec. 53.4942(b)-
1(a)(1)(ii). The Treasury Department and the IRS conclude for the
foregoing reasons that it would be inconsistent to apply a different
rule to NFI Type III supporting organizations. Therefore, these final
regulations adopt the 2016 proposed revision to Sec. 1.509(a)-
4(i)(5)(ii)(B) without change.
2. Distributions That Count Toward Distribution Requirement
Section 1.509(a)-4(i)(6) provides details on the distributions by a
supporting organization that count toward satisfying the distribution
requirement imposed in Sec. 1.509(a)-4(i)(5)(ii). The regulations
provide that distributions include but are not limited to: (1) Any
amount paid to a supported organization to accomplish the supported
organization's exempt purposes; (2) any amount paid by the supporting
organization to perform an activity that directly furthers the exempt
purposes of the supported organization within the meaning of Sec.
1.509(a)-4(i)(4)(ii), but only to the extent such amount exceeds any
income derived by the supporting organization from the activity; (3)
any reasonable and
[[Page 71295]]
necessary administrative expenses paid to accomplish the exempt
purposes of the supported organization(s), which do not include
expenses incurred in the production of investment income; (4) any
amount paid to acquire an exempt-use asset described in Sec. 1.509(a)-
4(i)(8)(ii); and (5) any amount set aside for a specific project that
accomplishes the exempt purposes of a supported organization to which
the supporting organization is responsive.
The list in Sec. 1.509(a)-4(i)(6) is not exhaustive and other
distributions may count towards the distribution requirement. As stated
in the preamble to the 2016 proposed regulations, the use of a non-
exclusive list creates uncertainty for supporting organizations and the
IRS about what counts toward the distribution requirement. Therefore,
the 2016 proposed regulations proposed revising and clarifying the list
in Sec. 1.509(a)-4(i)(6) of what counts toward the distribution
requirement and making it an exclusive list.
a. Reasonable and Necessary Administrative Expenses
Under Sec. 1.509(a)-4(i)(6), reasonable and necessary
administrative expenses paid to accomplish the exempt purposes of
supported organizations, but not expenses incurred in the production of
investment income, count toward the distribution requirement. For
example, if a supporting organization conducts exempt activities that
are for the benefit of, perform the functions of, or carry out the
purposes of its supported organization(s) and also conducts nonexempt
activities (such as investment activities or unrelated business
activities), then the supporting organization's administrative expenses
(such as salaries, rent, utilities and other overhead expenses) must be
allocated between the exempt and nonexempt activities on a reasonable
and consistently-applied basis. The supporting organization's
administrative expenses attributable to the exempt activities are
treated as distributions to its supported organization(s) if such
expenses are reasonable and necessary. Conversely, the administrative
expenses and operating costs attributable to the nonexempt activities
are not treated as distributions to the supported organization(s). The
2016 proposed regulations proposed retaining this provision, with
additional guidance regarding fundraising expenses.
b. Fundraising Expenses
Section 1.509(a)-4(i)(6) does not specifically address whether
fundraising expenses count toward the distribution requirement. The
2016 proposed regulations addressed the issue, specifying that
reasonable and necessary administrative expenses paid to accomplish the
exempt purposes of a supported organization generally do not include
fundraising expenses the supporting organization incurs. For example,
when a supporting organization conducts a fundraising event for its
supported organization(s) and distributes the proceeds of the event,
net of its fundraising expenses, to its supported organization(s), only
the amount that the supporting organization actually distributes to its
supported organization(s) counts towards the distribution requirement.
Thus, under the 2016 proposed regulations, the supporting
organization's fundraising expenses do not count towards the
distribution requirement.
If a supporting organization conducts a fundraising event at which
the supporting organization instructs donors to make contributions
directly to the supported organization, the 2016 proposed regulations
proposed that those contributions would not count as a distribution
from the supporting organization to its supported organization.
However, in this situation the supporting organization could count
towards the distribution requirement the reasonable and necessary
expenses it incurs to solicit the contributions the donors pay directly
to its supported organization: (1) to the extent that the amount of
these solicitation expenses does not exceed the amount of contributions
the supported organization actually receives; and (2) if the supporting
organization can substantiate (as discussed later in this preamble)
that those contributions were received as a result of the supporting
organization's solicitation activities. The 2016 proposed regulations
proposed this rule to provide consistency with the treatment of
contributions that supporting organizations receive directly and then
distribute to their supported organizations (net of the supporting
organization's solicitation expenses).
While commenters were generally supportive of the proposal to count
as distributions the fundraising expenses incurred to solicit
contributions directly to the supported organization, one commenter
recommended deleting the requirement that contributions be received
directly by the supported organization for the fundraising expenses to
count. Alternatively, the commenter requested this special rule for
fundraising expenses also apply if the contributions were received
directly by an agent of the supported organization.
Another commenter proposed that contributions the supporting
organization received directly from the fundraising solicitation as a
matter of convenience should be treated as contributions the supported
organization received directly if the supporting organization is
contractually obligated to remit the contributions to the supported
organization and the supporting organization actually distributes the
contributions to the supported organization within a reasonable time
period. The commenter also proposed that the supporting organization be
allowed to count its fundraising solicitation expenses in the year it
incurred them so long as the supported organization received the
corresponding contributions within a reasonable time period following
the end of that year.
In response to these comments, these final regulations adopt the
proposed rules with certain modifications and clarifications. These
final regulations provide that expenses the supporting organization
incurs to solicit contributions count towards the distribution
requirement when the resulting contributions are received directly by a
supported organization, but only to the extent that the supporting
organization's expenses for each solicitation do not exceed the amount
of contributions a supported organization actually receives, and only
if the supporting organization substantiates that those contributions
were received as a result of the supporting organization's solicitation
activities. This limitation is applied on a solicitation-by-
solicitation basis; the supporting organization may not aggregate its
expenses, or the contributions a supported organization receives, from
more than one solicitation to determine the amount of solicitation
expenses that count towards its distribution requirement. The Treasury
Department and the IRS intend that contributions are received directly
by the supported organization when donors make their checks, credit
card or other payments payable to the supported organization. The
Treasury Department and the IRS also intend that when a supporting
organization receives checks or processes credit card or other
transactions that are payable to its supported organization, the
supporting organization may count as distributions the expenses it
incurs for soliciting those checks or credit card or other payments,
but only up to the amount of contributions received directly by or paid
directly to the supported organization and substantiated by the
[[Page 71296]]
supported organization. Thus, for purposes of meeting its distribution
requirement, the supporting organization may not count as distributions
from the supporting organization to the supported organization the
amount of the check and credit card or other contributions the donors
make payable to the supported organization. Contributions made payable
to the supporting organization that are transferred to the supported
organization, however, may be counted as distributions from the
supporting organization to the supported organization at the time that
the funds are given by the supporting organization to the supported
organization. These final regulations do not adopt a rule permitting
payments that are first deposited with the supporting organization to
count as contributions received directly by the supported organization
(for purposes of permitting additional solicitation expenses related to
those contributions to count as distributions). Preventing the
supporting organization from counting those amounts twice toward
satisfying the supporting organization's annual distribution
requirements and accounting for those funds in the supporting
organization's account would be administratively difficult.
c. Joint Fundraising Expenses
One commenter also requested guidance on how to allocate
contributions when the supporting organization and the supported
organization share the costs of a solicitation event. The Treasury
Department and the IRS do not intend for the rule for fundraising
expenses to apply with respect to a solicitation event if the supported
organization incurs more than de minimis costs related to the same
solicitation event. Section 1.509(a)-4(i)(6)(i) permits supporting
organizations to count any amount they pay to their supported
organization as a distribution for purposes of satisfying the annual
distribution requirement described in Sec. 1.509(a)-4(i)(5)(ii). A
supporting organization can, therefore, share the costs of a fundraiser
by distributing to the supported organization an amount equal to the
supporting organization's share of the joint fundraising expenses.
Section 1.509(a)-4(i)(6)(i) would permit the supporting organization to
count this payment as a distribution for purposes of Sec. 1.509(a)-
4(i)(5)(ii), negating the need for a special rule in proposed Sec.
1.509(a)-4(i)(6)(iii)(B). The Treasury Department and the IRS note that
it would be very difficult to determine and substantiate what portion
of the contributions a supported organization receives are attributable
to the supporting organization's expenditures. Thus, expanding the rule
to cover joint solicitation efforts as the commenter suggests would
increase the compliance burden on supporting organizations and
supported organizations and would be difficult for the IRS to
administer. These final regulations, therefore, do not adopt this
recommendation.
d. Taxable Year to Which Fundraising Expenses Are Attributable
One commenter requested a clarification that contributions made to
a supported organization in response to a supporting organization's
end-of-the-year fundraiser that the supported organization does not
receive until the following year may be used to determine the portion
of reasonable and necessary fundraising expenses the supporting
organization may treat as a distribution for the year in which the
fundraiser occurred. This commenter recommended a 90-day window in the
second year for counting such contributions. These final regulations
clarify that, for purposes of applying the limitation on the supporting
organization's solicitation expenses for each taxable year that count
toward its distribution requirement, any contributions the supported
organization receives directly from donors that are attributable to a
solicitation the supporting organization conducted in a particular
taxable year includes any contributions the supported organization
receives and substantiates in writing on or before the due date
(without regard to extensions) of the supporting organization's Form
990 for the year in which it conducted the solicitation.
For example, assume a supporting organization makes a solicitation
on December 15, 2024. The supported organization receives contributions
from donors of $1x on December 26, 2024, and $2x on March 15, 2025,
that are attributable to the solicitation made on December 15, 2024.
The supported organization substantiates the total contributions of $3x
in writing prior to May 15, 2025 (the due date without extensions of
the supporting organization's Form 990 for 2024). The written
substantiation indicates that these contributions were attributable to
the December 15, 2024 solicitation. Under Sec. 1.509(a)-
4(i)(6)(iii)(B), the supporting organization may treat up to $3x of any
reasonable and necessary expenses it incurred for the December 15, 2024
solicitation toward its distribution requirement.
A supporting organization may not take into account the same
contributions in computing the fundraising expense limitation in more
than one year or with respect to more than one solicitation. Thus, in
the preceding example, the $2x contribution the supported organization
received on March 15, 2025, may only be used by the supporting
organization to determine its fundraising expense limitation for the
December 15, 2024, solicitation. The supporting organization may not
use the $2x again to determine its 2025 fundraising expense limitation.
e. Written Substantiation From Supported Organization
The 2016 proposed regulations proposed requiring a supporting
organization to obtain written substantiation from the supported
organization of the amount of contributions the supported organization
actually receives as a result of each of the supporting organization's
solicitations. One commenter requested that the permitted written
substantiation include an email from the supported organization that
the supporting organization maintains in its electronic records. These
final regulations adopt this recommendation, stating that the written
substantiation may be provided by electronic media.
Another commenter requested that a supported organization be
allowed to aggregate into a single annual written report the
substantiation of all the contributions it received from the supporting
organization's fundraising activities. The commenter also requested
that the supported organization should only be responsible for
reporting the amount of the contributions it received and not be
responsible for calculating the supporting organization's fundraising
activities.
These final regulations clarify that the supporting organization
may substantiate the contributions provided to the supported
organization by a single annual statement in writing from the supported
organization, provided that the amount of contributions, if any,
received by the supported organization as a result of each solicitation
is separately identified. To satisfy Sec. 1.509(a)-4(i)(6)(iii)(B),
the written substantiation must be postmarked or electronically
transmitted to the supporting organization no later than the due date
(without regard to extensions) of the supporting organization's Form
990 for the year of the solicitation. In addition, written
substantiation relied on by the supporting organization (whether
[[Page 71297]]
provided in one or multiple reports) must separately state the amount
of contributions, if any, received directly by the supported
organization allocable to each solicitation made by the supporting
organization that is covered in the report. The supporting organization
is responsible for determining its solicitation expenses. The written
substantiation the supporting organization is required to receive from
the supported organization need only provide information relevant to
the amount of contributions the supported organization received; it
does not need to address the supporting organization's expenses.
f. Program-Related Investments Not Taken Into Account
Finally, one commenter requested that program-related investments
(PRIs) count toward the distribution requirement. The preamble to the
2016 proposed regulations stated that, for purposes of meeting the
integral part test, PRIs are not treated as distributions to the
supported organizations. As the preamble to the 2016 proposed
regulations stated, the Treasury Department and the IRS recognize that
private foundations may use PRIs in a variety of ways to accomplish
their exempt purposes and that PRIs thus are treated as qualifying
distributions under section 4942. However, because supporting
organizations must be operated exclusively for the benefit of, to
perform the functions of, or to carry out the purposes of their
supported organizations, they differ from private foundations.
Furthermore, other provisions relating to the distribution requirement,
such as the availability of set-asides and the potential for carry-
forwards of excess distributions, provide significant flexibility for
supporting organizations to meet the current and future needs of their
supported organizations. For these reasons, these final regulations do
not adopt this recommendation.
IV. Technical Corrections
This Treasury Decision conforms the paragraphs throughout Sec.
1.509(a)-4 to the Code of Federal Regulations by making non-substantive
changes, including capitalizing letters of fourth level paragraphs.
This Treasury Decision also modifies Sec. 53.4947-1 to correct certain
cross-references to Sec. 1.509(a)-4.
V. Applicability Date
These final regulations are applicable to taxable years beginning
on or after October 16, 2023. Taxpayers may choose to apply these final
regulations to taxable years beginning on or after February 19, 2016,
and before October 16, 2023, so long as the taxpayer applies the
provisions of these final regulations in their entirety and in a
consistent manner.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6(b) of Executive Order 12866, as amended. Therefore, a
regulatory impact assessment is not required.
II. Paperwork Reduction Act
The collection of information contained in these regulations has
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))
under control number 1545-2271.
The collection of information in these regulations is in Sec.
1.509(a)-4(i)(4)(iv)(C) (written record of close coordination or
collaboration by certain governmental supported organizations) and
Sec. 1.509(a)-4(i)(6)(iii)(B) (written record of contributions
received by certain supported organizations). Requiring a supporting
organization to collect (1) written records of its governmental
supported organizations' close coordination or collaboration with each
other and (2) written records of the contributions its supported
organizations directly received from donors in response to
solicitations by the supporting organization helps the IRS determine
whether the supporting organization is a functionally integrated or
non-functionally integrated Type III supporting organization. The
record keepers are certain Type III supporting organizations.
Estimated number of recordkeepers: 6,089.
Estimated average annual burden hours per recordkeeper: 2 hours.
Estimated total annual recordkeeping burden: 12,178 hours.
Estimated frequency of collection of such information: Annual.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
return information are confidential, as required by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
In connection with the requirements of the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby certified that these final
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that these final regulations will not impact a substantial
number of small entities.
Based on IRS Statistics of Income data for 2019, there are
1,365,744 active nonprofit charitable organizations recognized by the
IRS under section 501(c)(3), of which only 6,089 organizations self-
identified as Type III supporting organizations. The universe of
organizations that would be affected by Sec. 1.509(a)-4(i)(4)(iv)(C)
and Sec. 1.509(a)-4(i)(6)(iii)(B) is a subset of all Type III
supporting organizations, because those provisions apply either to
organizations seeking to qualify as functionally integrated based on
support of two or more governmental supported organizations or to non-
functionally integrated organizations that solicit contributions that
are received directly by a supported organization (rather than by the
supporting organization). Thus, the number of organizations that will
be affected by the collection of information under Sec. 1.509(a)-
4(i)(4)(iv)(C) and (i)(6)(iii)(B) will not be substantial. Moreover,
the time to complete the recordkeeping requirements is expected to be
no more than 2 hours for each organization, thus the regulations will
not have a significant economic impact. The requirements under Sec.
1.509(a)-4(i)(4)(iv)(C) and (i)(6)(iii)(B), therefore, will not have a
significant economic impact.
Pursuant to section 7805(f) of the Code, this regulation was
submitted to the Chief Counsel for the Office of Advocacy of the Small
Business Administration for comment on its impact on small business and
no comments were received.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. The regulations
[[Page 71298]]
do not include any Federal mandate that may result in expenditures by
State, local, or tribal governments, or by the private sector in excess
of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. The regulations do not have
federalism implications, impose substantial direct compliance costs on
State and local governments, or preempt State law within the meaning of
the Executive order.
VI. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Management and Budget's Office of Information and
Regulatory Affairs designated this rule as not a ``major rule,'' as
defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
Notice 2014-4 is published in the Internal Revenue Bulletin and is
available from the Superintendent of Documents, U.S. Government
Printing Office, Washington, DC 20402, or by visiting the IRS website
at: <a href="https://www.irs.gov/irb/20142_IRB/ar14.html?_ga=1.74171665.204111657.1425931511">https://www.irs.gov/irb/20142_IRB/ar14.html?_ga=1.74171665.204111657.1425931511</a>.
Drafting Information
The principal authors of these regulations are Jonathan Carter and
Don Spellmann, Office of Associate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment Taxes). However, other personnel
from the Treasury Department and the IRS participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 53
Excise taxes, Foundations, Investments, Lobbying, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR parts
1 and 53 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.509(a)-4 is amended by:
0
1. In paragraph (d)(2)(i) introductory text, removing ``subdivision
(iv) of this subparagraph'' and ``subparagraph (1) of this paragraph''
and adding ``paragraph (d)(2)(iv) of this section'' and ``paragraph
(d)(1) of this section'' in their places, respectively.
0
2. Redesignating paragraphs (d)(2)(i)(a) and (b) as paragraphs
(d)(2)(i)(A) and (B), respectively.
0
3. In newly redesignated paragraph (d)(2)(i)(B)(1), removing ``(a) of
this subdivision'' and adding ``paragraph (d)(2)(i)(A) of this
section'' in its place.
0
4. In newly redesignated paragraph (d)(2)(i)(B)(2), removing
``subdivision (i)(a) or this subparagraph'' and adding ``paragraph
(d)(2)(i)(A) of this section or this paragraph (d)(2)(i)(B)(2)'' in its
place.
0
5. In paragraph (d)(2)(ii), removing ``subdivision (i)(a) or this
subparagraph'', ``subparagraph (1) of this paragraph'' and
``subparagraphs (3)(i), (ii), and (iii) and (4)(i) (a) and (b) of this
paragraph'' and adding ``paragraph (d)(2)(i)(A) of this section'',
``paragraph (d)(1) of this section'', and ``paragraphs (d)(3)(i)
through (iii) and (d)(4)(i)(A) and (B) of this section'' in their
places, respectively.
0
6. In paragraph (d)(2)(iii) introductory text, removing
``subparagraph'' and adding ``paragraph (d)(2)'' in its place.
0
7. Designating Examples 1 and 2 of paragraph (d)(2)(iii) as paragraphs
(d)(2)(iii)(A) and (B), respectively.
0
8. In paragraph (d)(2)(iv) introductory text, removing ``subparagraph
(1) of this paragraph'' and adding ``paragraph (d)(1) of this section''
in its place.
0
9. Redesignating paragraphs (d)(2)(iv)(a) and (b) as paragraphs
(d)(2)(iv)(A) and (B), respectively.
0
10. In newly redesignated paragraph (d)(2)(iv)(A), removing ``, and''
and adding ``; and'' in its place.
0
11. In paragraph (d)(3) introductory text, removing ``subparagraph
(2)(i) (a) of this paragraph'' and adding ``paragraph (d)(2)(i)(A) of
this section'' in its place.
0
12. In paragraph (d)(4)(i) introductory text, removing ``subparagraph
(2)(iv) of this paragraph'' and ``this subparagraph'' and adding
``paragraph (d)(2)(iv) of this section'' and ``this paragraph (d)(4)''
in their places, respectively.
0
13. Redesignating paragraphs (d)(4)(i)(a) through (c) as paragraphs
(d)(4)(i)(A) through (C), respectively.
0
14. Revising newly redesignated paragraph (d)(4)(i)(C).
0
15. In paragraph (d)(4)(ii), removing ``subdivision (i)(b) of this
subparagraph'' and ``subdivision (i)(b)'' and adding ``paragraph
(d)(4)(i)(B) of this section'' and ``paragraph (d)(4)(i)(B)'' in their
places, respectively.
0
16. In paragraph (d)(4)(iii) introductory text, removing
``subparagraph'' and adding ``paragraph (d)(4)'' in its place.
0
17. Designating the Example in paragraph (d)(4)(iii) as paragraph
(d)(4)(iii)(A) and adding reserved paragraph (d)(4)(iii)(B).
0
18. In paragraph (e)(3) introductory text, removing ``paragraph'' and
adding ``paragraph (e)'' in its place.
0
19. Designating Examples 1 through 5 of paragraph (e)(3) as paragraphs
(e)(3)(i) through (v), respectively.
0
20. Revising paragraph (f)(5)(ii).
0
21. In paragraph (g)(2) introductory text, removing ``paragraph'' and
adding ``paragraph (g)'' in its place.
0
22. Designating Examples 1 through 3 of paragraph (g)(2) as paragraphs
(g)(2)(i) through (iii), respectively.
0
23. In newly redesignated paragraph (g)(2)(iii), removing
``subparagraph (1)(ii) of this paragraph'' and adding ``paragraph
(g)(1)(ii) of this section'' in its place.
0
24. In paragraph (h)(3) introductory text, removing ``paragraph'' and
adding ``paragraph (h)'' in its place.
0
25. Designating Examples 1 through 3 of paragraph (h)(3) as paragraphs
(h)(3)(i) through (iii), respectively.
0
26. Revising paragraphs (i)(2)(i) introductory text, (i)(2)(i)(A),
(i)(2)(iii), and (i)(3)(i).
0
27. Designating Examples 1 and 2 of paragraph (i)(3)(iv) as paragraphs
(i)(3)(iv)(A) and (B), respectively.
0
28. Adding paragraph (i)(3)(iv)(C).
0
29. Revising paragraphs (i)(4)(ii)(A)(1), (i)(4)(ii)(B), and
(i)(4)(iii) and (iv).
0
30. Designating Examples 1 through 5 of paragraph (i)(4)(v) as
paragraphs (i)(4)(v)(A) through (E), respectively.
0
31. Adding paragraph (i)(4)(v)(F).
0
32. Revising paragraphs (i)(5)(ii)(A) and (B) and (i)(5)(iii)(A).
0
33. Designating Examples 1 through 4 of paragraph (i)(5)(iii)(D) as
paragraphs (i)(5)(iii)(D)(1) through (4), respectively.
0
34. Revising newly designated paragraph (i)(5)(iii)(D)(4), the third
sentence of paragraph (i)(6) introductory text, and paragraphs
(i)(6)(iii) and (v) introductory text.
0
35. In paragraph (k)(2) introductory text, removing ``paragraph'' and
adding ``paragraph (k)'' in its place.
[[Page 71299]]
0
36. Designating the Example in paragraph (k)(2) as paragraph (k)(2)(i)
and adding reserved paragraph (k)(2)(ii).
0
37. Revising paragraph (l).
The revisions and additions read as follows:
Sec. 1.509(a)-4 Supporting organizations.
* * * * *
(d) * * *
(4) * * *
(i) * * *
(C) Permit the supporting organization to vary the amount of its
support between different designated organizations, so long as it meets
the requirements of the integral part test set forth in paragraph
(i)(1)(iii) of this section with respect to at least one beneficiary
organization.
* * * * *
(f) * * *
(5) * * *
(ii) Meaning of control. For purposes of paragraph (f)(5)(i) of
this section, the governing body of a supported organization will be
considered controlled by a person described in paragraph (f)(5)(i)(A)
of this section if that person, alone or by aggregating the person's
votes or positions of authority with persons described in paragraph
(f)(5)(i)(B) or (C) of this section, may require the governing body of
the supported organization to perform any act that significantly
affects its operations or may prevent the governing body of the
supported organization from performing any such act. The governing body
of a supported organization will be considered to be controlled
directly or indirectly by one or more persons described in paragraph
(f)(5)(i)(A), (B), or (C) of this section if the voting power of such
persons is 50 percent or more of the total voting power of such
governing body or if one or more of such persons have the right to
exercise veto power over the actions of the governing body of the
supported organization. Thus, if the governing body of a supported
organization is composed of five members, none of whom has a veto power
over the actions of the supported organization, and no more than two
members are at any time described in paragraph (f)(5)(i)(A), (B), or
(C) of this section, such supported organization will not be considered
to be controlled directly or indirectly by such persons by reason of
this fact alone. However, all pertinent facts and circumstances will be
taken into consideration in determining whether one or more persons do
in fact directly or indirectly control the governing body of a
supported organization.
* * * * *
(i) * * *
(2) * * *
(i) Annual notification. For each taxable year (Reporting Year), a
Type III supporting organization must provide the following documents
to each of its supported organizations:
(A) A written notice addressed to a principal officer of the
supported organization describing the type and amount of all of the
support (including all of the distributions described in paragraph
(i)(6) of this section, if applicable) the supporting organization
provided to the supported organization during the supporting
organization's taxable year immediately preceding the Reporting Year
(and during any other taxable year of the supporting organization
ending after December 28, 2012, for which such support information has
not previously been provided), including a brief narrative description
of the support provided and sufficient financial detail for the
recipient to identify the types and amounts of support being reported;
* * * * *
(iii) Due date. The notification documents required by this
paragraph (i)(2) must be delivered or electronically transmitted by the
last day of the fifth calendar month of the Reporting Year.
* * * * *
(3) * * *
(i) General rule. A supporting organization meets the
responsiveness test only if it is responsive to the needs or demands of
each of its supported organizations. Except as provided in paragraph
(i)(3)(v) of this section, in order to meet this test, a supporting
organization must satisfy the requirements of paragraphs (i)(3)(ii) and
(iii) of this section with respect to each of its supported
organizations.
* * * * *
(iv) * * *
(C) Example 3. Z is described in section 501(c)(3). Z's
organizational documents provide that it supports ten different
organizations, each of which is described in section 509(a)(1). One of
the directors of S (one of the supported organizations) is a voting
member of Z's board of directors and participates in Z's regular board
meetings. Officers of Z hold regularly scheduled face-to-face or
telephonic meetings during the year, to which officers of all the
supported organizations are invited. Z's meetings with the supported
organizations may be held jointly or separately. Prior to the meetings,
Z makes available to the supported organizations (including by email)
up-to-date information about its activities, including its assets and
liabilities, receipts and distributions, and investment policies and
returns. In the meetings, officers of each of the supported
organizations have an opportunity to ask questions and discuss with
officers of Z the projected needs of their organizations, as well as
Z's investment and grant making policies and practices. In addition to
holding these meetings with the supported organizations, Z provides the
contact information of one of its officers to each of the supported
organizations and encourages them to contact that officer if they have
questions, or if they wish to schedule additional meetings to discuss
the projected needs of their organization and how Z should distribute
its income and invest its assets. Z provides the information required
under paragraph (i)(2) of this section and a copy of its annual audited
financial statements to the principal officers of the supported
organizations. Z meets the relationship requirement of paragraph
(i)(3)(ii)(B) or (C) of this section with respect to each of its
supported organizations. Based on these facts, Z also satisfies the
significant voice requirement of paragraph (i)(3)(iii) of this section,
and therefore meets the responsiveness test of this paragraph (i)(3)
with respect to each of its ten supported organizations.
* * * * *
(4) * * *
(ii) * * *
(A) * * *
(1) Directly further the exempt purposes of one or more supported
organizations by performing the functions of, or carrying out the
purposes of, such supported organization(s); and
* * * * *
(B) Meaning of substantially all. For purposes of paragraph
(i)(4)(ii)(A) of this section, in determining whether substantially all
of a supporting organization's activities directly further the exempt
purposes of one or more supported organization(s), all pertinent facts
and circumstances will be taken into consideration.
* * * * *
(iii) Parent of supported organization(s)--(A) In general. For
purposes of paragraph (i)(4)(i)(B) of this section, in order for a
supporting organization to qualify as the parent of each of its
supported organizations--
(1) The supporting organization and its supported organizations
must be part of an integrated system (such as, for example, a hospital
system);
(2) The supporting organization must direct the overall policies,
programs, and activities of the supported organizations (such as, for
example,
[[Page 71300]]
coordinating the activities of the supported organizations and engaging
in overall planning, policy development, budgeting, and resource
allocation); and
(3) The supporting organization's governing body, members of the
governing body, or officers (acting in their official capacities) must
appoint or elect, directly or indirectly, a majority of the officers,
directors, or trustees of each supported organization and have the
power to remove and replace such directors, officers, or trustees, or
otherwise have an ongoing power to appoint or elect such directors,
officers or trustees with reasonable frequency.
(B) Subsidiary organizations. A supporting organization may meet
the requirements of paragraph (i)(4)(iii)(A)(3) of this section with
respect to a second-tier (or lower) subsidiary provided that the
supporting organization, by control of its first-tier subsidiary, has
the power to appoint or elect (as described in paragraph
(i)(4)(iii)(A)(3) of this section) a majority of the officers,
directors, or trustees of the lower-tier subsidiary. For example, if
the board of directors of supporting organization A elects a majority
of the directors of supported organization B, and the board of
directors of B, in turn elect, by a simple majority vote, a majority of
the directors of supported organization C, the directors of supporting
organization A will be treated as electing a majority of the directors
of both supported organization B and supported organization C.
(iv) Supporting a governmental supported organization--(A) In
general. A supporting organization satisfies the requirements of this
paragraph (i)(4)(iv) if--
(1) The supporting organization only supports one or more
governmental supported organizations;
(2) In any case in which the supporting organization supports more
than one governmental supported organization, all of the governmental
supported organizations either--
(i) Operate within the same city, county, or metropolitan area; or
(ii) Work in close coordination or collaboration with one another
to conduct a service, program, or activity that the supporting
organization supports; and
(3) A substantial part of the supporting organization's total
activities are activities that directly further, as defined by
paragraph (i)(4)(ii)(C) of this section, the exempt purposes of at
least one governmental supported organization.
(B) Governmental supported organization defined. For purposes of
paragraph (i)(4)(iv)(A) of this section, the term governmental
supported organization means a supported organization that is:
(1) A governmental unit described in section 170(c)(1), including
all of its agencies, departments, and divisions (all of which will be
treated as one governmental supported organization for purposes of this
paragraph (i)(4)(iv)); or
(2) An organization described in section 170(c)(2) and (b)(1)(A)
(other than in clauses (vii) and (viii)) that is an instrumentality of
one or more governmental units described in section 170(c)(1).
(C) Close coordination or collaboration. To satisfy the close
coordination or collaboration requirement of paragraph (i)(4)(iv)(A)(2)
of this section, the supporting organization must maintain on file a
letter from each of the governmental supported organizations (or a
joint letter from all of them) describing their coordination or
collaboration efforts with respect to the particular service, program,
or activity.
(D) Substantial part. For purposes of paragraph (i)(4)(iv)(A)(3) of
this section, in determining whether a substantial part of a supporting
organization's activities directly further the exempt purposes of one
or more governmental supported organization(s), all pertinent facts and
circumstances will be taken into consideration.
(E) Exception for organizations supporting a governmental supported
organization on or before February 19, 2016. A Type III supporting
organization in existence on or before February 19, 2016, will be
treated as meeting the requirements of this paragraph (i)(4)(iv) if it
met and continues to meet the following requirements:
(1) It supports one or more governmental supported organizations
described in paragraph (i)(4)(iv)(B) of this section and does not
support more than one supported organization that is not a governmental
supported organization;
(2) Each of the supported organizations is designated by the
supporting organization as provided in paragraph (d)(4) of this section
on or before February 19, 2016; and
(3) A substantial part (as defined in paragraph (i)(4)(iv)(D) of
this section) of the supporting organization's total activities are
activities that directly further (as defined by paragraph (i)(4)(ii)(C)
of this section) the exempt purposes of its governmental supported
organization(s).
(F) Transition rule for supporting organizations in existence on or
before February 19, 2016. Until the first day of the organization's
second taxable year beginning after February 19, 2016, a Type III
supporting organization in existence on or before February 19, 2016,
will be treated as meeting the requirements of this paragraph
(i)(4)(iv) if it continuously met the following requirements prior to
the first day of the organization's second taxable year beginning after
February 19, 2016--
(1) It supported at least one supported organization that was a
governmental entity to which the supporting organization was responsive
within the meaning of paragraph (i)(3) of this section; and
(2) It engaged in activities for or on behalf of the governmental
supported organization described in paragraph (i)(4)(iv)(E)(1) of this
section that performed the functions of, or carried out the purposes
of, that governmental supported organization and that, but for the
involvement of the supporting organization, would normally have been
engaged in by the governmental supported organization itself.
* * * * *
(v) * * *
(F) Example 6. X, an organization described in section 501(c)(3),
is organized and operated as a supporting organization to two
organizations, City and Park. X meets the responsiveness test described
in paragraph (i)(3) of this section with respect to both City and Park.
City and Park are both governmental units described in section
170(c)(1). Park maintains a state park located within the same county
as City. X does not support any other organizations. X supports Park by
operating an information center for visitors to Park. The information
center provides educational material and informational sessions to
visitors to Park. X's activities related to operating the Park
information center constitute a substantial part of X's activities. X
also makes grants directly to City to fund City's other programs. X's
grant making activities constitute a substantial part of X's
activities. X meets the requirements of paragraph (i)(4)(iv)(A)(1) of
this section because X only supports City and Park, both of which are
governmental supported organizations described in paragraph
(i)(4)(iv)(B) of this section. X meets the requirements of paragraph
(i)(4)(iv)(A)(2) of this section because City and Park operate within
the same county in accordance with paragraph (i)(4)(iv)(A)(2)(i) of
this section. Finally, X meets the requirements of paragraph
(i)(4)(iv)(A)(3) of this section because a substantial part of X's
activities directly
[[Page 71301]]
further (within the meaning of paragraph (i)(4)(ii)(C) of this section)
Park's exempt purposes, even though X's grants to City are also a
substantial part of X's activities. Based on these facts, X qualifies
as functionally integrated under paragraph (i)(4)(iv) of this section.
(5) * * *
(ii) * * *
(A) Annual distribution. With respect to each taxable year, a
supporting organization must make distributions described in paragraph
(i)(6) of this section in a total amount equaling or exceeding the
supporting organization's distributable amount for the taxable year, as
defined in paragraph (i)(5)(ii)(B) of this section, on or before the
last day of the taxable year.
(B) Distributable amount. Except as provided in paragraphs
(i)(5)(ii)(D) and (E) of this section, the distributable amount for a
taxable year is an amount equal to the greater of 85 percent of the
supporting organization's adjusted net income (as determined by
applying the principles of section 4942(f) and Sec. 53.4942(a)-2(d) of
this chapter) for the taxable year immediately preceding the taxable
year of the required distribution (immediately preceding taxable year)
or its minimum asset amount (as defined in paragraph (i)(5)(ii)(C) of
this section) for the immediately preceding taxable year.
* * * * *
(iii) * * *
(A) General rule. With respect to each taxable year, a non-
functionally integrated Type III supporting organization must
distribute one-third or more of its distributable amount to one or more
supported organizations that are attentive to the operations of the
supporting organization (within the meaning of paragraph (i)(5)(iii)(B)
of this section).
* * * * *
(D) * * *
(4) Example 4. O is an organization described in section 501(c)(3).
O is organized to support five private universities, V, W, X, Y, and Z,
each of which is described in section 509(a)(1). O meets the
responsiveness test described in paragraph (i)(3) of this section with
respect to each of its supported organizations. Each year, O
distributes an aggregate amount that equals its distributable amount
described in paragraph (i)(5)(ii)(B) of this section and distributes an
equal amount to each of the five universities. O distributes annually
to each of V and W an amount that equals more than 10 percent of each
university's total annual support received in its most recently
completed taxable year. Based on these facts, O meets the requirements
of paragraph (i)(5)(iii) of this section because it distributes two-
fifths (more than the required one-third) of its distributable amount
to supported organizations that are attentive to O.
* * * * *
(6) * * * Distributions by the supporting organization that count
toward the distribution requirement imposed in paragraph (i)(5)(ii) of
this section are limited to--
* * * * *
(iii) Any reasonable and necessary--
(A) Administrative expenses paid to accomplish the exempt purposes
of the supported organization, which do not include expenses incurred
in the production of investment income or expenses incurred in the
conduct of fundraising activities (except solicitation expenses
described in paragraph (i)(6)(iii)(B) of this section); and
(B) Expenses incurred to solicit contributions that are received
directly by a supported organization (rather than by the supporting
organization), but only to the extent the amount of the reasonable and
necessary expenses the supporting organization incurs for each
solicitation does not exceed the amount of contributions that are
actually received by the supported organization directly from donors as
a result of each such solicitation, as substantiated in a written
report by the supported organization to the supporting organization
that is postmarked or electronically transmitted by the due date of the
supporting organization's Form 990 (or successor form) for the year of
the solicitation(s) (without regard to extensions);
* * * * *
(v) Any amount set aside for a specific project that accomplishes
the exempt purposes of a supported organization, with such set-aside
counting toward the distribution requirement for the taxable year in
which the amount is set aside but not in the year in which it is
actually paid, if at the time of the set-aside, the supporting
organization--
* * * * *
(l) Applicability dates. (1) Paragraphs (a)(6), (f)(5), and (i) of
this section are applicable on December 28, 2012, except--
(i) Paragraphs (i)(4)(ii)(C), (i)(5)(ii)(C) and (D), (i)(6)(iv),
(i)(7)(ii), and (i)(8) of this section are applicable on December 21,
2015; and
(ii) Paragraphs (d)(4)(i)(C), (f)(5)(ii), (i)(2)(i) and (iii),
(i)(3)(i), (i)(3)(iv)(C) (Example 3), (i)(4)(ii)(A)(1), (i)(4)(ii)(B),
(i)(4)(iii) and (iv), (i)(4)(v)(F) (Example 6), (i)(5)(ii)(A) and (B),
(i)(5)(iii)(A), (i)(5)(iii)(D)(4) (Example 4), (i)(6) introductory
text, and (i)(6)(iii) and (v) of this section are applicable to taxable
years beginning on or after October 16, 2023.
(2) Taxpayers may choose to apply the paragraphs listed in
paragraph (I)(1)(ii) of this section to taxable years beginning on or
after February 19, 2016, and before October 16, 2023, provided the
taxpayer applies the provisions listed in paragraph (l)(1)(ii) of this
section in their entirety and in a consistent manner.
(3) See paragraphs (i)(5)(ii)(B) and (C) and (i)(8) of Sec.
1.509(a)-4T contained in 26 CFR part 1, revised as of April 1, 2015,
for certain rules regarding non-functionally integrated Type III
supporting organizations effective before December 21, 2015. See
paragraphs (i)(5)(ii)(A) and (B) and (i)(5)(iii)(D) of Sec. 1.509(a)-4
contained in 26 CFR part 1, revised as of April 1, 2023, for certain
rules regarding non-functionally integrated Type III supporting
organizations effective before October 16, 2023.
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
0
Par. 3. The authority citation for part 53 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 53.4947-1 [Amended]
0
Par. 4. Section 53.4947-1 is amended in paragraph (b)(3) by removing
the language ``Sec. Sec. 1.509(a)-4(d)(2)(iv)(a), and 1.509(a)-4(i)(1)
(ii) and (iii)(c)'' and ``the regulations under section 507(b)(1)'' and
adding in their places ``Sec. 1.509(a)-4(d)(2)(iv)(A) and (i)(1)(ii)
of this chapter'' and ``the regulations in this part under section
507(b)(1)'', respectively.
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
Approved: August 20, 2023.
Lily L. Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2023-22286 Filed 10-13-23; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on October 16, 2023.
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