Is Group Filing an Alternative for Your Exempt Organization?
Author: Jeanette Verrelli
In recent months, various clients have inquired about the applicability of filing group returns for their organizations. Group filings have unique characteristics, so we’re going to offer a general overview, along with potential pros and cons, to help you understand the concept of obtaining a group tax exemption and filing a group return.
A group exemption pertains to a group of organizations all exempt under the same Internal Revenue Code (IRC) section. The exemption is applied for and obtained by a central organization on behalf of subordinate organizations under the central organization’s general supervision or control.
Items to consider related to filing for a group exemption include:
- A subordinate included in a group exemption letter should not apply separately for recognition of exempt status unless it no longer wants to be included in the group exemption letter; existing organizations forfeit their separate exempt status when filing for group exemption.
- A subordinate organized and operated in a foreign country may not be included in a group exemption letter.
- A subordinate described in IRC Section 501(c)(3) may not be included in a group exemption letter if it is a private foundation defined in Section 509(a).
Advantages & Disadvantages of Group Exemption
There are several advantages and disadvantages related to the group exemption filing process. Potential tax compliance and reporting advantages include:
- Fewer Form 990 filings – one return for the parent organization and one group return for all the subordinates
- Fewer Form 1023 filings – new organizations may be added to the group exemption by informing the IRS rather than proceeding through the time-consuming process of filing separate applications for exemption
- Reduction of inefficiencies in the tax return reporting process, since many financial statements already are prepared on a consolidated basis
- Officer compensation reported on fewer public returns
- Reduced narrative disclosures on Schedule O
However, the Advisory Committee on Tax-Exempt and Government Entities (ACT) sees the group filing exemption as an unfavorable planning mechanism for exempt organizations. According to ACT, this tax planning tool has several disadvantages:
- Less transparency, accountability and responsibility than separately filed Forms 990
- Administrative burden on the central organization to gather and present the information on a group basis
- Additional information reporting requirements to maintain group exemption, including documentation due to the IRS months before the end of the organization’s tax year
- Limited public access to Form 990 information for each subordinate
The IRS is not bound by the recommendations of the ACT, but the topic is still open for discussion. Group exemption holders normally are organizations with several chapters, e.g., Boy Scouts of America, where each subordinate’s activity is minimal.
Requirements for Inclusion in a Group Exemption Letter
A central organization applying for a group exemption letter must obtain recognition of its own exempt status. It also must establish that the subordinates to be included in the group exemption letter meet the following requirements:
- Affiliation with the central organization and subject to its general supervision or control
- All must be exempt under the same paragraph of IRC Section 501(c), though not necessarily the paragraph under which the central organization is exempt.
- They cannot be private foundations, if the application for a group exemption letter involves Section 501(c)(3).
- They all must be on the same accounting period as the central organization if they are to be included in group returns.
- Organizations must have been formed within the 15-month period prior to the date of submission of the group exemption application if they are claiming Section 501(c)(3) status and are subject to the requirements of section 508(a) and wish to be recognized as exempt from their dates of creation.
A group exemption letter may be issued covering subordinates, one or more of which have not been organized within the 15-month period prior to the date of submission, if all subordinates are willing to be recognized as exempt only from the date of application.
Each subordinate must authorize the central organization to include it in the application for the group exemption letter. The authorization must be signed by a duly authorized officer of the subordinate and retained by the central organization while the group exemption letter is in effect. A new organization described in IRC Section 501(c)(3) that wants to be included in a group exemption must submit its authorization before the end of the 15th month after it was formed to satisfy the requirement of IRC Section 508(a). The central organization also must include this subordinate in its next annual submission.
Filing Application for a Group Exemption Letter
A central organization seeking a group exemption letter for its subordinates must obtain recognition of its own exemption by filing an application of exemption with the IRS. If the central organization is recognized as exempt, it must indicate its employer identification number (EIN), the date of the letter recognizing its exemption and the Internal Revenue Office that issued it. It need not resubmit documents already submitted. However, if it has not already done so, it must submit a copy of any amendment to its governing instruments or internal regulations as well as any information regarding any change in its character, purposes or methods of operations.
In addition to the information required to obtain recognition of its own exemption, the central organization must submit to the key district director the following information on behalf of those subordinates to be included in the group exemption letter:
- A letter signed by the principal officer of the central organization setting forth or including as attachments all of the following:
- Information verifying the existence of the relationships
- A sample copy of a uniform governing instrument (charter, trust indenture, articles of association, etc.) adopted by the subordinates or, in the absence of a uniform governing document, copies of representative instruments
- A detailed description of the purposes and activities of the subordinates, including the sources of receipts and nature of expenditures
- An affirmation that, to the best of the officer’s knowledge, the purposes and activities of the subordinates are as set forth in (b) and (c) above
- A statement that each subordinate to be included in the group exemption letter has furnished written authorization to the central organization
- A list of the subordinates to be included in the group exemption letter to which the IRS has issued an outstanding ruling or determination letter relating to exemption
- If the application for a group exemption letter involves IRC Section 501(c)(3) and is subject to the provisions of Section 508(b), and affirmation to the effect that, to the best of the officer’s knowledge and belief, no subordinate to be included in the group exemption is a private foundation as defined in Section 509(a)
- For each subordinate that is a school claiming exemption under Section 501(c)(3), the information required by Rev. Proc. 75-50
Please note each subordinate must have its own EIN even if it has no employees. The central organization must submit with the exemption application a completed Form SS-4 on behalf of each subordinate not having a number.
Information Required Annually to Maintain Group Exemption
To maintain a group exemption letter, the central organization must submit annually to the IRS, at least 90 days before the close of its annual accounting period, the following:
- Information must be included regarding all changes in the purposes, character or method of operation of subordinates included in the group exemption letter.
- Lists of:
- Subordinates that have changed their names or addresses during the year
- Subordinates no longer to be included in the group exemption letter because they have ceased to exist, disaffiliated or withdrawn their authorization to the central organization
- Subordinates to be added to the group exemption letter because they are newly organized or affiliated or they have newly authorized the central organization to include them
A separate list must be submitted for each of the three categories above. Each list must show the names, mailing address (including ZIP codes), actual address if different and EINs of the affected subordinates. An annotated directory of subordinates will not be accepted for this purpose. If none of the above changes apply, the central organization must submit a statement to that effect.
- The information required in the previous section 1 (a) through (h), with respect to subordinates to be added to the group exemption letter. However, if the information upon which the group exemption letter was based is applicable in all material respects to such subordinates, a statement to this effect may be submitted in lieu of the information required by items (a) through (d).
The requirements and reporting rules for group returns can be cumbersome, and the time saved preparing fewer 990s could be offset by the increased requirements for a group return. The detail supporting data needed for individual 990s will, to a great degree, still need to be developed in a group setting. Also, some industry watchdog groups have expressed concern over group filings due to lack of transparency, so it’s unclear how the IRS will treat this option going forward.
Most organizations that have taken advantage of the group strategy are large, multisite organizations with chapters throughout the U.S. While this may be a reasonable alternative for certain clients, e.g., self-contained health systems, most of those organizations continue to file individual returns for each affiliate. You should look at the specifics of your organization and determine if this alternative is right for you.
If you have any specific questions or concerns, please contact your BKD advisor.