On February 19, 2016, the Treasury Department and IRS issued proposed regulations setting additional requirements for Type III supporting organizations and defining “control” for purposes of accepting contributions. Here’s a look at these changes and what they could mean for your organization.
Gifts from Controlling Donor – Defining Control
Type I and Type III supporting organizations are prohibited from accepting gifts or contributions 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 organization; organizations also are prohibited from accepting gifts from persons related to those possessing such control. “Related persons” include family members and 35 percent-controlled entities.
The proposed regulations provide further definition of “control.” The governing body of a supported organization is “controlled” by a person if that person, alone or by aggregating his or her votes or positions of authority with certain related persons, may require (or prevent) the governing body of the supported organization to perform any act that significantly affects its operations.
Additional Requirements for Type III Supporting Organizations
An organization qualifies as a Type III supporting organization if it satisfies all of the following:
- Annual notification requirement
- Responsiveness test
- Integral part test
The proposed regulations provide additional rules regarding each of these requirements.
Annual Notification Requirement – The proposed regulations require a written notice addressed to the principal officer of the supported organization describing all of the following:
- The type and amount of all support the supporting organization provided to the supported organization during the preceding year
- A copy of the supporting organization’s most recently filed Form 990
- A copy of the supporting organization’s governing documents, including any amendments (unless previously provided)
The notice must be delivered or electronically transmitted by the last day of the fifth month of the taxable year after the taxable year in which the supporting organization provided support.
Responsiveness Test – The proposed regulations say a supporting organization satisfies the responsiveness test if it’s responsive to the needs and demands of its supported organizations. Recognizing the administrative burden on meeting this test when there are multiple supported organizations, the proposed regulations provide an example.
Integral Part Test – The proposed regulations address two of the three tests used to determine whether a Type III organization is functionally integrated.
- For a supporting organization to qualify as the parent of each supported organization:
- The supporting organization and its supported organizations must be part of an integrated system (such as a hospital system).
- The supporting organization must engage in activities typical of a parent of an integrated system.
- A majority of the officers, directors or trustees of each supported organization must be appointed or elected, directly or indirectly, by the governing body, members of the governing body or officers of the supporting organization.
- For a supporting organization to qualify as functionally integrated when it supports a governmental supported organization:
- The supporting organization must support only governmental supported organizations.
- A substantial part of the supporting organization’s total activities must directly further the exempt purposes of its governmental supported organization(s).
A governmental supported organization must be a governmental unit described in section 170(c)(1), or an organization described in section 170(c)(2) and (b)(1)(A) (with certain exclusions).
- A Type III supporting organization that supports more than one governmental supported organization is considered to be functionally integrated if either of the following is true:
- All of its governmental supported organizations operated within the same geographic region
- All of its governmental supported organizations worked in close coordination to conduct a service, program or activity the supporting organization supports; to satisfy the close cooperation or coordination requirement, the Type III supporting organization would need to maintain a letter on file from each of its governmental supported organizations describing the collaborative/coordination efforts
A substantial part of the supporting organization’s total activities must directly further the exempt purposes of its governmental supported organization(s). A special exception exists for Type III supporting organizations in existence prior to February 19, 2016, provided that they support only one other nongovernmental supported organization.
Nonfunctionally integrated organizations meet the integral part test if they satisfy a distribution requirement and an attentiveness requirement:
- The proposed regulations modify the definition of “distributable amount” to remove the provision that allows for reduction to the distributable amount for taxes. This proposed regulation is based on the fact that taxes generated from an activity producing unrelated business taxable income don’t further the exempt purpose of the organization and, thus, should not be treated as an amount distributed to a supported organization.
- In addition, the proposed regulations contain a list of expenditures that qualify for the distribution requirement. The proposed regulations make this an exclusive list.
The Treasury Department and IRS want comments on aspects of the proposed regulations no later than May 19, 2016.
If you have any questions on these or other issues, contact your BKD advisor.