[Federal Register Volume 72, Number 148 (Thursday, August 2, 2007)]
[Proposed Rules]
[Pages 42335-42339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14925]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-155929-06]
RIN 1545-BG31
Payout Requirements for Type III Supporting Organizations That
Are Not Functionally Integrated
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document describes rules that the Treasury Department and
the IRS anticipate proposing, in a notice of proposed rulemaking,
regarding the payout requirements for Type III supporting organizations
that are not functionally integrated, the criteria for determining
whether a Type III supporting organization is functionally integrated,
the modified requirements for Type III supporting organizations that
are organized as trusts, and the requirements regarding the type of
information a Type III supporting organization must provide to its
supported organization(s) to demonstrate that it is responsive to its
supported organization(s). Sections 1241 and 1243 of the Pension
Protection Act of 2006 amended the law with respect to Type III
supporting organizations prompting a need to revise the Treasury
Regulations regarding the four matters mentioned above. These new
requirements and criteria would apply to Type III supporting
organizations as defined under sections 509(a)(3)(B)(iii) and
4943(f)(5) of the Internal Revenue Code (Code). This document also
invites comments from the public regarding the proposed payout
requirement and the proposed criteria for qualifying as functionally
integrated. All materials submitted will be available for public
inspection and copying.
DATES: Written or electronic comments must be submitted by October 31,
2007.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-155929-06), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
155929-06), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov/ (IRS REG-155929-06).
FOR FURTHER INFORMATION CONTACT: Concerning submissions, Richard A.
Hurst at (202) 622-2949 (TDD Telephone) and his e-mail address is
[email protected]; concerning the proposed rules,
Philip T. Hackney or Michael B. Blumenfeld at (202) 622-6070 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
The Pension Protection Act of 2006, Public Law 109-280, 120 Stat.
780 (2006) (PPA), amended the requirements that an organization exempt
from tax under section 501(c)(3) of the Code must meet to qualify as a
Type III supporting organization under section 509(a)(3) of the Code.
This advanced notice of proposed rulemaking describes the rules that
the Treasury Department and the IRS expect to propose to implement the
new qualification requirements for Type III supporting organizations
enacted by Congress and solicits comments from the public.
Public Charities Versus Private Foundations
Under section 509(a), an organization described in section
501(c)(3) is a private foundation unless it meets the requirements of
section 509(a)(1), (2), (3), or (4). Organizations described in section
501(c)(3) that meet the requirements of section 509(a)(1), (2), (3), or
(4) are referred to as public charities.
Private foundations, which are generally divided into two
categories, operating and non-operating, depending on the type of
activity in which the foundation engages, are subject to a different
set of requirements than those applicable to public charities. Sections
4940 through 4948 impose various restrictions and excise taxes on
private foundations along with their disqualified persons and
foundation managers, that are generally not applicable to public
charities. Furthermore, more stringent deduction limitations apply to
contributions made to private non-operating foundations than apply to
contributions to public charities. For example, under section
170(b)(1)(A), an individual who makes a cash contribution to a public
charity may deduct up to fifty percent of his or her contribution base
(a modified adjusted gross income amount) in the year of his or her
contribution, while the same contribution to a private non-operating
foundation would be limited to thirty percent of the individual's
contribution base under section 170(b)(1)(B). In addition, deductions
for contributions of certain appreciated property to a private non-
operating foundation are limited to the contributor's basis in the
property under section 170(e)(1)(A), while the same contribution to a
public charity could result in a deduction based on the property's fair
market value under section 170(e)(1)(B)(ii).
Supporting Organizations
Public charities that meet the requirements of section 509(a)(3)
are known as supporting organizations. To be classified as a supporting
organization, an organization must satisfy an organizational test, an
operational test, a relationship test, and a disqualified person
control test. The organizational and operational tests require that the
organization be organized and at all times thereafter operated
exclusively for the benefit of, to perform the functions of, or to
conduct the purposes of one or more publicly supported organizations
described in section 509(a)(1) or (2). The relationship test requires
that the organization be operated, supervised, or controlled by or in
connection with one or more publicly supported organizations. Finally,
the disqualified person control test requires that the organization not
be controlled directly or indirectly by certain disqualified persons.
Relationship Test
Treasury Regulation (Treas. Reg.) Sec. 1.509(a)-4(f)(2) sets forth
three structural or operational relationships a supporting organization
is permitted to have with its supported organization(s). Each
supporting organization must have one of the three types of
relationships with the organization(s) it supports to be a supporting
organization described in section 509(a)(3) of the Code. The purpose of
the relationship requirement is to ensure that a supporting
organization has a sufficiently close tie to one or more publicly
supported organizations such that the supporting organization will be
accountable to a broader public constituency.
A supporting organization that is operated, supervised or
controlled by one or more publicly supported organizations is commonly
known as a Type I supporting organization. The relationship a Type I
supporting organization has with its supported
[[Page 42336]]
organization(s) is comparable to that of a parent-subsidiary
relationship. A supporting organization supervised or controlled in
connection with one or more publicly supported organizations is
commonly known as a Type II supporting organization. The relationship a
Type II supporting organization has with its supported organization(s)
is comparable to a brother-sister corporate relationship. A supporting
organization that is operated in connection with one or more publicly
supported organizations is commonly known as a Type III supporting
organization.
Qualification Requirements for Type III Supporting Organizations Prior
to Enactment of the Pension Protection Act
In general, Treas. Reg. Sec. 1.509(a)-4(i)(1) requires an
organization to meet a ``responsiveness test'' and an ``integral part
test'' to satisfy the relationship requirement for a Type III
supporting organization.
Responsiveness Test: General Rule. Treas. Reg. Sec. 1.509(a)-
4(i)(2)(i) provides that an organization is ``considered to meet the
`responsiveness test' if the organization is responsive to the needs or
demands of'' its publicly supported organizations. Treas. Reg. Sec.
1.509(a)-4(i)(2)(ii) provides that a supporting organization may
demonstrate responsiveness to its publicly supported organization(s)
if: (1)(a) One or more of its officers, directors, or trustees are
elected or appointed by the officers, directors, trustees, or
membership of its publicly supported organization(s), (b) one or more
members of the governing bodies of its publicly supported
organization(s) are also officers, directors, or trustees of, or hold
other important offices in, the supporting organization, or (c) the
officers, directors, or trustees of the supporting organization
maintain a close, continuous working relationship with the officers,
directors, or trustees of its publicly supported organization(s); and
(2) by reason of such arrangement, the officers, directors, or trustees
of its publicly supported organization(s) have a significant voice in
the investment policies of the supporting organization, the timing and
the manner of making grants, the selection of the grant recipients by
the supporting organization, and otherwise directing the use of the
income or assets of the supporting organization.
In addition, with respect to an organization that was supporting a
publicly supported organization before November 20, 1970, Treas. Reg.
Sec. 1.509(a)-4(i)(1)(ii) provides that additional facts and
circumstances, such as a historic and continuing relationship between
the supporting organization and its supported organization(s), may be
taken into account, in addition to the factors described in the general
responsiveness test above, to establish compliance with the
responsiveness test.
Responsiveness Test: Charitable Trusts. Before enactment of the
PPA, one way of satisfying the responsiveness test, under Treas. Reg.
Sec. 1.509(a)-4(i)(2)(iii), required that (1) the supporting
organization be a charitable trust under state law, (2) each publicly
supported organization that the trust supports be named as a
beneficiary under the charitable trust's governing instrument, and (3)
each beneficiary organization have the power to enforce the trust and
compel an accounting under State law. As described below, this method
of satisfying the responsiveness test was effectively removed by the
PPA.
Integral Part Test. Treas. Reg. Sec. 1.509(a)-4(i)(3)(i) provides
that a supporting organization is required to establish that ``it
maintains a significant involvement in the operations of one or more
publicly supported organizations and such publicly supported
organizations are in turn dependent upon the supporting organization
for the type of support which it provides.'' Treas. Reg. Sec.
1.509(a)-4(i)(3)(ii) and (iii) sets forth two alternative ways to meet
the integral part test. The first method is typically referred to as
the ``but for'' test. In this advance notice of proposed rulemaking,
the second method of meeting the integral part test will be referred to
as the ``attentiveness'' test.
Integral Part Test, Alternative I: the ``but for'' test. Under
Treas. Reg. Sec. 1.509(a)-4(i)(3)(ii) the ``but for'' test is
satisfied if ``the activities engaged in [by the supporting
organization] for or on behalf of the publicly supported organizations
are activities to perform the functions of, or to carry out the
purposes of, such organizations, and, but for the involvement of the
supporting organization, would normally be engaged in by the publicly
supported organizations themselves.''
Integral Part Test, Alternative II: the ``attentiveness'' test. The
``attentiveness'' test, under Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii),
requires a supporting organization to (1) make payments of
substantially all of its income to or for the use of one or more
publicly supported organizations, (2) provide enough support to one or
more publicly supported organizations to insure the attentiveness of
such organizations to the operations of the supporting organization,
and (3) pay a substantial amount of the total support of the supporting
organization to those publicly supported organizations that meet the
attentiveness requirement. Rev. Rul. 76-208, 1976-1 CB 161, (see Sec.
601.601(d)(2) of this chapter), provides that the phrase
``substantially all of its income'' in Treas. Reg. Sec. 1.509(a)-
4(i)(3)(iii) means at least 85 percent of its adjusted net income.
PPA Amendments to Qualification Requirements for Type III Supporting
Organizations
The PPA amended the qualification requirements for Type III
supporting organizations, modifying both the integral part test and the
responsiveness test.
Sections 1241 and 1243 of the PPA enacted Code sections 509(d) and
4943(f)(5). These provisions define the term Type III supporting
organization and distinguish between functionally integrated and non-
functionally integrated Type III supporting organizations. These two
new categories appear to reflect the distinction drawn in the Treasury
Regulations between those organizations that meet the integral part
test by meeting the ``but for'' test and those that meet the integral
part test by meeting the ``attentiveness'' test.
In conformity with existing Treasury Regulations, new section
4943(f)(5)(A) defines a Type III supporting organization as a
supporting organization that is operated in connection with one or more
section 509(a)(1) or (2) organizations. New section 4943(f)(5)(B)
defines a functionally integrated Type III supporting organization as a
Type III supporting organization that is not required under regulations
established by the Secretary to make payments to supported
organizations due to the activities of the organization related to
performing the functions of, or carrying out the purposes of, such
supported organizations. Although this language appears similar to the
``but for'' prong of the integral part test, the Staff of the Joint
Committee on Taxation in its technical explanation of the provision
notes that there is ``concern that the current regulatory standards for
satisfying the integral part test not by reason of a payout [i.e., the
existing ``but for'' test] are not sufficiently stringent to ensure
that there is a sufficient nexus between the supporting and supported
organizations.'' See Staff of the Joint Committee on Taxation,
Technical Explanation of H.R. 4, the ``Pension Protection of 2006,'' as
Passed by the House on July 28, 2006, and as Considered by the Senate
on August 3,
[[Page 42337]]
2006 (JCX-38-06) at 360 n. 571, August 3, 2006 (Technical Explanation).
In particular, the Technical Explanation states that in revising the
Type III supporting organization regulations the Secretary ``shall
strengthen the standard for qualification as [a Type III supporting]
organization that is not required to pay out.'' Id.
Section 1241(d)(1) of the PPA directed the Secretary to promulgate
new regulations on the payments required by Type III supporting
organizations that are not functionally integrated. Section 1241(d)(1)
of the PPA provides that such regulations shall require non-
functionally integrated Type III supporting organizations to make
distributions of a ``percentage of either income or assets to supported
organizations (defined in new section 509(f)(3) of [the] Code) in order
to ensure that a significant amount is paid'' to their supported
organizations. The Technical Explanation notes that there is concern
that merely requiring a Type III supporting organization to pay out
substantially all of its net income (as under the ``attentiveness''
prong of the integral part test) does not necessarily result in
significant distributions to publicly supported organizations relative
to the value of the assets held by the Type III supporting organization
and ``as compared to amounts paid out by nonoperating private
foundations.'' See Technical Explanation at 360 n. 571.
Section 1241(c) of the PPA modified the responsiveness test as it
applies to charitable trusts. Effectively, section 1241(c) provides
that having each organization that the trust supports be a publicly
supported organization named as a beneficiary under the trust's
governing instrument and establishing that each beneficiary
organization has the power to enforce the trust and compel an
accounting is no longer sufficient to satisfy the responsiveness test
as provided in Treas. Reg. Sec. 1.509(a)-4(i)(2)(iii). The Technical
Explanation states that a Type III supporting organization organized as
a trust must now ``establish to the satisfaction of the Secretary, that
it has a close and continuous relationship with the supported
organization such that the trust is responsive to the needs or demands
of the supported organization.'' Technical Explanation at 362. Under
section 1241(e)(2)(A) of the PPA, trusts that operated in connection
with a publicly supported organization on August 17, 2006, have until
August 17, 2007 to satisfy the modified responsiveness test under
Treas. Reg. 1.509(a)-4(i)(2)(ii). For other trusts, the provision was
effective on August 17, 2006.
Finally, section 1241(b) added section 509(f)(1)(A), which contains
another requirement for Type III supporting organizations. The
provision requires a Type III supporting organization to provide each
of its supported organizations with ``such information as the Secretary
may require to ensure that such organization is responsive to the needs
or demands of the supported organization.''
As described in this advanced notice of proposed rulemaking, the
Treasury Department and the IRS intend to propose regulations that
provide (1) the payout requirements for Type III supporting
organizations that are not functionally integrated, (2) the criteria
for determining whether a Type III supporting organization is
functionally integrated, (3) the modified responsiveness test for Type
III supporting organizations that are organized as charitable trusts,
and (4) the type of information a Type III supporting organization will
be required to provide to its supported organization(s) to demonstrate
that it is responsive.
Explanation of Provisions
Summary of Proposed Criteria for Qualifying as a Type III Supporting
Organization
The Treasury Department and the IRS expect that all Type III
supporting organizations will be required to meet the responsiveness
test under Treas. Reg. Sec. 1.509(a)-4(i)(2)(ii). In addition, it is
expected that Type III supporting organizations that are functionally
integrated will be required to meet: (A) The ``but for'' test in
existing Treas. Reg. Sec. 1.509(a)-4(i)(3)(ii); (B) an expenditure
test that will resemble the qualifying distributions test for private
operating foundations; and (C) an assets test that will resemble the
alternative assets test for private operating foundations. Finally, it
is expected that a Type III supporting organization that is not
functionally integrated will be required to meet a payout requirement
equal to the qualified distribution requirement of a private non-
operating foundation. In addition, there will be a limit on the number
of publicly supported organizations a non-functionally integrated Type
III supporting organization may support. These proposed criteria for
qualifying as a Type III supporting organization will replace the
integral part test in the existing regulations. These provisions are
explained in more detail below.
Definition of Functionally Integrated Type III Supporting Organization
and the Applicability of Private Operating Foundation Rules
Private operating foundations under section 4942(j)(3) share strong
similarities with Type III functionally integrated supporting
organizations under section 4943(f)(5)(B) in that both are expected to
be directly engaged in the active conduct of charitable activities
rather than only making grants to, or for the use of, charitable
organizations. The Code and Treasury Regulations provide extensive
rules used to determine whether a private foundation is a private
operating foundation. See section 4942(j)(3) and Treas. Reg. Sec.
53.4942(b). The Treasury Department and the IRS believe that these
rules provide a useful model for developing standards to determine
whether a Type III supporting organization is functionally integrated,
and that adoption of similar rules under section 4943(f)(5)(B) will
further the Congressional purpose articulated in the Technical
Explanation of strengthening the nexus between a functionally
integrated Type III supporting organization and the publicly supported
organization(s) it supports.
To qualify as a private operating foundation under section
4942(j)(3), an organization must satisfy a qualifying distributions
test and one of three alternative tests described below. Under the
qualifying distributions test, a private operating foundation must make
qualifying distributions ``directly for the active conduct of the
activities constituting the purpose or function for which it is
organized and operated,'' equal to substantially all (at least 85
percent) of the lesser of its adjusted net income or its minimum
investment return. Under section 4942(e)(1), the minimum investment
return is equal to 5 percent of the excess of (A) the aggregate fair
market value of all the foundation's assets other than those used (or
held for use) directly in carrying out the organization's exempt
purpose over (B) the acquisition indebtedness with respect to such
assets. Under Treas. Reg. Sec. 53.4942(b)-1(b)(1), a qualifying
distribution directly for the active conduct of activities constituting
the foundation's exempt purpose is a distribution that is used by the
foundation itself to carry out its exempt activities rather than paid
to other organizations to help them carry out their exempt activities.
In addition, a private operating foundation must meet one of three
alternative tests: An assets test, an endowment test or a support test.
The
[[Page 42338]]
assets test, under section 4942(j)(3)(B)(i) and Treas. Reg. Sec.
53.4942(b)-2(a), requires that substantially more than half (at least
65 percent) of the assets of an operating foundation must be devoted
directly to the private operating foundation's exempt purpose
activities, or to functionally related businesses (see section
4942(j)(4)), or both, or are stock of a corporation controlled by, and
substantially all (at least 85 percent) of the assets of which are
devoted to, the foundation. The endowment test, under Treas. Reg. Sec.
53.4942(b)-2(b), requires a foundation to make qualifying distributions
directly for the active conduct of its exempt activities in an amount
not less than two thirds of its minimum investment return. The support
test, under Treas. Reg. Sec. 53.4942(b)-2(c), is satisfied if
substantially all (85 percent) of a foundation's support (other than
gross investment income) is normally received from the general public
and from five or more exempt organizations that are not related to each
other or the recipient foundation, if the foundation does not normally
receive more than 25 percent of its support from any one such exempt
organization; and if the foundation does not normally receive more than
50 percent of its support from gross investment income.
Description of the Proposed Functionally Integrated Test
The Treasury Department and the IRS anticipate that the proposed
regulations will define the term functionally integrated Type III
supporting organization as a Type III supporting organization that
meets: (A) The ``but for'' test in existing Treas. Reg. Sec. 1.509(a)-
4(i)(3)(ii); (B) an expenditure test consistent with section
4942(j)(3)(A); and (C) an assets test consistent with section
4942(j)(3)(B)(i). It is expected that the expenditure test will require
a functionally integrated Type III supporting organization to use
substantially all of the lesser of (a) its adjusted net income or (b)
five percent of the aggregate fair market value of all its assets
(other than assets that are used, or held for use, directly in
supporting the charitable programs of the supported organizations)
directly for the active conduct of activities that directly further the
exempt purposes of the organizations it supports. The assets test will
require the organization to devote at least 65 percent of the aggregate
fair market value of all its assets directly for the active conduct of
activities that directly further the exempt purposes of the
organizations it supports. The Treasury Department and the IRS believe
that requiring functionally integrated Type III supporting
organizations to satisfy the expenditure and assets tests, in addition
to the ``but for'' test, will be stronger than the existing integral
part test and ensure a sufficient nexus between a supporting
organization and the organization(s) it supports. These tests also will
ensure that a sufficient amount is being dedicated directly to the
active conduct of activities that further the exempt purposes of
publicly supported organizations.
The term ``adjusted net income'' is expected to have substantially
the same meaning as that term has in section 4942(f) and Treas. Reg.
Sec. 53.4942(a)-2(d). The valuation of assets is expected to be
determined in a manner similar to the rules under section 4942(e)(2)
and Treas. Reg. Sec. 53.4942(a)-2(c)(4).
The Treasury Department and the IRS also intend that certain Type
III supporting organizations that oversee or facilitate the operation
of an integrated system that includes one or more charities and that
may be unable to satisfy the ``direct active conduct'' and ``directly
further'' requirements of the expenditure and assets tests, such as
certain hospital systems, will be classified as functionally integrated
in the proposed regulations if they satisfy the existing ``but for''
test.
The proposed regulations will not permit a functionally integrated
Type III supporting organization to qualify as functionally integrated
by using the endowment or support tests that are available to private
operating foundations as alternatives to the proposed assets test.
Because the endowment test is similar to the expenditure test, the
Treasury Department and the IRS believe that the endowment test would
not provide sufficient additional assurances of a tight nexus between a
functionally integrated supporting organization and its supported
organizations. Furthermore the support test, which focuses on sources
of support received by a private foundation rather than on its
activities, appears to be inapplicable to the functionally integrated
concept. By requiring at least 65 percent of the value of all assets of
each functionally integrated supporting organization to be devoted
directly for the active conduct of the activities of its supported
organizations, the proposed assets test is intended to ensure that the
connection between the supporting and supported organizations is
significant.
Payout Requirement for Type III Supporting Organizations That Are Not
Functionally Integrated
In establishing a payout requirement for non-functionally
integrated Type III supporting organizations, the Treasury Department
and the IRS expect to follow the framework of the existing section 4942
qualifying distribution regulations applicable to private non-operating
foundations. Private non-operating foundations have operated under
these qualifying distribution regulations for many years. The Treasury
Department and the IRS believe these rules are appropriate for Type III
grant-making organizations, and would further the Congressional purpose
articulated in the Technical Explanation of ensuring that, as compared
to amounts paid out by private non-operating foundations, significant
amounts are being paid to supported organizations even if the
supporting organization's assets produce little or no income.
A private non-operating foundation is required under section 4942
to make certain qualifying distributions or pay an excise tax. A
private non-operating foundation is generally liable for this excise
tax under section 4942(a) and (b) if it does not make qualifying
distributions each year equal to its minimum investment return. The
minimum investment return is five percent of the aggregate fair market
value of all the foundation's assets other than those used (or held for
use) directly in carrying out the organization's exempt purpose over
the acquisition indebtedness with respect to such assets. Qualifying
distributions under section 4942(g) are generally those distributions
(including reasonable and necessary administrative expenses) paid to
accomplish charitable purposes.
Description of the Proposed Payout Rule
The Treasury Department and the IRS anticipate that the proposed
regulations will (A) require a non-functionally integrated Type III
supporting organization to meet a payout requirement and (B) limit the
number of publicly supported organizations a non-functionally
integrated Type III supporting organization may support.
The payout requirement will call for a Type III supporting
organization that is not functionally integrated to distribute annually
to or for the use of its supported organizations an amount equal to at
least five percent of the aggregate fair market value of all its assets
(other than assets that are used, or held for use, directly in
supporting the charitable programs of its supported organizations).
Additionally, the
[[Page 42339]]
Treasury Department and the IRS are concerned that a supporting
organization's relationship with and accountability to its supported
organizations is diminished as the number of its supported
organizations increases. Accordingly, except for organizations in
existence on or before the date the regulations are proposed, it is
expected that the proposed regulations will also provide that non-
functionally integrated Type III supporting organizations will be
limited to supporting no more than five publicly supported
organizations. An organization in existence on or prior to the date
regulations are proposed may support more than five supported
organizations only if the organization distributes at least 85 percent
of its total required payout amount to, or for the use of, publicly
supported organizations to which the supporting organization is
responsive pursuant to Treas. Reg. Sec. 1.509(a)-4(i)(2)(ii). The
anticipated proposed payout rules are intended to ensure that a non-
functionally integrated Type III supporting organization has a tight
nexus with its supported organization(s).
The Treasury Department and the IRS recognize that requiring an
existing Type III supporting organization that supports more than five
supported organizations to provide 85 percent of its total required
payout to those supported organizations to which it is responsive may
affect existing donee relationships. The Treasury Department and the
IRS solicit comments on whether transitional rules are needed with
respect to this proposed limitation regarding distributions to
supported organizations.
The valuation of assets for purposes of the payout requirement is
expected to be determined in a manner similar to that under section
4942(e)(2) and Treas. Reg. Sec. 53.4942(a)-2(c)(4). The proposed
distribution rules will be similar to the distribution rules under
section 4942. It is expected that amounts paid by an organization to
accomplish the exempt purposes of its supported organizations will be
considered as distributed to or for the use of its supported
organization(s).
Responsiveness Test
Except as explained below with respect to charitable trusts, the
Treasury Department and the IRS do not expect to modify the
responsiveness test. Thus, all Type III supporting organizations will
be expected to meet the responsiveness test under Treas. Reg. Sec.
1.509(a)-4(i)(2)(ii). Accordingly, a Type III supporting organization
will be expected to demonstrate the necessary relationship between its
officers, directors or trustees and those of its supported
organization(s), and further show that this relationship results in the
officers, directors or trustees of its supported organization(s) having
a significant voice in the operations of the supporting organization.
Responsiveness Test for Charitable Trusts
Consistent with section 1241(c) of the PPA, discussed in the
Background section above, the proposed regulations will provide that
charitable trusts must satisfy the responsiveness test under Treas.
Reg. Sec. 1.509(a)-4(i)(2)(ii). Thus, for instance, a trust would be
expected to show that its trustees have a close, continuous working
relationship with the officers, directors, or trustees of the publicly
supported organization(s) it supports and that through such
relationship the officers, directors or trustees of its publicly
supported organization(s) have a significant voice in the operations of
the supporting organization. Comments are requested with respect to
potential transition relief given that the statute directs that this
modified test apply as of August 17, 2007 to trusts already in
existence on the date of enactment of the PPA.
Requirement To Provide Supported Organizations With Information
Regarding Responsiveness
The proposed regulations will provide rules for the form, content
and timing of the information Type III supporting organizations are
required to provide their supported organization(s) under section
509(f)(1)(A). The Treasury Department and the IRS solicit comments as
to what information the Secretary should require a Type III supporting
organization to provide to each of its supported organizations to
ensure that such supporting organization is responsive to the needs or
demands of its supported organization(s).
Consequences for Failing To Satisfy the Proposed Tests
The proposed regulations will clarify that an organization that
would otherwise be classified as a Type III supporting organization,
but either does not establish that it is functionally integrated or
does not satisfy the payout requirement for non-functionally integrated
organizations in a taxable year, will be classified as a private
foundation for such taxable year and all subsequent taxable years until
it terminates its private foundation status under section 507. The
Treasury Department and the IRS solicit comments on how the
requirements for a private foundation termination under section 507
should apply in these circumstances.
Transitional Issues
Implementation of the new qualification requirements for Type III
supporting organizations enacted in the PPA will raise transitional
issues for certain organizations. For instance, an organization that
currently qualifies as a Type III supporting organization by meeting
the attentiveness prong of the integral part test might be prohibited
by its current governing instrument from distributing capital or
corpus, thus preventing it from being able to satisfy the new payout
requirement for non-functionally integrated Type III supporting
organizations without a change to such instrument. The Treasury
Department and the IRS invite comments regarding potential transition
rules for supporting organizations in existence as of the date of
enactment of the PPA that will provide such organizations a reasonable
opportunity to amend their governing instruments or make other changes
to comply with the law as amended by the PPA.
Proposed Effective Date
Except as otherwise noted, the Treasury Department and the IRS
anticipate that these new proposed rules for Type III supporting
organizations would apply to taxable years with respect to each
organization beginning after the date these rules are published in the
Federal Register as final or temporary regulations.
Request for Comments
Before the notice of proposed rulemaking is issued, consideration
will be given to any written comments (a signed original and eight (8)
copies) or electronic comments that are submitted timely to the IRS.
All comments will be available for public inspection and copying.
Drafting Information
The principal authors of this advance notice of proposed rulemaking
are Philip T. Hackney and Michael B. Blumenfeld, Office of the Chief
Counsel (Tax-exempt and Government Entities), however, other personnel
from the IRS and the Treasury Department participated in its
development.
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-14925 Filed 8-1-07; 8:45 am]
BILLING CODE 4830-01-P