[Federal Register Volume 74, Number 184 (Thursday, September 24, 2009)]
[Proposed Rules]
[Pages 48672-48687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-22866]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 53
[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: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations regarding the
requirements to qualify as a Type III supporting organization that is
operated in connection with one or more supported organizations. The
regulations reflect changes to the law made by the Pension Protection
Act of 2006. The regulations will affect Type III supporting
organizations and their supported organizations.
DATES: Written or electronic comments and requests for a public hearing
must be received by December 23, 2009.
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
[[Page 48673]]
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 the proposed regulations,
Philip T. Hackney or Don R. Spellmann at (202) 622-6070; concerning
submissions of comments and requests for a public hearing, Richard A.
Hurst at (202) 622-7180 (not toll-free numbers) or
[email protected].
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on the collection of information should
be received by November 23, 2009. Comments are specifically requested
concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in this proposed regulation is in
Prop. Reg. Sec. 1.509(a)-4(i)(2). The collection of information flows
from section 509(f)(1)(A), which requires a Type III supporting
organization to provide to each of its supported organizations such
information as the Secretary may require to ensure that the Type III
supporting organization is responsive to the needs or demands of its
supported organization(s). The likely recordkeepers are Type III
supporting organizations.
Estimated total annual reporting burden: 8,400 hours.
Estimated average annual burden hours per recordkeeper: Two hours.
Estimated number of recordkeepers: 4,200.
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.
Background
An organization described in section 501(c)(3) of the Internal
Revenue Code (Code) is classified as either a private foundation or a
public charity. To be classified as a public charity, an organization
must meet the requirements of section 509(a)(1), (2), (3), or (4).
Organizations described in section 509(a)(3) are known as supporting
organizations. Such organizations achieve their 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 meet the requirements of section 509(a)(3), 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 supporting 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
supported organizations. The relationship test requires the supporting
organization to establish one of three types of relationships with one
or more supported organizations. Finally, the disqualified person
control test requires that the supporting organization not be
controlled directly or indirectly by certain disqualified persons.
Although each of these tests is a necessary requirement for an
organization to establish that it qualifies as a supporting
organization, this notice of proposed rulemaking (NPRM) focuses
primarily on the relationship test.
Three Types of Supporting Organizations
Treas. Reg. Sec. 1.509(a)-4(f)(2) provides that a supporting
organization must maintain one of three types of structural or
operational relationships with its supported organization(s). A
supporting organization that is operated, supervised or controlled by
one or more supported organizations is commonly 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 commonly known as a Type II supporting
organization. The relationship of a Type II supporting organization
with its supported organization(s) is comparable to a corporate
brother-sister relationship. A supporting organization that is operated
in connection with one or more supported organizations is commonly
known as a Type III supporting organization. This NPRM focuses
primarily on Type III supporting organizations.
Qualification Requirements for Type III Supporting Organizations Prior
to Enactment of the Pension Protection Act of 2006, Public Law 109-280
(120 Stat. 780 (2006)) (PPA)
Prior to the enactment of the PPA, the regulations under section
509(a)(3) generally provided that an organization is ``operated in
connection with'' one or more supported organizations if it meets a
``responsiveness test'' and an ``integral part test.''
Responsiveness Test
Treas. Reg. Sec. 1.509(a)-4(i)(2)(i) provides that an organization
meets the responsiveness test if the organization is responsive to the
needs or demands of its supported organizations. Treas. Reg. Sec.
1.509(a)-4(i)(2)(ii) provides three ways that a supporting organization
may demonstrate responsiveness to a supported organization: (1) The
supported organization appoints or elects one or more of the officers,
directors, or trustees of the supporting organization; (2) one or more
members of the governing body of the supported organization serve as
officers, directors, or trustees of, or hold other important offices
in, the supporting organization; or (3) the officers, directors, or
trustees of the supporting organization maintain
[[Page 48674]]
a close continuous working relationship with the officers, directors,
or trustees of the supported organization. In all three cases, the
relationship must result in the supported organization having 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 of the supporting organization, and direction
over the use of the income or assets of the supporting organization.
The existing regulations also provide an alternative means for
charitable trusts to satisfy the responsiveness test. Under Treas. Reg.
Sec. 1.509(a)-4(i)(2)(iii), a supporting organization is responsive
if: (1) it is a charitable trust under State law, (2) each specified
supported organization is a named beneficiary under the charitable
trust's governing instrument, and (3) each beneficiary organization has
the power to enforce the trust and compel an accounting under State
law.
In the case of an organization that was supporting one or more
supported organizations 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), also may be taken into
account to establish compliance with the responsiveness test.
Integral Part Test
Treas. Reg. Sec. 1.509(a)-4(i)(3)(i) provides that a supporting
organization meets the integral part test by maintaining a significant
involvement in the operations of one or more supported organizations
that are dependent upon the supporting organization for the type of
support which it provides. Under the existing regulations, there are
two alternative ways to meet the integral part test: (1) The ``but
for'' test under Treas. Reg. Sec. 1.509(a)-4(i)(3)(ii); or (2) the
``attentiveness'' test under Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii).
Treas. Reg. Sec. 1.509(a)-4(i)(3)(ii) states that the ``but for''
test is satisfied if ``the activities engaged in [by the supporting
organization] for or on behalf of the 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 supported
organizations themselves.''
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
supported organizations, (2) provide enough support to one or more
supported organizations to ensure the attentiveness of such
organization(s) to the operations of the supporting organization; and
(3) pay a substantial amount of the total support of the supporting
organization to those supported organizations that meet the
attentiveness requirement. Rev. Rul. 76-208, 1976-1 CB 161 (see Sec.
601.601(d)(2)(ii)(b)), 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 adjusted net income.
PPA Changes to Qualification Requirements for Type III Supporting
Organizations
The PPA made five changes to the requirements an organization must
meet to qualify as a Type III supporting organization:
(1) It removed the alternative test for charitable trusts as a
means of meeting the responsiveness test;
(2) It required the Secretary of the Treasury to set a new payout
requirement for organizations that are not functionally integrated
(generally, those organizations that met the integral part test by
satisfying the attentiveness test under the existing regulations) to
ensure that such organizations pay a ``significant amount'' to their
supported organizations;
(3) It provided that a Type III supporting organization must
annually provide to each of its supported organizations such
information as the Secretary may require to ensure that the supporting
organization is responsive to the needs or demands of its supported
organization(s);
(4) It prohibited a Type III supporting organization from
supporting any supported organization not organized in the United
States; and
(5) It prohibited a Type I or Type III supporting organization from
accepting a gift or contribution from a person who, 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.
Notice 2006-109
On December 18, 2006, the Treasury Department and the IRS released
Notice 2006-109 (2006-51 IRB 1121) (see Sec. 601.601(d)(2)(ii)(b)),
which alerted taxpayers to the new supporting organization rules
enacted by the PPA; provided interim guidance, including reliance
standards for private foundations making grants to supporting
organizations; and solicited comments regarding the new supporting
organization requirements. Fifteen comments and numerous phone calls
were received in response to the request for comments contained in
Notice 2006-109.
Advanced Notice of Proposed Rulemaking (ANPRM)
On August 2, 2007, the Treasury Department and the IRS issued an
ANPRM titled ``Payout Requirements for Type III Supporting
Organizations that Are Not Functionally Integrated'' (Reg-155929-06, 72
FR 148). The ANPRM described proposed rules to implement the PPA
changes to the Type III supporting organization requirements, and
solicited comments regarding those proposed rules.
In the ANPRM, the Treasury Department and the IRS proposed that all
Type III supporting organizations would be required to meet the
responsiveness test under Treas. Reg. Sec. 1.509(a)-4(i)(2)(ii). In
addition, the Treasury Department and the IRS proposed that Type III
supporting organizations that are functionally integrated would 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 resembling the
section 4942(j)(3)(A) qualifying distributions test for private
operating foundations; and (C) an assets test resembling the section
4942(j)(3)(B) alternative assets test for private operating
foundations. However, the Treasury Department and the IRS indicated
that an exception would be provided for certain Type III supporting
organizations that oversee or facilitate the operation of an integrated
system, such as certain hospital systems. The ANPRM stated that such
organizations would be classified as functionally integrated as long as
they satisfied the responsiveness and ``but for'' tests under the
existing regulations.
The ANPRM proposal provided that a non-functionally integrated Type
III supporting organization would be required to make an annual payout
equal to the annual payout required from a private non-operating
foundation (generally, five percent of the fair market value of non-
exempt-use assets). The Treasury Department and the IRS also proposed a
limitation on the number of supported organizations a non-functionally
integrated Type III supporting organization could support.
The IRS received over 40 comments and numerous phone calls in
response to the ANPRM. After consideration of all comments received,
the Treasury Department and the IRS are issuing this
[[Page 48675]]
NPRM regarding the new qualification requirements for Type III
supporting organizations. The major areas of comment in response to the
ANPRM are discussed in the preamble under Explanation of Provisions.
Explanation of Provisions
Summary of Proposed Criteria To Qualify as a Type III Supporting
Organization
The proposed regulations provide that every Type III supporting
organization must: (1) Satisfy the notification requirement set forth
under Prop. Reg. Sec. 1.509(a)-4(i)(2); (2) meet the responsiveness
test set forth under Prop. Reg. Sec. 1.509(a)-4(i)(3); and (3)
demonstrate that it is an integral part of one or more supported
organizations. A Type III supporting organization demonstrates that it
is an integral part of a supported organization by satisfying either
the requirements for functionally integrated Type III supporting
organizations set forth in Prop. Reg. Sec. 1.509(a)-4(i)(4), or the
requirements for non-functionally integrated Type III supporting
organizations set forth in Prop. Reg. Sec. 1.509(a)-4(i)(5). Further,
as set forth in Prop. Reg. Sec. 1.509(a)-4(i)(10), a Type III
supporting organization may not support a supported organization that
is organized outside of the United States. Finally, as set forth in
Prop. Reg. Sec. 1.509(a)-4(f)(5), Type I and Type III supporting
organizations are prohibited from accepting a gift or contribution from
a person who, 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.
Requirement To Notify Supported Organizations
Prop. Reg. Sec. 1.509(a)-4(i)(2) implements section 509(f)(1)(A)
of the Code, which provides that a Type III supporting organization
must provide to each of its supported organizations such information as
the Secretary may require to ensure that the supporting organization is
responsive to the needs or demands of the supported organization.
The Treasury Department and the IRS requested comments in the ANPRM
on the type of information a Type III supporting organization should be
required to provide to its supported organizations. One commentator
recommended that the proposed regulations adopt a recommendation of the
Panel on the Nonprofit Sector, which suggested requiring Type III
supporting organizations to provide annually to their supported
organizations: (1) A copy of governing documents, including those filed
with Form 1023, ``Application for Recognition of Exemption Under
Section 501(c)(3) of the Internal Revenue Code,'' and any updates; (2)
a copy of Form 990, ``Return of Organization Exempt from Income Tax;''
and (3) an annual report of activities, including a narrative,
financial detail, and a description of the support provided (including
how it was calculated or determined) and a projection of support to be
provided in the subsequent year. Panel on the Nonprofit Sector,
Strengthening Transparency, Governance, Accountability of Charitable
Organizations (June 2005), at 45.
Another commentator recommended that the proposed regulations
require only that the Form 990 be distributed to the ``lead'' supported
organization. This commentator argued that any additional requirement
would impose too much additional administrative burden and cost on the
charitable sector. The comment also suggested allowing the notification
to be provided electronically.
The proposed regulations require that each taxable year, a Type III
supporting organization must provide to each of its supported
organizations: (A) A written notice addressed to a principal officer of
the supported organization identifying the supporting organization and
describing the amount and type of support it provided to the supported
organization in the past year; (B) a copy of the supporting
organization's most recently filed Form 990; and (C) a copy of the
supporting organization's governing documents, including any
amendments. Copies of governing documents need only be provided once.
The proposed regulations provide that the required notice and documents
may be delivered by electronic media. Organizations must satisfy the
notification requirement to qualify as a Type III supporting
organization and should retain proof of delivery in their records.
Responsiveness Test
The proposed regulations provide that all Type III supporting
organizations, including those organized as charitable trusts, must
meet the responsiveness test under existing Treas. Reg. Sec. 1.509(a)-
4(i)(2)(ii).
The ANPRM proposed to apply the responsiveness test to all Type III
supporting organizations and to remove the special rule for charitable
trusts. In response to the ANPRM, commentators argued that the PPA did
not require imposition of the general responsiveness test on charitable
trusts, and that the test could be difficult to satisfy because of
State-law fiduciary requirements on trusts. Thus, a commentator
recommended the development of an alternate charitable trust test based
on facts and circumstances.
One commentator recommended exempting trusts managed by
institutional trustees from the responsiveness test. The commentator
stated that institutional trustees employ strict rules to manage
trusts, thereby making abuse of these trusts highly unlikely. Another
commentator recommended transition relief for trusts in existence on
the date the PPA was enacted similar to that provided in Treas. Reg.
Sec. 1.509(a)-4(i)(4) for trusts established before November 20, 1970,
which would apply to a trust with a lengthy and continuous history of
distributions, and no discretion to vary the beneficiaries or the
amount of distributions.
The proposed regulations require that all Type III supporting
organizations demonstrate the necessary relationship between its
officers, directors or trustees and those of the supported
organization, and show that this relationship results in the officers,
directors or trustees of the supported organization having a
significant voice in the operations of the supporting organization. The
proposed regulations do not adopt a special rule for trusts.
The Treasury Department and the IRS believe that requiring
charitable trusts to meet the responsiveness test set forth in these
proposed regulations is consistent with Congress' intent in the PPA.
The Treasury Department and the IRS expect that some charitable trusts
will be able to demonstrate that they meet the requirements of the
responsiveness test. The proposed regulations provide examples that
illustrate factors that could lead to a conclusion that a supporting
organization organized as a trust is responsive to the needs of a
supported organization. Additionally, the Treasury Department and the
IRS request comments regarding a specific responsiveness rule for
trusts that would be consistent with the existing responsiveness test
and the Congressional intent behind section 1241 of the PPA, which
removed the alternative trust test in the regulations.
Integral Part Test--Functionally Integrated Type III Supporting
Organizations
The proposed regulations provide that a Type III supporting
organization is functionally integrated if it either: (1)
[[Page 48676]]
Engages in activities substantially all of which directly further the
exempt purposes of the supported organization(s) to which it is
responsive by performing the functions of, or carrying out the purposes
of, such supported organization(s) and that, but for the involvement of
the supporting organization, would normally be engaged in by the
supported organization(s); or (2) is the parent of each of its
supported organizations.
The ANPRM proposed requiring an organization to meet not only the
``but for'' test under existing Treas. Reg. Sec. 1.509(a)-4(i)(3)(ii),
but also two additional tests--an expenditure test and an assets test--
in order to qualify as a functionally integrated Type III supporting
organization. In general, commentators said that the additional tests
were unduly restrictive and more burdensome than those proposed for
non-functionally integrated Type III supporting organizations. These
commentators argued that the ANPRM's expenditure test was arbitrary and
that Congress did not authorize the Secretary to impose a payout
requirement on functionally integrated organizations. Many commentators
highlighted differences between a Type III supporting organization and
a private operating foundation that warrant treating these types of
organizations differently, including the fact that a supporting
organization is dedicated to specific organizations and that those
specified organizations rely on the supporting organization for
consistent support.
Many commentators recommended exempting certain types of
organizations from the proposed requirements for functionally
integrated Type III supporting organizations, such as long-standing
supporting organizations and supporting organizations that support
governmental agencies, religious organizations, and grant-making
organizations. Several commentators recommended that the proposed
regulations take into account the historic and continuing relationship
of ``long-standing'' organizations with their supported organizations.
Additionally, many commentators requested an exemption for supporting
organizations of governmental entities, contending that these
organizations are not subject to abuse because of their connection to a
governmental entity. These commentators argued that supporting
organizations choose a Type III structure to ensure that funds are
dedicated long-term to a specific purpose, and removed from the
appropriation process of the government.
In formulating the criteria in the proposed regulations, the
Treasury Department and the IRS also noted the suggestion in the Joint
Committee on Taxation's Technical Explanation of the PPA that
``substantially all of the activities of [a functionally integrated
Type III supporting organization] should be activities in direct
furtherance of the functions or purposes of supported organizations.''
Staff of the Joint Committee on Taxation, Technical Explanation of H.R.
4, The ``Pension Protection Act of 2006'' (Aug. 3, 2006), at 360 n.571
(Technical Explanation). In the Technical Explanation, the Joint
Committee on Taxation also expressed concern that ``the current
regulatory standards for satisfying the integral part test not by
reason of a payout are not sufficiently stringent to ensure that there
is a sufficient nexus between the supporting and supported
organizations.'' Technical Explanation at 360 n.571.
The Treasury Department and the IRS believe that a sufficient nexus
exists between a supporting organization and its supported
organization(s) where the supporting organization engages in activities
that directly further the exempt purposes of the supported
organization(s) and that would otherwise be conducted by the supported
organization itself. Accordingly, the proposed regulations provide that
a Type III supporting organization is functionally integrated if it
either: (1) Engages in activities (a) substantially all of which
directly further the exempt purposes of the supported organization(s)
to which it is responsive by performing the functions of, or carrying
out the purposes of, such supported organization(s) and (b) that, but
for the involvement of the supporting organization, would normally be
engaged in by the supported organization(s); or (2) is the parent of
each of its supported organizations. The Treasury Department and the
IRS request comments on how guidance might clarify the application of
the ``substantially all'' test in this context. The proposed
regulations do not adopt the expenditure test and the assets test
described in the ANPRM.
The proposed regulations provide that a supporting organization
directly furthers the exempt purposes of its supported organization by
holding or managing exempt-use assets but does not directly further
such exempt purposes by fundraising, grantmaking, or investing and
managing non-exempt-use assets. The Treasury Department and the IRS
believe that fundraising, grantmaking, and investing and managing non-
exempt-use assets do not alone establish a sufficient nexus between a
supporting organization and its supported organization. Further, the
Treasury Department and the IRS believe that an organization that does
not engage in activities that directly further a exempt purpose will
achieve a sufficient nexus with its supported organization(s) only if
it distributes a significant amount to its supported organizations, as
Congress directed in the PPA.
The Treasury Department and the IRS recognize the unique
circumstances of a governmental entity whose assets are subject to the
appropriations process of a Federal, State, local or Indian Tribal
government and that therefore organizes a Type III supporting
organization to remove assets from the appropriations process of the
government. The proposed regulations therefore provide an exception
under which a supporting organization that supports a single
governmental entity may treat investing and managing non-exempt-use
assets as activities that directly further an exempt purpose, so long
as a substantial part of the supporting organization's total activities
directly furthers the exempt purposes of such governmental entity.
The proposed regulations specifically require that a functionally
integrated Type III supporting organization's activities directly
further the exempt purposes of those supported organizations with
respect to which the supporting organization meets the responsiveness
test under Prop. Reg. Sec. 1.509(a)-4(i)(3). The Treasury Department
and the IRS request comments on this requirement.
The proposed regulations provide that a supporting organization
will be treated as the parent of a supported organization if the
supporting organization exercises a substantial degree of direction
over the policies, programs, and activities of the supported
organization, and the 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 of the supporting organization acting in their official
capacity. Thus, the supporting organization could qualify as a parent
of a second-tier (or lower) subsidiary. The classification of a parent
supporting organization as functionally integrated is intended to apply
to supporting organizations that oversee or facilitate the operation of
an integrated system, such as hospital systems.
The proposed regulations provide examples that illustrate the
[[Page 48677]]
requirements for functionally integrated Type III supporting
organizations.
Integral Part Test--Non-Functionally Integrated Type III Supporting
Organizations
The proposed regulations provide that a Type III supporting
organization is non-functionally integrated if it satisfies a
distribution requirement equal to five percent of the fair market value
of non-exempt-use assets and an attentiveness requirement.
Section 1241(d)(1) of the PPA directed the Secretary of the
Treasury to promulgate new regulations on a payout requirement for non-
functionally integrated Type III supporting organizations, based on
income or assets, in order to ensure that these supporting
organizations pay a significant amount to their supported
organizations. The ANPRM proposal required an annual payout of five
percent of the fair market value of non-exempt-use assets. Many
commentators said that this payout rate was too high and would erode an
organization's assets over time. The commentators said that a Type III
supporting organization provides long-term consistent support to
specific organizations, while private foundations may pay out to
whomever they choose. Further, a supporting organization maintains a
governance relationship with its supported organization(s) in a way
that a private foundation does not. Commentators argued that because of
these differences, the private foundation payout requirement should not
be imposed on a supporting organization. Imposing a five percent
payout, these commentators contend, would jeopardize the ability of
supporting organizations to provide the kind of consistent, reliable,
long-term support supported organizations have come to expect.
Commentators suggested a number of alternative payout rates. Many
of them also recommended allowing an averaging of assets over a period
of years for purposes of calculating the payout amount.
The ANPRM proposed to limit the number of organizations a non-
functionally integrated Type III supporting organization can support to
no more than five. The ANPRM further provided that Type III supporting
organizations in existence before the date regulations are proposed may
support more than five organizations, as long as the supporting
organization pays 85 percent of its support to organizations to which
the supporting organization is responsive.
Many commentators asked that the proposed regulations not include
the limitation on the number of supported organizations a non-
functionally integrated Type III supporting organization can support,
arguing that such a rule is arbitrary. In particular, commentators
pointed out that the original Senate bill associated with supporting
organizations, contained in the Tax Increase Prevention and
Reconciliation Act of 2005, Public Law 109-222 (120 Stat. 345 (2005)),
limited the number of organizations a supporting organization could
support to five, but that Congress ultimately did not enact such a
limitation.
One commentator suggested that the proposed regulations adopt a
rule that one-third of a non-functionally integrated Type III
supporting organization's required distribution must go to a supported
organization that is attentive to the supporting organization and to
which the supporting organization is responsive.
Commentators recommended providing a transition period for the
payout requirement to allow organizations sufficient time either to
modify governing instruments or to sell assets.
A number of commentators suggested that the proposed regulations
exempt Type III supporting organizations that (1) have no continuing
involvement of donors or their family in the governance of the
organization; and (2) before the date of enactment of PPA, had
distributed to or for the benefit of its supported organizations an
amount equal to or greater than the amounts transferred to the
organization for which charitable deductions were allowed.
Under the proposed regulations, to qualify as a non-functionally
integrated Type III supporting organization, an organization must meet
a distribution requirement and an attentiveness requirement. The
proposed regulations set the distribution requirement for non-
functionally integrated Type III supporting organizations at five
percent of non-exempt-use assets, and retain the concept of
attentiveness that is in the current regulations. The proposed
regulations do not adopt the five organization limit described in the
ANPRM.
Distribution Requirement
To satisfy the distribution requirement of Prop. Reg. Sec.
1.509(a)-4(i)(5)(ii), a Type III supporting organization that is not
functionally integrated must distribute, with respect to each taxable
year, to or for the use of its supported organizations, amounts
equaling or exceeding five percent of the aggregate fair market value
of its non-exempt-use assets (the annual distributable amount), on or
before the last day of such taxable year. The annual distributable
amount is determined based on asset values measured over the preceding
taxable year. Thus, for example, a Type III supporting organization
that is not functionally integrated would determine its annual
distributable amount for its 2012 taxable year, which must be
distributed on or before the last day of the organization's 2012
taxable year, based on asset values measured over its 2011 taxable
year. A Type III supporting organization that is not functionally
integrated is not required to distribute any amount in its first year
of existence.
The proposed regulations generally draw from the regulations under
section 4942 for principles on valuation, timing, and carryovers.
However, the proposed regulations do not permit set-asides, which count
towards a private foundation's distribution requirement under section
4942(g)(2). While Congress statutorily provided that set-asides
constitute qualifying distributions for private foundations, Congress
made no such statutory provision for supporting organizations. Rather,
in the PPA, it directed that a payout requirement be implemented for
non-functionally integrated Type III supporting organizations that
would result in a prompt, robust flow of support to supported
organizations. The Treasury Department and the IRS request comments on
whether set-asides are necessary and consistent with Congressional
intent in determining whether Type III supporting organizations that
are not functionally integrated have distributed their annual
distributable amount.
The proposed regulations also provide a slightly different rule
regarding the carryover of excess distributions than is applicable to
private foundations. Under section 4942(i), a private foundation that
distributes more than its distributable amount may carry forward that
excess amount for five years. However, when calculating qualifying
distributions in a future year under section 4942, amounts paid out in
the future year count first towards the required distributable amount,
and any amount carried forward is not ``used'' in the future year to
the extent that the organization made qualifying distributions in that
future year. These proposed regulations reverse the ordering rule and
first count any excess amount carried forward toward the non-
functionally integrated Type III supporting organization's annual
distributable amount, followed by amounts paid out in the later year.
[[Page 48678]]
The proposed regulations provide a reasonable cause exception for
failure to meet the distribution requirement applicable to non-
functionally integrated Type III supporting organizations. Under the
exception, an organization that fails to meet the distribution
requirement will not be classified as a private foundation in the
taxable year for which it fails to meet such distribution requirement,
if the organization establishes to the satisfaction of the Secretary
that: (1) The failure was due solely to an incorrect valuation of
assets, a ministerial error, or unforeseen events or circumstances that
are beyond the organization's control; (2) the failure was due to
reasonable cause and not to willful neglect; and (3) the distribution
requirement is met within 180 days after the date the incorrect
valuation or ministerial error was or should have been discovered, or
180 days after the organization is first able to make its required
payout notwithstanding the unforeseen event or circumstances. The
reasonable cause exception applies only to the distribution requirement
of Prop. Reg. Sec. 1.509(a)-4(i)(5)(ii), and not to the attentiveness
requirement of Prop. Reg. Sec. 1.509(a)-4(i)(5)(iii). The Treasury
Department and the IRS request comments regarding the reasonable cause
exception for the distribution requirement.
The proposed regulations also provide for an emergency temporary
reduction in the annual distributable amount. Under Prop. Reg. Sec.
1.509(a)-4(i)(5)(ii)(D), the Secretary may provide by publication in
the Internal Revenue Bulletin for a temporary reduction in the annual
distributable amount in the case of a disaster or emergency.
The Treasury Department and the IRS are aware that some supporting
organizations impacted by the distribution requirement contained in
these proposed regulations may be heavily invested in assets that are
not readily marketable. The Treasury Department and the IRS request
comments regarding the need for a transition rule for non-functionally
integrated Type III supporting organizations whose assets, as of the
effective date of these regulations, consist predominantly (in any
event more than one-half) of assets that are not readily marketable.
Attentiveness Requirement
These proposed regulations modify the attentiveness requirement in
existing Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii) to provide that an
organization must distribute one-third or more of its annual
distributable amount to one or more supported organizations that are
attentive to the supporting organization and with respect to which the
supporting organization meets the responsiveness test under Prop. Reg.
Sec. 1.509(a)-4(i)(3).
The proposed regulations provide that to demonstrate that a
supported organization is attentive, a supporting organization must
either: (1) Provide 10 percent or more of the supported organization's
total support; (2) provide support that is necessary to avoid the
interruption of the carrying on of a particular function or activity of
the supported organization; or (3) provide an amount of support that
based on all the facts and circumstances is a sufficient part of a
supported organization's total support.
Consequences of Failure to Meet Requirements
A Type III supporting organization that fails to meet the
requirements of these proposed regulations, once they are published as
final or temporary regulations, will be classified as a private
foundation. Once classified as a private foundation, the section 507
rules regarding termination of private foundation status apply. The
Treasury Department and the IRS request comments on whether exceptions
or special rules under section 507 are needed for Type III supporting
organizations that are reclassified as private foundations as a result
of the changes in the PPA.
Transition and Other Relief Provisions
Responsiveness Test
The proposed regulations continue to provide that additional facts
and circumstances, such as a historic and continuing relationship with
a supported organization, may be taken into account in establishing
compliance with the responsiveness test for organizations that were
operating prior to November 20, 1970.
Integral Part Test
The proposed regulations provide a transition rule for Type III
supporting organizations in existence on the date these regulations are
published in the Federal Register as final or temporary regulations.
Under the transition rule, such organizations that met and continue to
meet the requirements of existing Treas. Reg. Sec. 1.509(a)-
4(i)(3)(ii) (i.e., an organization that meets the integral part test by
satisfying the ``but for'' test) will be treated as meeting the
requirements of a functionally integrated Type III supporting
organization set forth in Prop. Reg. Sec. 1.509(a)-4(i)(4) until the
first day of the organization's first taxable year beginning after the
date these proposed regulations are published as final or temporary
regulations.
The proposed regulations also provide that Type III supporting
organizations in existence on the date these regulations are published
in the Federal Register as final or temporary regulations that met and
continue to meet the requirements of existing Treas. Reg. Sec.
1.509(a)-4(i)(3)(iii) will be treated as meeting the requirements of a
non-functionally integrated Type III supporting organization set forth
in Prop. Reg. Sec. 1.509(a)-4(i)(5) until the first day of the
organization's second taxable year beginning after the date these
proposed regulations are published as final or temporary regulations.
Such organizations will be required to value their assets in accordance
with Prop. Reg. Sec. 1.509(a)-4(i)(8) in the first taxable year
beginning after final or temporary regulations are published, and to
meet all of the requirements of Prop. Reg. Sec. 1.509(a)-4(i)(5)(i) in
the second taxable year beginning after the publication of these
regulations as final or temporary regulations and for all succeeding
taxable years.
For example, if the Treasury Department and the IRS publish these
regulations as final or temporary regulations any time in 2010, a
calendar-year non-functionally integrated Type III supporting
organization must: (1) in 2010, meet all of the requirements of
existing Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii) (i.e., distribute to
its supported organizations substantially all of its income in accord
with the existing regulations); (2) in 2011, meet all of the
requirements of current Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii) and
value its assets according to Prop. Reg. Sec. 1.509(a)-4(i)(8); and
(3) in 2012, meet all of the requirements of Prop. Reg. Sec. 1.509(a)-
4(i)(5)(i), including the distribution requirement.
The proposed regulations also retain the exception from the
integral part test for pre-November 20, 1970 trusts that meet certain
other requirements found in current Treas. Reg. Sec. 1.509(a)-4(i)(4).
The Treasury Department and the IRS request comments on whether
additional transition relief is needed.
The proposed regulations eliminate current Treas. Reg. Sec.
1.509(a)-4(i)(1)(iii), which provides an exception from the integral
part test if an organization can establish that: (1) It met the payout
requirement under current Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii)(a)
for any five-year period; (2) it cannot meet such payout requirement
for its current taxable year solely because the amount received by
[[Page 48679]]
one or more of the supported organizations is no longer sufficient to
satisfy the attentiveness requirement; and (3) there has been a
historic and continuing relationship of support between such
organizations between the end of the five-year period and the taxable
year in question. The Treasury Department and the IRS believe that the
breadth of this exception is inconsistent with Congress' intent in
mandating a payout requirement in the PPA.
Regulations Under Section 4943
This NPRM also includes proposed regulations under section 4943
that provide two transition rules to address excess business holdings
for Type III supporting organizations affected by the PPA. The PPA
applied the section 4943 excess business holdings excise tax to non-
functionally integrated Type III supporting organizations. However, it
provided that in calculating the ``present holdings'' of Type III
supporting organizations in existence on August 17, 2006 (the date of
enactment of the PPA), the transition rules that applied to private
foundations in 1969, when section 4943 was first enacted, would apply.
These transition rules effectively allow affected organizations
additional time to dispose of certain business holdings.
The proposed regulations provide transition relief to a private
foundation that qualified as a Type III supporting organization under
section 509(a)(3) immediately before August 17, 2006, and that was
reclassified as a private foundation under section 509(a) on or after
August 17, 2006, solely as a result of the rules enacted by Section
1241 of the PPA. Thus, under the proposed regulations, the present
holdings of such private foundations will be determined using the same
rules that apply to Type III supporting organizations under section
4943(f)(7).
In addition, the Treasury Department and the IRS believe that pre-
November 20, 1970 trusts that are exempted from the integral part test
under current regulations and these proposed regulations should not be
subject to the excess business holdings excise tax that applies to non-
functionally integrated Type III supporting organizations. Therefore,
the proposed regulations under section 4943 provide that a Type III
supporting organization created as a trust before November 20, 1970,
that meets the requirements of current Treas. Reg. Sec. 1.509(a)-
4(i)(4) and Prop. Reg. Sec. 1.509(a)-4(i)(9), will be treated as a
``functionally integrated Type III supporting organization'' for
purposes of section 4943(f)(3)(A).
Reliance on Prior Guidance
In Notice 2006-109, the Treasury Department and the IRS provided
guidance to private foundations regarding determinations of the public
charity status of a section 501(c)(3) organization when making grants.
In particular, because a grant to a non-functionally integrated Type
III supporting organization is not considered a qualifying distribution
under section 4942, and is considered a taxable expenditure unless
expenditure responsibility is exercised under section 4945, the notice
provided criteria for determining whether a Type III supporting
organization is functionally integrated and allowed private foundations
to rely on those criteria for purposes of sections 4942 and 4945.
Commentators to the ANPRM requested that the Treasury Department and
the IRS permit private foundations to continue to rely on the guidance
in Notice 2006-109 on private foundation grantmaking until the IRS
issues determination letters addressing functionally integrated status.
Private foundations can continue to rely on the grantor reliance
standards of section 3.0 of Notice 2006-109 until these proposed
regulations are published as final or temporary regulations.
In addition, the IRS stated in a September 24, 2007 memorandum from
the Director of Exempt Organizations Rulings and Agreements that it
would issue functionally integrated Type III supporting organization
determinations to organizations that meet the requirements for
functionally integrated organizations set forth in the ANPRM. As of the
date of the publication in the Federal Register of this notice of
proposed rulemaking, the IRS will issue a functionally integrated Type
III supporting organization determination only to organizations that
meet the requirements of Prop. Reg. Sec. 1.509(a)-4(i)(4). An
organization that received a determination that it qualified as a
functionally integrated Type III supporting organization under the
ANPRM can continue to rely on such determination letter until final or
temporary regulations are published in the Federal Register, so long as
the organization continues to meet the requirements of either the ANPRM
or Prop. Reg. Sec. 1.509(a)-4(i)(4). An organization that receives a
determination that it is a functionally integrated Type III supporting
organization under either the ANPRM or these proposed regulations will
be required to meet the requirements established in final or temporary
regulations as of the first taxable year beginning after final or
temporary regulations are published in the Federal Register.
Effective Date
The proposed regulations will apply to taxable years beginning
after the date these rules are published in the Federal Register as
final or temporary regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It is hereby
certified that this regulation will not have a significant economic
impact on a substantial number of small entities. This certification is
based on the fact that this regulation will not impact a substantial
number of small entities. Based on IRS Statistics of Income data for
2005, there are over 1.4 million organizations that qualify as exempt
from Federal income tax under section 501(c)(3). Approximately 13,000
of the 1.4 million exempt organizations reported as supporting
organizations; approximately 4,200 supporting organizations reported as
Type III supporting organizations; and it is expected that some
fraction of the 4,200 Type III supporting organizations may be
classified as non-functionally integrated Type III supporting
organizations. Thus, the number of organizations affected by this
regulation will not be substantial. The collection of information in
this regulation that is subject to the Regulatory Flexibility Act will
impose a minimal burden upon the affected organizations. All of the
information required to be delivered is information that the
organization is already required to maintain. Further, the distribution
requirement in Prop. Reg. Sec. 1.509(a)-4(i)(5)(ii) for non-
functionally integrated Type III supporting organizations does not have
a significant economic impact. A non-functionally integrated Type III
supporting organization that fails to satisfy the distribution
requirement of Prop. Reg. Sec. 1.509(a)-4(i)(5)(ii) would be
reclassified as a private non-operating foundation and as such, would
be required under section 4942 to distribute amounts equal to five
percent of the aggregate fair market value of non-exempt-use assets. In
addition, as a private non-operating foundation, the organization would
be subject to additional regulatory requirements and excise taxes that
do not apply to non-functionally integrated Type III supporting
organizations. Accordingly,
[[Page 48680]]
a Regulatory Flexibility Analysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of
the Code, this regulation has been submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Request for Comments
Before these proposed regulations are adopted as final or temporary
regulations, consideration will be given to any written (a signed
original and eight (8) copies) or electronic comments that are
submitted timely to the IRS. The Treasury Department and the IRS
request comments on the clarity of the proposed rules and how they can
be made easier to understand. All comments will be available for public
inspection and copying. A public hearing will be scheduled if requested
in writing by any person that timely submits written comments. If a
public hearing is scheduled, notice of the date, time, and place for
the public hearing will be published in the Federal Register.
Drafting Information
The principal authors of these proposed regulations are Philip T.
Hackney and Don R. Spellmann, Office of the Chief Counsel (Tax-Exempt
and Government Entities). 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 53 are proposed to be amended as
follows:
PART 1--INCOME TAXES
Par. 1. The authority citation for part 1 continues to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.509(a)-4 is amended by:
1. The term ``publicly supported organization'' is removed and the
term ``supported organization'' is added in its place wherever it
appears.
2. Paragraphs (a)(5) and (i) are revised.
3. New paragraphs (a)(6) and (f)(5) are added.
The revisions and additions read as follows:
Sec. 1.509(a)-4 Supporting organizations.
(a) * * *
(5) For purposes of this section, the term ``supporting
organization'' means either an organization described in section
509(a)(3) or an organization seeking section 509(a)(3) status,
depending upon its context.
(6) For purposes of this section, the term ``supported
organization'' means an organization described in section 509(a)(1) or
(2)--
(i) For whose benefit the supporting organization is organized and
operated, or
(ii) With respect to which the supporting organization performs the
functions, or carries out the purposes.
* * * * *
(f) * * *
(5) Organizations controlled by donors. An organization shall not
be considered to be operated, supervised, or controlled by, or operated
in connection with, one or more supported organizations, if such
organization accepts any gift or contribution from any person (other
than an organization described in section 509(a)(1), (2) or (4)) who--
(i) Directly or indirectly controls, either alone or together with
persons described in paragraph (f)(5)(ii) or (iii) of this section, a
supported organization supported by such supporting organization;
(ii) Is a member of the family (determined under section
4958(f)(4)) of an individual described in paragraph (f)(5)(i) of this
section; or
(iii) Is a 35-percent controlled entity (as defined in section
4958(f)(3) by substituting ``persons described in paragraph (f)(5)(i)
or (ii) of this section'' for ``persons described in subparagraph (A)
or (B) of paragraph (1)'' in paragraph (A)(i) thereof).
* * * * *
(i) Meaning of ``operated in connection with''--(1) General Rule.
Except as otherwise provided in paragraphs (f)(5) and (i)(10) of this
section, a supporting organization is operated in connection with one
or more supported organizations only if it satisfies--
(i) The notification requirement in paragraph (i)(2) of this
section;
(ii) The responsiveness test, which is set forth in paragraph
(i)(3) of this section; and
(iii) The integral part test, which is set forth in paragraphs
(i)(4) and (i)(5) of this section. An organization is an integral part
of a supported organization if it is significantly involved in the
operations of the supported organization and the supported organization
is dependent upon the supporting organization for the type of support
the supporting organization provides. An organization can demonstrate
that it is an integral part of a supported organization only if it
satisfies either the requirements for functionally integrated Type III
supporting organizations set forth in paragraph (i)(4) of this section
or the requirements for non-functionally integrated Type III supporting
organizations set forth in paragraph (i)(5) of this section.
(2) Notification requirement. Each taxable year, the supporting
organization must provide to each of its supported organizations--
(i) A written notice addressed to a principal officer of the
supported organization indicating the type and amount of support
provided by the supporting organization to the supported organization
in the past year;
(ii) A copy of the supporting organization's most recently filed
Form 990, ``Return of Organization Exempt from Income Tax,'' or other
return required to be filed under section 6033; and
(iii) A copy of the supporting organization's governing documents,
including its charter or trust instrument and bylaws, and any
amendments to such documents. Copies of governing documents need not be
provided in a given year if such documents have previously been
provided and have not subsequently been amended.
(iv) Electronic media. Notification may be provided by electronic
media.
(v) Due date. The required notifications shall be postmarked or
electronically transmitted by the last day of the 5th month after the
close of the supporting organization's tax year.
(3) Responsiveness test. (i) A supporting organization meets the
responsiveness test if it is responsive to the needs or demands of a
supported organization. Except as provided in paragraph (i)(3)(v) of
this section, a supporting organization is responsive to the needs or
demands of a supported organization if it satisfies the requirements of
paragraphs (i)(3)(ii) and (i)(3)(iii) of this section.
(ii) A supporting organization satisfies the requirements of this
paragraph (i)(3)(ii) if:
(A) One or more officers, directors, or trustees of the supporting
organization are elected or appointed by the officers, directors,
trustees, or membership of the supported organization;
(B) One or more members of the governing bodies of the supported
[[Page 48681]]
organization 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 and continuous working relationship with
the officers, directors, or trustees of the supported organization.
(iii) By reason of paragraphs (i)(3)(ii)(A), (i)(3)(ii)(B), or
(i)(3)(ii)(C) of this section, the officers, directors or trustees of
the supported organization have a significant voice in the investment
policies of the supporting organization, the timing of grants, the
manner of making them, and the selection of recipients by such
supporting organization, and in otherwise directing the use of the
income or assets of such supporting organization.
(iv) Examples. The provisions of this paragraph (i)(3) may be
illustrated by the following examples:
Example (1). X, an organization described in section 501(c)(3),
is a trust created under the last will and testament of Decedent.
The trustee of X is a bank (Trustee). Under the trust instrument, X
supports M, a private university described in section 509(a)(1). The
trust instrument provides that Trustee has discretion regarding the
timing and amount of distributions consistent with the Trustee's
fiduciary duties. Representatives of Trustee and an officer of M
have quarterly face to face meetings, at which they discuss M's
projected needs for the university and ways in which M would like X
to use its income and invest its assets. Additionally, Trustee
communicates regularly with the officer of M regarding X's
investments and plans for distributions from X. Trustee provides the
officer of M with quarterly investment statements, the information
required under paragraph (i)(2) of this section, and an annual
accounting statement. Based on these facts, X meets the
responsiveness test of this paragraph (i)(3).
Example (2). Y is an organization described in section 501(c)(3)
and is organized as a trust under State law. The trustee of Y is a
bank, Trustee. Y supports charities P, Q and R, each an organization
described in section 509(a)(1). Y makes annual cash payments to P, Q
and R. Once a year, Trustee sends to P, Q, and R the cash payment,
the information required under paragraph (i)(2) of this section, and
an accounting statement. Trustee has no other communication with P,
Q or R. Y does not meet the responsiveness test of this paragraph
(i)(3).
(v) Exception for Pre-November 20, 1970 Organizations. In the case
of a supporting organization that was supporting or benefiting a
supported organization before November 20, 1970, additional facts and
circumstances, such as a historic and continuing relationship between
the organizations, may be taken into account, in addition to the
factors described in paragraph (i)(3)(ii) of this section, to establish
compliance with the responsiveness test.
(4) Integral part test--functionally integrated Type III supporting
organization--(i) General rule. A supporting organization meets the
integral part test as a functionally integrated Type III supporting
organization if it satisfies either paragraph (i)(4)(i)(A) or paragraph
(i)(4)(i)(B) of this section.
(A) The supporting organization engages in activities:
(1) Substantially all of which directly further the exempt purposes
of the supported organization(s) to which the supporting organization
is responsive, by performing the functions of, or carrying out the
purposes of, such supported organization(s); and
(2) That, but for the involvement of the supporting organization,
would normally be engaged in by the supported organization(s).
(B) The supporting organization is the parent of each of its
supported organizations. For purposes of the integral part test, a
supporting organization is the parent of a supported organization 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 capacity) of the supporting
organization.
(ii) ``Directly further.'' Holding title to exempt-use property and
managing exempt-use property are activities that directly further the
exempt purposes of the supported organization within the meaning of
paragraph (i)(4)(i)(A) of this section. Except as provided in paragraph
(i)(4)(iii) of this section, fundraising, investing and managing non-
exempt-use property, and making grants (whether to the supported
organization or to third parties) are not activities that directly
further the exempt purposes of the supported organization within the
meaning of paragraph (i)(4)(i)(A) of this section.
(iii) Governmental Entity Exception. A supporting organization may
treat the investment and management of non-exempt-use assets and the
making of grants directly to a supported organization as activities
that directly further the exempt purposes of a supported organization
if:
(A) Such activities are conducted on behalf of a supported
organization whose assets are subject to the appropriation process of a
Federal, State, local or Indian Tribal government for purposes or
programs unrelated to the exempt purposes of the supported
organization;
(B) The supporting organization supports only one supported
organization; and
(C) A substantial part of the supporting organization's total
activities directly furthers the exempt purpose(s) of its supported
organization and are activities other than fundraising, grantmaking,
and investing and managing non-exempt-use assets.
(iv) Examples. The provisions of this paragraph (i)(4) may be
illustrated by the following examples. In each example, the supporting
organization meets the requirements of paragraphs (i)(2) and (i)(3) of
this section.
Example 1. N, an organization described in section 501(c)(3), is
the parent organization of a healthcare system consisting of two
hospitals (Q and R) and an outpatient clinic (S), each of which is
described in section 509(a)(1), and a taxable subsidiary (T). N is
the sole member of each of Q, R, and S. Under the charter and bylaws
of each of Q, R, and S, N appoints all members of the board of
directors of each corporation. N engages in the overall coordination
and supervision of the healthcare system's exempt subsidiary
corporations Q, R, and S in approval of their budgets, strategic
planning, marketing, resource allocation, securing tax-exempt bond
financing, and community education. N also manages and invests
assets that serve as endowments of Q, R and S. Based on these facts,
N qualifies as a functionally integrated Type III supporting
organization under paragraph (4)(i)(B) of this section.
Example 2. V, an organization described in section 501(c)(3), is
organized as a supporting organization to L, a church described in
section 509(a)(1). L transferred to V title to the buildings in
which L conducts religious services, Bible study and community
enrichment programs. Substantially all of V's activities consist of
holding and managing these buildings. But for the activities of V, L
would normally engage in these same activities. Based on these
facts, V satisfies the activities and but for requirements of
paragraph (4)(i)(A) of this section and therefore qualifies as a
functionally integrated Type III supporting organization.
Example 3. O is a nonprofit publishing organization described in
section 501(c)(3). It does all of the publishing and printing for
the eight churches of a particular denomination located in a
particular geographic region, each of which is described in section
509(a)(1). Control of O is vested in a five-man Board of Directors,
which includes an official from one of the churches and four lay
members of the congregations of that denomination. The officers of O
maintain a close and continuing working relationship with each of
the eight churches for whom it publishes and prints materials and as
a result of such relationship, each of the eight
[[Page 48682]]
churches has a significant voice in the operations of O. O does no
other printing or publishing. O publishes all of the churches'
religious as well as secular tracts and materials. All of O's
activities directly further the exempt purposes of supported
organizations to which it is responsive. Additionally, but for the
activities of O, the churches would normally publish these materials
themselves. Based on these facts, O qualifies as a functionally
integrated Type III supporting organization under paragraph
(4)(i)(A) of this section.
Example 4. M, an organization described in section 501(c)(3),
was created by B, an individual, to provide scholarships for
students of a private secondary school, U, an organization described
in section 509(a)(1). U establishes the scholarship criteria,
publicizes the scholarship program, solicits and reviews
applications, and selects the scholarship recipients. M invests its
assets and disburses the funds for scholarships to the recipients
selected by U. Based on these facts, M is not a functionally
integrated Type III supporting organization.
Example 5. J, an organization described in section 501(c)(3), is
a supporting organization to community foundation G, an organization
described in section 509(a)(1). In addition to maintaining field-of-
interest funds, sponsoring donor advised funds, and general grant-
making activities, G also engages in activities to beautify and
maintain local parks. J's activities consist of maintaining all of
the local parks in the area of community foundation G by activities
such as establishing and maintaining trails, planting trees and
removing trash. But for the activities of J, G would normally engage
in these efforts to beautify and maintain the local parks. Based on
these facts, J qualifies as a functionally integrated Type III
supporting organization under paragraph (4)(i)(A) of this section.
Example 6. W, an organization described in section 501(c)(3), is
organized as a supporting organization to Z, a public university in
State D described in section 509(a)(1). Z is the sole named
supported organization in W's articles of incorporation. Under the
laws of State D, assets under Z's control are subject to the
appropriation process for any State D purpose by an action of the
State D legislature. Z transfers the intellectual property developed
by Z's science department to W for patenting and licensing,
including making the property available to the public. The royalties
generated by the licenses are shared among Z, the original
researcher, and W. W invests and manages its share of the royalties
and other income generated by the patenting and licensing of the
intellectual property to build an endowment to support Z. W also
conducts further research on scientific processes developed at Z and
makes the results of this research available to the public. W's
research activities make up a substantial part of W's total
activities. But for the activities of W, Z would normally conduct
the research engaged in by W and manage the royalties from the
intellectual property generated at Z. W's activities of investing
and managing its share of royalties and other income are not
considered activities that directly further the exempt purposes of Z
under paragraph (i)(4)(ii) of this section. However, because Z's
assets are subject to the appropriation process of State D for
purposes unrelated to Z's exempt purposes, Z is W's sole supported
organization, and a substantial part of W's activities directly
further Z's exempt purposes, W qualifies for the exception in
paragraph (i)(4)(iii) of this section. Accordingly, based on these
facts, W qualifies as a functionally integrated Type III supporting
organization under paragraph (4)(i)(A) of this section.
Example 7. P, an alumni association described in section
501(c)(3), was formed to promote a spirit of loyalty among graduates
of Y University, a public university in State E described in section
509(a)(1), and to effect united action in promoting the general
welfare of Y. Y is the sole named supported organization in P's
articles of incorporation. Under the laws of State E, Y's assets are
subject to the appropriation process for any State E purpose. P
manages an endowment created by gifts from the alumni. A special
committee of Y's governing board meets with P and makes
recommendations as to the allocation of P's program of gifts and
scholarships to the university and its students. More than a
substantial part of P's activities, however, consist of maintaining
records of alumni and publishing a bulletin to keep alumni aware of
the activities of the university. But for the activities of P, Y
would normally engage in these same activities. P's endowment
management activities are not considered activities that directly
further the exempt purposes of Y under paragraph (i)(4)(ii) of this
section. However, because Y's assets are subject to the
appropriation process of State E for purposes unrelated to Y's
exempt purposes, Y is P's sole supported organization, and a
substantial part of P's activities directly further Y's exempt
purposes, P qualifies for the exception in paragraph (i)(4)(iii) of
this section. Accordingly, based on these facts, P qualifies as a
functionally integrated Type III supporting organization under
paragraph (4)(i)(A) of this section.
(5) Integral part test--non-functionally integrated Type III
supporting organization--(i) A supporting organization meets the
integral part test as a non-functionally integrated Type III supporting
organization if it satisfies either:
(A) The distribution requirement of paragraph (i)(5)(ii) of this
section and the attentiveness requirement of paragraph (i)(5)(iii) of
this section; or
(B) The pre-1970 trust requirements of paragraph (i)(9) of this
section.
(ii) Distribution requirement. (A) The supporting organization must
distribute, with respect to each taxable year, to or for the use of one
or more supported organizations, amounts equaling or exceeding the
supporting organization's annual distributable amount for such year, as
defined in paragraph (i)(5)(ii)(B) of this section, on or before the
last day of such taxable year.
(B) Annual distributable amount. Except as provided in paragraphs
(i)(5)(ii)(C) and (i)(5)(ii)(D) of this section, the annual
distributable amount for a taxable year is:
(1) Five percent of the excess of the aggregate fair market value
of all non-exempt-use assets (determined under paragraph (i)(8) of this
section) over the acquisition indebtedness with respect to such non-
exempt-use assets, determined under section 514(c)(1) without regard to
the taxable year in which the indebtedness was incurred; increased by
(2) Amounts received or accrued as repayments of amounts which were
taken into account by the organization to meet the distribution
requirement imposed in paragraph (i)(5)(ii)(A) of this section for any
taxable year; increased by
(3) Amounts received or accrued from the sale or other disposition
of property to the extent that the acquisition of such property was
taken into account by the organization to meet the distribution
requirement imposed in paragraph (i)(5)(ii)(A) of this section for any
taxable year; and reduced by
(4) The amount of taxes imposed on the supporting organization for
such taxable year under subtitle A of the Code.
(C) First taxable year of existence. The annual distributable
amount for the first taxable year an organization is treated as a non-
functionally integrated Type III supporting organization is zero.
(D) Emergency temporary reduction. The Secretary may provide by
publication in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter) for a temporary reduction in the
annual distributable amount in the case of a disaster or emergency.
(E) Reasonable cause exception. An organization that fails to meet
the distribution requirement of paragraph (i)(5)(ii) of this section
will not be classified as a private foundation in the taxable year for
which it fails to meet such distribution requirement, if the
organization establishes to the satisfaction of the Secretary that:
(1) The failure was due solely to an incorrect valuation of assets,
a ministerial error, or unforeseen events or circumstances that are
beyond the organization's control,
(2) The failure was due to reasonable cause and not to willful
neglect,
and
(3) The distribution requirement is met within 180 days after the
date the incorrect valuation or ministerial error was or should have
been discovered, or 180 days after the organization is first able to
make its required payout
[[Page 48683]]
notwithstanding the unforeseen event or circumstances.
(iii) Attentiveness requirement. (A) General rule. A non-
functionally integrated Type III supporting organization must
distribute one-third or more of its annual distributable amount to one
or more supported organizations that are attentive to the operations of
the supporting organization and to which the supporting organization is
responsive under paragraph (i)(3) of this section.
(B) Except as provided in paragraph (i)(5)(iii)(C) of this section,
a supported organization is attentive to the operations of the
supporting organization if the supporting organization distributes
annually to such supported organization an amount of support that
represents a sufficient part of the supported organization's total
support. A supporting organization must meet the requirements of
paragraphs (i)(5)(iii)(B)(1), (i)(5)(iii)(B)(2), or (i)(5)(iii)(B)(3)
of this section to demonstrate that it is attentive. If a supporting
organization makes payments to, or for the use of, a particular
department or school of a university, hospital or church, the total
support of the department or school shall be substituted for the total
support of the beneficiary organization.
(1) The supporting organization distributes annually to the
supported organization an amount that is 10 percent or more of the
supported organization's total support.
(2) The amount of support received from the supporting organization
is necessary to avoid the interruption of the carrying on of a
particular function or activity. The support is necessary if the
supporting organization or the supported organization earmarks the
support for a particular program or activity, even if such program or
activity is not the supported organization's primary program or
activity so long as such program or activity is a substantial one.
(3) Based on the consideration of all pertinent factors, including
the number of supported organizations, the length and nature of the
relationship between the supported organization and supporting
organization and the purpose to which the funds are put, the amount of
support is a sufficient part of a supported organization's total
support. Normally the attentiveness of a supported organization is
motivated by reason of the amounts received from the supporting
organization. Thus, the more substantial the amount involved, in terms
of a percentage of the supported organization's total support, the
greater the likelihood that the required degree of attentiveness will
be present. However, in determining whether the amount received from
the supporting organization is sufficient to ensure the attentiveness
of the supported organization to the operations of the supporting
organization (including attentiveness to the nature and yield of such
supporting organization's investments), evidence of actual
attentiveness by the supported organization is of almost equal
importance. A supported organization is not considered to be attentive
solely because it has enforceable rights against the supporting
organization under State law.
(C) Distribution to donor-advised fund does not establish
attentiveness. Notwithstanding paragraphs (i)(5)(iii)(A) and
(i)(5)(iii)(B) of this section, a supported organization will not be
considered attentive to the operations of a supporting organization
with respect to any amount received from the supporting organization
that is held by the supported organization in a donor advised fund
described in section 4966(d)(2).
(iv) Paragraph (5)(iii)(B)(2) of this section is illustrated by
examples 1 and 2 and paragraph(5)(iii)(B) of this section is
illustrated by examples 3 and 4:
Example 1. K, an organization described in section 501(c)(3),
annually pays over an amount equal to five percent of its assets to
L, a museum described in section 509(a)(2). K meets the
responsiveness test described in paragraph (i)(3) of this section
with respect to L. In recent years, L has earmarked the income
received from K to underwrite the cost of carrying on a chamber
music series consisting of 12 performances a year that are performed
for the general public free of charge at its premises. The chamber
music series is not L's primary activity. L could not continue the
performances without K's support. Based on these facts, K meets the
requirements of paragraph (i)(5)(iii)(B)(2) of this section.
Example 2. M, an organization described in section 501(c)(3),
pays annually an amount equal to five percent of its assets to the
Law School of N University, an organization described in section
509(a)(1). M meets the responsiveness test described in paragraph
(i)(3) of this section with respect to N. M has earmarked the income
paid over to N's Law School to endow a chair in International Law.
Without M's continued support, N could not continue to maintain this
chair. Based on these facts, M meets the requirements of paragraph
(i)(5)(iii)(B)(2) of this section.
Example 3. R is a charitable trust created under the will of B,
who died in 1969. R's purpose is to hold assets as an endowment for
S, a hospital, T, a university, and U, a national medical research
organization (all organizations described in section 509(a)(1) and
specifically named in the trust instrument), and to distribute all
of the income each year in equal shares among the three named
beneficiaries. Each year, R pays an amount equal to five percent of
its assets to each of S, T, and U. Such payments are less than one
percent of each organization's total support. Based on these facts,
R does not meet the attentiveness requirement of paragraph
(i)(5)(iii)(B). However, because B died prior to November 20, 1970,
R could, upon meeting all of the requirements of paragraph (i)(9) of
this section, be considered as meeting the requirements of paragraph
(i)(5)(i)(B) of this section.
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 under paragraph (i)(3) of this section only as
to V. Each year, O distributes five percent of the fair market value
of its non-exempt-use assets in equal amounts to the five
universities. O distributes annually more than 10 percent of the
total annual support of V and W. Based on these facts O does not
meet the requirements of paragraph (i)(5)(iii) of this section.
Although both V and W are attentive to the operations of O under
paragraph (i)(5)(iii)(B)(1) of this section, O is only responsive to
V. Accordingly, O distributes only one-fifth (i.e., less than the
required one-third) of its annual distributable amount to supported
organization(s) that are both attentive to O and to which O is also
responsive under paragraph (i)(3) of this section.
(6) Distributions. For purposes of this paragraph (i)(6), the
amount of a distribution made to a supported organization is the fair
market value of such property as of the date such distribution is made.
The amount of a distribution will be determined solely on the cash
receipts and disbursements method of accounting described in section
446(c)(1). Distributions that count toward the distribution requirement
imposed in paragraph (i)(5)(ii)(A) of this section shall include:
(i) Any amount paid to a supported organization to accomplish its
exempt purposes,
(ii) Any amount paid to acquire an asset used (or held for use) to
carry out the exempt purposes of the supported organization(s), and
(iii) Any amount expended by the supporting organization for
reasonable and necessary administrative expenses.
(7) Carryover of excess amounts--(i) In general. If with respect to
any taxable year, an excess amount, as defined in paragraph (i)(7)(ii)
of this section, is created, such excess amount may be used to reduce
the annual distributable amount in any of the five taxable years
immediately following the taxable year in which the excess amount is
created (the ``carryover period''). An excess amount created in a
taxable year cannot be carried over beyond the succeeding five taxable
years. With respect to any
[[Page 48684]]
taxable year to which an excess amount is carried over, in determining
whether an excess amount is created in that taxable year, the annual
distributable amount is reduced first to the extent of any excess
amounts carried over and then to the extent of distributions made in
that taxable year.
(ii) Excess amount. An excess amount is created for any taxable
year beginning after the effective date of these regulations if the
total distributions made by a supporting organization to its supported
organization(s) for such taxable year exceeds the supporting
organization's annual distributable amount for such taxable year, as
defined in paragraph (i)(5)(ii)(B) of this section, determined without
regard to this paragraph.
(8) Valuation of assets--(i) General rules. (A) For purposes of
determining the organization's annual distributable amount, as defined
in paragraph (i)(5)(ii)(B) of this section, the determination of the
fair market value of the non-exempt-use assets shall be made in the
year preceding the year of the required distribution under paragraph
(i)(5)(ii)(A) of this section. The aggregate fair market value of all
non-exempt-use assets of a supporting organization is the sum of:
(1) The average of the fair market values on a monthly basis of
securities for which market quotations are readily available (within
the meaning of paragraph (i)(8)(iii)(A)(1) of this section);
(2) The average of the supporting organization's cash balances on a
monthly basis (less the same amount of cash balances excluded under
paragraph (i)(8)(i)(C)(2)(iv) of this section) from the computation of
the annual distributable amount); and
(3) The fair market value of all other assets (except those assets
described in paragraph (i)(8)(i)(B) or paragraph (i)(8)(i)(C) of this
section) for the period of time during the taxable year for which such
assets are held by the supporting organization.
(B) Certain assets excluded. For purposes of this paragraph, the
non-exempt-use assets taken into account in determining the annual
distributable amount described in paragraph (i)(5)(ii)(B) of this
section shall not include the following:
(1) Any future interest (such as a vested or contingent remainder,
whether legal or equitable) of a supporting organization in the income
or corpus of any real or personal property, other than a future
interest created by the supporting organization after August 17, 2006,
until all intervening interests in, and rights to the actual possession
or enjoyment of, such property have expired, or, although not actually
reduced to the supporting organization's possession, until such future
interest has been constructively received by the supporting
organization, as where it has been credited to the supporting
organization's account, set apart for the supporting organization, or
otherwise made available so that the supporting organization may
acquire it at any time or could have acquired it if notice of intention
to acquire had been given;
(2) The assets of an estate until such time as such assets are
distributed to the supporting organization or, due to a prolonged
period of administration, such estate is considered terminated for
Federal income tax purposes by operation of Treas. Reg. Sec. 1.641(b)-
3(a);
(3) Any present interest of a supporting organization in any trust
created and funded by another person;
(4) Any pledge to the supporting organization of money or property
(whether or not the pledge may be legally enforced); and
(5) Any assets used (or held for use) to carry out the exempt
purposes of the supported organization(s).
(C) Assets used (or held for use) to carry out the exempt purposes
of the supported organization(s)--(1) In general. For purposes of
paragraph (i)(8)(i)(B)(5) of this section, an asset is ``used (or held
for use) to carry out the exempt purposes of the supported
organization(s)'' only if the asset is actually used by the supporting
organization in activities that carry out the exempt purposes of its
supported organization(s), or if the supporting organization owns the
asset and establishes to the satisfaction of the Commissioner that its
immediate use for such exempt purpose is not practical (based on the
facts and circumstances of the particular case) and that definite plans
exist to commence such use on behalf of its supported organization(s)
within a reasonable period of time. Consequently, assets that are held
for the production of income or for investment (for example, stocks,
bonds, interest-bearing notes, endowment funds, or, generally, leased
real estate) are not being used (or held for use) to carry out the
exempt purposes of the supported organization(s), even though the
income from such assets is used to carry out such exempt purposes.
Whether an asset is held for the production of income or for investment
rather than used (or held for use) by the supporting organization to
carry out the exempt purposes of the supported organization(s) is a
question of fact. For example, an office building used for the purpose
of providing offices for employees engaged in the management of
endowment funds is not being used (or held for use) by the supporting
organization to carry out the exempt purposes of the supported
organization(s). However, where property is used both to carry out the
exempt purposes of the supported organization(s) and for other
purposes, if the former use represents 95 percent or more of the total
use, such property shall be considered to be used exclusively to carry
out an exempt purpose of the supported organization(s). If the use of
such property to carry out the exempt purposes of the supported
organization(s) represents less than 95 percent of the total use,
reasonable allocation between such use and other use must be made for
purposes of this paragraph. Property acquired by the supporting
organization to be used to carry out the exempt purposes of the
supported organization(s) may be considered as used (or held for use)
to carry out such exempt purposes even though the property, in whole or
in part, is leased for a limited period of time during which
arrangements are made for its conversion to the use for which it was
acquired, provided such income-producing use of the property does not
exceed a reasonable period of time. Generally, one year shall be deemed
to be a reasonable period of time for purposes of the immediately
preceding sentence. Where the income-producing use continues beyond a
reasonable period of time, the property shall not be deemed to be used
by the supporting organization to carry out the exempt purposes of the
supported organization(s), but, instead, as of the time the income-
producing use becomes unreasonable, such property shall be treated as
disposed of within the meaning of paragraph (i)(5)(ii)(B)(3) of this
section to the extent that the acquisition of the property was taken
into account by the organization to meet the distribution requirement
imposed in paragraph (i)(5)(ii)(A) of this section for any taxable
year. If, subsequently, the property is used by the supporting
organization to carry out the exempt purposes of the supported
organization(s), a distribution to its supported organization(s) in the
amount of its then fair market value, determined in accordance with the
rules contained in this paragraph (i)(8), shall be deemed to have been
made as of the time such exempt purpose use begins.
(2) Illustrations. Examples of assets that are ``used (or held for
use) to carry out the exempt purposes of the
[[Page 48685]]
supported organization(s)'' include, but are not limited to, the
following:
(i) Administrative assets, such as office equipment and supplies
that are used by employees or consultants of the supporting
organization, to the extent such assets are devoted to and used
directly in the administration of the supporting organization's
activities that carry out the exempt purposes of the supported
organization(s).
(ii) Real estate or the portion of a building used by the
supporting organization directly in its activities to carry out the
exempt purposes of the supported organization(s).
(iii) Physical facilities used in the supporting organization's
activities to carry out the exempt purposes of the supported
organization(s), such as paintings or other works of art owned by the
supporting organization that are on public display, fixtures and
equipment in classrooms, and research facilities and related equipment,
which under the facts and circumstances serve a useful purpose in the
conduct of such exempt purpose activities.
(iv) The reasonable cash balances necessary to cover current
administrative expenses and other normal and current disbursements
directly connected to the supporting organization's activities to carry
out the exempt purposes of the supported organization(s). The
reasonable necessary cash balances will generally be deemed to be an
amount, computed on an annual basis, equal to one and one-half percent
of the fair market value of all of the supporting organization's
assets, other than assets used or held for use to carry out the exempt
purposes of the supported organization(s), without regard to this
paragraph (i)(8)(i)(C)(2)(iv). However, if the Commissioner is
satisfied that under the facts and circumstances an amount in addition
to such one and one-half percent is necessary for payment of such
expenses and disbursements, then such additional amount may also be
excluded from the amount of assets described in paragraph (i)(5)(ii)(B)
of this section. All remaining cash balances, including amounts
necessary to pay any tax imposed by section 511 or section 4943, are to
be included in the assets described in paragraph (i)(5)(ii)(B) of this
section.
(v) Any property leased by the supporting organization in carrying
out the exempt purposes of its supported organization(s) at no cost (or
at a nominal rent) to the lessee, such as the leasing of renovated
apartments to low-income tenants at a low rental as part of the lessor-
supporting organization's program for rehabilitating a blighted portion
of the community.
(ii) Valuation of assets--timing. For purposes of determining the
annual distributable amount for a taxable year, the supporting
organization's assets are to be valued over the preceding taxable year.
(iii) Valuation of assets--(A) Certain securities. (1) For purposes
of this paragraph, a supporting organization may use any reasonable
method to determine the fair market value on a monthly basis of
securities for which market quotations are readily available, as long
as such method is consistently used.
(2) For purposes of this paragraph, market quotations are readily
available if a security is:
(i) Listed on the New York Stock Exchange, the American Stock
Exchange, or any city or regional exchange in which quotations appear
on a daily basis, including foreign securities listed on a recognized
foreign national or regional exchange;
(ii) Regularly traded in the national or regional over-the-counter
market, for which published quotations are available; or
(iii) Locally traded, for which quotations can readily be obtained
from established brokerage firms.
(3) For purposes of this paragraph, if the supporting organization
can show that the value of securities determined on the basis of market
quotations as provided by paragraph (i)(8)(iii)(A)(2) of this section,
does not reflect the fair market value thereof because:
(i) The securities constitute a block of securities so large in
relation to the volume of actual sales on the existing market that it
could not be liquidated in a reasonable time without depressing the
market;
(ii) The securities are securities in a closely held corporation
and sales are few or of a sporadic nature; and/or
(iii) The sale of the securities would result in a forced or
distress sale because the securities could not be offered to the public
for sale without first being registered under the Securities Act of
1933 or because of other factors, then the price at which the
securities could be sold as such outside the usual market, as through
an underwriter, may be a more accurate indication of value than market
quotations. On the other hand, if the securities to be valued represent
a controlling interest, either actual or effective, in a going
business, the price at which other lots change hands may have little
relation to the true value of the securities. No decrease in the fair
market value of any given class of securities determined on the basis
of market quotations as provided by paragraph (i)(8)(iii)(A)(2) of this
section shall be allowed except as authorized by this paragraph, and no
such decrease shall in the aggregate exceed 10 percent of the fair
market value of such class of securities so determined on the basis of
market quotations and without regard to this paragraph.
(4) In the case of securities described in paragraph
(i)(8)(iii)(A)(2) of this section, that are held in trust for, or on
behalf of, a supporting organization by a bank or other financial
institution that values such securities periodically by use of a
computer, a supporting organization may determine the correct value of
such securities by use of such computer pricing system, provided the
Commissioner has accepted such computer pricing system as a valid
method for valuing securities for Federal estate tax purposes.
(B) Cash. In order to determine the amount of a supporting
organization's cash balances, the supporting organization shall value
its cash on a monthly basis by averaging the amount of cash on hand as
of the first day of each month and as of the last day of each month.
(C) Common trust funds. If a supporting organization owns a
participating interest in a common trust fund (as defined in section
584) established and administered under a plan providing for the
periodic valuation of participating interests during the fund's taxable
year and the reporting of such valuations to participants, the value of
the supporting organization's interest in the common trust fund based
upon the average of the valuations reported to the supporting
organization during its taxable year will ordinarily constitute an
acceptable method of valuation.
(D) Other assets. (1) Except as otherwise provided in paragraph
(i)(8)(iii)(D)(2) of this section, the fair market value of assets
other than those described in paragraphs (i)(8)(iii)(A) through
(i)(8)(iii)(C) of this section, shall be determined annually. Thus, the
fair market value of securities other than those described in paragraph
(i)(8)(iii)(A) of this section shall be determined in accordance with
this paragraph (i)(8)(iii)(D)(1). If, however, a supporting
organization owns voting stock of an issuer of unlisted securities and
has, or together with disqualified persons or another supporting
organization has, effective control of the issuer (within the meaning
of Sec. 53.4943-3(b)(3)(ii)), then to the extent that the issuer's
assets consist of shares of listed securities issues, such assets shall
be
[[Page 48686]]
valued monthly on the basis of market quotations or in accordance with
section 4942(e)(2)(B), if applicable. Thus, for example, if a
supporting organization and a disqualified person together own all of
the unlisted voting stock of a holding company that in turn holds a
portfolio of securities of issues that are listed on the New York Stock
Exchange, in determining the net worth of the holding company, the
underlying portfolio securities are to be valued monthly by reference
to market quotations for their issues unless a decrease in such value
is authorized in accordance with section 4942(e)(2)(B). Such
determination may be made by employees of the supporting organization
or by any other person without regard to whether such person is a
disqualified person with respect to the supporting organization. A
valuation made pursuant to the provisions of this paragraph, if
accepted by the Commissioner, shall be valid only for the taxable year
for which it is made. A new valuation made in accordance with these
provisions is required for the succeeding taxable year.
(2) If the requirements of this paragraph are met, the fair market
value of any interest in real property, including any improvements
thereon, may be determined on a five-year basis. Such value must be
determined by means of a certified, independent appraisal made in
writing by a qualified person who is neither a disqualified person with
respect to, nor an employee of, the supporting organization. The
appraisal is certified only if it contains a statement at the end
thereof to the effect that, in the opinion of the appraiser, the values
placed on the assets appraised were determined in accordance with
valuation principles regularly employed in making appraisals of such
property using all reasonable valuation methods. The supporting
organization shall retain a copy of the independent appraisal for its
records. If a valuation made pursuant to the provisions of this
paragraph in fact falls within the range of reasonable values for the
appraised property, such valuation may be used by the supporting
organization for the taxable year for which the valuation is made and
for each of the succeeding four taxable years. Any valuation made
pursuant to the provisions of this paragraph may be replaced during the
five-year period by a subsequent five-year valuation made in accordance
with the rules set forth in this paragraph (i)(8)(iii)(D)(2), or with
an annual valuation made in accordance with paragraph (i)(8)(iii)(D)(1)
of this section, and the most recent such valuation of such assets
shall be used in computing the supporting organization's annual
distributable amount. A valuation made in accordance with this
paragraph must be made no later than the last day of the first taxable
year for which such valuation is applicable. A valuation, if properly
made in accordance with the rules set forth in this paragraph, will not
be disturbed by the Commissioner during the five-year period for which
it applies even if the actual fair market value of such property
changes during such period.
(3) For purposes of this paragraph (i)(8)(iii)(D)(3), commonly
accepted methods of valuation must be used in making an appraisal.
Valuations made in accordance with the principles stated in the
regulations under section 2031 constitute acceptable methods of
valuation. The term ``appraisal,'' as used in this paragraph
(i)(8)(iii)(D)(3), means a determination of fair market value and is
not to be construed in a technical sense peculiar to particular
property or interests therein, such as, for example, mineral interests
in real property.
(E) Definition of ``securities''. For purposes of this paragraph
(i)(8)(iii)(E), the term ``securities'' includes, but is not limited
to, common and preferred stocks, bonds, and mutual fund shares.
(F) Valuation date. (1) In the case of an asset that is required to
be valued on an annual basis as provided in paragraph (i)(8)(iii)(D)(1)
of this section, such asset may be valued as of any day in the
supporting organization's taxable year to which such valuation applies,
provided the supporting organization follows a consistent practice of
valuing such asset as of such date in all taxable years.
(2) A valuation described in paragraph (i)(8)(iii)(D)(2) of this
section may be made as of any day in the first taxable year of the
supporting organization to which such valuation is to be applied.
(G) Assets held for less than a taxable year. For purposes of this
paragraph (i)(8)(iii)(G), any asset described in paragraph (i)(8)(i)(A)
of this section that is held by a supporting organization for only part
of a taxable year shall be taken into account for purposes of
determining the supporting organization's annual distributable amount
for such taxable year by multiplying the fair market value of such
asset (as determined pursuant to paragraph (i)(8) of this section) by a
fraction, the numerator of which is the number of days in such taxable
year that the supporting organization held such asset and the
denominator of which is the number of days in such taxable year.
(9) Exception to integral part test for certain trusts. A trust
(whether or not exempt from taxation under section 501(a)) that on
November 20, 1970, met and continues to meet the requirements of
paragraphs (i)(9)(i) through (i)(9)(v) of this section, shall be
treated as meeting the requirements of the integral part test (whether
or not it meets the requirements of paragraph (i)(4) or paragraph
(i)(5) of this section) if for taxable years beginning after October
16, 1972, the trustee of such trust makes annual written reports to all
of the beneficiary supported organizations with respect to such trust
setting forth a description of the assets of the trust, including a
detailed list of the assets and the income produced by such assets. A
trust organization that meets the requirements of this paragraph may
request a ruling that it is described in section 509(a)(3) in such
manner as the Commissioner may prescribe.
(i) All the unexpired interests in the trust are devoted to one or
more purposes described in section 170(c)(1) or (2)(B) and a deduction
was allowed with respect to such interests under sections 170,
545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), 2522, or corresponding
provisions of prior law (or would have been allowed such a deduction if
the trust had not been created before 1913);
(ii) The trust was created prior to November 20, 1970, and did not
receive any grant, contribution, bequest or other transfer on or after
such date. For purpose of this paragraph (i)(9)(ii), a split-interest
trust described in section 4947(a)(2) that was created prior to
November 20, 1970, was irrevocable on such date, and that becomes a
charitable trust described in section 4947(a)(1) after such date shall
be treated as having been created prior to such date;
(iii) The trust is required by its governing instrument to
distribute all of its net income currently to a designated beneficiary
supported organization. Where more than one beneficiary supported
organization is designated in the governing instrument of a trust, all
of the net income must be distributable and must be distributed
currently to each of such beneficiary organizations in fixed shares
pursuant to such governing instrument. For purposes of this paragraph
(i)(9)(iii), the governing instrument of a charitable trust shall be
treated as requiring distribution to a designated beneficiary
organization where the trust instrument describes the charitable
purpose of the trust so completely that such description can apply to
only one existing beneficiary organization and is of sufficient
particularity as to vest in such organization rights against the trust
[[Page 48687]]
enforceable in a court possessing equitable powers;
(iv) The trustee of the trust does not have discretion to vary
either the beneficiaries or the amounts payable to the beneficiaries.
For purposes of this paragraph (i)(9)(iv), a trustee shall not be
treated as having such discretion where the trustee has discretion to
make payments of principal to the single section 509(a)(1) or (2)
organization that is currently entitled to receive all of the trust's
income or where the trust instrument provides that the trustee may
cease making income payments to a particular charitable beneficiary in
the event of certain specific occurrences, such as the loss of
exemption under section 501(c)(3) or classification under section
509(a)(1) or (2) by the beneficiary or the failure of the beneficiary
to carry out its charitable purpose properly; and
(v) None of the trustees would be disqualified persons within the
meaning of section 4946(a) (other than foundation managers under
section 4946(a)(1)(B)) with respect to the trust if such trust were
treated as a private foundation.
(10) Foreign supported organizations. A supporting organization is
not operated in connection with one or more supported organizations if
it supports any supported organization organized outside of the United
States.
(11) Transition rules--(i) A Type III supporting organization in
existence on the effective date of these regulations that met and
continues to meet the requirements of Treas. Reg. Sec. 1.509(a)-
4(i)(3)(ii), as in effect prior to the date these regulations are
published as final or temporary regulations, will be treated as meeting
the requirements of paragraph (i)(4)(i) of this section until the first
day of the organization's first taxable year beginning after the date
these regulations are published as final or temporary regulations.
(ii) A Type III supporting organization in existence on the
effective date of these regulations that met and continues to meet the
requirements of Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii), as in effect
prior to the date these regulations are published as final or temporary
regulations, will be treated as meeting the requirements of paragraph
(i)(5)(i) of this section until the first day of its second taxable
year beginning after the effective date of these regulations. Beginning
in the first taxable year beginning after the effective date of these
regulations, such organizations must value their assets according to
paragraph (i)(8) of this section. Beginning in the second taxable year
beginning after the effective date of these regulations (and in all
succeeding taxable years), these organizations must meet all of the
requirements of paragraph (i)(5)(i) of this section.
(iii) For the first taxable year after the effective date of these
regulations, the annual distributable amount for Type III supporting
organizations that are not functionally integrated is zero.
(12) Effective/applicability date. These regulations are effective
on the date of publication of the Treasury decision adopting these
rules as final or temporary regulations.
* * * * *
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
Par. 3. The authority citation for part 53 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. In Sec. 53.4943-11, section heading is revised and
paragraphs (f) and (g) are added to read as follows:
Sec. 53.4943-11 Effective/Applicability date.
* * * * *
(f) Special transitional rule for private foundations that
qualified as Type III supporting organizations before August 17, 2006.
The present holdings of a private foundation that qualified as a Type
III supporting organization under section 509(a)(3) immediately before
August 17, 2006, and that was reclassified as a private foundation
under section 509(a) on or after August 17, 2006, solely as a result of
the rules enacted by section 1241 of the Pension Protection Act of
2006, Public Law 109-280 (120 Stat. 780), will be determined using the
same rules that apply to Type III supporting organizations under
section 4943(f)(7).
(g) Special transitional rule for Type III supporting organizations
created as trusts before November 20, 1970. A trust that qualifies as a
Type III supporting organization under section 509(a)(3) and meets the
requirements of Treas. Reg. Sec. 1.509(a)-4(i)(9) will be treated as a
``functionally integrated Type III supporting organization'' for
purposes of section 4943(f)(3)(A).
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E9-22866 Filed 9-23-09; 8:45 am]
BILLING CODE 4830-01-P