The IRS recently issued Notice 2020-36 that proposes new requirements to qualify for group tax exemptions under Section 501(c) that would supersede Rev. Proc. 80-27. The proposed guidance does not apply until after a one-year transition period; however, the transition period is not uniform and some actions will be required during the transition.
New Requirements for Central Organizations
Limitations. To obtain a group tax exemption, a central organization must have at least five subordinate organizations. To maintain a group exemption, a central organization must have at least one subordinate organization. A central organization may only have one group exemption.
Annual reporting. Supplemental group ruling information is required to be submitted by most central organizations every year at least 30 days prior to the close of the organization’s annual accounting period.
New Requirements for Subordinate Organizations
Match requirement. Requires all subordinate organizations initially included in or subsequently added to a group exemption letter to be described in the same paragraph of § 501(c) as the central organization. For example, if a central organization is described in § 501(c)(3), all the subordinate organizations initially included in or subsequently added to the group exemption letter must be described in § 501(c)(3).
Foundation classification requirement. If the subordinate organizations initially included in or subsequently added to a group tax exemption letter are described in § 501(c)(3), all such subordinate organizations must be classified as public charities under the same paragraph of § 509(a). Eventually, the IRS may require all subordinate organizations classified under Section 509(a)(1) to have the same foundation subclassification (such as school, hospital, church). Publicly supported organizations classified under Section 509(a)(1) and described in 170(b)(1)(A)(vi), and those classified under Section 509(a)(2), are considered to have the same foundation classification.
Similar purpose requirement. Subordinate organizations other than § 501(c)(3) organizations included in a group exemption must have the same or similar purposes and the same National Taxonomy of Exempt Entities (NTEE) code.
Uniform governing instrument requirement. Eliminates the option of submitting copies of representative instruments in the absence of a uniform governing instrument and requires all
subordinate organizations to adopt a uniform governing instrument and to submit a copy of the uniform governing instrument with its request for a group tax exemption letter. However, § 501(c)(3) subordinate organizations that have different purposes may adopt different uniform governing instruments as long as all subordinate organizations with the same purpose have the same uniform governing instrument.
Domestic organization requirement. A subordinate organization that is organized in a foreign country may not be initially included in or subsequently added to a group exemption letter. However, a domestic organization can be a subordinate organization even if it operates in a foreign country.
Ineligible organizations. Organizations that are ineligible to be subordinate organizations include (1) Section 501(c)(3) Type III supporting organizations, (2) a qualified nonprofit health insurance issuer under Section 501(c)(29), and (3) a private foundation.
Automatic exemption revocation. An organization that has had its exemption automatically revoked is eligible to become a subordinate organization for purposes of inclusion in a group exemption letter only after it has filed a reinstatement application and has been reinstated.
Removal. A central organization is allowed to remove a subordinate organization from the group exemption for failure to comply with the revenue procedure.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 689-0437 or reach out to us through our contact page.