The IRS released Notice 2020-36
on May 1 providing updated procedures on how an organization may obtain, maintain and qualify as a subordinate of a group exemption letter.
The proposed revenue procedure is intended to serve as “a comprehensive resource” for group exemptions, incorporating and updating guidance already available in Rev. Proc. 80-27. Substantial modifications to the current group exemption rules under Rev. Proc. 80-27 include:
- Reducing the number of central organizations eligible to receive group rulings
- Limiting the number of subordinate organizations that can be included in a group exemption
- Imposing additional administration burdens on central organizations.
Rev. Proc. 80-27 continues to apply pending publication of the final revenue procedure, but new requests for group exemption under the old revenue procedure will not be accepted after June 17, 2020. A one-year transition period and grandfathering will apply for certain provisions once the revenue procedure is published. Comments on the new procedure should be submitted on or before Aug. 16, 2020.
The group exemption process is a valuable tax planning tool, allowing tax-exempt organizations sharing a common mission to file a consolidated Form 990 that simplifies its tax compliance burden while also streamlining its reporting and presenting a unified message to the public. Organizations seeking a new group exemption should consider filing before the June 17, 2020, as the IRS will not consider requests after this date until the new revenue procedure is adopted. They should also familiarize themselves with the new rules governing the types of subordinate organizations that may be included within a group exemption to ensure that all related entities qualify for inclusion in the group exemption.
Proposed changes to Rev. Proc. 80-27
Notice 2020-36 proposes several changes to the existing guidance under Rev. Proc. 80-27, including the following modifications and limitations to central organizations.
Group exemption application
The central organization in a group exemption is usually a parent organization that supervises or controls one or more subordinate organizations. Rev. Proc. 80-27 did not require that an approved group exemption contain a specific number of subordinate organizations; this resulted in a number of group exemptions being issued and maintained with one (or even no) subordinate organizations. The new procedure requires that the central organization must initially have at least five subordinate organizations to obtain a group exemption. Thereafter, it must have at least one subordinate organization to maintain the group exemption annually.
Relationship with subordinate organizations
While Rev. Proc. 80-27 required that subordinate organizations be affiliated with the central organization, it did not define “affiliation,” “general supervision” or “control.” The proposed revenue procedures define these terms in great detail for purposes of the group exemption rules.
Single group exemption letter limit
Under Rev. Proc. 80-27, a central organization could obtain multiple group exemption letters; this is no longer permitted and each is now limited to one group exemption.
The proposed revenue procedures also impose the following new requirements on subordinate organizations seeking initial inclusion in (or subsequent addition to) a group exemption letter.
Rev. Proc. 80-27 allowed subordinate organizations to be exempt under a different sub-section of Section 501(c) as the central organization, as long as all of the subordinate organizations were exempted under the same sub-section. The proposed revenue procedures modifies this rule by requiring the subordinate organizations to be exempt under the same sub-section 501(c) as the central organization. (This rule does not apply if the central organization is a state instrumentality or agencies of a political subdivision).
Foundation classification requirement
Rev. Proc. 80-27 does not have a particular requirement that subordinate organizations described in Section 501(c)(3) have a particular or specific foundation classification under Section 509(a). The proposed revenue procedures changes this and requires that all subordinate entities be exempt under the same category of Section 509(a). Publicly supported organizations classified under Section 509(a)(1) and described in Section 170(b)(1)(A)(vi), and those classified under Section 509(a)(2), are considered as having the same foundation classification.
Similar purpose requirement
All subordinate organizations described in Section 501(c) (other than Section 501(c)(3) organizations) must have a similar exempt purpose based on the National Taxonomy of Exempt Entities (NTEE) code.
Uniform governing instrument requirement
The proposed revenue procedure requires that the central organization submit a copy of a uniform governing document that applies to (and is adopted by) all of the subordinate organizations that share a similar exempt mission. Section 501(c)(3) organizations with different missions may adopt different uniform governing documents.
Organizations not eligible for inclusion in a group exemption letter
The proposed revenue procedure excludes foreign organizations, Type III supporting organizations and Qualified Nonprofit Health Insurance Issuers from being part of a group exemption.
Authorization for inclusion or removal from the group exemption letter
Similar to Rev. Proc. 80-27, the proposed revenue procedure requires that a subordinate organization authorize the central organization to include it in a group exemption letter. The subordinate organization must permit the central organization to remove it from the group exemption if it fails to meet the requirements of this revenue procedure.
Subordinates with revoked tax-exemption
Under the automatic revocation rules, a subordinate organization is ineligible for initial inclusion in (or subsequent addition to) a group exemption if its own federal exemption has been automatically revoked. The subordinate must seek reinstatement before it may be included in a group exemption.
As noted above, certain grandfathering and transition rules apply to ease the burden on existing group exemptions. Requirements such as the need that a central organization maintain only one group exemption and have at least one subordinate will apply after a one-year transition period. The requirements for matching classification status, similar purpose and uniform governing instrument requirements will not apply to preexisting subordinate organizations but will apply to all new subordinate organizations added to preexisting group exemption letters.
The group exemption process has long been a source of confusion within the not-for-profit community because the guidance governing the process has gone stale, having been issued over 40 years ago. Not-for-profit organizations have evolved in the intervening 40 years, both operationally and structurally, and this has resulted in much more complex tax compliance obligations that can impede an organization’s ability to get its charitable message out to the public. The group exemption process enables organizations sharing a common mission to file a consolidated Form 990 that simplifies its tax compliance burden while also streamlining its reporting and presenting a unified message to the public.
The group exemption is a valuable tax planning tool. Organizations seeking a new group exemption should consider filing before the June 17, 2020, as the IRS will not consider requests after this date until the new revenue procedure is adopted (which may be some time in coming given the necessary delays created by the COVID-19 pandemic). Tax-exempt organizations should familiarize themselves with the new rules governing the types of subordinate organizations that may be included within a group exemption to ensure that all related entities continue to qualify for inclusion in the group exemption.
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