On February 19, 2016, the IRS and Treasury Department issued proposed regulations regarding (i) prohibitions on certain contributions to Type I and Type III supporting organizations and (ii) requirements for Type III supporting organizations. These proposed regulations reflect changes to the law made by the Pension Protection Act of 2006, which changed the requirements an organization must satisfy to qualify as a Type III supporting organization.

A supporting organization may have one of three types of relationships with a supported organization – Type I, Type II, or Type III. A Type I supporting organization relationship is similar to that of a parent-subsidiary relationship. A Type III relationship is one that is operated “in connection with” the supported organization. To learn more about supporting organizations, please read our previous blog entry on supporting organizations.

In addition to reflecting the Pension Protection Act changes, the proposed regulations also provide additional rules to the requirements for Type III supporting organizations, focusing primarily on the “relationship test” for Type III supporting organizations:

  • Additional requirements to meet the responsiveness test for all Type III supporting organizations;
  • Additional rules regarding the qualification of an organization as a functionally integrated Type III supporting organization under Treas. Reg. Section 1.509(a)-4(i)(4), including provisions for supporting organizations that support governmental entities; and
  • Additional rules regarding the required annual distribution under Treas. Reg. Section 1.509(a)-4(i)(5) by a non-functionally-integrated Type III supporting organization.

Two additional concepts – notification and control – are also addressed by the proposed regulations:

Notification: The proposed regulations amend Treas. Reg. Section 1.509(a)-4(i)(2) to clarify that a Type III supporting organization must deliver to each of its supported organizations information that establishes it is responsive to the supported organization(s) by the last day of the fifth month of the taxable year after the taxable year in which the supporting organization provided the support it is reporting.

Control: The proposed regulations also define the term “control” for purposes of Code Section 509(f)(2), which prohibits a Type I or Type III supporting organization from accepting contributions from persons who control the governing body of its supported organization(s). Under the proposed regulations, the governing body of a supported organization is considered “controlled” by a person if that person, alone or by aggregating his or her votes or positions of authority with certain related persons, may require or prevent the governing body of the supported organization from performing any act that significantly affects its operations.

Comments and any requests for a public hearing on the proposed regulations must be received by May 19, 2016. Comments about a Type III supporting organization’s obligation to collect information to maintain its relationship status are specifically requested.

Posted in IRS Filings
Tags: control, IRC 509, notification, Pension Protection Act, relationship test, supporting organizations, Treas. Reg. Section 1.509, treasury regulations
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Photo of A. Nicole Campbell A. Nicole Campbell

A. Nicole Campbell is Associate General Counsel at the Open Society Institute (“OSI”), a private operating and grantmaking foundation in New York City. As Associate General Counsel, Nic works on a wide range of exempt organization matters at the foundation, including tax compliance…

A. Nicole Campbell is Associate General Counsel at the Open Society Institute (“OSI”), a private operating and grantmaking foundation in New York City. As Associate General Counsel, Nic works on a wide range of exempt organization matters at the foundation, including tax compliance and grantmaking, as well as other corporate, compliance, and governance matters. Prior to joining OSI, Nic was an associate in Proskauer’s Tax Department and a member of its Not-for-Profit/Exempt Organizations Practice Group where she advised not-for-profit clients on a variety of matters, including applying for and maintaining exemption from federal income tax, structuring joint ventures and partnerships with taxable entities, and excise tax issues. In 2009, while at Proskauer, Nic went on leave to The New York Community Trust as its Associate General Counsel and was responsible for handling a range of legal matters, including charitable contributions, donor-advised funds, and corporate and governance issues. From 2007 to 2009, she was recognized by the New York State Bar Association for her pro bono service, earning her the title of “Empire State Counsel.” In 2008 and 2009, she was honored by The Legal Aid Society as one of the recipients of the Society’s Pro Bono Publico Awards for outstanding service to the Society and its clients. She is also a past recipient of the Proskauer Rose Golden Gavel Award for her commitment to pro bono service.
Nic is an Editor of and contributor to the Not-For-Profit/Exempt Organizations Blog and she has also been a presenter at Proskauer’s annual “Trick or Treat Seminar,” where she discusses recent developments affecting tax-exempt entities.
At Northeastern University School of Law, Nic was a Teaching Assistant for the Legal Practice Writing Program and a Teaching Facilitator for the Law Skills in Social Context Program.
As an Educational Counselor for Massachusetts Institute of Technology, Nic interviews high school students who are interested in attending. Nic is also a member of the Board of Directors of Ardea Arts, Inc., a not-for-profit organization dedicated to developing and producing new American opera and music theater works for multi-generational audiences. Nic is also founding Director of Access Caribbean Assistance Fund, a not-for-profit organization that provides health and education assistance to needy individuals in the Caribbean.

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