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.