Exempt Organizations Advisory - IRS Suspends Determination Letters for "Functionally Integrated" Type III Supporting Organizations

March 15, 2007

On February 22, the IRS issued an internal memorandum which suspends the issuance of determination letters for organizations seeking "functionally integrated Type III supporting organization" status. The suspension, which applies to applications seeking functionally integrated Type III supporting organization status and determination letter requests seeking a change in foundation status to functionally integrated Type III supporting organization, is effective immediately until the issuance of guidance.

Functionally integrated Type III supporting organizations, which are defined by the Pension Protection Act of 2006 (PPA) as a special class of Type III supporting organizations, are excluded from some of the new PPA requirements, such as the Section 4943 excess business holding rules (which tax organizations that exceed their permitted stock holdings) and the "payout rules" (which require supporting organizations to make significant payments to their supported organizations).

The PPA defines three types of supporting organizations, based on the relationship between the supporting organization and the publicly supported charity (or charities) that it supports.

A Type I supporting organization is one that is operated, supervised or controlled by one or more publicly supported organizations.
A Type II supporting organization is supervised or controlled in connection with one or more publicly supported organizations.
A Type III supporting organizations is operated in connection with one or more publicly supported organizations. A "functionally integrated" Type III supporting organization is a Type III supporting organizations that is not required to make payments to the group it supports because the organization’s activities are related to performing the functions of, or carrying out the purposes of, the supported organization(s).

Committee on Finance Asks IRS for Updated Report on Tax Compliance Issues
Senator Max Baucus, chairman of the Committee on Finance, and Senator Charles Grassley, ranking Republican member, have asked the IRS for a new report on compliance issues involving tax-exempt and government entities, as well as corporate and individual abuse of charitable contributions.

After a letter from the IRS on March 30, 2005 regarding significant tax compliance issues, Congress passed reforms in the area of tax-exempt organizations. Grassley and Baucus are now requesting that the IRS produce an updated report on those compliance issues, as well as identify an additional twenty issues of tax noncompliance.

Read the text of the Baucus and Grassley letters to the IRS.