Overview
Today, the IRS and Treasury Department issued final regulations regarding the distribution requirement for non-functionally integrated Type III supporting organizations.
In general, an organization described in section 501(c)(3) may be classified as a public charity (as opposed to a private foundation) if it is described in one of the paragraphs of section 509(a). Organizations described in section 509(a)(3), called “supporting organizations,” achieve their public charity status by supporting one or more other public charities described in sections 509(a)(1) or (2). Among the tests that a supporting organization must satisfy is a relationship test, which requires that the supporting organization is (i) operated, supervised, or controlled by one or more organizations described in sections 509(a)(1) or (2); (ii) supervised or controlled in connection with one or more such organizations; or (iii) operated in connection with one or more such organizations. Organizations meeting clause (iii) of this relationship test are referred to as Type III supporting organizations. In general, a “functionally integrated” Type III supporting organization is a Type III organization that, “due to the activities of the organization related to performing the functions of, or carrying out the purposes of, [its] supported organizations,” is not subject to the requirement to make minimum payments to supported organizations under Treasury regulations.
The final regulations reflect statutory changes enacted by the Pension Protection Act of 2006, which required the Treasury Department to promulgate regulations under section 509 that establish a new distribution requirement for Type III supporting organizations that are not “functionally integrated” to ensure that a “significant amount” is paid to supported organizations. The Treasury Department initially proposed regulations in 2009. In 2012, these proposed regulations were issued as final regulations, in part, and as temporary regulations, in part. The temporary portion of these regulations was set to expire today. Under the temporary regulations, non-functionally integrated Type III supporting organizations were required to distribute the greater of (1) 85% of the supporting organization’s adjusted net income or (2) its “minimum asset amount.” “Minimum asset amount” was defined as 3.5% of the excess of the aggregate fair market value of the supporting organization’s non-exempt-use assets over the acquisition indebtedness with respect to such nonexempt use assets. Today’s final regulations adopt the expiring temporary regulations as final, except to: (1) conform the provisions to cross-referenced regulations under section 4942; and (2) replace references to the temporary regulations with references to the final regulations.
However, the preamble states that the Treasury Department and the IRS intend to publish a notice of proposed rulemaking that would modify these final regulations in several respects (and provide certain transitional relief) in the near future. The preamble further provides that supporting organizations may continue to rely on the transitional rule described in Section 3.01 of Notice 2014-4 until the date that the notice of proposed rulemaking prescribing the new proposed regulations is published in the Federal Register.