Overview
On May 1, 2020, the IRS issued Notice 2020-36, which contains proposed procedures for central organizations to receive and maintain group exemption letters for subordinate organizations affiliated with and under the general supervision of the central organization.
If finalized, the proposed revenue procedure would make substantial changes to the existing procedures under Rev. Proc. 80-27 (as modified by Rev. Proc. 96-40). Going forward the new procedures may reduce the number of central organizations that are eligible to receive group rulings, limit the number of subordinate organizations that qualify to be included under a group ruling, and impose additional administrative burdens on central organizations with preexisting group exemption letters. Comments should be submitted on or before August 16, 2020.
Proposed changes to existing procedures include:
- Requiring a central organization to have at least five subordinate organizations to obtain a group exemption letter and at least one subordinate organization to maintain the group exemption letter thereafter;
- Prohibiting a central organization from maintaining more than one group exemption letter; and
- Defining the terms "affiliation," "general supervision," and "control" that were previously left undefined.
The proposed revenue procedure also imposes new requirements that subordinate organizations must meet for initial inclusion or subsequent addition to a group exemption letter.
- Matching requirement: Require all subordinate organizations initially included in or subsequently added to a group exemption letter to be described in the same paragraph of section 501(c) as the central organization (unless the central organization is an instrumentality or an agency of a political subdivision not described in section 501(c)).
- Foundation classification requirement: If the subordinate organizations initially included in or subsequently added to a group exemption letter are described in section 501(c)(3), require all such subordinate organizations to be classified as public charities under the same paragraph of 509(a).
- Similar purpose requirement: Require group exemption letters for certain types of subordinate organizations to have the same or similar purposes (based on NTEE codes).
- Uniform governing instrument requirement: Require all subordinate organizations, except those described under section 501(c)(3), to adopt a uniform governing instrument.
- Other requirements: Prohibit Type III supporting organizations and qualified nonprofit health insurance issuers from initial inclusion in or subsequent addition to a group exemption letter as a subordinate organization.
Certain grandfathering and transition rules would apply. The requirements that a central organization have at least one subordinate organization to maintain a group exemption letter and that the central organization maintain only one group exemption letter will apply after a one-year transition period. If finalized, the revenue procedure will apply to all new group exemption letters and all new subordinate organizations added to a preexisting group exemption letter. The proposed revenue procedure generally will apply to preexisting subordinate organizations, except for the definitions of "general supervision" or "control"; the matching, foundation classification, similar purpose, and uniform governing instrument requirements; and the limitation applicable to Type III supporting organizations.
The proposed revenue procedure also would incorporate statutory changes into the existing procedures, including rules for automatic revocation of exempt status if an organization fails to file information returns for three consecutive years, and the required notice of intent to operate as a 501(c)(4) organization. The proposed revenue procedure explains when the declaratory judgment provisions of section 7428 apply in the group exemption letter context.
The IRS will stop accepting new group ruling exemption applications starting June 17 until a final revenue procedure or other guidance is published.
