New Proposed Rules for Group Tax Exemptions
By Section 501(a) provides an exemption from income taxation for certain organizations. For decades, the IRS has provided a procedure allowing multiple organizations to receive tax exemption under the same umbrella central organization. Such group exemption process was instituted to relieve the IRS from the burden of individually processing a large number of applications for organizations that are affiliated and operate for the same purpose.
The central organization receives a group exemption letter (“GEL”) granting tax-exempt status not only to itself but also to all of its subordinate organizations. The subordinate organizations are not required to provide individual documentation supporting their exemption. Instead, the central organization attests that the subordinates qualify and provides the information required by the IRS. Common examples of group exemptions are churches, fraternal societies, and other central-hub-style organizations.
Under the current rules, the general requirements for receiving a GEL are that the subordinates are (1) affiliated with the central organization; (2) subject to its general supervision or control; (3) exempt under the same paragraph of Section 501(c); (4) not private foundations or foreign organizations; and (5) on the same accounting period as the central organization.
On May 1, 2020, the IRS issued Notice 2020-36 proposing a new revenue procedure to modify the existing rules. The notice (1) further defines the terms “general supervision” and “control”; (2) requires central organizations to be under the same paragraph of Section 501(c) as their subordinate organizations; (3) requires all subordinate organizations to be public charities under the same paragraph of Section 509(a) (although they need not be the same type under Section 170(b)(1)(A) if they are under Section 509(a)(1)); (4) requires subordinate organizations that are not exempt under Section 501(c)(3) to have the same purpose using NTEE codes; (5) requires all subtypes of subordinate organizations (e.g., churches, schools, or hospitals) to use the same uniform governing instruments; and (6) modifies many other applicable rules.
The notice helpfully has a grandfather rule that prevents the application of many of these new rules to existing subordinate organizations. The notice is currently in a comment period and has not yet been adopted.
John G. Hodnette, JD, LLM is an attorney with Johnston, Allison, & Hord, P.A. in Charlotte.