On May 1, the IRS issued Notice 2020-36, which includes a proposed revenue procedure to update the group exemption rules under Revenue Procedure 80-27. A group exemption letter permits a central organization (an organization that has one or more subordinates under its general supervision or control) to request recognition of tax-exempt status for itself and subordinate organizations. Comments on the proposed revenue procedure are due by Aug. 16, 2020. Following are highlights of the proposed updates:
New requirements for central organizations:
- Limitations. A central organization must have at least five subordinate organizations to obtain a group exemption and at least one subordinate organization to maintain the group exemption. Also, a central organization can have only one group exemption.
- Annual reporting. Most central organizations will be required to submit supplemental group ruling information every year at least 30 days before the close of their annual accounting period.
New requirements for subordinate organizations:
- Matching requirement. All subordinate organizations must be described in the same paragraph of Section 501(c) as the central organization. For example, if the central organization is a Section 501(c)(3) organization, the subordinate organizations must be described in Section 501(c)(3).
- Foundation classification. Subordinate organizations described in Section 501(c)(3) are not required to have the same foundation classification as the central organization, although generally they must collectively share the same foundation classification under Section 509(a)(1)-(4). The IRS, however, eventually might require all subordinate organizations classified under Section 509(a)(1) to have the same foundation subclassification (such as church, hospital, school). Publicly supported organizations classified under Section 509(a)(1) and described in 170(b)(1)(A)(vi), and those classified under Section 509(a)(2), are considered as having the same foundation classification.
- Similar purpose. Subordinate organizations other than Section 501(c)(3) organizations included in a group exemption must have the same or similar purposes and the same National Taxonomy of Exempt Entities code.
- Uniform governing instrument. Generally, all subordinate organizations must adopt a uniform governing instrument and submit a copy with the group exemption letter request. However, Section 501(c)(3) subordinate organizations with different purposes can have different uniform governing instruments as long as all subordinate organizations with the same purpose have the same uniform governing instrument.
- Domestic organization. An organization organized in a foreign country cannot be a subordinate organization. However, an organization organized in the U.S. can be a subordinate organization even if it operates in a foreign country.
- Per se ineligible organizations. A Section 501(c)(3) Type III supporting organization, a qualified nonprofit health insurance issuer under Section 501(c)(29), and a private foundation are not eligible to be subordinate organizations.
- Organization with automatic exemption revocation. An organization that has had its exemption automatically revoked is eligible to become a subordinate organization included in a group exemption letter only after it has filed an application for reinstatement and has had its exemption reinstated.
- Removal. A subordinate organization must permit the central organization to remove it from the group exemption for failure to comply with the revenue procedure.