IRS Final and Temporary Regulations for Type III Supporting Organizations: Notification Requirement and Responsiveness Test
Tax-Exempt Organizations Law Update 01/14/13 Norah L. Jones, Amanda K. Blaising
The Internal Revenue Service (the "Service") has issued final and temporary regulations (respectively, the "Final Regulations" and "Temporary Regulations") regarding the requirements to qualify (or continue to qualify) as a Type III supporting organization. The regulations, which reflect changes made to the law by the Pension Protection Act of 2006 (the "PPA"), can be read in their entirety here and went into effect on December 28, 2012.
Type III Supporting Organizations
The Pension Protection Act of 2006 statutorily defined Type I, Type II, and Type III supporting organizations for the first time. It also created two subcategories of Type III supporting organizations: "functionally integrated" and "non-functionally integrated." The distinction is important because "functionally integrated" Type III supporting organizations are not subject to an annual distribution requirement and generally are favored as recipients of grants and distributions from private foundations and donor advised funds. "Non-functionally integrated" Type III supporting organizations, in contrast, are subject to an annual distribution requirement and are not favored as recipients of grants and distributions from private foundations and donor advised funds.
Under the Final Regulations, all supporting organizations must continue to meet an organizational test, an operational test, a disqualified person control test, and a relationship test. The Final Regulations revise the relationship test for Type III supporting organizations by requiring each Type III supporting organization to satisfy three criteria as part of that test: (1) a notification requirement; (2) a responsiveness test; and (3) an integral part test. The Final Regulations also create specific definitions of "functionally integrated" and "non-functionally integrated" Type III supporting organizations as part of the revised integral part test (although other parts of the revised integral part test are contained in the Temporary Regulations).
This client update discusses the notification requirement and the responsiveness test. Separate client updates discussing the integral part test's "functionally integrated" and "non-functionally integrated" definitions and requirements are available here and here, respectively.
The Notification Requirement
The PPA and the Final Regulations require all Type III supporting organizations to provide an annual notification to each of their respective supported organizations. The annual notification must include the following:
- a written notice addressed to a "principal officer" of the supported organization (as defined in more detail below) describing the amount and type of support provided to the supported organization in the supporting organization's immediately preceding tax year;
- a copy of the supporting organization's most recently filed Form 990 (noting that names and addresses of contributors may be redacted); and
- a copy of the supporting organization's governing documents, such as articles of incorporation and bylaws, including any amendments (noting that such copies need be provided only in the first notification and after that only when revised).
A "principal officer" includes any person who has ultimate responsibility for supervising the management, administration, or operation of the supported organization; implementing the decisions of its governing body; or managing its finances.
The Final Regulations provide that the annual notification must be postmarked or electronically transmitted no later than the last day of the fifth month following the end of the supporting organization's tax year (e.g., by May 31 for a calendar-year supporting organization). For tax years including December 28, 2012, however, the Final Regulations include some transitional relief by providing that the annual notification must be postmarked or electronically transmitted by the later of (1) the last day of the fifth month following the end of that tax year; or (2) the due date (including extensions) of the supporting organization's Form 990 for that tax year.
The Responsiveness Test
The PPA and the Final Regulations require all Type III supporting organizations, including those organized as charitable trusts with institutional trustees, to meet the responsiveness test. This generally means that (1) the supported organization must be represented on the supporting organization's governing body or otherwise maintain a close and continuous working relationship with the supporting organization; and (2) the supported organization must have a significant voice in the supporting organization's investment policies, grant making, and use of assets. The Final Regulations include an example of how a charitable trust with an institutional trustee can meet the responsiveness test. The Treasury Department and the Service intend to issue proposed regulations in the near future that will further amend the responsiveness test by clarifying that Type III supporting organizations must satisfy the responsiveness test with respect to each of their supported organizations.
The Final Regulations became effective when published on December 28, 2012. All Type III supporting organizations should begin to take steps to confirm compliance with the notification requirement and responsiveness test. These steps could include:
- Preparing an annual notification template and adding the notification requirement to the organization's calendar of required annual filings;
- Working with their supported organizations to identify an appropriate principal officer of each to whom the written notice should be addressed;
- Reviewing the responsiveness test to be sure that the requisite relationships are present; and
- In the case of charitable trusts with institutional trustees, developing procedures to satisfy the responsiveness test.
To the extent a supporting organization is unsure of its Type I, Type II, or Type III classification, we recommend that it consult with qualified counsel to make that determination.
This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact Norah L. Jones, at (312) 715-5052 / email@example.com, Amanda K. Blaising, at (312) 715-5112 / firstname.lastname@example.org, or your Quarles & Brady LLP attorney.