On April 6, 2009, at the Georgetown University Law Center’s tax-exempt
organizations conference, the Internal Revenue Service indicated that the
long-awaited rules for non-functionally-integrated Type III supporting
organizations and the proposed payout requirements are a high priority.
Catherine Livingston, a deputy division counsel in exempt organizations at the
IRS, said that the Service has a goal of publishing guidance on these rules by
June 30, 2009. The project is awaiting clearance from all offices, including the
office of assistant Treasury secretary for tax policy to which President Obama
is nominating Helen Elizabeth Garrett.
The Pension Protection Act of 2006 (PPA) added new requirements for
classification as a Type III supporting organization, including a payout
requirement for those Type III supporting organizations that are not
functionally integrated. The PPA directed the Internal Revenue Service to issue
new regulations on this payout requirement to ensure that a significant amount
is paid to the supported organizations. In an Advance Notice of Proposed
Rulemaking issued on August 1, 2007 and Announcement 2007-87 issued on October
1, 2007, the Internal Revenue Service indicated that this payout requirement may
be equal to the amount required by the minimum distribution rules applicable to
nonoperating private foundations under Internal Revenue Code section 4942.
The coming guidance may also clarify the penalty to be applied to
non-functionally integrated Type III supporting organizations who fail to meet
this payout requirement. Generally, the tax-exempt sector expects that the
result will be that the organization will lose its status as a supporting
organization and will be reclassified as a private foundation. Tax-exempt
organizations who will be subject to these rules as a result of the PPA may soon
know more on the payout requirement if the Internal Revenue Service meets its
goal of June 30th.
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