Awaiting Guidance for Type III Supporting Organizations

April 10, 2009

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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