IRS Publishes Long-Awaited Final Regulations for Type III Supporting Organizations

January 4, 2013

On Dec. 21, 2012, more than three years after publishing proposed regulations in 2009, the IRS and the Treasury Department issued final and temporary regulations (T.D. 9605) regarding the changes made to Type III supporting organizations under the Pension Protection Act of 2006 (the 2006 Act). Most significantly, the IRS withdrew portions of the 2009 proposed regulations that provided for a 5 percent distribution requirement for non-functionally integrated Type III supporting organizations similar to the distribution requirements that apply to private foundations. The withdrawn portion of the regulations was replaced with temporary regulations, which serve as the text of the new proposed regulations, requiring non-functionally integrated Type III supporting organizations to meet a distribution requirement equal to the greater of 85 percent of the organization’s adjusted net income or 3.5 percent of the fair market value of the organization’s non-exempt-use assets.

These final and temporary regulations are particularly relevant to organizations currently classified as Type III supporting organizations, including those that conduct certain activities on behalf of their supported organizations, such as fundraising, investment and management of non-exempt-use assets, and grantmaking; those that support educational institutions, hospitals or churches; and certain charitable trusts held by institutional trustees.

The final and temporary regulations were published in the Federal Register and became effective on Dec. 28, 2012.

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