The IRS issued Notice 2020-36 on May 1, 2020.The Notice includes a proposed revenue procedure and solicits public comments on changes that would modify and supersede Revenue Procedure 80-27 (as modified by Rev. Proc. 96-40), dealing with Central Organization filing.
A group exemption letter permits a central organization, i.e., an organization that has one or more subordinates under its general supervision or control, to request recognition of tax-exempt status for itself and the subordinate organizations. The IRS will temporarily stop accepting requests for group exemption letters as of June 17, 2020, until publication of the final revenue procedure or other guidance is released.
New Requirements for Central Organizations Under the Proposed Revenue Procedure
- A central organization must have at least five subordinate organizations to obtain a group exemption and at least one subordinate organization to maintain a group exemption.
- A central organization can have only one group exemption.
- A central organization must be in general supervision or control of its subordinates.
- The submission of the Supplemental Group Ruling Information (“SGRI”), done on an annual basis, will now be required at least 30 days, rather than 90 days, before the close of a central organization’s annual accounting period.
- An exception to the SGRI filing requirement applies to churches, conventions or associations of churches.
New Requirements for Subordinate Organizations Under the Proposed Revenue Procedure
- Matching requirement – All subordinate organizations must be described in the same paragraph.
- Foundation classification requirement – A subordinate organization as described in section 501(c)(3) is not required to have the same foundation classification as the central organization, although in general they must collectively share the same classification under section 509(a)(1)-(4).
- Similar purpose – All subordinates, except those under section 501(c)(3), must have the same or similar purpose and same National Taxonomy of Exempt Entities code.
- Uniform governing instrument – Subordinate organizations must adopt a uniform governing instrument and submit a copy of it along with any new group exemption letter request.
- A subordinate organization that is organized in the United States but operates in a foreign country is permitted to be included in the group exemption letter.
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- Section 6033(j) states that an organization’s exempt status will be automatically revoked if it fails to file required Form 990-series returns or notices for three consecutive years.
- The proposed revenue procedure states that a subordinate organization that has had its exemption automatically revoked and is not yet reinstated cannot not be included in or subsequently added to a group exemption.
- A subordinate organization whose exemption was revoked is eligible to be included after it has filed an application for reinstatement, has had its exemption reinstated and meets other requirements in the proposed regulation.
- The IRS may terminate a group exemption letter with respect to all subordinate organizations if more than half of the subordinate organizations have had their exemption automatically revoked.
The revenue procedure is proposed to apply to new and existing group exemption letters requested and issued after the date it is published in the Federal Register.When the final revenue procedure is published, it will apply to preexisting group exemptions, although a one-year transition period for compliance will be provided.Additionally, there will be a grandfathering rule that exempts certain existing subordinate organizations from some of the new rules, e.g., matching requirement, foundation classification, similar purpose, and uniform governing instrument.
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