Tax News

CCH (cch.taxgroup.com) reports:

  The approval process for organizations seeking tax-exempt status as publicly supported charities has been streamlined by newly issued final and temporary regulations. The new regulations do away with advance rulings that granted public charity status for an initial five-year period, but required exempt organizations to demonstrate, after the initial period, that they in fact received a substantial part of their support from public sources to receive a final determination letter. The IRS was able to eliminate the advance rulings process because of the recent redesign of the Form 990, Return of Organization Exempt From Income Tax. Organizations that have already received an advance ruling, but are still in their first five years of existence, can use their advance ruling letter as their final determination letter. In addition to the streamlined approval process, the new regulations include other modifications necessary to implement the redesigned Form 990.

  Approximately 95 percent of exempt organizations that received advance rulings were later recognized as publicly supported charities at the end of the five-year period. "Given the high "recognition" rate and the redesigned Form 990, it makes sense to eliminate the burdensome advance ruling process," said Lois Lerner, Director of the IRS Exempt Organizations division. "Not only will the streamlined process aid exempt organizations, but it will also allow the IRS to redirect staffing to other program areas without compromising compliance."

  "The advance ruling procedures always seemed burdensome," Nancy Ortmeyer Kuhn of Caplin & Drysdale told CCH. "Five years is a remarkable grace period. It's a real gift to the charitable community."

  The temporary regulations make revisions to the regulations under Code Sec. 6033 and Code Sec. 6043 to allow for new threshold amounts for reporting compensation, to require that compensation be reported on a calendar year basis, and to modify the scope of organizations subject to information reporting requirements upon a substantial contraction. The temporary regulations also eliminate the substantial and material changes exception, which is made obsolete by the establishment of a general five-year computation period. Further, the temporary regulations add key employees to the list of persons who may be required to be reported on Form 990.

Elimination of Advance Ruling Process

  The temporary regulations eliminate advance rulings and the Form 8734, Support Schedule for Advance Ruling Period, filing requirement for all new Code Sec. 501(c)(3) organizations. Under the temporary regulations if, at the time of the initial application for exemption, an organization can establish to the satisfaction of the IRS that the organization can reasonably be expected to meet a public support test during its first five years, the organization qualifies as publicly supported for its first five years as a Code Sec. 501(c)(3) organization. The IRS will issue a determination letter stating that the organization is exempt under Code Sec. 501(c)(3) and is classified as a public charity. The organization will be a public charity for its first five years, regardless of the level of public support it in fact receives during this period. In addition, unlike a new organization's public charity status under an advance ruling, which was conditioned on its ultimate satisfaction of a public support test on a Form 8734 filed with the IRS, under the temporary regulations, a new organization that can show it can reasonably be expected to meet a public support test will be classified as a public charity for all purposes during its first five years. The organization will not owe any Code Sec. 4940 tax or Code Sec. 507 termination tax with respect to its first five years. Beginning with the organization's sixth year, if the organization cannot establish that it is not a private foundation, such as a public charity or a supporting organization under Code Sec. 509(a)(3), it will be liable for the Code Sec. 4940 excise tax and other Chapter 42 excise taxes applicable to private foundations for any year for which it cannot establish that it is not a private foundation.

Method of Accounting

  Under the temporary regulations, when a Code Sec. 501(c)(3) organization computes its public support and reports the information on Schedule A, it must use the same accounting method that it uses in keeping its books under Code Sec. 446 and that it otherwise uses to report on its Form 990. An organization that uses the accrual method will not be able to use the support information reported on Form 990 for prior years (because that support was reported using the cash method) to compute its public support for the current year, and instead must report all support for the computation period on the accrual method.

  Kuhn stated that "using the same [accrual] method is a positive step. It's one more welcome simplification."

Effective Date, Proposed Regulations

  The regulations apply to tax years beginning on or after January 1, 2008. The text of the temporary regulations also serves as the text of the proposed regulations. Written or electronic comments and requests for a public hearing must be received by November 10, 2008.

  By Brant Goldwyn and Larry Perlman, CCH News Staff

IR-2008-102,
2008FED ¶46,563

T.D. 9423, 2008FED ¶47,057

Proposed Regulations, NPRM REG-142333-07, 2008FED ¶49,831

Other References:

 
Code Sec. 170

  CCH Reference - 2008FED ¶11,662

  CCH Reference - 2008FED ¶11,662E

 
Code Sec. 507

  CCH Reference - 2008FED ¶22,773

  CCH Reference - 2008FED ¶22,773E

 
Code Sec. 509

  CCH Reference - 2008FED ¶22,803

  CCH Reference - 2008FED ¶22,803E

  CCH Reference - 2008FED ¶22,812.40

 
Code Sec. 6033

  CCH Reference - 2008FED ¶35,422

  CCH Reference - 2008FED ¶35,422C

 
Code Sec. 6034

  CCH Reference - 2008FED ¶35,885

  CCH Reference - 2008FED ¶35,885B

  Tax Research Consultant

  CCH Reference - TRC EXEMPT: 12,102
CCH Reference - TRC EXEMPT: 21,114