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Group Exemption Holders

New Rules for IRS Group Exemption Holders

by Sandra Pfau Englund on Jun 30, 2020

On June 12, 2020, the Internal Revenue Service (IRS) issued proposed new rules for its group exemption program (IRS Notice 2020-36).  The group exemption program allows large organizations (known as “central organizations” by the IRS) to apply for and obtain an IRS group exemption letter.  With a group exemption letter, the chapters and affiliated organizations that are “supervised or controlled” by the central organization are recognized as tax-exempt automatically.  The chapters and affiliates do not need to apply to the IRS each individually for 501(c)(3) or other tax-exempt status.  The IRS group exemption program was started more than 40 years ago for the IRS’ “administrative convenience.”

Here’s what you need to know about the IRS’ proposed changes for its group exemption program.

New group exemptions are temporarily halted

The IRS, at least temporarily, is no longer accepting group exemption requests.  Time will tell, with online filing of the 1023EZ and IRS Forms 990 now available, whether automation is more “convenient” for the IRS than dealing with group exemptions. 

The IRS defines and strengthens its supervision or control requirements

Under current rules found in IRS Rev. Proc. 80-27, group exemption holders must “supervise or control” their chapters and affiliates (known as “subordinates” by the IRS).  What it means to “supervise” or “control” your subordinates is not defined under current rules.

The proposed rules define supervision of subordinates as requiring the central organization to essentially:

  1. Educate its subordinates about the annual IRS 990 filing requirements; and,
  2. Obtain, review, and retain a copy of each subordinate’s 990 each year.

Alternatively, central organization’s may “control” their subordinates by:

  1. The central organization appointing a majority of the subordinate organization’s officers, directors, or trustees; or,
  2. A majority of the subordinate organization's officers and directors consist of officers, directors, or trustees of the central organization.

Failure to supervise subordinates may result in loss of the group exemption

The proposed rules also provide that if 50% or more of the central organization’s subordinates are auto-revoked, the central organization may lose its group exemption letter.  The IRS seems concerned that a high percentage of subordinates are failing to file the annual IRS Form 990 and are therefore losing their IRS tax exemption through the auto-revocation.

Annual reporting requirements for central organizations are modified

Late in 2019, the IRS announced that it would no longer provide each central organization with a printout of its subordinates to be used for the required annual update to the IRS.  Central organizations used to be required to mark up the paper printout with changes to their subordinate list. Beginning in 2020, central organizations must still provide an annual updated list of subordinates to the IRS, including new organizations to be added, and organizations that should be deleted.  However, each central organization must now produce the list on its own.  No specific format for the list has been provided by the IRS.  

The proposed new rules also provide that the updated list of subordinates be submitted at least 30 days prior to the end of the central organization’s fiscal year.  Prior rules provided that the updated list be provided at least 90 days before the central organization’s fiscal year end.

Finally, the annual update now must include a list of subordinates that have been auto-revoked.  The IRS is hammering home the need for central organizations to supervise their subordinates, including ensuring that the subordinates file the annual IRS Form 990.

Additional lists of subordinates may be submitted to the IRS

The proposed rules clarify that central organizations may provide updates on their subordinates throughout the year, in addition to the required annual update. For organizations with numerous and changing subordinates, submitting lists throughout the year may make sense. 

New requirements for subordinates

The IRS is proposing new requirements for subordinates as follows:

  1. Both the subordinates and the central organization must be classified under the same paragraph of the Internal Revenue Code (IRC) (e.g., Section 501(c)(3));
  2. Subordinates tax-exempt under a section of the IRS other than 501(c)(3) (such as 501(c)(4), 501(c)(6) or 501(c)(7)) must
    1. have the same NTEE code classification as the central organization; and,           
    2. use a uniform governing document;
  3. Private foundations, Type III supporting organizations and qualified nonprofit health insurance providers may not be included as subordinates in a group exemption.
  4. Subordinates must give permission to the central organization both to add, and now also to remove, the subordinate from the group exemption. 

Subordinate organizations existing prior to when these rules take effect are grandfathered out of the new requirements.  However, complying with the better defined supervision or control rules for all subordinates will be considered a safe harbor that the central organization is meeting IRS requirements. 

Minimum number of subordinates

The proposed rules provide that a central organization must have a minimum of five (5) subordinates to apply for a group exemption, and always must maintain at least one (1) subordinate to keep a group exemption.  In addition, a central organization may hold only one (1) group exemption letter. 

Public comments accepted through August 16, 2020

The IRS is accepting public comments on the proposed rules through August 16, 2020.  Comments may be sent electronically to: Notice.Comments@irscounsel.treas.gov.  Include “Notice 2020-36” in the subject line.


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