[Federal Register Volume 73, Number 175 (Tuesday, September 9, 2008)]
[Rules and Regulations]
[Pages 52528-52555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-20560]
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Part IV
Department of the Treasury
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Internal Revenue Service
26 CFR Parts 1 and 602
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Implementation of Form 990; Final Rule
Federal Register / Vol. 73, No. 175 / Tuesday, September 9, 2008 /
Rules and Regulations
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9423]
RIN 1545-BH85
Implementation of Form 990
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations
necessary to implement the redesigned Form 990, ``Return of
Organization Exempt From Income Tax.'' The final regulations contained
in this document make only nonsubstantive revisions to comply with
Federal Register requirements. The temporary regulations make revisions
to the regulations under section 6033 and section 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 advance ruling process for new organizations, change the
public support computation period for organizations described in
sections 170(b)(1)(A)(vi) and 509(a)(1) and in section 509(a)(2) to
five years, consistent with the revised Form 990, and clarify that
support must be reported using the organization's overall method of
accounting. All tax-exempt organizations required under section 6033 of
the Internal Revenue Code (Code) to file annual information returns are
affected by these temporary regulations. The text of these temporary
regulations also serves as the text of the proposed regulations (REG-
142333-07) published in the Proposed Rules section in this issue of the
Federal Register.
DATES: Effective Date: These regulations are effective on September 9,
2008.
Applicability Date: These regulations apply to taxable years
beginning on or after January 1, 2008.
FOR FURTHER INFORMATION CONTACT: Terri Harris at (202) 622-6070 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these temporary
regulations has been reviewed and approved by the Office of Management
and Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under control number 1545-2117. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number
assigned by the Office of Management and Budget. Books or records
relating to a collection of information must be retained as long as
their contents may become material in the administration of any
internal revenue law. Generally, tax returns and tax return information
are confidential, as required by 26 U.S.C. 6103.
Background
Form 990
Under section 6033 of the Code, organizations that are exempt from
Federal income tax under section 501(a) are generally required to file
an annual information return reporting gross income, receipts,
disbursements and such other information as the IRS requires. Certain
exceptions to this filing requirement apply. For example, churches are
not required to file annual information returns. The Treasury
regulations direct that the annual information return shall be filed on
Form 990, ``Return of Organization Exempt From Income Tax'' or Form
990-PF, ``Return of Private Foundation or Section 4947(a)(1) Nonexempt
Charitable Trust Treated as a Private Foundation.'' The regulations
further specify certain information to be reported on the return.
The IRS revises forms and instructions on an annual basis to
reflect changes in the law and evolving tax administration needs. On
December 20, 2007, the IRS released a redesigned Form 990. The Form 990
had not been significantly revised since 1979, and both the IRS and
stakeholders regarded the form as needing major revision to keep pace
with changes in the law and with the increasing size, diversity, and
complexity of the exempt sector. The new form incorporates many
recommendations made in public comments on the discussion draft
released on June 14, 2007. With the exception of certain smaller
organizations for which there is a graduated transition period,
organizations must begin using the new form for the 2008 tax year
(returns filed in 2009). The current Form 990 will be used for tax year
2007 (returns filed in 2008) but will be replaced with the redesigned
Form 990 beginning with the 2008 tax year. Earlier this year, the IRS
released draft instructions for the new form and schedules for public
comment.
These regulations make the revisions that must be made to the
regulations under sections 6033 and 6043 of the Code to implement the
Form 990 redesign. For example, the regulation that currently gives
organizations a choice of using either the calendar year or the
organization's annual accounting period as the basis for reporting
compensation of officers, directors, trustees and certain employees and
contractors is revised to require calendar year reporting. Revisions
are also made to allow for new threshold amounts for reporting
compensation and to expand the scope of organizations subject to
information reporting requirements upon a substantial contraction.
In addition, as discussed in further detail in this preamble, these
regulations eliminate the advance ruling process and change the public
support computation period for organizations described in sections
170(b)(1)(A)(vi) and 509(a)(1) and in section 509(a)(2) to five years,
consistent with the revised Schedule A, ``Public Charity Status and
Public Support'' to the redesigned Form 990. These regulations also
clarify that support must be reported using the organization's overall
method of accounting.
Private Foundation Status and Advance Rulings
Public Support Tests
Under present law, as established in the Tax Reform Act of 1969, an
organization described in section 501(c)(3) of the Code is a private
foundation unless it meets one of the exceptions described in sections
509(a)(1) through 509(a)(4). Organizations that are described in
section 509(a)(1), (2), (3) or (4) are classified as public charities,
and are not subject to various excise taxes in Chapter 42 that apply to
private foundations. The Code defines two major categories of
organizations that are considered public charities and not private
foundations because they are broadly publicly supported: (1)
Organizations described in section 170(b)(1)(A)(vi), which are not
private foundations because they are referenced in section 509(a)(1);
and (2) organizations described in section 509(a)(2).
Section 170(b)(1)(A)(vi) encompasses organizations that normally
receive a substantial part of their support from a governmental unit or
from direct or indirect contributions from the general public. The
regulations under section 170 provide that an organization will be
described in section 170(b)(1)(A)(vi) if it
[[Page 52529]]
normally receives at least 33\1/3\ percent of its support from
governmental units or from the general public. See Sec. 1.170A-9(f).
Alternatively, an organization can meet a ``facts and circumstances''
test, under which it may qualify as a section 170(b)(1)(A)(vi)
organization if it normally receives at least 10 percent of its support
from governmental units or the general public, and can establish that,
under all the facts and circumstances, it normally receives a
substantial part of its support from governmental units or the general
public.
Section 509(a)(2) encompasses organizations that normally receive
more than one-third of their support from a combination of gifts,
grants, contributions, membership fees, and gross receipts from
performing exempt function activities, and normally receive not more
than one-third of their support from investment income and unrelated
business taxable income. The major difference between the section
509(a)(2) and section 170(b)(1)(A)(vi) tests is that the former
includes in support gross receipts from exempt function activities, for
example, admission proceeds for a museum or ticket sales for a
symphony, while the latter does not. As noted, section 509(a)(2) also
includes an investment income limitation. For ease of reference, the
tests in sections 170(b)(1)(A)(vi) and 509(a)(2) will be referred to
collectively as the public support tests.
The statute does not define, for either provision, the meaning of
``normally.'' The current regulations for both public support tests
generally use a rolling four-year computation period, with two
exceptions: New organizations and organizations that experience
``substantial and material changes'' in their sources of support for
the current year are permitted to use a five-year computation period.
For any particular taxable year, the four-year computation period is
the four years immediately preceding the current taxable year. For
example, for taxable year 1998, the computation period would be taxable
years 1994, 1995, 1996, and 1997. The regulations further provide that
if the public support test is met for the four-year computation period,
the organization will be considered to meet the public support test for
the taxable year being tested and the immediately succeeding taxable
year. In the example above, a section 170(b)(1)(A)(vi) organization
would meet the public support test for 1998 and 1999 if the support it
received from the general public and from governmental units for the
years 1994 through 1997 exceeded 33\1/3\ percent of the total support
it received for those years.
The effect of the current rule regarding the subsequent taxable
year is that an organization must fail to meet a public support test
two years in a row to become a private foundation. In the example
above, the organization met the public support test for 1998 and 1999,
based on support received during the four-year computation period 1994
through 1997. If the organization does not meet a public support test
for the 1995 through 1998 computation period, it is still a public
charity in 1999 because it met a support test for taxable year 1998.
However, if the organization again does not meet a public support test
for the 1996 through 1999 computation period, the organization becomes
a private foundation effective at the beginning of its taxable year
2000.
Advance Rulings
In its application for recognition of tax-exempt status (Form 1023,
``Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code''), a section 501(c)(3) organization also
requests a determination of its private foundation status, that is,
whether it is a private foundation and, if not, the Code provision
excepting it from private foundation classification. Under the current
statute and regulations, an organization can request either an advance
ruling or a definitive ruling addressing the organization's exemption
under section 501(c)(3) and its private foundation status under section
509(a).
Under the current regulations, a new organization applying for
exemption can request a definitive ruling as to its foundation status
only if it has completed its first tax year consisting of at least
eight full months. In lieu of the general four-year computation period
for public support, a new organization requesting a definitive ruling
tests its public support based on the years it has been in existence.
If an organization qualifies as an organization described in section
509(a)(1) or (2) based on the support received in its initial year(s)
of existence, the IRS issues a definitive ruling stating that the
organization is recognized as exempt under section 501(c)(3) and
classified as a public charity.
If a new organization has not yet completed its first tax year
consisting of at least eight full months at the time it applies for
recognition of tax exemption, or if the organization so elects, it
requests an ``advance ruling'' regarding its private foundation status
in its application for exemption. Current regulations provide for an
advance ruling period of two or three years, depending on the length of
the organization's first tax year, and an additional ``extended advance
ruling period'' of three more years if the organization requests. These
current regulations have been overridden. In the conference report to
the Tax Reform Act of 1984, Congress directed that the advance ruling
period in all cases be five years. See H.R. Rep. No. 98-861, 98th
Cong., 2d Sess. 1 (1984), 1984-3 CB (Vol. 2) 1090. The advance ruling
period gives new organizations time to build up broad public support in
the first few years of their existence. In lieu of the general four-
year computation period for public support, a new organization
requesting an advance ruling tests its public support over the first
five years of its existence as an organization described in section
501(c)(3). If an organization demonstrates to the IRS's satisfaction
that it can reasonably be expected to meet a public support test during
its first five years, the IRS issues an advance ruling stating that the
organization is recognized as exempt under section 501(c)(3) and
classified as a public charity during its first five years. With
limited exceptions, donors can rely on this advance ruling as to public
charity status.
At the end of the initial five-year advance ruling period, the
organization is required to file Form 8734, ``Support Schedule for
Advance Ruling Period'' to establish that it actually met a public
support test. As noted above, for this purpose, public support is
calculated over the five-year advance ruling period, rather than over a
four-year period. If the organization meets a public support test for
its advance ruling period, the IRS issues a definitive ruling letter
classifying the organization as a public charity. If the organization
does not meet a public support test for its advance ruling period, or
the organization fails to submit Form 8734, the IRS reclassifies the
organization as a private foundation as of its first taxable year and
publishes notice of the change in status in the Internal Revenue
Bulletin and Publication 78, ``Cumulative List of Organizations
described in Section 170(c) of the Internal Revenue Code of 1986,''
which can be searched at www.irs.gov. Once notice of a change in status
is published, donors can no longer automatically rely on the advance
ruling for charitable contribution deduction purposes and must assume
that the organization is a private foundation. See Sec.
601.601(d)(2)(ii)(b).
An organization that is reclassified as a private foundation is
subject to the
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section 4940 investment income tax and the section 507 termination tax
for its five-year advance ruling period. The other Chapter 42 excise
taxes applicable to private foundations do not apply during the five-
year advance ruling period. In year six, the reclassified organization
is subject to all Chapter 42 excise taxes that apply to private
foundations.
The advance ruling process is complex and burdensome for both
taxpayers and the IRS and provides little tax administration or
compliance benefit. While statistics vary from year to year,
approximately 95 percent of the organizations that receive advance
rulings later receive definitive rulings that the organizations are
public charities at the end of the advance ruling period. The current
regulations governing advance rulings are complex, and, as discussed
above, were overridden in part by the Tax Reform Act of 1984. Moreover,
the public support information that is reported on Form 8734 will be
captured on Schedule A of the redesigned Form 990. For these reasons,
in its 2003 report, the IRS Advisory Committee for Tax Exempt and
Governmental Entities, a group that includes representatives of exempt
organizations and practitioners, recommended that the advance ruling
process be eliminated.
The IRS believes that it can more effectively deploy its compliance
resources by eliminating the advance ruling process and Form 8734 and
instead monitoring public charity status based on public support
information reported on the revised Schedule A, to the redesigned Form
990. The revised Schedule A sets forth easier-to-follow rules for
calculating public support and captures all of the information
necessary for the IRS to monitor and verify compliance with the public
support tests.
Explanation of Provisions
Private Foundation Status and Advance Rulings
The temporary regulations eliminate the advance ruling process and
provide instead that an organization will be a public charity in its
first five years if it can show, in its application for exemption, that
it can reasonably be expected to receive the requisite public support
during such period. The temporary regulations also change the public
support computation period for purposes of sections 170(b)(1)(A)(vi)
and 509(a)(1) and section 509(a)(2) from a four-year period prior to
the tested year to a five-year period that includes the current year.
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. In addition, Sec. 1.170A-9T(f),
which corresponds to Sec. 1.170A-9(e) of the prior regulations and
governs section 170(b)(1)(A)(vi) organizations, has been revised
throughout to simplify some of the language and to provide a better
``road map'' of what the provisions are designed to do.
Elimination of Advance Ruling Process
The temporary regulations eliminate advance rulings and the Form
8734 filing requirement for all new section 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 section 501(c)(3) organization. The IRS will issue a determination
letter stating that the organization is exempt under section 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 section 4940 tax or section 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 section 509(a)(3), it will be liable for the section
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.
The standards for whether an organization can reasonably be
expected to be publicly supported are drawn from the existing
regulations. A new organization required to file Form 990 or Form 990-
EZ, ``Short Form Return of Organization Exempt From Income Tax,'' will
be required to report its support on Schedule A every year, but it will
not be required to file Form 8734 after its first five years.
Organizations will be required to meet a public support test using the
general five-year computation period beginning in their sixth taxable
years. The five-year computation period is discussed in detail in this
preamble.
Computation Period for Public Support
The temporary regulations change the computation period for public
support from a four-year period comprised of the four years prior to
the tested year to a five-year period that includes the current year.
Because all organizations will use a five-year computation period under
the temporary regulations, the temporary regulations eliminate the
substantial and material change exception, which allowed organizations
to use a five-year computation period rather than the four-year
computation period under certain circumstances.
An organization that meets a public support test for the current
taxable year is treated as publicly supported for the current taxable
year and the immediately succeeding taxable year. Thus, for example, a
calendar year organization that meets a public support test for taxable
year 2011, based on the five-year computation period 2007 through 2011,
is a public charity for taxable years 2011 and 2012. If the
organization cannot meet a public support test for taxable year 2012
(based on the five-year computation period 2008 through 2012), it still
will be a public charity for taxable year 2012, because it met the
public support test for taxable year 2011 (based on the five-year
computation period 2007 through 2011). If, however, the organization
cannot meet a public support test for taxable year 2013 as well, based
on the computation period 2009 through 2013, the organization will be
classified as a private foundation as of the beginning of taxable year
2013. Because an organization that cannot meet a public support test
for the current taxable year is at risk of private foundation
classification as of the first day of the subsequent taxable year,
organizations may wish to carefully monitor their public support
calculations.
The IRS and the Treasury Department recognize that an organization
may not be able to compute its public support for the current taxable
year until some time in the subsequent taxable year. In the example
above, taxable year 2013 may have already begun by the time the
calendar year organization computes its public support for taxable year
2012 and realizes (perhaps for the first time) that it is at risk of
being classified as a private foundation as of January 1, 2013.
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Moreover, the organization may not know definitively that it is a
private foundation for taxable year 2013 until some time in 2014, when
it is able to definitively calculate its public support. Accordingly,
the IRS will not assert private foundation excise taxes and/or
penalties for all or part of the first taxable year in which an
organization is reclassified as a private foundation due to failure to
satisfy a public support test in cases where the imposition of such
taxes would lead to unfair or inequitable results, such as where the
change in the organization's public support was unforeseeable or due to
circumstances beyond the organization's control. Organizations that
believe that the imposition of private foundation excise taxes and/or
penalties against them for all or part of the first year in which they
are reclassified as a private foundation would be unfair or inequitable
should contact the IRS, Exempt Organizations, Rulings and Agreements,
Washington, DC, at (202) 283-4905. An organization will be required to
provide to the IRS all of the relevant facts and circumstances
establishing that the imposition of private foundation taxes would be
unfair or inequitable. Comments are requested regarding the specific
circumstances that may warrant relief.
The existing regulations contain numerous examples reflecting the
four-year computation period. The temporary regulations update the
examples to reflect the new computation period. These examples are in
Sec. 1.170A-9T(f)(9), Sec. 1.509(a)-3T(c)(6) and Sec. 1.509(a)-
3T(e)(3).
Method of Accounting
Previously, when a section 501(c)(3) organization computed its
public support, it was required to use the cash method of accounting to
report the amount of public support it received on Schedule A, even if
it used the accrual method of accounting in keeping its books under
section 446, and in otherwise reporting on Form 990. Under these
temporary regulations, when a section 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
section 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.
Reliance
These temporary regulations provide that donors may rely on an
organization's ruling that the organization is described in sections
170(b)(1)(A)(vi) and 509(a)(1) or in section 509(a)(2) until notice of
a change in status is provided to the public (such as by publication in
the Internal Revenue Bulletin), unless the donor was responsible for or
aware of the act or failure to act that results in the organization's
loss of public charity status. This rule is substantively the same as
the rules contained in the current regulations. The regulations further
provide that donors may rely on advance rulings that expire on or after
June 9, 2008, until notice of a change in status is provided to the
public (such as by publication in the Internal Revenue Bulletin).
Effective/Applicability Date and Transition Rules
These temporary regulations are effective on September 9, 2008, and
apply to taxable years beginning on or after January 1, 2008. All
organizations, including organizations that received a definitive
ruling prior to the effective date of these regulations, must use the
new five-year computation period to calculate public support for their
first taxable year beginning on or after January 1, 2008 and for all
subsequent taxable years.
These regulations provide a transition rule under which an
organization that cannot meet a public support test for its first
taxable year beginning on or after January 1, 2008, using the five-year
computation period will continue to qualify as a public charity for its
2008 taxable year if it satisfied a public support test for its 2007
taxable year, based on public support received over the four-year
period 2003 through 2006.
These regulations also provide a transition rule under which
organizations that received advance rulings that expire on or after
June 9, 2008, are treated as new public charities under the new
regulations, that is, public charities for all purposes without regard
to public support in fact received during the first five years of their
existence as section 501(c)(3) organizations. This rule effectively
applies the temporary regulations to all organizations that are in
their advance ruling period as of the effective date of these temporary
regulations. As such, these organizations will not have to file Form
8734 at the end of the advance ruling period. Grantors and contributors
can rely upon these organizations' advance ruling letter as if it were
a definitive ruling letter. The IRS plans to send follow-up letters to
such organizations explaining the new rules. An organization that did
not timely file Form 8734 at the expiration of its advance ruling
period is not covered by the transition rule. Such an organization must
file information with the IRS establishing that it met a public support
test during its advance ruling period in order to qualify as a public
charity during its first five years.
Forms 1023 filed prior to the effective date of these regulations
that have not yet been processed by the IRS will be processed under the
new regulations. The IRS will issue definitive rulings regarding
private foundation status to such organizations.
Community Trust Rules
Sections 1.170A-9(f)(10) through 1.170A-9(f)(14), which establish
rules for when multiple trusts can be treated as a single entity for
purposes of the public support tests, provide old transition rules that
are obsolete, and, therefore, the transition rules are being deleted in
these temporary regulations.
Compensation Reporting
Current Sec. 1.6033-2(a)(2)(ii)(g) requires that exempt
organizations report on Form 990 the names and addresses of all
officers, directors, trustees, and persons having responsibilities or
powers similar to those of officers, directors or trustees, of the
organization. The reference to a person having responsibilities and
powers similar to those of officers, directors or trustees is meant to
capture those persons who function as officers, directors or trustees
of the organization, regardless of title, as well as the key employees
of the organization. The redesigned Form 990 expanded the definition of
key employee to cover not only persons having responsibilities or
powers similar to those of officers, directors or trustees, but also
persons who manage a discrete segment or activity of the organization
that represents a substantial portion of the activities, assets,
income, or expenses of the organization. The redesigned Form 990
requires reporting for only those key employees whose compensation
exceeds $150,000. These temporary regulations add key employees to the
list of persons in Sec. 1.6033-2T(a)(2)(ii)(g) who may be required to
be reported on Form 990, as prescribed by publication, form or
instructions.
Current Sec. 1.6033-2(a)(2)(ii)(g) requires that exempt
organizations that make payments of more than $30,000 annually to
employees and independent contractors report these persons' names
[[Page 52532]]
and addresses on Form 990. Current Sec. 1.6033-2(a)(2)(ii)(h) requires
a schedule showing the compensation or other payments made to the
persons listed in paragraph (a)(2)(ii)(g). The redesigned Form 990
requires an organization to report, for each person listed (other than
a key employee or a former director or trustee of the organization),
compensation and other payments totaling more than $100,000 annually
paid by the organization and its related organizations to the person.
For key employees, the redesigned Form 990 requires an organization to
report compensation and other payments totaling more than $150,000
annually paid by the organization and its related organizations to the
person. For former directors and trustees, the redesigned Form 990
requires an organization to report compensation and other payments
totaling more than $10,000 annually paid by the organization and its
related organizations to the person solely on account of the person's
past services as a director or trustee of the organization. As amended
in these temporary regulations, Sec. 1.6033-2T(a)(2)(ii)(g) gives the
Commissioner discretion to revise the threshold amount for reporting by
form and instruction.
Furthermore, the current rule in Sec. 1.6033-2(a)(2)(ii)(h), which
requires generally the reporting of compensation paid by an
organization during its annual accounting period (or during the
calendar year ending within such period), imposes no requirement that
the compensation reported on Form 990 be consistent with what is
reported on Form W-2, ``Wage and Tax Statement,'' or Form 1099-MISC,
``Miscellaneous Income.'' The current rule permits, but does not
require, a fiscal year organization to report paid compensation on a
calendar year basis. The redesigned Form 990 (Part VII and Schedule J)
requires that compensation reported as paid to officers and other
employees be consistent with Form W-2 (box 5) and that compensation
reported as paid to directors, individual trustees, and independent
contractors be consistent with Form 1099-MISC (box 7). As amended by
these temporary regulations, Sec. 1.6033-2T(a)(2)(ii)(h) requires an
organization to report compensation it has paid during the calendar
year ending with or within the organization's annual accounting period,
or during such other period as specified by form or form instructions.
The rule in these temporary regulations will ensure consistency in
compensation reporting, provide greater certainty about what
compensation is to be reported, and reduce the reporting burden for
most filing organizations. A fiscal year organization will continue to
be required to use fiscal year accounting when reporting aggregate
compensation as an expense item (Form 990, Part IX). In addition, an
organization will not be required to reconcile compensation for
individuals reported in Part VII with compensation for such individuals
included in its Part IX statement of expenses.
Asset Disposition Reporting
Schedule N, ``Liquidation, Termination, Dissolution, or Significant
Disposition of Assets,'' of the redesigned Form 990 requires
information about organizations that liquidate, terminate, or dissolve,
or sell, exchange, dispose of or otherwise transfer more than 25
percent of the organization's assets. The collection of this
information is authorized by section 6033, the general authorization
for the collection of information on Form 990. The collection of
information with respect to liquidations, dissolutions, terminations
and substantial contractions is also authorized by section 6043(b).
While section 6043(b) and its companion penalty provision section
6652(c) contemplate a separate return, since 1981 this information has
been collected on Form 990.
In order to eliminate the potential for inconsistency and confusion
by taxpayers, the regulations under section 6043(b) have been amended
so that they are consistent with section 6033 and the redesigned
Schedule N. Generally, current Sec. 1.6043-3(b)(8) excuses from the
information reporting requirement of section 6043(b) organizations
other than former section 501(c)(3) organizations. The IRS believes
that this exception is too broad, because information reporting from
other exempt organizations may facilitate sound tax administration.
Therefore, these temporary regulations amend Sec. 1.6043-3(b)(8) to
provide discretion to narrow the exception and require reporting from
organizations exempt under other Code sections by form or form
instructions. In addition, these temporary regulations remove the
definition of ``substantial contraction'' in Sec. 1.6043-3(d)(1),
leaving this term to be defined by form or form instructions.
Private Foundation Termination
Section 1.507-2, which addresses private foundation terminations
under section 507(b), contains references to the four-year computation
period for public support and old transition rules related to 12-month
terminations that are obsolete. These temporary regulations revise
Sec. 1.507-2 to delete references to the four-year computation period
and the transition rules related to 12-month terminations.
Revisions To Comply With Federal Register
The final regulations make various nonsubstantive revisions to
comply with Federal Register requirements. For example, the
undesignated flush language preceding prior Sec. 1.170A-9(a) was
designated as paragraph (a), and all following paragraphs were
redesignated accordingly.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply. It is hereby certified that the
collection of information in this regulation will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that burden on tax-exempt
entities will be reduced by (1) eliminating the separate advance ruling
process and the additional process for subsequently seeking a
definitive ruling, (2) clarifying rules regarding the method of
accounting and period for reporting certain items, and (3) providing
discretion for the IRS to narrow or clarify circumstances under which
reporting is required. Accordingly, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of the Code, these regulations
have been submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal author of this regulation is Terri Harris, Office of
Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the IRS and the Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
[[Page 52533]]
Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.170A-9 is amended as follows:
0
1. Paragraphs (a), (b), (c), (d), (e), (f), (g), (h) and (i) are
redesignated as paragraphs (b), (c), (d), (e), (f), (g), (h), (i) and
(j), respectively.
0
2. The undesignated text following the section heading is designated as
paragraph (a).
0
3. The newly-designated paragraphs (a) and (d) are revised.
0
4. New paragraph (k) is added.
The addition and revisions read as follows:
Sec. 1.170A-9 Definition of section 170(b)(1)(A) organization.
(a) The term section 170(b)(1)(A) organization as used in the
regulations under section 170 means any organization described in
paragraphs (b) through (j) of this section, effective with respect to
taxable years beginning after December 31, 1969, except as otherwise
provided. Section 1.170-2(b) shall continue to be applicable with
respect to taxable years beginning prior to January 1, 1970. The term
one or more organizations described in section 170(b)(1)(A) (other than
clauses (vii) and (viii)) as used in sections 507 and 509 of the
Internal Revenue Code (Code) and the regulations means one or more
organizations described in paragraphs (b) through (f) of this section,
except as modified by the regulations under part II of subchapter F of
chapter 1 or under chapter 42.
* * * * *
(d) Hospitals and medical research organizations--(1) Hospitals. An
organization (other than one described in paragraph (d)(2) of this
section) is described in section 170(b)(1)(A)(iii) if--
(i) It is a hospital; and
(ii) Its principal purpose or function is the providing of medical
or hospital care or medical education or medical research.
(A) The term hospital includes--
(1) Federal hospitals; and
(2) State, county, and municipal hospitals which are
instrumentalities of governmental units referred to in section
170(c)(1) and otherwise come within the definition. A rehabilitation
institution, outpatient clinic, or community mental health or drug
treatment center may qualify as a ``hospital'' within the meaning of
paragraph (d)(1)(i) of this section if its principal purpose or
function is the providing of hospital or medical care. For purposes of
this paragraph (d)(1)(ii), the term medical care shall include the
treatment of any physical or mental disability or condition, whether on
an inpatient or outpatient basis, provided the cost of such treatment
is deductible under section 213 by the person treated. An organization,
all the accommodations of which qualify as being part of a ``skilled
nursing facility'' within the meaning of 42 U.S.C. 1395x(j), may
qualify as a ``hospital'' within the meaning of paragraph (d)(1)(i) of
this section if its principal purpose or function is the providing of
hospital or medical care. For taxable years ending after June 28, 1968,
the term hospital also includes cooperative hospital service
organizations which meet the requirements of section 501(e) and Sec.
1.501(e)-1.
(B) The term hospital does not, however, include convalescent homes
or homes for children or the aged, nor does the term include
institutions whose principal purpose or function is to train
handicapped individuals to pursue some vocation. An organization whose
principal purpose or function is the providing of medical education or
medical research will not be considered a ``hospital'' within the
meaning of paragraph (d)(1)(i) of this section, unless it is also
actively engaged in providing medical or hospital care to patients on
its premises or in its facilities, on an inpatient or outpatient basis,
as an integral part of its medical education or medical research
functions. See, however, paragraph (d)(2) of this section with respect
to certain medical research organizations.
(2) Certain medical research organizations--(i) Introduction. A
medical research organization is described in section 170(b)(1)(A)(iii)
if the principal purpose or functions of such organization are medical
research and if it is directly engaged in the continuous active conduct
of medical research in conjunction with a hospital. In addition, for
purposes of the 50 percent limitation of section 170(b)(1)(A) with
respect to a contribution, during the calendar year in which the
contribution is made such organization must be committed to spend such
contribution for such research before January 1 of the fifth calendar
year which begins after the date such contribution is made. An
organization need not receive contributions deductible under section
170 to qualify as a medical research organization and such organization
need not be committed to spend amounts to which the limitation of
section 170(b)(1)(A) does not apply within the 5-year period referred
to in this paragraph (d)(2)(i). However, the requirement of continuous
active conduct of medical research indicates that the type of
organization contemplated in this paragraph (d)(2) is one which is
primarily engaged directly in the continuous active conduct of medical
research, as compared to an inactive medical research organization or
an organization primarily engaged in funding the programs of other
medical research organizations. As in the case of a hospital, since an
organization is ordinarily not described in section 170(b)(1)(A)(iii)
as a hospital unless it functions primarily as a hospital, similarly a
medical research organization is not so described unless it is
primarily engaged directly in the continuous active conduct of medical
research in conjunction with a hospital. Accordingly, the rules of this
paragraph (d)(2) shall only apply with respect to such medical research
organizations.
(ii) General rule. An organization (other than a hospital described
in paragraph (d)(1) of this section) is described in section
170(b)(1)(A)(iii) only if within the meaning of this paragraph (d)(2):
(A) The principal purpose or functions of such organization are to
engage primarily in the conduct of medical research; and
(B) It is primarily engaged directly in the continuous active
conduct of medical research in conjunction with a hospital which is--
(1) Described in section 501(c)(3);
(2) A Federal hospital; or
(3) An instrumentality of a governmental unit referred to in
section 170(c)(1).
(C) In order for a contribution to such organization to qualify for
purposes of the 50 percent limitation of section 170(b)(1)(A), during
the calendar year in which such contribution is made or treated as
made, such organization must be committed (within the meaning of
paragraph (d)(2)(viii) of this section) to spend such contribution for
such active conduct of medical research before January 1 of the fifth
calendar year beginning after the date such contribution is made. For
the meaning of the term ``medical research'' see paragraph (d)(2)(iii)
of this section. For the meaning of the term ``principal purpose or
functions'' see paragraph (d)(2)(iv) of this section. For the meaning
of the term ``primarily engaged directly in the continuous active
conduct of medical research'' see
[[Page 52534]]
paragraph (d)(2)(v) of this section. For the meaning of the term
``medical research in conjunction with a hospital'' see paragraph
(d)(2)(vii) of this section.
(iii) Definition of medical research. Medical research means the
conduct of investigations, experiments, and studies to discover,
develop, or verify knowledge relating to the causes, diagnosis,
treatment, prevention, or control of physical or mental diseases and
impairments of man. To qualify as a medical research organization, the
organization must have or must have continuously available for its
regular use the appropriate equipment and professional personnel
necessary to carry out its principal function. Medical research
encompasses the associated disciplines spanning the biological, social
and behavioral sciences. Such disciplines include chemistry
(biochemistry, physical chemistry, bioorganic chemistry, etc.),
behavioral sciences (psychiatry, physiological psychology,
neurophysiology, neurology, neurobiology, and social psychology, etc.),
biomedical engineering (applied biophysics, medical physics, and
medical electronics, for example, developing pacemakers and other
medically related electrical equipment), virology, immunology,
biophysics, cell biology, molecular biology, pharmacology, toxicology,
genetics, pathology, physiology, microbiology, parasitology,
endocrinology, bacteriology, and epidemiology.
(iv) Principal purpose or functions. An organization must be
organized for the principal purpose of engaging primarily in the
conduct of medical research in order to be an organization meeting the
requirements of this paragraph (d)(2). An organization will normally be
considered to be so organized if it is expressly organized for the
purpose of conducting medical research and is actually engaged
primarily in the conduct of medical research. Other facts and
circumstances, however, may indicate that an organization does not meet
the principal purpose requirement of this paragraph (d)(2)(iv) even
where its governing instrument so expressly provides. An organization
that otherwise meets all of the requirements of this paragraph (d)(2)
(including this paragraph (d)(2)(iv)) to qualify as a medical research
organization will not fail to so qualify solely because its governing
instrument does not specifically state that its principal purpose is to
conduct medical research.
(v) Primarily engaged directly in the continuous active conduct of
medical research--(A) In order for an organization to be primarily
engaged directly in the continuous active conduct of medical research,
the organization must either devote a substantial part of its assets
to, or expend a significant percentage of its endowment for, such
purposes, or both. Whether an organization devotes a substantial part
of its assets to, or makes significant expenditures for, such
continuous active conduct depends upon the facts and circumstances
existing in each specific case. An organization will be treated as
devoting a substantial part of its assets to, or expending a
significant percentage of its endowment for, such purposes if it meets
the appropriate test contained in paragraph (d)(2)(v)(B) of this
section. If an organization fails to satisfy both of such tests, in
evaluating the facts and circumstances, the factor given most weight is
the margin by which the organization failed to meet such tests. Some of
the other facts and circumstances to be considered in making such a
determination are--
(1) If the organization fails to satisfy the tests because it
failed to properly value its assets or endowment, then upon
determination of the improper valuation it devotes additional assets
to, or makes additional expenditures for, such purposes, so that it
satisfies such tests on an aggregate basis for the prior year in
addition to such tests for the current year;
(2) The organization acquires new assets or has a significant
increase in the value of its securities after it had developed a budget
in a prior year based on the assets then owned and the then current
values;
(3) The organization fails to make expenditures in any given year
because of the interrelated aspects of its budget and long-term
planning requirements, for example, where an organization prematurely
terminates an unsuccessful program and because of long-term planning
requirements it will not be able to establish a fully operational
replacement program immediately; and
(4) The organization has as its objective to spend less than a
significant percentage in a particular year but make up the difference
in the subsequent few years, or to budget a greater percentage in an
earlier year and a lower percentage in a later year.
(B) For purposes of this section, an organization which devotes
more than one half of its assets to the continuous active conduct of
medical research will be considered to be devoting a substantial part
of its assets to such conduct within the meaning of paragraph
(d)(2)(v)(A) of this section. An organization which expends funds
equaling 3.5 percent or more of the fair market value of its endowment
for the continuous active conduct of medical research will be
considered to have expended a significant percentage of its endowment
for such purposes within the meaning of paragraph (d)(2)(v)(A) of this
section.
(C) Engaging directly in the continuous active conduct of medical
research does not include the disbursing of funds to other
organizations for the conduct of research by them or the extending of
grants or scholarships to others. Therefore, if an organization's
primary purpose is to disburse funds to other organizations for the
conduct of research by them or to extend grants or scholarships to
others, it is not primarily engaged directly in the continuous active
conduct of medical research.
(vi) Special rules. The following rules shall apply in determining
whether a substantial part of an organization's assets are devoted to,
or its endowment is expended for, the continuous active conduct of
medical research activities:
(A) An organization may satisfy the tests of paragraph (d)(2)(v)(B)
of this section by meeting such tests either for a computation period
consisting of the immediately preceding taxable year, or for the
computation period consisting of the immediately preceding four taxable
years. In addition, for taxable years beginning in 1970, 1971, 1972,
1973, and 1974, if an organization meets such tests for the computation
period consisting of the first four taxable years beginning after
December 31, 1969, an organization will be treated as meeting such
tests, not only for the taxable year beginning in 1974, but also for
the preceding four taxable years. Thus, for example, if a calendar year
organization failed to satisfy such tests for a computation period
consisting of 1969, 1970, 1971, and 1972, but on the basis of a
computation period consisting of the years 1970 through 1973, it
expended funds equaling 3.5 percent or more of the fair market value of
its endowment for the continuous active conduct of medical research,
such organization will be considered to have expended a significant
percentage of its endowment for such purposes for the taxable years
1970 through 1974. In applying such tests for a four-year computation
period, although the organization's expenditures for the entire four-
year period shall be aggregated, the fair market value of its endowment
for each year shall be summed, even though, in the case of an asset
held throughout the four-year period, the fair market value of such an
asset will be counted four times.
[[Page 52535]]
Similarly, the fair market value of an organization's assets for each
year of a four-year computation period shall be summed.
(B) Any property substantially all the use of which is
``substantially related'' (within the meaning of section 514(b)(1)(A))
to the exercise or performance of the organization's medical research
activities will not be treated as part of its endowment.
(C) The valuation of assets must be made with commonly accepted
methods of valuation. A method of valuation made in accordance with the
principles stated in the regulations under section 2031 constitutes an
acceptable method of valuation. Assets may be valued as of any day in
the organization's taxable year to which such valuation applies,
provided the organization follows a consistent practice of valuing such
asset as of such date in all taxable years. For purposes of paragraph
(d)(2)(v) of this section, an asset held by the organization for part
of a taxable year shall be taken into account by multiplying the fair
market value of such asset by a fraction, the numerator of which is the
number of days in such taxable year that the organization held such
asset and the denominator of which is the number of days in such
taxable year.
(vii) Medical research in conjunction with a hospital. The
organization need not be formally affiliated with a hospital to be
considered primarily engaged directly in the continuous active conduct
of medical research in conjunction with a hospital, but in any event
there must be a joint effort on the part of the research organization
and the hospital pursuant to an understanding that the two
organizations will maintain continuing close cooperation in the active
conduct of medical research. For example, the necessary joint effort
will normally be found to exist if the activities of the medical
research organization are carried on in space located within or
adjacent to a hospital, the organization is permitted to utilize the
facilities (including equipment, case studies, etc.) of the hospital on
a continuing basis directly in the active conduct of medical research,
and there is substantial evidence of the close cooperation of the
members of the staff of the research organization and members of the
staff of the particular hospital or hospitals. The active participation
in medical research by members of the staff of the particular hospital
or hospitals will be considered to be evidence of such close
cooperation. Because medical research may involve substantial
investigation, experimentation and study not immediately connected with
hospital or medical care, the requisite joint effort will also normally
be found to exist if there is an established relationship between the
research organization and the hospital which provides that the
cooperation of appropriate personnel and the use of facilities of the
particular hospital or hospitals will be required whenever it would aid
such research.
(viii) Commitment to spend contributions. The organization's
commitment that the contribution will be spent within the prescribed
time only for the prescribed purposes must be legally enforceable. A
promise in writing to the donor in consideration of his making a
contribution that such contribution will be so spent within the
prescribed time will constitute a commitment. The expenditure of
contributions received for plant, facilities, or equipment, used solely
for medical research purposes (within the meaning of paragraph
(d)(2)(ii) of this section), shall ordinarily be considered to be an
expenditure for medical research. If a contribution is made in other
than money, it shall be considered spent for medical research if the
funds from the proceeds of a disposition thereof are spent by the
organization within the five-year period for medical research; or, if
such property is of such a kind that it is used on a continuing basis
directly in connection with such research, it shall be considered spent
for medical research in the year in which it is first so used. A
medical research organization will be presumed to have made the
commitment required under this paragraph (d)(2)(viii) with respect to
any contribution if its governing instrument or by-laws require that
every contribution be spent for medical research before January 1 of
the fifth year which begins after the date such contribution is made.
(ix) Organizational period for new organizations. A newly created
organization, for its ``organizational'' period, shall be considered to
be primarily engaged directly in the continuous active conduct of
medical research in conjunction with a hospital within the meaning of
paragraphs (d)(2)(v) and (d)(2)(vii) of this section if during such
period the organization establishes to the satisfaction of the
Commissioner that it reasonably can be expected to be so engaged by the
end of such period. The information to be submitted shall include
detailed plans showing the proposed initial medical research program,
architectural drawings for the erection of buildings and facilities to
be used for medical research in accordance with such plans, plans to
assemble a professional staff and detailed projections showing the
timetable for the expected accomplishment of the foregoing. The
``organizational'' period shall be that period which is appropriate to
implement the proposed plans, giving effect to the proposed amounts
involved and the magnitude and complexity of the projected medical
research program, but in no event in excess of three years following
organization.
(x) Examples. The application of this paragraph (d)(2) may be
illustrated by the following examples:
Example 1. N, an organization referred to in section 170(c)(2),
was created to promote human knowledge within the field of medical
research and medical education. All of N's assets were contributed
to it by A and consist of a diversified portfolio of stocks and
bonds. N's endowment earns 3.5 percent annually, which N expends in
the conduct of various medical research programs in conjunction with
Y hospital. N is located adjacent to Y hospital, makes substantial
use of Y's facilities, and there is close cooperation between the
staffs of N and Y. N is directly engaged in the continuous active
conduct of medical research in conjunction with a hospital, meets
the principal purpose test described in paragraph (d)(2)(iv) of this
section, and is therefore an organization described in section
170(b)(1)(A)(iii).
Example 2. O, an organization referred to in section 170(c)(2),
was created to promote human knowledge within the field of medical
research and medical education. All of O's assets consist of a
diversified portfolio of stocks and bonds. O's endowment earns 3.5
percent annually, which O expends in the conduct of various medical
research programs in conjunction with certain hospitals. However, in
1974, O receives a substantial bequest of additional stocks and
bonds. O's budget for 1974 does not take into account the bequest
and as a result O expends only 3.1 percent of its endowment in 1974.
However, O establishes that it will expend at least 3.5 percent of
its endowment for the active conduct of medical research for taxable
years 1975 through 1978. O is therefore directly engaged in the
continuous active conduct of medical research in conjunction with a
hospital for taxable year 1975. Since O also meets the principal
purpose test described in paragraph (d)(2)(iv) of this section, it
is therefore an organization described in section 170(b)(1)(A)(iii)
for taxable year 1975.
Example 3. M, an organization referred to in section 170(c)(2),
was created to promote human knowledge within the field of medical
research and medical education. M's activities consist of the
conduct of medical research programs in conjunction with various
hospitals. Under such programs, researchers employed by M engage in
research at laboratories set aside for M within the various
hospitals. Substantially all of M's assets consist of 100 percent of
the stock of X corporation, which has a fair market value of
approximately 100 million dollars. X pays M approximately 3.3
million dollars in dividends annually, which M expends in the
[[Page 52536]]
conduct of its medical research programs. Since M expends only 3.3
percent of its endowment, which does not constitute a significant
percentage, in the active conduct of medical research, M is not an
organization described in section 170(b)(1)(A)(iii) because M is not
engaged in the continuous active conduct of medical research.
(xi) Special rule for organizations with existing ruling. This
paragraph (d)(2)(xi) shall apply to an organization that prior to
January 1, 1970, had received a ruling or determination letter which
has not been expressly revoked holding the organization to be a medical
research organization described in section 170(b)(1)(A)(iii) and with
respect to which the facts and circumstances on which the ruling was
based have not substantially changed. An organization to which this
paragraph (d)(2)(xi) applies shall be treated as an organization
described in section 170(b)(1)(A)(iii) for a period not ending prior to
90 days after February 13, 1976 (or where appropriate, for taxable
years beginning before such 90th day). In addition, with respect to a
grantor or contributor under sections 170, 507, 545(b)(2), 556(b)(2),
642(c), 4942, 4945, 2055, 2106(a)(2), and 2522, the status of an
organization to which this paragraph (d)(2)(xi) applies will not be
affected until notice of change of status under section
170(b)(1)(A)(iii) is made to the public (such as by publication in the
Internal Revenue Bulletin). The preceding sentence shall not apply if
the grantor or contributor had previously acquired knowledge that the
Internal Revenue Service had given notice to such organization that it
would be deleted from classification as a section 170(b)(1)(A)(iii)
organization.
* * * * *
(k) Effective/applicability date. This section shall apply to
taxable years beginning after December 31, 1969. The applicability of
paragraph (f) of this section shall be limited to taxable years
beginning before January 1, 2008.
0
Par. 3. Section 1.170A-9T is added to read as follows:
Sec. 1.170A-9T Definition of section 170(b)(1)(A) organization
(temporary).
(a) through (e) [Reserved]. For further guidance, see Sec. 1.170A-
9(a) through (e).
(f) Definition of section 170(b)(1)(A)(vi) organization--(1) In
general. An organization is described in section 170(b)(1)(A)(vi) if
it--
(i) Is referred to in section 170(c)(2) (other than an organization
specifically described in paragraphs (b) through (e) of this section);
and
(ii) Normally receives a substantial part of its support from a
governmental unit referred to in section 170(c)(1) or from direct or
indirect contributions from the general public (``publicly
supported''). For purposes of this paragraph (f)(1)(ii), an
organization is publicly supported if it meets the requirements of
either paragraph (f)(2) of this section (33\1/3\ percent support test)
or paragraph (f)(3) of this section (facts and circumstances test).
Paragraph (f)(4) of this section defines normally for purposes of the
33\1/3\ percent support test, the facts and circumstances test and for
new organizations in the first 5 years of the organization's existence
as a section 501(c)(3) organization. Paragraph (f)(5) of this section
provides for determinations of foundation classification and rules for
reliance by donors and contributors. Paragraphs (f)(6), (7), and (8) of
this section list the items that are included and excluded from the
term support. Paragraph (f)(9) of this section provides examples of the
application of this paragraph. Types of organizations that, subject to
the provisions of this paragraph, generally qualify under section
170(b)(1)(A)(vi) as ``publicly supported'' are publicly or
governmentally supported museums of history, art, or science,
libraries, community centers to promote the arts, organizations
providing facilities for the support of an opera, symphony orchestra,
ballet, or repertory drama or for some other direct service to the
general public.
(2) Determination whether an organization is ``publicly
supported''; 33\1/3\ percent support test. An organization is publicly
supported if the total amount of support (see paragraphs (f)(6), (7),
and (8) of this section) that the organization normally (see paragraph
(f)(4)(i) of this section) receives from governmental units referred to
in section 170(c)(1), from contributions made directly or indirectly by
the general public, or from a combination of these sources, equals at
least 33\1/3\ percent of the total support normally received by the
organization. See paragraph (f)(9) Example 1 of this section.
(3) Determination whether an organization is ``publicly
supported''; facts and circumstances test. Even if an organization
fails to meet the 33\1/3\ percent support test, it is publicly
supported if it normally receives a substantial part of its support
from governmental units, from contributions made directly or indirectly
by the general public, or from a combination of these sources, and
meets the other requirements of this paragraph (f)(3). In order to
satisfy the facts and circumstances test, an organization must meet the
requirements of paragraphs (f)(3)(i) and (f)(3)(ii) of this section. In
addition, the organization must be in the nature of an organization
that is publicly supported, taking into account all relevant facts and
circumstances, including the factors listed in paragraphs
(f)(3)(iii)(A) through (E) of this section.
(i) Ten percent support limitation. The percentage of support (see
paragraphs (f)(6), (7) and (8) of this section) normally (see paragraph
(f)(4) of this section) received by an organization from governmental
units, from contributions made directly or indirectly by the general
public, or from a combination of these sources, must be substantial.
For purposes of this paragraph (f)(3), an organization will not be
treated as normally receiving a substantial amount of governmental or
public support unless the total amount of governmental and public
support normally received equals at least 10 percent of the total
support normally received by such organization.
(ii) Attraction of public support. An organization must be so
organized and operated as to attract new and additional public or
governmental support on a continuous basis. An organization will be
considered to meet this requirement if it maintains a continuous and
bona fide program for solicitation of funds from the general public,
community, or membership group involved, or if it carries on activities
designed to attract support from governmental units or other
organizations described in section 170(b)(1)(A)(i) through (vi). In
determining whether an organization maintains a continuous and bona
fide program for solicitation of funds from the general public or
community, consideration will be given to whether the scope of its
fundraising activities is reasonable in light of its charitable
activities. Consideration will also be given to the fact that an
organization may, in its early years of existence, limit the scope of
its solicitation to persons deemed most likely to provide seed money in
an amount sufficient to enable it to commence its charitable activities
and expand its solicitation program.
(iii) In addition to the requirements set forth in paragraphs
(f)(3)(i) and (ii) of this section that must be satisfied, all
pertinent facts and circumstances, including the following factors,
will be taken into consideration in determining whether an organization
is ``publicly supported'' within the meaning of paragraph (f)(1) of
this section. However, an organization is not generally required to
satisfy all of the factors in paragraphs (f)(3)(iii)(A) through (E) of
this section. The factors relevant to each case and the weight
[[Page 52537]]
accorded to any one of them may differ depending upon the nature and
purpose of the organization and the length of time it has been in
existence.
(A) Percentage of financial support. The percentage of support
received by an organization from public or governmental sources will be
taken into consideration in determining whether an organization is
``publicly supported.'' The higher the percentage of support above the
10 percent requirement of paragraph (f)(3)(i) of this section from
public or governmental sources, the lesser will be the burden of
establishing the publicly supported nature of the organization through
other factors described in this paragraph (f)(3), while the lower the
percentage, the greater will be the burden. If the percentage of the
organization's support from public or governmental sources is low
because it receives a high percentage of its total support from
investment income on its endowment funds, such fact will be treated as
evidence of compliance with this subdivision if such endowment funds
were originally contributed by a governmental unit or by the general
public. However, if such endowment funds were originally contributed by
a few individuals or members of their families, such fact will increase
the burden on the organization of establishing compliance with the
other factors described in paragraph (f)(3)(iii) of this section.
(B) Sources of support. The fact that an organization meets the
requirement of paragraph (f)(3)(i) of this section through support from
governmental units or directly or indirectly from a representative
number of persons, rather than receiving almost all of its support from
the members of a single family, will be taken into consideration in
determining whether an organization is ``publicly supported.'' In
determining what is a ``representative number of persons,''
consideration will be given to the type of organization involved, the
length of time it has been in existence, and whether it limits its
activities to a particular community or region or to a special field
which can be expected to appeal to a limited number of persons.
(C) Representative governing body. The fact that an organization
has a governing body which represents the broad interests of the
public, rather than the personal or private interests of a limited
number of donors (or persons standing in a relationship to such donors
which is described in section 4946(a)(1)(C) through (G)), will be taken
into account in determining whether an organization is ``publicly
supported.'' An organization will be treated as meeting this
requirement if it has a governing body (whether designated in the
organization's governing instrument or bylaws as a Board of Directors,
Board of Trustees, etc.) which is comprised of public officials acting
in their capacities as such; of individuals selected by public
officials acting in their capacities as such; of persons having special
knowledge or expertise in the particular field or discipline in which
the organization is operating; of community leaders, such as elected or
appointed officials, clergymen, educators, civic leaders, or other such
persons representing a broad cross-section of the views and interests
of the community; or, in the case of a membership organization, of
individuals elected pursuant to the organization's governing instrument
or bylaws by a broadly based membership.
(D) Availability of public facilities or services; public
participation in programs or policies. (1) The fact that an
organization is of the type which generally provides facilities or
services directly for the benefit of the general public on a continuing
basis (such as a museum or library which holds open its building or
facilities to the public, a symphony orchestra which gives public
performances, a conservation organization which provides educational
services to the public through the distribution of educational
materials, or an old age home which provides domiciliary or nursing
services for members of the general public) will be considered evidence
that such organization is ``publicly supported.''
(2) The fact that an organization is an educational or research
institution which regularly publishes scholarly studies that are widely
used by colleges and universities or by members of the general public
will also be considered evidence that such organization is ``publicly
supported.''
(3) Similarly, the following factors will also be considered
evidence that an organization is ``publicly supported'':
(i) The participation in, or sponsorship of, the programs of the
organization by members of the public having special knowledge or
expertise, public officials, or civic or community leaders.
(ii) The maintenance of a definitive program by an organization to
accomplish its charitable work in the community, such as combating
community deterioration in an economically depressed area that has
suffered a major loss of population and jobs.
(iii) The receipt of a significant part of its funds from a public
charity or governmental agency to which it is in some way held
accountable as a condition of the grant, contract, or contribution.
(E) Additional factors pertinent to membership organizations. The
following are additional factors to be considered in determining
whether a membership organization is ``publicly supported'':
(1) Whether the solicitation for dues-paying members is designed to
enroll a substantial number of persons in the community or area, or in
a particular profession or field of special interest (taking into
account the size of the area and the nature of the organization's
activities).
(2) Whether membership dues for individual (rather than
institutional) members have been fixed at rates designed to make
membership available to a broad cross section of the interested public,
rather than to restrict membership to a limited number of persons.
(3) Whether the activities of the organization will be likely to
appeal to persons having some broad common interest or purpose, such as
educational activities in the case of alumni associations, musical
activities in the case of symphony societies, or civic affairs in the
case of parent-teacher associations. See Examples 2 through 5 contained
in paragraph (f)(9) of this section for illustrations of this paragraph
(f)(3).
(4) Definition of normally; general rule--(i) Normally; 33\1/3\
percent support test. An organization meets the 33\1/3\ percent support
test for its current taxable year and the taxable year immediately
succeeding its current year, if, for the current taxable year and the 4
taxable years immediately preceding the current taxable year, the
organization meets the 33\1/3\ percent support test on an aggregate
basis.
(ii) Normally; facts and circumstances test. An organization meets
the facts and circumstances test for its current taxable year and the
taxable year immediately succeeding its current year, if, for the
current taxable year and the 4 taxable years immediately preceding the
current taxable year, the organization meets the facts and
circumstances test on an aggregate basis. In the case of paragraphs
(f)(3)(iii)(A) and (B) of this section, facts pertinent to the 5-year
period may also be taken into consideration. The combination of factors
set forth in paragraphs (f)(3)(iii)(A) through (E) of this section that
an organization ``normally'' must meet does not have to be the same for
each 5-year period so long as there exists a sufficient combination of
factors to show compliance with the facts and circumstances test.
[[Page 52538]]
(iii) Special rule. The fact that an organization has normally met
the requirements of the 33\1/3\ percent support test for a current
taxable year, but is unable normally to meet such requirements for a
succeeding taxable year, will not in itself prevent such organization
from meeting the facts and circumstances test for such succeeding
taxable year.
(iv) Example. The application of paragraphs (f)(4)(i), (ii), and
(iii) of this section may be illustrated by the following example:
Example. (i) X is recognized as an organization described in
section 501(c)(3). On the basis of support received during taxable
years 2008, 2009, 2010, 2011 and 2012, it meets the 33\1/3\ percent
support test for taxable year 2012 (the current taxable year). X
also meets the 33\1/3\ support test for 2013, as the immediately
succeeding taxable year.
(ii) In taxable years 2009, 2010, 2011, 2012 and 2013, in the
aggregate, X does not receive at least 33\1/3\ percent of its
support from governmental units referred to in section 170(c)(1),
from contributions made directly or indirectly by the general
public, or from a combination of these sources. X still meets the
33\1/3\ percent support test for taxable year 2013 based on the
aggregate support received for taxable years 2008 through 2012.
(iii) In taxable years 2010, 2011, 2012, 2013 and 2014, in the
aggregate, X does not receive at least 33\1/3\ percent of its
support from governmental units referred to in section 170(c)(1),
from contributions made directly or indirectly by the general
public, or from a combination of these sources. X does not meet the
33\1/3\ percent support test for taxable year 2014.
(iv) Based on the aggregate support and other factors listed in
paragraphs (f)(3)(iii)(A) through (E) of this section for taxable
years 2009, 2010, 2011, 2012, and 2013, X meets the facts and
circumstances test for taxable year 2013 and for taxable year 2014
(as the immediately succeeding taxable year). Therefore, X is still
an organization described in section 170(b)(1)(A)(vi) for taxable
year 2014, even though X did not meet the 33\1/3\ percent support
test for that year.
(v) Normally; first five years of an organization's existence. (A)
An organization meets the 33\1/3\ public support test or the facts and
circumstances test during its first five taxable years as a section
501(c)(3) organization if the organization can reasonably be expected
to meet the requirements of the 33\1/3\ percent support test or the
facts and circumstances test during that period. With respect to such
organization's sixth taxable year, the organization shall be described
in section 170(b)(1)(A)(vi) if it meets the 33\1/3\ percent support
test or the facts and circumstances test under the definitions of
normally set forth in paragraphs (f)(4)(i) through (iii) of this
section for its sixth taxable year (based on support received in its
second through sixth taxable years), or for its fifth taxable year
(based on support received in its first through fifth taxable years).
(B) Basic consideration. In determining whether an organization can
reasonably be expected (within the meaning of paragraph (f)(4)(v)(A) of
this section) to meet the requirements of the 33\1/3\ percent support
test or the facts and circumstances test during its first five taxable
years, the basic consideration is whether its organizational structure,
current or proposed programs or activities, and actual or intended
method of operation are such as can reasonably be expected to attract
the type of broadly based support from the general public, public
charities, and governmental units that is necessary to meet such tests.
The factors that are relevant to this determination, and the weight
accorded to each of them, may differ from case to case, depending on
the nature and functions of the organization. The information to be
considered for this purpose shall consist of all pertinent facts and
circumstances relating to the requirements set forth in paragraph
(f)(3) of this section.
(vi) Example. The application of paragraph (f)(4)(v) of this
section may be illustrated by the following example:
Example. (i) Organization Y was formed in January 2008, and uses
a December 31 taxable year. After September 9, 2008, and before
December 31, 2008, Organization Y filed Form 1023 requesting
recognition of exemption as an organization described in section
501(c)(3) and in sections 170(b)(1)(A)(vi) and 509(a)(1). In its
application, Organization Y established that it can reasonably be
expected to operate as a public charity under paragraph (f)(4)(v) of
this section. Subsequently, Organization Y received a ruling or
determination letter that it is an organization described in section
501(c)(3) and sections 170(b)(1)(A)(vi) and 509(a)(1) effective as
of the date of its formation.
(ii) Organization Y is described in sections 170(b)(1)(A)(vi)
and 509(a)(1) for its first 5 taxable years (the taxable years
ending December 31, 2008, through December 31, 2012).
(iii) Organization Y can qualify as a public charity beginning
with the taxable year ending December 31, 2013, if Organization Y
can meet the requirements of paragraphs (f)(2) through (3) of this
section or Sec. 1.509(a)-3T(a) through (b) for the taxable years
ending December 31, 2009, through December 31, 2013, or for the
taxable years ending December 31, 2008, through December 31, 2012.
(5) Determinations on foundation classification and reliance. (i) A
ruling or determination letter that an organization is described in
section 170(b)(1)(A)(vi) may be issued to an organization. Such
determination may be made in conjunction with the recognition of the
organization's tax-exempt status or at such other time as the
organization believes it is described in section 170(b)(1)(A)(vi). The
ruling or determination letter that the organization is described in
section 170(b)(1)(A)(vi) may be revoked if, upon examination, the
organization has not met the requirements of paragraph (f) of this
section. The ruling or determination letter that the organization is
described in section 170(b)(1)(A)(vi) also may be revoked if the
organization's application for a ruling or determination contained one
or more material misstatements of fact or if such application was part
of a scheme or plan to avoid or evade any provision of the Internal
Revenue Code. The revocation of the determination that an organization
is described in section 170(b)(1)(A)(vi) does not preclude revocation
of the determination that the organization is described in section
501(c)(3).
(ii) Status of grantors or contributors. For purposes of sections
170, 507, 545(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2), and 2522,
grantors or contributors may rely upon a determination letter or ruling
that an organization is described in section 170(b)(1)(A)(vi) until the
Internal Revenue Service publishes notice of a change of status (for
example, in the Internal Revenue Bulletin or Publication 78,
``Cumulative List of Organizations described in Section 170(c) of the
Internal Revenue Code of 1986,'' which can be searched at www.irs.gov).
For this purpose, grantors or contributors also may rely on an advance
ruling that expires on or after June 9, 2008. However, a grantor or
contributor may not rely on such an advance ruling or any determination
letter or ruling if the grantor or contributor was responsible for, or
aware of, the act or failure to act that resulted in the organization's
loss of classification under section 170(b)(1)(A)(vi) or acquired
knowledge that the Internal Revenue Service had given notice to such
organization that it would be deleted from such classification.
(6) Definition of support; meaning of general public--(i) In
general. In determining whether the 33\1/3\ percent support test or the
10 percent support limitation described in paragraph (f)(3)(i) of this
section is met, contributions by an individual, trust, or corporation
shall be taken into account as support from direct or indirect
contributions from the general public only to the extent that the total
amount of the contributions by any such
[[Page 52539]]
individual, trust, or corporation during the period described in
paragraphs (f)(4)(i) or (ii) of this section does not exceed 2 percent
of the organization's total support for such period, except as provided
in paragraph (f)(6)(ii) of this section. Therefore, any contribution by
one individual will be included in full in the denominator of the
fraction determining the 33\1/3\ percent support or the 10 percent
support limitation, but will be includible in the numerator of such
fraction only to the extent that such amount does not exceed 2 percent
of the denominator. In applying the 2 percent limitation, all
contributions made by a donor and by any person or persons standing in
a relationship to the donor that is described in section 4946(a)(1)(C)
through (G) and the regulations relating to section 4946(a)(1)(C)
through (G) shall be treated as made by one person. The 2 percent
limitation shall not apply to support received from governmental units
referred to in section 170(c)(1) or to contributions from organizations
described in section 170(b)(1)(A)(vi), except as provided in paragraph
(f)(6)(v) of this section. For purposes of paragraphs (f)(2), (f)(3)(i)
and (f)(7)(iii)(A)(2) of this section, the term indirect contributions
from the general public includes contributions received by the
organization from organizations (such as section 170(b)(1)(A)(vi)
organizations) that normally receive a substantial part of their
support from direct contributions from the general public, except as
provided in paragraph (f)(6)(v) of this section. See the examples in
paragraph (f)(9) of this section for the application of this paragraph
(f)(6)(i). For purposes of this paragraph (f), the term contributions
includes qualified sponsorship payments (as defined in Sec. 1.513-4)
in the form of money or property (but not services).
(ii) Exclusion of unusual grants. (A) For purposes of applying the
2 percent limitation described in paragraph (f)(6)(i) of this section
to determine whether the 33\1/3\ percent support test or the 10 percent
support limitation in paragraph (f)(3)(i) of this section is satisfied,
one or more contributions may be excluded from both the numerator and
the denominator of the applicable support fraction if such
contributions meet the requirements of paragraph (f)(6)(iii) of this
section. The exclusion provided by this paragraph (f)(6)(ii) is
generally intended to apply to substantial contributions or bequests
from disinterested parties, which contributions or bequests--
(1) Are attracted by reason of the publicly supported nature of the
organization;
(2) Are unusual or unexpected with respect to the amount thereof;
and
(3) Would, by reason of their size, adversely affect the status of
the organization as normally being publicly supported for the
applicable period described in paragraph (f)(4) of this section.
(B) In the case of a grant (as defined in Sec. 1.509(a)-3(g)) that
meets the requirements of this paragraph (f)(6)(ii), if the terms of
the granting instrument (whether executed before or after 1969) require
that the funds be paid to the recipient organization over a period of
years, the amount received by the organization each year pursuant to
the terms of such grant may be excluded for such year. However, no item
of gross investment income may be excluded under this paragraph (f)(6).
The provisions of this paragraph (f)(6) shall apply to exclude unusual
grants made during any of the applicable periods described in paragraph
(f)(4) or (f)(6) of this section. See paragraph (f)(6)(iv) of this
section as to reliance by a grantee organization upon an unusual grant
ruling under this paragraph (f)(6).
(iii) Determining factors. In determining whether a particular
contribution may be excluded under paragraph (f)(6)(ii) of this section
all pertinent facts and circumstances will be taken into consideration.
No single factor will necessarily be determinative. For some of the
factors similar to the factors to be considered, see Sec. 1.509(a)-
3T(c)(4).
(iv) Grantors and contributors. Prior to the making of any grant or
contribution that will allegedly meet the requirements for exclusion
under paragraph (f)(6)(ii) of this section, a potential grantee
organization may request a determination whether such grant or
contribution may be so excluded. Requests for such determination may be
filed by the grantee organization. The issuance of such determination
will be at the sole discretion of the Commissioner. The organization
must submit all information necessary to make a determination on the
factors referred to in paragraph (f)(6)(iii) of this section. If a
favorable ruling is issued, such ruling may be relied upon by the
grantor or contributor of the particular contribution in question for
purposes of sections 170, 507, 545(b)(2), 642(c), 4942, 4945, 2055,
2106(a)(2), and 2522 and by the grantee organization for purposes of
paragraph (f)(6)(ii) of this section.
(v) Grants from public charities. Pursuant to paragraph (f)(6)(i)
of this section, contributions received from a governmental unit or
from a section 170(b)(1)(A)(vi) organization are not subject to the 2
percent limitation described in paragraph (f)(6)(i) of this section
unless such contributions represent amounts which have been expressly
or impliedly earmarked by a donor to such governmental unit or section
170(b)(1)(A)(vi) organization as being for, or for the benefit of, the
particular organization claiming section 170(b)(1)(A)(vi) status. See
Sec. 1.509(a)-3(j)(3) for examples illustrating the rules of this
paragraph (f)(6)(v).
(7) Definition of support; special rules and meaning of terms--(i)
Definition of support. For purposes of this paragraph (f)(7), the term
``support'' shall be as defined in section 509(d) (without regard to
section 509(d)(2)). The term ``support'' does not include--
(A) Any amounts received from the exercise or performance by an
organization of its charitable, educational, or other purpose or
function constituting the basis for its exemption under section 501(a).
In general, such amounts include amounts received from any activity the
conduct of which is substantially related to the furtherance of such
purpose or function (other than through the production of income); or
(B) Contributions of services for which a deduction is not
allowable.
(ii) For purposes of the 33\1/3\ percent support test and the 10
percent support limitation in paragraph (f)(3)(i) of this section, all
amounts received that are described in paragraphs (f)(7)(i)(A) or (B)
of this section are to be excluded from both the numerator and the
denominator of the fractions determining compliance with such tests,
except as provided in paragraph (f)(7)(iii) of this section.
(iii) Organizations dependent primarily on gross receipts from
related activities. (A) Notwithstanding the provisions of paragraph
(f)(7)(i) of this section, an organization will not be treated as
satisfying the 33\1/3\ percent support test or the 10 percent support
limitation in paragraph (f)(3)(i) of this section if it receives--
(1) Almost all of its support (as defined in section 509(d)) from
gross receipts from related activities; and
(2) An insignificant amount of its support from governmental units
(without regard to amounts referred to in paragraph (f)(7)(i)(A) of
this section) and contributions made directly or indirectly by the
general public.
(B) Example. The application of this paragraph (f)(7)(iii) may be
illustrated by the following example:
Example. Z, an organization described in section 501(c)(3), is
controlled by A, its
[[Page 52540]]
president. Z received $500,000 during the period consisting of the
current taxable year and the four immediately preceding taxable
years under a contract with the Department of Transportation,
pursuant to which Z has engaged in research to improve a particular
vehicle used primarily by the Federal government. During this same
period, the only other support received by Z consisted of $5,000 in
small contributions primarily from Z's employees and business
associates. The $500,000 amount constitutes support under sections
509(d)(2) and 509(a)(2)(A). Under these circumstances, Z meets the
conditions of paragraphs (f)(7)(iii)(A)(1) and (2) of this section
and will not be treated as meeting the requirements of either the
33\1/3\ percent support test or the facts and circumstances test. As
to the rules applicable to organizations that fail to qualify under
section 170(b)(1)(A)(vi) because of the provisions of this paragraph
(f)(7)(ii), see section 509(a)(2) and the accompanying regulations.
For the distinction between gross receipts (as referred to in
section 509(d)(2)) and gross investment income (as referred to in
section 509(d)(4)), see Sec. 1.509(a)-3(m).
(iv) Membership fees. For purposes of this paragraph (f)(7), the
term support shall include ``membership fees'' within the meaning of
Sec. 1.509(a)-3(h) (that is, if the basic purpose for making a payment
is to provide support for the organization rather than to purchase
admissions, merchandise, services, or the use of facilities).
(8) Support from a governmental unit. (i) For purposes of the 33\1/
3\ percent support test and the 10 percent support limitation described
in paragraph (f)(3)(i) of this section, the term support from a
governmental unit includes any amounts received from a governmental
unit, including donations or contributions and amounts received in
connection with a contract entered into with a governmental unit for
the performance of services or in connection with a government research
grant. However, such amounts will not constitute support from a
governmental unit for such purposes if they constitute amounts received
from the exercise or performance of the organization's exempt functions
as provided in paragraph (f)(7)(i)(A) of this section.
(ii) For purposes of paragraph (f)(8)(i) of this section, any
amount paid by a governmental unit to an organization is not to be
treated as received from the exercise or performance of its charitable,
educational, or other purpose or function constituting the basis for
its exemption under section 501(a) (within the meaning of paragraph
(f)(7)(i)(A) of this section) if the purpose of the payment is
primarily to enable the organization to provide a service to, or
maintain a facility for, the direct benefit of the public (regardless
of whether part of the expense of providing such service or facility is
paid for by the public), rather than to serve the direct and immediate
needs of the payor. For example--
(A) Amounts paid for the maintenance of library facilities which
are open to the public;
(B) Amounts paid under government programs to nursing homes or
homes for the aged in order to provide health care or domiciliary
services to residents of such facilities; and
(C) Amounts paid to child placement or child guidance organizations
under government programs for services rendered to children in the
community, are considered payments the purpose of which is primarily to
enable the recipient organization to provide a service or maintain a
facility for the direct benefit of the public, rather than to serve the
direct and immediate needs of the payor. Furthermore, any amount
received from a governmental unit under circumstances such that the
amount would be treated as a ``grant'' within the meaning of Sec.
1.509(a)-3(g) will generally constitute ``support from a governmental
unit'' described in this paragraph (f)(8), rather than an amount
described in paragraph (f)(7)(i)(A) of this section.
(9) Examples. The application of paragraphs (f)(1) through (8) of
this section may be illustrated by the following examples:
Example 1. (i) M is recognized as an organization described in
section 501(c)(3). For the years 2008 through 2012 (the applicable
period with respect to the taxable year 2012 under paragraph (f)(4)
of this section), M received support (as defined in paragraphs
(f)(6) through (8) of this section) of $600,000 from the following
sources:
Investment income........................................... $300,000
City R (a governmental unit described in section 170(c)(1)). 40,000
United Fund (an organization described in section 40,000
170(b)(1)(A)(vi))..........................................
Contributions............................................... 220,000
-----------
Total support........................................... $600,000
(ii) With respect to the taxable year 2012, M's public support
is computed as follows:
Support from a governmental unit described in section $40,000
170(c)(1)..................................................
Indirect contributions from the general public (United Fund) 40,000
Contributions by various donors (no one having made 50,000
contributions that total in excess of $12,000--2 percent of
total support).............................................
Six contributions (each in excess of $12,000--2 percent 72,000
total support) 6 x $12,000.................................
-----------
$202,000
(iii) M's support from governmental units referred to in section
170(c)(1) and from direct and indirect contributions from the
general public (as defined in paragraph (f)(6) of this section) with
respect to the taxable year 2012 normally exceeds 33\1/3\ percent of
M's total support ($202,000/$600,000 = 33.67 percent) for the
applicable period (2008 through 2012). M meets the 33\1/3\ percent
support test with respect to 2012 and is therefore publicly
supported for the taxable years 2012 and 2013.
Example 2. N is recognized as an organization described in
section 501(c)(3). It was created to maintain public gardens
containing botanical specimens and displaying statuary and other art
objects. The facilities, works of art, and a large endowment were
all contributed by a single contributor. The members of the
governing body of the organization are unrelated to its creator. The
gardens are open to the public without charge and attract a
substantial number of visitors each year. For the current taxable
year and the four taxable years immediately preceding the current
taxable year, 95 percent of the organization's total support was
received from investment income from its original endowment. N also
maintains a membership society that is supported by members of the
general public who wish to contribute to the upkeep of the gardens
by paying a small annual membership fee. Over the 5-year period in
question, these fees from the general public constituted the
remaining 5 percent of the organization's total support for such
period. Under these circumstances, N does not meet the 33\1/3\
percent support test for its current taxable year. Furthermore,
because only 5 percent of its total support is, with respect to the
current taxable year, normally received from the general public, N
does not satisfy the 10 percent support limitation described in
paragraph (f)(3)(i) of this section and therefore does not qualify
as publicly supported under the facts and circumstances test.
Because N has failed to satisfy the 10 percent support limitation
under paragraph (f)(3)(i) of this section, none of the other
requirements or factors set forth in paragraphs (f)(3)(iii)(A)
through (E) of this section can be considered in determining whether
N qualifies as a publicly supported organization. For its current
taxable year, N therefore is not an organization described in
section 170(b)(1)(A)(vi).
Example 3. (i) O, an art museum, is recognized as an
organization described in section 501(c)(3). In 1930, O was founded
in S City by the members of a single family to collect, preserve,
interpret, and display to the public important works of art. O is
governed by a Board of Trustees that originally consisted almost
entirely of members of the founding family. However, since 1945,
members of the founding family or persons standing in a relationship
to the members of such family described in section 4946(a)(1)(C)
through (G) have annually constituted less than one-fifth of the
Board of Trustees. The remaining board members are citizens of S
City from a variety of professions and occupations who represent the
interests and views of the people of S City in the activities
carried on by the
[[Page 52541]]
organization rather than the personal or private interests of the
founding family. O solicits contributions from the general public
and for the current taxable year and each of the four taxable years
immediately preceding the current taxable year, O has received total
contributions (in small sums of less than $100, none of which
exceeds 2 percent of O's total support for such period) in excess of
$10,000. These contributions from the general public (as defined in
paragraph (f)(6) of this section) represent 25 percent of the
organization's total support for such 5-year period. For this same
period, investment income from several large endowment funds has
constituted 75 percent of O's total support. O expends substantially
all of its annual income for its exempt purposes and thus depends
upon the funds it annually solicits from the public as well as its
investment income in order to carry out its activities on a normal
and continuing basis and to acquire new works of art. O has, for the
entire period of its existence, been open to the public and more
than 300,000 people (from S City and elsewhere) have visited the
museum in each of the current taxable year and the four most recent
taxable years.
(ii) Under these circumstances, O does not meet the 33\1/3\
percent support test for its current year because it has received
only 25 percent of its total support for the applicable 5-year
period from the general public. However, under the facts set forth
above, O has met the 10 percent support limitation under paragraph
(f)(3)(i) of this section, as well as the requirements of paragraph
(f)(3)(ii) of this section. Under all of the facts set forth in this
example, O is considered as meeting the requirements of the facts
and circumstances test on the basis of satisfying paragraphs
(f)(3)(i) and (ii) of this section and the factors set forth in
paragraphs (f)(3)(iii)(A) through (D) of this section. O is
therefore publicly supported for its current taxable year and the
immediately succeeding taxable year.
Example 4. (i) In 1960, the P Philharmonic Orchestra was
organized in T City through the combined efforts of a local music
society and a local women's club to present to the public a wide
variety of musical programs intended to foster music appreciation in
the community. P is recognized as an organization described in
section 501(c)(3). The orchestra is composed of professional
musicians who are paid by the association. Twelve performances open
to the public are scheduled each year. A small admission fee is
charged for each of these performances. In addition, several
performances are staged annually without charge. During the current
taxable year and the four taxable years immediately preceding the
current taxable year, P has received separate contributions of
$200,000 each from A and B (not members of a single family) and
support of $120,000 from the T Community Chest, a public federated
fundraising organization operating in T City. P depends on these
funds in order to carry out its activities and will continue to
depend on contributions of this type to be made in the future. P has
also begun a fundraising campaign in an attempt to expand its
activities for the coming years. P is governed by a Board of
Directors comprised of 5 individuals. A faculty member of a local
college, the president of a local music society, the head of a local
banking institution, a prominent doctor, and a member of the
governing body of the local chamber of commerce currently serve on
P's Board and represent the interests and views of the community in
the activities carried on by P.
(ii) With respect to P's current taxable year, P's sources of
support are computed on the basis of the current taxable year and
the four taxable years immediately preceding the current taxable
year, as follows:
Contributions............................................... $520,000
Receipts from performances.................................. 100,000
-----------
Total support........................................... $620,000
-----------
Less:
Receipts from performances (excluded under paragraph 100,000
(f)(7)(i)(A) of this section)............................
-----------
Total support for purposes of paragraphs (f)(2) and $520,000
(f)(3)(i) of this section..............................
(iii) For purposes of paragraphs (f)(2) and (f)(3)(i) of this
section, P's support is computed as follows:
T Community Chest (indirect support from the general public) $120,000
Two contributions (each in excess of $10,400--2 percent of 20,800
total support) 2 x $10,400.................................
-----------
Total................................................... $140,800
(iv) P's support from the direct and indirect contributions from
the general public does not meet the 33\1/3\ percent support test
($140,800/$520,000 = 27 percent of total support). However, because
P receives 27 percent of its total support from the general public,
it meets the 10 percent support limitation under paragraph (f)(3)(i)
of this section. P also meets the requirements of paragraph
(f)(3)(ii) of this section. As a result of satisfying these
requirements and the factors set forth in paragraphs (f)(3)(iii)(A)
through (D) of this section, P is considered to meet the facts and
circumstances test and therefore qualifies as a publicly supported
organization under paragraph (f)(1) of this section for its current
taxable year and the immediately succeeding taxable year.
Example 5. (i) Q is recognized as an organization described in
section 501(c)(3). It is a philanthropic organization founded in
1965 by C for the purpose of making annual contributions to worthy
charities. C created Q as a charitable trust by the transfer of
appreciated securities worth $500,000 to Q. Pursuant to the trust
agreement, C and two other members of his family are the sole
trustees of Q and are vested with the right to appoint successor
trustees. In each of the current taxable year and the four taxable
years immediately preceding the current taxable year, Q received
$15,000 in investment income from its original endowment. Each year
Q makes a solicitation for funds by operating a charity ball at C's
residence. Guests are invited and requested to make contributions of
$100 per couple. During the 5-year period at issue, $15,000 was
received from the proceeds of these events. C and his family have
also made contributions to Q of $25,000 over the 5-year period at
issue. Q makes disbursements each year of substantially all of its
net income to the public charities chosen by the trustees.
(ii) Q's sources of support for the current taxable year and the
four taxable years immediately preceding the current taxable year as
follows:
Investment income........................................... $60,000
Contributions............................................... 40,000
-----------
Total support........................................... $100,000
(iii) For purposes of paragraphs (f)(2) and (f)(3)(i) of this
section, Q's support is computed as follows:
Contributions from the general public....................... $15,000
One contribution (in excess of $2,000--2 percent of total 2,000
support) 1 x $2,000........................................
-----------
Total................................................... $17,000
(iv) Q's support from the general public does not meet the 33\1/
3\ percent support test ($17,000/$100,000 = 17 percent of total
support). Thus, Q's classification as a ``publicly supported''
organization depends on whether it meets the requirements of the
facts and circumstances test. Even though it satisfies the 10
percent support limitation under paragraph (f)(3)(i) of this
section, its method of solicitation makes it questionable whether Q
satisfies the requirements of paragraph (f)(3)(ii) of this section.
Because of its method of operating, Q also has a greater burden of
establishing its publicly supported nature under paragraph
(f)(3)(iii)(A) of this section. Based upon the foregoing and upon
Q's failure to receive favorable consideration under the remaining
factors set forth in paragraphs (f)(3)(iii)(B), (C) and (D) of this
section, Q does not satisfy the facts and circumstances test.
(10) Community trust; introduction. Community trusts have often
been established to attract large contributions of a capital or
endowment nature for the benefit of a particular community or area, and
often such contributions have come initially from a small number of
donors. While the community trust generally has a governing body
comprised of representatives of the particular community or area, its
contributions are often received and maintained in the form of separate
trusts or funds, which are subject to varying degrees of control by the
governing body. To qualify as a ``publicly supported'' organization, a
community trust must meet the 33\1/3\ percent support test, or, if it
cannot meet that test, be organized and operated so as to attract new
and additional public or governmental support on a continuous basis
sufficient to meet the facts and circumstances test. Such facts and
circumstances test includes a requirement of attraction of public
[[Page 52542]]
support in paragraph (f)(3)(ii) of this section which, as applied to
community trusts, generally will be satisfied if they seek gifts and
bequests from a wide range of potential donors in the community or area
served, through banks or trust companies, through attorneys or other
professional persons, or in other appropriate ways that call attention
to the community trust as a potential recipient of gifts and bequests
made for the benefit of the community or area served. A community trust
is not required to engage in periodic, community-wide, fundraising
campaigns directed toward attracting a large number of small
contributions in a manner similar to campaigns conducted by a community
chest or united fund. Paragraph (f)(11) of this section provides rules
for determining the extent to which separate trusts or funds may be
treated as component parts of a community trust, fund or foundation
(herein collectively referred to as a ``community trust'', and
sometimes referred to as an ``organization'') for purposes of meeting
the requirements of this paragraph for classification as a publicly
supported organization. Paragraph (f)(12) of this section contains
rules for trusts or funds that are prevented from qualifying as
component parts of a community trust by paragraph (f)(11) of this
section.
(11) Community trusts; requirements for treatment as a single
entity--(i) General rule. For purposes of sections 170, 501, 507, 508,
509, and Chapter 42, any organization that meets the requirements
contained in paragraphs (f)(11)(iii) through (iv) of this section will
be treated as a single entity, rather than as an aggregation of
separate funds, and except as otherwise provided, all funds associated
with such organization (whether a trust, not-for-profit corporation,
unincorporated association, or a combination thereof) which meet the
requirements of paragraph (f)(11)(ii) of this section will be treated
as component parts of such organization.
(ii) Component part of a community trust. In order to be treated as
a component part of a community trust referred to in this paragraph
(f)(11) (rather than as a separate trust or not-for-profit corporation
or association), a trust or fund:
(A) Must be created by a gift, bequest, legacy, devise, or other
transfer to a community trust which is treated as a single entity under
this paragraph (f)(11); and
(B) May not be directly or indirectly subjected by the transferor
to any material restriction or condition (within the meaning of Sec.
1.507-2T(a)(7)) with respect to the transferred assets. For purposes of
this paragraph (f)(11)(ii)(B), if the transferor is not a private
foundation, the provisions of Sec. 1.507-2T(a)(7) shall be applied to
the trust or fund as if the transferor were a private foundation
established and funded by the person establishing the trust or fund and
such foundation transferred all its assets to the trust or fund. Any
transfer made to a fund or trust which is treated as a component part
of a community trust under this paragraph (f)(11)(ii) will be treated
as a transfer made ``to'' a ``publicly supported'' community trust for
purposes of section 170(b)(1)(A) and 507(b)(1)(A) if such community
trust meets the requirements of section 170(b)(1)(A)(vi) as a
``publicly supported'' organization at the time of the transfer, except
as provided in paragraph (f)(4)(v)(B) of this section or Sec. 1.508-
1(b)(4) and (6) (relating, generally, to reliance by grantors and
contributors). See also paragraphs (f)(12)(ii) and (iii) of this
section for special provisions relating to split-interest trusts and
certain private foundations described in section 170(b)(1)(F)(iii).
(iii) Name. The organization must be commonly known as a community
trust, fund, foundation or other similar name conveying the concept of
a capital or endowment fund to support charitable activities (within
the meaning of section 170(c)(1) or (2)(B)) in the community or area it
serves.
(iv) Common instrument. All funds of the organization must be
subject to a common governing instrument or a master trust or agency
agreement (herein referred to as the ``governing instrument''), which
may be embodied in a single document or several documents containing
common language. Language in an instrument of transfer to the community
trust making a fund subject to the community trust's governing
instrument or master trust or agency agreement will satisfy the
requirements of this paragraph (f)(11)(iv). In addition, if a community
trust adopts a new governing instrument (or creates a corporation) to
put into effect new provisions (applying to future transfers to the
community trust), the adoption of such new governing instrument (or
creation of a corporation with a governing instrument) which contains
common language with the existing governing instrument shall not
preclude the community trust from meeting the requirements of this
paragraph (f)(11)(iv).
(v) Common governing body. (A) The organization must have a common
governing body or distribution committee (herein referred to as the
``governing body'') which either directs or, in the case of a fund
designated for specified beneficiaries, monitors the distribution of
all of the funds exclusively for charitable purposes (within the
meaning of section 170(c)(1) or (2)(B)). For purposes of this paragraph
(f)(11)(v), a fund is designated for specified beneficiaries only if no
person is left with the discretion to direct the distribution of the
fund.
(B) Powers of modification and removal. The fact that the exercise
of any power described in this paragraph (f)(11)(v)(B) is reviewable by
an appropriate State authority will not preclude the community trust
from meeting the requirements of this paragraph (f)(11)(v)(B). Except
as provided in paragraph (f)(11)(v)(C) of this section, the governing
body must have the power in the governing instrument, the instrument of
transfer, the resolutions or by-laws of the governing body, a written
agreement, or otherwise--
(1) To modify any restriction or condition on the distribution of
funds for any specified charitable purposes or to specified
organizations if in the sole judgment of the governing body (without
the necessity of the approval of any participating trustee, custodian,
or agent), such restriction or condition becomes, in effect,
unnecessary, incapable of fulfillment, or inconsistent with the
charitable needs of the community or area served;
(2) To replace any participating trustee, custodian, or agent for
breach of fiduciary duty under State law; and
(3) To replace any participating trustee, custodian, or agent for
failure to produce a reasonable (as determined by the governing body)
return of net income (within the meaning of paragraph (f)(11)(v)(F) of
this section) over a reasonable period of time (as determined by the
governing body).
(C) Transitional rule--(1) Notwithstanding paragraph (f)(11)(v)(B)
of this section, if a community trust meets the requirements of
paragraph (f)(11)(v)(C)(3) of this section, then in the case of any
instrument of transfer which is executed before July 19, 1977, and is
not revoked or amended thereafter (with respect to any dispositive
provision affecting the transfer to the community trust), and in the
case of any instrument of transfer which is irrevocable on January 19,
1982, the governing body must have the power to cause proceedings to be
instituted (by request to the appropriate State authority):
(i) To modify any restriction or condition on the distribution of
funds for any specified charitable purposes or to specified
organizations if in the
[[Page 52543]]
judgment of the governing body such restriction or condition becomes,
in effect, unnecessary, incapable of fulfillment, or inconsistent with
the charitable needs of the community or area served; and
(ii) To remove any participating trustee, custodian, or agent for
breach of fiduciary duty under State law.
(2) The necessity for the governing body to obtain the approval of
a participating trustee to exercise the powers described in paragraph
(f)(11)(v)(C)(1) of this section shall be treated as not preventing the
governing body from having such power, unless (and until) such approval
has been (or is) requested by the governing body and has been (or is)
denied.
(3) Paragraph (f)(11)(v)(C)(1) of this section shall not apply
unless the community trust meets the requirements of paragraph
(f)(11)(v)(B) of this section, with respect to funds other than those
under instruments of transfer described in the first sentence of such
paragraph (f)(11)(v)(C)(1) of this section, by January 19, 1978, or
such later date as the Commissioner may provide for such community
trust, and unless the community trust does not, once it so complies,
thereafter solicit for funds that will not qualify under the
requirements of paragraph (f)(11)(v)(B) of this section.
(D) Inconsistent State law--(1) For purposes of paragraphs
(f)(11)(v)(B)(1), (2), or (3), (f)(11)(v)(C)(1)(i) or (ii) or
(f)(11)(v)(E) of this section, if a power described in such a provision
is inconsistent with State law even if such power were expressly
granted to the governing body by the governing instrument and were
accepted without limitation under an instrument of transfer, then the
community trust will be treated as meeting the requirements of such a
provision if it meets such requirements to the fullest extent possible
consistent with State law (if such power is or had been so expressly
granted).
(2) For example, if, under the conditions of paragraph
(f)(11)(v)(D)(1) of this section, the power to modify is inconsistent
with State law, but the power to institute proceedings to modify, if so
expressly granted, would be consistent with State law, the community
trust will be treated as meeting such requirements to the fullest
extent possible if the governing body has the power (in the governing
instrument or otherwise) to institute proceedings to modify a condition
or restriction. On the other hand, if in such a case the community
trust has only the power to cause proceedings to be instituted to
modify a condition or restriction, it will not be treated as meeting
such requirements to the fullest extent possible.
(3) In addition, if, for example, under the conditions of paragraph
(f)(11)(v)(D)(1) of this section, the power to modify and the power to
institute proceedings to modify a condition or restriction is
inconsistent with State law, but the power to cause such proceedings to
be instituted would be consistent with State law, if it were expressly
granted in the governing instrument and if the approval of the State
Attorney General were obtained, then the community trust will be
treated as meeting such requirements to the fullest extent possible if
it has the power (in the governing instrument or otherwise) to cause
such proceedings to be instituted, even if such proceedings can be
instituted only with the approval of the State Attorney General.
(E) Exercise of powers. The governing body shall (by resolution or
otherwise) commit itself to exercise the powers described in paragraphs
(f)(11)(v)(B), (C) and (D) of this section in the best interests of the
community trust. The governing body will be considered not to be so
committed where it has grounds to exercise such a power and fails to
exercise it by taking appropriate action. Such appropriate action may
include, for example, consulting with the appropriate State authority
prior to taking action to replace a participating trustee.
(F) Reasonable return. In addition to the requirements of
paragraphs (f)(11)(v)(B), (C), (D) or (E) of this section, the
governing body shall (by resolution or otherwise) commit itself to
obtain information and take other appropriate steps with the view to
seeing that each participating trustee, custodian, or agent, with
respect to each restricted trust or fund that is, and with respect to
the aggregate of the unrestricted trusts or funds that are, a component
part of the community trust, administers such trust or fund in
accordance with the terms of its governing instrument and accepted
standards of fiduciary conduct to produce a reasonable return of net
income (or appreciation where not inconsistent with the community
trust's need for current income), with due regard to safety of
principal, in furtherance of the exempt purposes of the community trust
(except for assets held for the active conduct of the community trust's
exempt activities). In the case of a low return of net income (and,
where appropriate, appreciation), the Internal Revenue Service will
examine carefully whether the governing body has, in fact, committed
itself to take the appropriate steps. For purposes of this paragraph
(f)(11)(v)(F), any income that has been designated by the donor of the
gift or bequest to which such income is attributable as being available
only for the use or benefit of a broad charitable purpose, such as the
encouragement of higher education or the promotion of better health
care in the community, will be treated as unrestricted. However, any
income that has been designated for the use or benefit of a named
charitable organization or agency or for the use or benefit of a
particular class of charitable organizations or agencies, the members
of which are readily ascertainable and are less than five in number,
will be treated as restricted.
(vi) Common reports. The organization must prepare periodic
financial reports treating all of the funds which are held by the
community trust, either directly or in component parts, as funds of the
organization.
(12) Community trusts; treatment of trusts and not-for-profit
corporations and associations not included as components. (i) For
purposes of sections 170, 501, 507, 508, 509 and Chapter 42, any trust
or not-for-profit corporation or association that is alleged to be a
component part of a community trust, but that fails to meet the
requirements of paragraph (f)(11)(ii) of this section, shall not be
treated as a component part of a community trust and, if a trust, shall
be treated as a separate trust and be subject to the provisions of
section 501 or section 4947(a)(1) or (2), as the case may be. If such
organization is a not-for-profit corporation or association, it will be
treated as a separate entity, and, if it is described in section
501(c)(3), it will be treated as a private foundation unless it is
described in section 509(a)(1), (2), (3), or (4). In the case of a fund
that is ultimately treated as not being a component part of a community
trust pursuant to this paragraph (f)(12), if the Forms 990 filed
annually by the community trust included financial information with
respect to such fund and treated such fund in the same manner as other
component parts thereof, such returns filed by the community trust
prior to the taxable year in which the Commissioner notifies such fund
that it will not be treated as a component part will be treated as its
separate return for purpose of Subchapter A of Chapter 61 of Subtitle
F, and the first such return filed by the community trust will be
treated as the notification required of the separate entity for
purposes of section 508(a).
(ii) If a transfer is made in trust to a community trust to make
income or
[[Page 52544]]
other payments for a period of a life or lives in being or a term of
years to any individual or for any noncharitable purpose, followed by
payments to or for the use of the community trust (such as in the case
of a charitable remainder annuity trust or a charitable remainder
unitrust described in section 664 or a pooled income fund described in
section 642(c)(5)), such trust will be treated as a component part of
the community trust upon the termination of all intervening
noncharitable interests and rights to the actual possession or
enjoyment of the property if such trust satisfies the requirements of
paragraph (f)(11) of this section at such time. Until such time, the
trust will be treated as a separate trust. If a transfer is made in
trust to a community trust to make income or other payments to or for
the use of the community trust, followed by payments to any individual
or for any noncharitable purpose, such trust will be treated as a
separate trust rather than as a component part of the community trust.
See section 4947(a)(2) and the regulations relating to section
4947(a)(2) for the treatment of such split-interest trusts. The
provisions of this paragraph (f)(12)(ii) provide rules only for
determining when a charitable remainder trust or pooled income fund may
be treated as a component part of a community trust and are not
intended to preclude a community trust from maintaining a charitable
remainder trust or pooled income fund. For purposes of grantors and
contributors, a pooled income fund of a publicly supported community
trust shall be treated no differently than a pooled income fund of any
other publicly supported organization.
(iii) An organization described in section 170(b)(1)(F)(iii) will
not ordinarily satisfy the requirements of paragraph (f)(11)(ii) of
this section because of the unqualified right of the donor to designate
the recipients of the income and principal of the trust. Such
organization will therefore ordinarily be treated as other than a
component part of a community trust under paragraph (f)(12)(i) of this
section. However, see section 170(b)(1)(F)(iii) and the regulations
relating to section 170(b)(1)(F)(iii) with respect to the treatment of
contributions to such organizations.
(13) Method of accounting. For purposes of section
170(b)(1)(A)(vi), an organization's support will be determined under
the method of accounting on the basis of which the organization
regularly computes its income in keeping its books under section 446.
For example, if a grantor makes a grant to an organization payable over
a term of years, such grant will be includible in the support fraction
of the grantee organization under the method of accounting on the basis
of which the grantee organization regularly computes its income in
keeping its books under section 446.
(14) Transition rules. (i) An organization that received an advance
ruling, that expires on or after June 9, 2008, that it will be treated
as an organization described in sections 170(b)(1)(A)(vi) and 509(a)(1)
or in section 509(a)(2) will be treated as meeting the requirements of
paragraph (f)(4)(v) of this section for the first five taxable years of
its existence as a section 501(c)(3) organization unless the Internal
Revenue Service issued the organization a proposed determination prior
to September 9, 2008, that the organization is not described in
sections 170(b)(1)(A)(vi) and 509(a)(1) or in section 509(a)(2).
(ii) Paragraph (f)(4)(v) of this section shall not apply to an
organization that received an advance ruling that expired prior to June
9, 2008, and that did not timely file with the Internal Revenue Service
the required information to establish that it is an organization
described in sections 170(b)(1)(A)(vi) and 509(a)(1) or in section
509(a)(2).
(iii) An organization that fails to meet a public support test for
its first taxable year beginning on or after January 1, 2008, under the
regulations in this section may use the prior test set forth in Sec.
1.170A-9(e)(4)(i) and (ii) or Sec. 1.509(a)-3(c)(1) as in effect
before September 9, 2008, (as contained in 26 CFR part 1 revised April
1, 2008) to determine whether the organization may be publicly
supported for its 2008 taxable year based on its satisfaction of a
public support test for taxable year 2007, computed over the period
2003 through 2006.
(iv) Examples. The application of this paragraph (f)(14) may be
illustrated by the following examples:
Example 1. (i) Organization X was formed in January 2004 and
uses a June 30 taxable year. Organization X received an advance
ruling letter that it is recognized as an organization described in
section 501(c)(3) effective as of the date of its formation and that
it is treated as a public charity under sections 170(b)(1)(A)(vi)
and 509(a)(1) during the five-year advance ruling period that will
end on June 30, 2008. This date is within 90 days before September
9, 2008.
(ii) Under the transition rule, Organization X is a public
charity described in sections 170(b)(1)(A)(vi) and 509(a)(1) for the
taxable years ending June 30, 2004, through June 30, 2008.
Organization X does not need to establish within 90 days after June
30, 2008, that it met a public support test under Sec. 1.170A-9(e)
or Sec. 1.509(a)-3, as in effect prior September 9, 2008, (as
contained in 26 CFR part 1 revised April 1, 2008), for its advance
ruling period.
(iii) Organization X can qualify as a public charity beginning
with the taxable year ending June 30, 2009, if Organization X can
meet the requirements of paragraphs (f)(4)(i) or (ii) of this
section or Sec. 1.509(a)-3T(c)(1) for the taxable years ending June
30, 2005, through June 30, 2009, or for the taxable years ending
June 30, 2004, through June 30, 2008. In addition, for its taxable
year ending June 30, 2009, Organization X may qualify as a public
charity by availing itself of the transition rule contained in
paragraph (f)(14)(iii) of this section, which looks to support
received by X in the taxable years ending June 30, 2004, through
June 30, 2007.
Example 2. (i) Organization Y was formed in January 2000, and
uses a December 31 taxable year. Organization Y received a final
determination that it was recognized as tax-exempt under section
501(c)(3) and as a public charity prior to September 9, 2008.
(ii) For taxable year 2008, Organization Y will qualify as
publicly supported if it meets the requirements under either
paragraphs (f)(4)(i) or (ii) of this section or Sec. 1.509(a)-
3T(c)(1) for the five-year period January 1, 2004, through December
31, 2008. Organization Y will also qualify as publicly supported for
taxable year 2008 if it meets the requirements under either Sec.
1.170A-9(e)(4)(i) or (ii) or Sec. 1.509(a)-3(c)(1) as in effect
prior to September 9, 2008, (as contained in 26 CFR part 1 revised
April 1, 2008) for taxable year 2007, using the four-year period
from January 1, 2003, through December 31, 2006.
(g) through (j) [Reserved]. For further guidance, see Sec. 1.170A-
9(g) through (j).
(k) Effective/applicability date--(1) Effective date. These
regulations are effective on September 9, 2008.
(2) Applicability date. The regulations in paragraph (f) of this
section shall apply to tax years beginning on or after January 1, 2008.
(3) Expiration date. The applicability of this section expires on
September 8, 2011.
0
Par. 4. Section 1.507-2 is amended by adding new paragraph (h) to read
as follows:
Sec. 1.507-2 Special rules; transfer to, or operation as, public
charity.
* * * * *
(h) Effective/applicability date. This section shall apply to tax
years beginning before January 1, 2008.
0
Par. 5. Section 1.507-2T is added to read as follows:
Sec. 1.507-2T Special rules; transfer to, or operation as, public
charity (temporary).
(a) Transfer to public charities--(1) General rule. Under section
507(b)(1)(A) a private foundation, with respect to which there have not
been either willful repeated acts (or failures to act) or a willful and
flagrant act (or failure to act)
[[Page 52545]]
giving rise to liability for tax under chapter 42, may terminate its
private foundation status by distributing all of its net assets to one
or more organizations described in section 170(b)(1)(A) (other than in
clauses (vii) and (viii)) each of which has been in existence and so
described for a continuous period of at least 60 calendar months
immediately preceding such distribution. Because section 507(a) does
not apply to such a termination, a private foundation which makes such
a termination is not required to give the notification described in
section 507(a)(1). A private foundation that terminates its private
foundation status under section 507(b)(1)(A) does not incur tax under
section 507(c) and, therefore, no abatement of such tax under section
507(g) is required.
(2) Effect of current ruling. A private foundation seeking to
terminate its private foundation status pursuant to section
507(b)(1)(A) may rely on a ruling or determination letter issued to a
potential distributee organization that such distributee organization
is an organization described in section 170(b)(1)(A)(i), (ii), (iii),
(iv), (v) or (vi) in accordance with the provisions of Sec. 1.509(a)-
7.
(3) Organizations described in more than one clause of section
170(b)(1)(A). For purposes of this paragraph and section 507(b)(1)(A),
the parenthetical term ``other than in clauses (vii) and (viii)'' shall
refer only to an organization that is described only in section
170(b)(1)(A)(vii) or (viii). Thus, an organization described in section
170(b)(1)(A)(i), (ii), (iii), (iv), (v), or (vi) will not be precluded
from being a distributee described in section 507(b)(1)(A) merely
because it also appears to meet the description of an organization
described in section 170(b)(1)(A) (vii) or (viii).
(4) Applicability of chapter 42 to foundations terminating under
section 507(b)(1)(A). An organization that terminates its private
foundation status pursuant to section 507(b)(1)(A) will remain subject
to the provisions of chapter 42 until the distribution of all of its
net assets to distributee organizations described in section
507(b)(1)(A) has been completed.
(5) Return required from organizations terminating private
foundation status under section 507(b)(1)(A).
(i) An organization that terminates its private foundation status
under section 507(b)(1)(A) is required to file a return under the
provisions of section 6043(b), rather than under the provisions of
section 6050.
(ii) An organization that terminates its private foundation status
under section 507(b)(1)(A) is not required to comply with section
6104(d) for the taxable year in which such termination occurs.
(6) Distribution of net assets. A private foundation will meet the
requirement that it ``distribute all of its net assets'' within the
meaning of section 507(b)(1)(A) only if it transfers all of its right,
title, and interest in and to all of its net assets to one or more
organizations referred to in section 507(b)(1)(A).
(7) Effect of restrictions and conditions upon distributions of net
assets--(i) In general. In order to effectuate a transfer of ``all of
its right, title, and interest in and to all of its net assets'' within
the meaning of paragraph (a)(6) of this section, a transferor private
foundation may not impose any material restriction or condition that
prevents the transferee organization referred to in section
507(b)(1)(A) (herein sometimes referred to as the ``public charity'')
from freely and effectively employing the transferred assets, or the
income derived therefrom, in furtherance of its exempt purposes.
Whether or not a particular condition or restriction imposed upon a
transfer of assets is material (within the meaning of this paragraph
(a)(7)) must be determined from all of the facts and circumstances of
the transfer. Some of the more significant facts and circumstances to
be considered in making such a determination are--
(A) Whether the public charity (including a participating trustee,
custodian, or agent in the case of a community trust) is the owner in
fee of the assets it receives from the private foundation;
(B) Whether such assets are to be held and administered by the
public charity in a manner consistent with one or more of its exempt
purposes;
(C) Whether the governing body of the public charity has the
ultimate authority and control over such assets, and the income derived
therefrom; and
(D) Whether, and to what extent, the governing body of the public
charity is organized and operated so as to be independent from the
transferor.
(ii) Independent governing body. As provided in paragraph
(a)(7)(i)(D) of this section, one of the more significant facts and
circumstances to be considered in making the determination whether a
particular condition or restriction imposed upon a transfer of assets
is material within the meaning of this paragraph (a)(7) is whether, and
the extent to which, the governing body is organized and operated so as
to be independent from the transferor. In turn, the determination as to
such factor must be determined from all of the facts and circumstances.
Some of the more significant facts and circumstances to be considered
in making such a determination are--
(A) Whether, and to what extent, members of the governing body are
comprised of persons selected by the transferor private foundation or
disqualified persons with respect thereto, or are themselves such
disqualified persons;
(B) Whether, and to what extent, members of the governing body are
selected by public officials acting in their capacities as such; and
(C) How long a period of time each member of the governing body may
serve as such. In the case of a transfer that is to a community trust,
the community trust shall meet this paragraph (a)(7)(ii)(C) if, with
respect to terms of office beginning after the date of transfer:
(1) its governing body is comprised of members who may serve a
period of not more than ten consecutive years; and
(2) Upon completion of a period of service (beginning before or
after the date of transfer), no member may serve again within a period
consisting of the lesser of 5 years or the number of consecutive years
the member has immediately completed serving.
(iii) Factors not adversely affecting determination. The presence
of some or all of the following factors will not be considered as
preventing the transferee ``from freely and effectively employing the
transferred assets, or the income derived therefrom, in furtherance of
its exempt purposes'' (within the meaning of paragraph (a)(7)(i) of
this section):
(A) Name. The fund is given a name or other designation which is
the same as or similar to that of the transferor private foundation or
otherwise memorializes the creator of the foundation or his family.
(B) Purpose. The income and assets of the fund are to be used for a
designated purpose or for one or more particular section 509(a)(1),
(2), or (3) organizations, and such use is consistent with the
charitable, educational, or other basis for the exempt status of the
public charity under section 501(c)(3).
(C) Administration. The transferred assets are administered in an
identifiable or separate fund, some or all of the principal of which is
not to be distributed for a specified period, if the public charity
(including a participating trustee, custodian, or agent in the case of
a community trust) is the legal and equitable owner of the fund and the
governing body exercises ultimate and direct authority and control over
such
[[Page 52546]]
fund, as, for example, a fund to endow a chair at a university or a
medical research fund at a hospital. In the case of a community trust,
the transferred assets must be administered in or as a component part
of the community trust within the meaning of Sec. 1.170A-9T(f)(11).
(D) Restrictions on disposition. The transferor private foundation
transfers property the continued retention of which by the transferee
is required by the transferor if such retention is important to the
achievement of charitable or other similar purposes in the community
because of the peculiar features of such property, as, for example,
where a private foundation transfers a woodland preserve which is to be
maintained by the public charity as an arboretum for the benefit of the
community. Such a restriction does not include a restriction on the
disposition of an investment asset or the distribution of income.
(iv) Adverse factors. The presence of any of the following factors
will be considered as preventing the transferee ``from freely and
effectively employing the transferred assets, or the income derived
therefrom, in furtherance of its exempt purposes'' (within the meaning
of paragraph (a)(7)(i) of this section):
(A) Distributions. (1) With respect to distributions made after
April 19, 1977, the transferor private foundation, a disqualified
person with respect thereto, or any person or committee designated by,
or pursuant to the terms of an agreement with, such a person
(hereinafter referred to as donor), reserves the right, directly or
indirectly, to name (other than by designation in the instrument of
transfer of particular section 509(a)(1), (2), or (3) organizations)
the persons to which the transferee public charity must distribute, or
to direct the timing of such distributions (other than by direction in
the instrument of transfer that some or all of the principal, as
opposed to specific assets, not be distributed for a specified period)
as, for example, by a power of appointment. The Internal Revenue
Service will examine carefully whether the seeking of advice by the
transferee from, or the giving of advice by, any donor after the assets
have been transferred to the transferee constitutes an indirect
reservation of a right to direct such distributions. In any such case,
the reservation of such a right will be considered to exist where the
only criterion considered by the public charity in making a
distribution of income or principal from a donor's fund is advice
offered by the donor. Whether there is a reservation of such a right
will be determined from all of the facts and circumstances, including,
but not limited to, the factors contained in paragraphs
(a)(7)(iv)(A)(2) and (3) of this section.
(2) The presence of some or all of the following factors will
indicate that the reservation of such a right does not exist:
(i) There has been an independent investigation by the staff of the
public charity evaluating whether the donor's advice is consistent with
specific charitable needs most deserving of support by the public
charity (as determined by the public charity).
(ii) The public charity has promulgated guidelines enumerating
specific charitable needs consistent with the charitable purposes of
the public charity and the donor's advice is consistent with such
guidelines.
(iii) The public charity has instituted an educational program
publicizing to donors and other persons the guidelines enumerating
specific charitable needs consistent with the charitable purposes of
the public charity.
(iv) The public charity distributes funds in excess of amounts
distributed from the donor's fund to the same or similar types of
organizations or charitable needs as those recommended by the donor.
(v) The public charity's solicitations (written or oral) for funds
specifically state that such public charity will not be bound by advice
offered by the donor.
(3) The presence of some or all of the following factors will
indicate the reservation of such a right does exist:
(i) The solicitations (written or oral) of funds by the public
charity state or imply, or a pattern of conduct on the part of the
public charity creates an expectation, that the donor's advice will be
followed.
(ii) The advice of a donor (whether or not restricted to a
distribution of income or principal from the donor's trust or fund) is
limited to distributions of amounts from the donor's fund, and the
factors described in paragraph (a)(7)(iv)(A)(2)(i) or (ii) of this
section are not present.
(iii) Only the advice of the donor as to distributions of such
donor's fund is solicited by the public charity and no procedure is
provided for considering advice from persons other than the donor with
respect to such fund.
(iv) For the taxable year and all prior taxable years the public
charity follows the advice of all donors with respect to their funds
substantially all of the time.
(B) Other action or withholding of action. The terms of the
transfer agreement, or any expressed or implied understanding, required
the public charity to take or withhold action with respect to the
transferred assets which is not designed to further one or more of the
exempt purposes of the public charity, and such action or withholding
of action would, if performed by the transferor private foundation with
respect to such assets, have subjected the transferor to tax under
chapter 42 (other than with respect to the minimum investment return
requirement of section 4942(e)).
(C) Assumption of leases, contractual obligations, or liabilities.
The public charity assumes leases, contractual obligations, or
liabilities of the transferor private foundation, or takes the assets
thereof subject to such liabilities (including obligations under
commitments or pledges to donees of the transferor private foundation),
for purposes inconsistent with the purposes or best interests of the
public charity, other than the payment of the transferor's chapter 42
taxes incurred prior to the transfer to the public charity to the
extent of the value of the assets transferred.
(D) Retention of investment assets. The transferee public charity
is required by any restriction or agreement (other than a restriction
or agreement imposed or required by law or regulatory authority),
express or implied, to retain any securities or other investment assets
transferred to it by the private foundation. In a case where such
transferred assets consistently produce a low annual return of income,
the Internal Revenue Service will examine carefully whether the
transferee is required by any such restriction or agreement to retain
such assets.
(E) Right of first refusal. An agreement is entered into in
connection with the transfer of securities or other property which
grants directly or indirectly to the transferor private foundation or
any disqualified person with respect thereto a right of first refusal
with respect to the transferred securities or other property when and
if disposed of by the public charity, unless such securities or other
property was acquired by the transferor private foundation subject to
such right of first refusal prior to October 9, 1969.
(F) Relationships. An agreement is entered into between the
transferor private foundation and the transferee public charity which
establishes irrevocable relationships with respect to the maintenance
or management of assets transferred to the public charity, such as
continuing relationships with banks, brokerage firms, investment
counselors, or other advisors with regard to the investments or other
property transferred to the public charity (other than a relationship
with a trustee, custodian, or agent for a
[[Page 52547]]
community trust acting as such). The transfer of property to a public
charity subject to contractual obligations which were established prior
to November 11, 1976, between the transferor private foundation and
persons other than disqualified persons with respect to such foundation
will not be treated as prohibited under the preceding sentence, but
only if such contractual obligations were not entered into pursuant to
a plan to terminate the private foundation status of the transferor
under section 507(b)(1)(A) and if the continuation of such contractual
obligations is in the best interests of the public charity.
(G) Other conditions. Any other condition is imposed on action by
the public charity which prevents it from exercising ultimate control
over the assets received from the transferor private foundation for
purposes consistent with its exempt purposes.
(v) Examples. The provisions of this paragraph (a)(7) may be
illustrated by the following examples:
Example 1. The M Private Foundation transferred all of its net
assets to the V Cancer Institute, a public charity described in
section 170(b)(1)(A)(iii). Prior to the transfer, M's activities
consisted of making grants to hospitals and universities to further
research into the causes of cancer. Under the terms of the transfer,
V is required to keep M's assets in a separate fund and use the
income and principal to further cancer research. Although the assets
may be used only for a limited purpose, this purpose is consistent
with and in furtherance of V's exempt purposes, and does not prevent
the transfer from being a distribution for purposes of section
507(b)(1)(A).
Example 2. The N Private Foundation transferred all of its net
assets to W University, a public charity described in section
170(b)(1)(A)(ii). Under the terms of the transfer, W is required to
use the income and principal to endow a chair at the university to
be known as the ``John J. Doe Memorial Professorship'', named after
N's creator. Although the transferred assets are to be used for a
specified purpose by W, this purpose is in furtherance of W's exempt
educational purposes, and there are no conditions on investment or
reinvestment of the principal or income. The use of the name of the
foundation's creator for the chair is not a restriction which would
prevent the transfer from being a distribution for purposes of
section 507(b)(1)(A).
Example 3. The O Private Foundation transferred all of its net
assets to X Bank as trustee for the Q Community Trust, a community
trust that is a public charity described in section
170(b)(1)(A)(vi). Under the terms of the transfer, X is to hold the
assets in trust for Q and is directed to distribute the income
annually to the Y Church, a public charity described in section
170(b)(1)(A)(i). The distribution of income to Y Church is
consistent with Q's exempt purposes. If the trust created by this
transfer otherwise meets the requirements of Sec. 1.170A-9T(f)(11)
as a component part of the Q Community Trust, the assets transferred
by O to X will be treated as distributed to one or more public
charities within the meaning of section 507(b)(1)(A). The direction
to distribute the income to Y Church meets the conditions of
paragraph (a)(7)(iii)(B) of this section and will therefore not
disqualify the transfer under section 507(b)(1)(A).
Example 4. (i) The P Private Foundation transferred all of its
net assets to Z Bank as trustee for the R Community Trust, a
community trust that is a public charity described in section
170(b)(1)(A)(vi). Under the terms of the transfer, Z is to hold the
assets in trust for R and distribute the income to those public
charities described in section 170(b)(1)(A)(i) through (vi) that are
designated by B, the creator of P. R's governing body has no
authority during B's lifetime to vary B's direction. Under the terms
of the transfer, it is intended that Z retain the transferred assets
in their present form for a period of 20 years, or until the date of
B's death if it occurs before the expiration of such period. Upon
the death of B, R will have the power to distribute the income to
such public charities as it selects and may dispose of the corpus as
it sees fit.
(ii) Under paragraph (a)(7)(iv)(A) or (D) of this section, as a
result of the restrictions imposed with respect to the transferred
assets, there has been no distribution of all P's net assets within
the meaning of section 507(b)(1)(A) at the time of the transfer. In
addition, P has not transferred its net assets to a component part
of R Community Trust, but rather to a separate trust described in
Sec. 1.170A-9T(f)(12).
(b) Operation as a public charity--(1) In general. Under section
507(b)(1)(B), an organization can terminate its private foundation
status if the organization--
(i) Meets the requirements of section 509(a)(1), (2) or (3) for a
continuous period of 60 calendar months beginning with the first day of
any taxable year that begins after December 31, 1969;
(ii) In compliance with section 507(b)(1)(B)(ii) and paragraph
(b)(3) of this section, properly notifies the Internal Revenue Service,
in such manner as may be provided by published guidance, publication,
form or instructions, before the commencement of such 60-month period,
that it is terminating its private foundation status; and
(iii) Properly establishes immediately after the expiration of such
60-month period that such organization has complied with the
requirements of section 509(a)(1), (2) or (3) during the 60-month
period, in the manner described in paragraph (b)(4) of this section.
(2) Relationship of section 507(b)(1)(B) to section 507(a), (c),
and (g). Because section 507(a) does not apply to a termination
described in section 507(b)(1)(B), a private foundation's notification
that it is commencing a termination pursuant to section 507(b)(1)(B)
will not be treated as a notification described in section 507(a) even
if the private foundation does not successfully terminate its private
foundation status pursuant to section 507(b)(1)(B). A private
foundation that terminates its private foundation status under section
507(b)(1)(B) does not incur tax under section 507(c) and, therefore, no
abatement of such tax under section 507(g) is required.
(3) Notification of termination. In order to comply with the
requirements under section 507(b)(1)(B)(ii), an organization shall
before the commencement of the 60-month period under section
507(b)(1)(B)(i) notify the Internal Revenue Service, in such manner as
may be provided by published guidance, publication, form or
instructions, of its intention to terminate its private foundation
status. Such notification shall contain the following information:
(i) The name and address of the private foundation.
(ii) Its intention to terminate its private foundation status.
(iii) The Code section under which it seeks classification (section
509(a)(1), (2) or (3)).
(iv) If section 509(a)(1) is applicable, the clause of section
170(b)(1)(A) involved.
(v) The date its regular taxable year begins.
(vi) The date of commencement of the 60-month period.
(4) Establishment of termination. In order to comply with the
requirements under section 507(b)(1)(B)(iii), an organization shall
within 90 days after the expiration of the 60-month period file such
information with the Internal Revenue Service, in such manner as may be
provided by published guidance, publication, form or instructions, as
is necessary to make a determination as to the organization's status as
an organization described under section 509(a)(1), (2) or (3) and the
accompanying regulations. See paragraph (c) of this section as to the
information required to be submitted under this paragraph (b)(4).
(5) Incomplete information. The failure to supply, within the
required time, all of the information required by paragraph (b)(3) or
(4) of this section is not alone sufficient to constitute a failure to
satisfy the requirements of section 507(b)(1)(B). If the information
that is submitted within the required time is incomplete and the
organization supplies the necessary additional information at the
request of the
[[Page 52548]]
Commissioner within the additional time period allowed by him, the
original submission will be considered timely.
(6) Application of special rules and filing requirements. An
organization that has terminated its private foundation status under
section 507(b)(1)(B) is not required to comply with the special rules
set forth in section 508(a) and (b). Such organization is also not
required to file a return under the provisions of section 6043(b) or
6050 by reason of termination of its private foundation status under
the provisions of section 507(b)(1)(B).
(7) Extension of time to assess deficiencies. If a private
foundation files a notification (defined in paragraph (b)(3) of this
section) that it intends to begin a 60-month termination pursuant to
section 507(b)(1)(B) and does not file a request for an advance ruling
pursuant to paragraph (d) of this section, such private foundation may
file with the notification described in paragraph (b)(3) of this
section a consent under section 6501(c)(4) to the effect that the
period of limitation upon assessment under section 4940 for any taxable
year within the 60-month termination period shall not expire prior to
one year after the date of expiration of the time prescribed by law for
the assessment of a deficiency for the last taxable year within the 60-
month period. Such consents, if filed, will ordinarily be accepted by
the Commissioner. See paragraph (e)(3) of this section for an
illustration of the procedure required to obtain a refund of the tax
imposed by section 4940 in a case where such a consent is not in
effect.
(c) Sixty-month terminations--(1) Method of determining normal
sources of support. (i) In order to meet the requirements of section
507(b)(1)(B) for the 60-month termination period as a section 509(a)(1)
or (2) organization, an organization must meet the requirements of
section 509(a)(1) or (2), as the case may be, for a continuous period
of at least 60 calendar months. In determining whether an organization
seeking status under section 509(a)(1) as an organization described in
section 170(b)(1)(A)(iv) or (vi) or under section 509(a)(2) normally
meets the requirements set forth under such sections, support received
in taxable years prior to the commencement of the 60-month period shall
not be taken into consideration, except as otherwise provided in this
section.
(ii) For purposes of section 507(b)(1)(B), an organization will be
considered to be a section 509(a)(1) organization described in section
170(b)(1)(A)(vi) for a continuous period of 60 calendar months only if
the organization satisfies the provisions of Sec. 1.170A-9T(f), other
than Sec. 1.170A-9T(f)(4)(v), based upon aggregate data for such
entire period. The calculation of public support shall be made over the
period beginning with the date of the commencement of the 60-month
period, and ending with the last day of the 60-month period.
(iii) For purposes of section 507(b)(1)(B), an organization will be
considered to be a section 509(a)(2) organization only if such
organization meets the support requirements set forth in section
509(a)(2)(A) and (B) and the accompanying regulations, other than Sec.
1.509(a)-3T(d), for the continuous period of 60 calendar months
prescribed under section 507(b)(1)(B). The calculation of public
support shall be made over the period beginning with the date of the
commencement of the 60-month period, and ending with the last day of
the 60-month period.
(2) Organizational and operational tests. In order to meet the
requirements of section 507(b)(1)(B) for the 60-month termination
period as an organization described in section 170(b)(1)(A)(i), (ii),
(iii), (iv), or (v) or section 509(a)(3), as the case may be, an
organization must meet the requirements of the applicable provisions
for a continuous period of at least 60 calendar months. For purposes of
section 507(b)(1)(B), an organization will be considered to be such an
organization only if it satisfies the requirements of the applicable
provision (including with respect to section 509(a)(3), the
organizational and operational test set forth in subparagraph (A)
thereof) at the commencement of such 60-month period and continuously
thereafter during such period.
(d) Advance rulings for 60-month terminations--(1) In general. An
organization that files the notification required by section
507(b)(1)(B)(ii) that it is commencing a 60-month termination may
obtain an advance ruling from the Commissioner that it can be expected
to satisfy the requirements of section 507(b)(1)(B)(i) during the 60-
month period. Such an advance ruling may be issued if the organization
can reasonably be expected to meet the requirements of section
507(b)(1)(B)(i) during the 60-month period. The issuance of a ruling
will be discretionary with the Commissioner.
(2) Basic consideration. In determining whether an organization can
reasonably be expected (within the meaning of paragraph (d)(1) of this
section) to meet the requirements of section 507(b)(1)(B)(i) for the
60-month period, the basic consideration is whether its organizational
structure (taking into account any revisions made prior to the
beginning of the 60-month period), current or proposed programs or
activities, actual or intended method of operation, and current or
projected sources of support are such as to indicate that the
organization is likely to satisfy the requirements of section
509(a)(1), (2), or (3) and paragraph (d) of this section during the 60-
month period. In making such a determination, all pertinent facts and
circumstances shall be considered.
(3) Reliance by grantors and contributors. For purposes of sections
170, 545(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2), and 2522, grants
or contributions to an organization which has obtained a ruling
referred to in this paragraph will be treated as made to an
organization described in section 509(a)(1), (2), or (3), as the case
may be, until the Internal Revenue Service publishes notice that such
advance ruling is being revoked (such as by publication in the Internal
Revenue Bulletin). However, a grantor or contributor may not rely on
such an advance ruling if the grantor or contributor was responsible
for, or aware of, the act or failure to act that resulted in the
organization's failure to meet the requirements of section 509(a)(1),
(2), or (3), or acquired knowledge that the Internal Revenue Service
had given notice to such organization that its advance ruling would be
revoked. Prior to the making of any grant or contribution which
allegedly will not result in the grantee's failure to meet the
requirements of section 509(a)(1), (2), or (3), a potential grantee
organization may request a ruling whether such grant or contribution
may be made without such failure. A request for such ruling may be
filed by the grantee organization with the Internal Revenue Service.
The issuance of such ruling will be at the sole discretion of the
Commissioner. The organization must submit all information necessary to
make a determination on the factors referred to in paragraph (d)(2) of
this section. If a favorable ruling is issued, such ruling may be
relied upon by the grantor or contributor of the particular
contribution in question for purposes of sections 170, 507, 545(b)(2),
642(c), 4942, 4945, 2055, 2106(a)(2), and 2522.
(4) Reliance by organization. An organization obtaining an advance
ruling pursuant to this paragraph cannot rely on such a ruling.
Consequently, if the organization does not pay the tax imposed by
section 4940 for any taxable year or years during the 60-month period,
and it is subsequently determined that such tax is due for such
[[Page 52549]]
year or years (because the organization did not in fact complete a
successful termination pursuant to section 507(b)(1)(B) and was not
treated as an organization described in section 509(a)(1), (2), or (3)
for such year or years), the organization is liable for interest in
accordance with section 6601 if any amount of tax under section 4940
has not been paid on or before the last date prescribed for payment.
However, because any failure to pay such tax during the 60-month period
(or prior to the revocation of such ruling) is due to reasonable cause,
the penalty under section 6651 with respect to the tax imposed by
section 4940 shall not apply.
(5) Extension of time to assess deficiencies. The advance ruling
described in paragraph (d)(1) of this section shall be issued only if
such organization's request for an advance ruling is filed with a
consent under section 6501(c)(4) to the effect that the period of
limitation upon assessment under section 4940 for any taxable year
within the advance ruling period shall not expire prior to 1 year after
the date of the expiration of the time prescribed by law for the
assessment of a deficiency for the last taxable year within the 60-
month period.
(e) Effect on grantors or contributors and on the organization
itself--(1) Effect of satisfaction of requirements for termination;
treatment during the termination period. In the event that an
organization satisfies the requirements of section 507(b)(1)(B) for
termination of its private foundation status during the continuous 60-
month period, such organization shall be treated for such entire 60-
month period in the same manner as an organization described in section
509(a)(1), (2) or (3), as the case may be.
(2) Failure to meet termination requirements--(i) In general.
Except as otherwise provided in paragraphs (e)(2)(ii) and (d) of this
section, any organization that fails to satisfy the requirements of
section 507(b)(1)(B) for termination of its private foundation status
during the continuous 60-month period shall be treated as a private
foundation for the entire 60-month period, for purposes of sections 507
through 509 and chapter 42, and grants or contributions to such an
organization shall be treated as made to a private foundation for
purposes of sections 170, 507(b)(1)(A), 4942, and 4945.
(ii) Certain 60-month terminations. Notwithstanding paragraph
(e)(2)(i) of this section, if an organization fails to satisfy the
requirements of section 509(a)(1), (2) or (3) for the continuous 60-
month period but does satisfy the requirements of section 509(a)(1),
(2) or (3), as the case may be, for any taxable year or years during
such 60-month period, the organization shall be treated as a section
509(a)(1), (2) or (3) organization for such taxable year or years and
grants or contributions made during such taxable year or years shall be
treated as made to an organization described in section 509(a)(1), (2)
or (3). In addition, sections 507 through 509 and chapter 42 shall not
apply to such organization for any taxable year within such 60-month
period for which it does meet such requirements. For purposes of
determining whether an organization satisfies the requirements of
section 509(a)(1), (2) or (3) for any taxable year in the 60-month
period, the calculation of public support shall be made over the period
beginning with the date of the commencement of the 60-month period, and
ending with the last day of the taxable year being tested. The
organization shall not be treated as a section 509(a)(1) or (2)
organization for any taxable year during the 60-month period solely by
reason of having met a public support test for the preceding year. In
addition, the transition rules in Sec. 1.170-9T(f)(14)(iii) and Sec.
1.509(a)-3T(n)(iii) shall not apply.
(iii) Aggregate tax benefit. For purposes of section 507(d), the
organization's aggregate tax benefit resulting from the organization's
section 501(c)(3) status shall continue to be computed from the date
from which such computation would have been made, but for the notice
filed under section 507(b)(1)(B)(ii), except that any taxable year
within such 60-month period for which such organization meets the
requirements of section 509(a)(1), (2), or (3) shall be excluded from
such computations.
(iv) Excess business holdings. See section 4943 and the
accompanying regulations for rules relating to decreases in a private
foundation's holdings in a business enterprise which are caused by the
foundation's failure to terminate its private foundation status after
giving the notification for termination under section 507(b)(1)(B)(ii).
(3) Example. The provisions of this paragraph (e) may be
illustrated by the following example:
Example. Y, a calendar year private foundation, notifies the
Internal Revenue Service that it intends to terminate its private
foundation status by converting into a publicly supported
organization described in section 170(b)(1)(A)(vi) and that its 60-
month termination period will commence on January 1, 2010. Y does
not obtain a ruling described in paragraph (d) of this section.
Based upon its support for 2010, Y does not qualify as a publicly
supported organization within the meaning of Sec. 1.170A-9T(f) and
this paragraph for 2010. Consequently, in order to avoid the risks
of penalties and interest if Y fails to terminate within the 60-
month period, Y files its 2010 return as a private foundation and
pays the tax imposed by section 4940. Because a consent (described
in paragraph (b)(7) of this section), which would prevent the period
of limitations for all years in the 60-month period from expiring,
is not in effect, in order to be able to file a claim for refund, Y
and the Internal Revenue Service must agree to extend the period of
limitation for all taxes imposed under chapter 42 for 2010. Based on
the aggregate data for the entire 60-month period (2010 through
2014), Y does qualify as a publicly-supported organization for the
entire 60-month period. Consequently, Y is treated as a publicly-
supported organization for the entire 60-month period. Y files a
claim for refund for the taxes paid under section 4940 for 2010, and
such taxes are refunded.
(f) Effective/applicability date--(1) Effective date. These
regulations are effective on September 9, 2008.
(2) Applicability date. The regulations in this section shall apply
to taxable years beginning on or after January 1, 2008.
(3) Expiration date. The applicability of this section expires on
September 8, 2011.
0
Par. 6. Section 1.509(a)-3 is amended by adding new paragraph (n) to
read as follows:
Sec. 1.509(a)-3 Broadly, publicly supported organizations.
* * * * *
(n) Effective/applicability date. This section shall apply to
taxable years beginning after December 31, 1969. The applicability of
paragraphs (a)(2), (a)(3)(i), (c), (d), (e) and (k) of this section
shall be limited to taxable years beginning before January 1, 2008.
0
Par. 7. Section 1.509(a)-3T is added to read as follows:
Sec. 1.509(a)-3T Broadly, publicly supported organizations
(temporary).
(a)(1) [Reserved]. For further guidance see Sec. 1.509(a)-3(a)(1).
(2) One-third support test. An organization will meet the one-third
support test if it normally (within the meaning of paragraph (c) or (d)
of this section) receives more than one-third of its support in each
taxable year from any combination of--
(i) Gifts, grants, contributions, or membership fees; and
(ii) Gross receipts from admissions, sales of merchandise,
performance of services, or furnishing of facilities, in an activity
that is not an unrelated trade or business (within the meaning of
section 513), subject to certain limitations
[[Page 52550]]
described in paragraph (b) of this section, from permitted sources. For
purposes of this section, governmental units, organizations described
in section 509(a)(1) and persons other than disqualified persons with
respect to the organization shall be referred to as permitted sources.
For purposes of this section, the amount of support received from the
sources described in paragraph (a)(2)(i) of this section and this
paragraph (a)(2)(ii) (subject to the limitations referred to in this
paragraph (a)(2)) will be referred to as the numerator of the one-third
support fraction, and the total amount of support received (as defined
in section 509(d)) will be referred to as the denominator of the one-
third support fraction. For purposes of section 509(a)(2), Sec.
1.509(a)-3(f) distinguishes gifts and contributions from gross
receipts; Sec. 1.509(a)-3(g) distinguishes grants from gross receipts;
Sec. 1.509(a)-3(h) defines membership fees; Sec. 1.509(a)-3(i)
defines ``any bureau or similar agency of a governmental unit''; Sec.
1.509(a)-3(j) describes the treatment of certain indirect forms of
support; paragraph (k) of this section describes the method of
accounting for support; Sec. 1.509(a)-3(l) describes the treatment of
gross receipts from section 513(a)(1), (2), or (3) activities; and
Sec. 1.509(a)-3(m) distinguishes gross receipts from gross investment
income.
(3) Not-more-than-one-third support test--(i) In general. An
organization will meet the not-more-than-one-third support test under
section 509(a)(2)(B) if it normally (within the meaning of paragraph
(c) or (d) of this section) receives not more than one-third of its
support in each taxable year from the sum of its gross investment
income (as defined in section 509(e)) and the excess (if any) of the
amount of its unrelated business taxable income (as defined in section
512) derived from trades or businesses that were acquired by the
organization after June 30, 1975, over the amount of tax imposed on
such income by section 511. For purposes of this section the amount of
support received from items described in section 509(a)(2)(B) will be
referred to as the numerator of the not-more-than-one-third support
fraction, and the total amount of support (as defined in section
509(d)) will be referred to as the denominator of the not-more-than-
one-third support fraction. For purposes of section 509(a)(2),
paragraph (m) of this section distinguishes gross receipts from gross
investment income. For purposes of section 509(e), gross investment
income includes the items of investment income described in Sec.
1.512(b)-1(a).
(a)(3)(ii) through (b) [Reserved]. For further guidance, see Sec.
1.509(a)-3(a)(3)(ii) through (b).
(c) Normally--(1) In general--(i) Definition. The support tests set
forth in section 509(a)(2) are to be computed on the basis of the
nature of the organization's normal sources of support. An organization
will be considered as normally receiving one third of its support from
any combination of gifts, grants, contributions, membership fees, and
gross receipts from permitted sources (subject to the limitations
described in Sec. 1.509(a)-3(b)) and not more than one third of its
support from items described in section 509(a)(2)(B) for its current
taxable year and the taxable year immediately succeeding its current
year, if, for the current taxable year and the four taxable years
immediately preceding the current taxable year, the aggregate amount of
the support received during the applicable period from gifts, grants,
contributions, membership fees, and gross receipts from permitted
sources (subject to the limitations described in Sec. 1.509(a)-3(b))
is more than one third, and the aggregate amount of the support
received from items described in section 509(a)(2)(B) is not more than
one third, of the total support of the organization for such 5-year
period.
(ii) First five years of an organization's existence. See paragraph
(d)(1) of this section for the definition of ``normally'' for
organizations in the first five years of their existence.
(2) Terminations under section 507(b)(1)(B). For the special rules
applicable to the term normally as applied to private foundations that
elect to terminate their private foundation status pursuant to the 60-
month procedure provided in section 507(b)(1)(B), see the regulations
under such section.
(3) Exclusion of unusual grants. For purposes of applying the 5-
year aggregation test for support set forth in paragraph (c)(1) of this
section, one or more contributions may be excluded from the numerator
of the one-third support fraction and from the denominator of both the
one-third support and not-more-than-one-third support fractions only if
such a contribution meets the requirements of this paragraph (c)(3).
The exclusion provided by this paragraph (c)(3) is generally intended
to apply to substantial contributions and bequests from disinterested
parties, which contributions or bequests--
(i) Are attracted by reason of the publicly supported nature of the
organization;
(ii) Are unusual or unexpected with respect to the amount thereof;
and
(iii) Would by reason of their size, adversely affect the status of
the organization as normally meeting the one-third support test for any
of the applicable periods described in this paragraph (c) or paragraph
(d) of this section. In the case of a grant (as defined in Sec.
1.509(a)-3(g)) that meets the requirements of this paragraph (c)(3), if
the terms of the granting instrument (whether executed before or after
1969) require that the funds be paid to the recipient organization over
a period of years, the amount received by the organization each year
pursuant to the terms of such grant may be excluded for such year.
However, no item described in section 509(a)(2)(B) may be excluded
under this paragraph (c)(3). The provisions of this paragraph (c)(3)
shall apply to exclude unusual grants made during any of the applicable
periods described in this paragraph (c) or paragraph (d) of this
section. See paragraph (c)(5)(ii) of this section as to reliance by a
grantee organization upon an unusual grant ruling under this paragraph
(c)(3).
(4) Determining factors. In determining whether a particular
contribution may be excluded under paragraph (c)(3) of this section,
all pertinent facts and circumstances will be taken into consideration.
No single factor will necessarily be determinative. Among the factors
to be considered are--
(i) Whether the contribution was made by any person (or persons
standing in a relationship to such person which is described in section
4946(a)(1)(C) through (G)) who created the organization, previously
contributed a substantial part of its support or endowment, or stood in
a position of authority, such as a foundation manager (within the
meaning of section 4946(b)), with respect to the organization. A
contribution made by a person other than those persons described in
this paragraph (c)(4)(i) will ordinarily be given more favorable
consideration than a contribution made by a person described in this
paragraph (c)(4)(i);
(ii) Whether the contribution was a bequest or an inter vivos
transfer. A bequest will ordinarily be given more favorable
consideration than an inter vivos transfer;
(iii) Whether the contribution was in the form of cash, readily
marketable securities, or assets which further the exempt purposes of
the organization, such as a gift of a painting to a museum;
(iv) Except in the case of a new organization, whether, prior to
the receipt of the particular contribution,
[[Page 52551]]
the organization has carried on an actual program of public
solicitation and exempt activities and has been able to attract a
significant amount of public support;
(v) Whether the organization may reasonably be expected to attract
a significant amount of public support subsequent to the particular
contribution. In this connection, continued reliance on unusual grants
to fund an organization's current operating expenses (as opposed to
providing new endowment funds) may be evidence that the organization
cannot reasonably be expected to attract future support from the
general public;
(vi) Whether, prior to the year in which the particular
contribution was received, the organization met the one-third support
test described in paragraph (c)(1) of this section without the benefit
of any exclusions of unusual grants pursuant to paragraph (c)(3) of
this section;
(vii) Whether neither the contributor nor any person standing in a
relationship to such contributor which is described in section
4946(a)(1)(C) through (G) continues directly or indirectly to exercise
control over the organization;
(viii) Whether the organization has a representative governing body
as described in Sec. 1.509(a)-3(d)(3)(i); and
(ix) Whether material restrictions or conditions (within the
meaning of Sec. 1.507-2T(a)(7)) have been imposed by the transferor
upon the transferee in connection with such transfer.
(5) Grantors and contributors. Prior to the making of any grant or
contribution expected to meet the requirements for exclusion under
paragraph (c)(3) of this section, a potential grantee organization may
request a ruling whether such grant or contribution may be so excluded.
Requests for such ruling may be filed by the grantee organization. The
issuance of such determination will be at the sole discretion of the
Commissioner. The organization must submit all information necessary to
make a determination of the applicability of paragraph (c)(3) of this
section, including all information relating to the factors described in
paragraph (c)(4) of this section. If a favorable ruling is issued, such
ruling may be relied upon by the grantor or contributor of the
particular contribution in question for purposes of sections 170, 507,
545(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2), and 2522 and by the
grantee organization for purposes of paragraph (c)(3) of this section.
(6) Examples. The application of the principles set forth in this
paragraph are illustrated by the examples as follows. For purposes of
these examples, the term general public is defined as persons other
than disqualified persons and other than persons from whom the
foundation received gross receipts in excess of the greater of $5,000
or 1 percent of its support in any taxable year, the term gross
investment income is as defined in section 509(e), and the term gross
receipts is limited to receipts from activities which are not unrelated
trades or businesses (within the meaning of section 513).
Example 1. (i) For the years 2008 through 2012, X, an
organization exempt under section 501(c)(3) that makes scholarship
grants to needy students of a particular city, received support from
the following sources:
2008:
Gross receipts (general public)........................... $35,000
Contributions (substantial contributors).................. 36,000
Gross investment income................................... 29,000
-----------
Total support........................................... 100,000
2009:
Gross receipts (general public)........................... 34,000
Contributions (substantial contributors).................. 35,000
Gross investment income................................... 31,000
-----------
Total support........................................... 100,000
2010:
Gross receipts (general public)........................... 35,000
Contributions (substantial contributors).................. 30,000
Gross investment income................................... 35,000
-----------
Total support........................................... 100,000
2011:
Gross receipts (general public)........................... 33,000
Contributions (substantial contributors).................. 32,000
Gross investment income................................... 35,000
-----------
Total support........................................... 100,000
2012:
Gross receipts (general public)........................... 31,000
Contributions (substantial contributors).................. 39,000
Gross investment income................................... 30,000
-----------
Total support........................................... $100,000
(ii) In applying section 509(a)(2) to the taxable year 2012, on
the basis of paragraph (c)(1)(i) of this section, the total amount
of support from gross receipts from the general public ($168,000)
for the period 2008 through 2012, was more than one third, and the
total amount of support from gross investment income ($160,000) was
less than one third, of X's total support for the same period
($500,000). For the taxable years 2012 and 2013, X is therefore
considered normally to receive more than one third of its support
from the public sources described in section 509(a)(2)(A) and less
than one third of its support from items described in section
509(a)(2)(B). The fact that X received less than one third of its
support from section 509(a)(2)(A) sources in 2012 and more than one
third of its support from items described in section 509(a)(2)(B) in
2011 does not affect its status because it met the normally test
over a 5-year period.
Example 2. Assume the same facts as in Example 1 except that in
2012, X also received an unexpected bequest of $50,000 from A, an
elderly widow who was interested in encouraging the work of X, but
had no other relationship to it. Solely by reason of the bequest, A
became a disqualified person. X used the bequest to create 5 new
scholarships. Its operations otherwise remained the same. Under
these circumstances X could not meet the 5-year support test because
the total amount received from gross receipts from the general
public ($168,000) would not be more than one-third of its total
support for the 5-year period ($550,000). Because A is a
disqualified person, her bequest cannot be included in the numerator
of the one-third support test under section 509(a)(2)(A). However,
based on the factors set forth in paragraph (c)(4) of this section,
A's bequest may be excluded as an unusual grant under paragraph
(c)(3) of this section. Therefore, X will be considered to have met
the support test for the taxable years 2012 and 2013.
Example 3. Y, an organization described in section 501(c)(3),
was created by A, the holder of all the common stock in M
corporation, B, A's wife, and C, A's business associate. The purpose
of Y was to sponsor and equip athletic teams for underprivileged
children in the community. Each of the three creators makes small
cash contributions to Y. A, B, and C have been active participants
in the affairs of Y since its creation. Y regularly raises small
amounts of contributions through fundraising drives and selling
admission to some of the sponsored sporting events. The operations
of Y are carried out on a small scale, usually being restricted to
the sponsorship of two to four baseball teams of underprivileged
children. In 2009, M recapitalizes and creates a first and second
class of 6 percent nonvoting preferred stock, most of which is held
by A and B. In 2010, A contributes 49 percent of his common stock in
M to Y. A's contribution of M's common stock was substantial and
constitutes 90 percent of Y's total support for 2010. A combination
of the facts and circumstances described in paragraph (c)(4) of this
section preclude A's contribution of M's common stock in 2010 from
being excluded as an unusual grant under paragraph (c)(3) of this
section for purposes of determining whether Y meets the one-third
support test under section 509(a)(2).
Example 4. (i) M is organized in 2009 to promote the
appreciation of ballet in a particular region of the United States.
Its principal activities consist of erecting a theater for the
performance of ballet and the organization and operation of a ballet
company. M receives a determination letter that it is an
organization described in section 501(c)(3) and that it is a public
charity described in section 509(a)(2). The governing body of M
consists of 9 prominent unrelated
[[Page 52552]]
citizens residing in the region who have either an expertise in
ballet or a strong interest in encouraging appreciation of the art
form.
(ii) In 2010, Z, a private foundation, proposes to makes a grant
of $500,000 in cash to M to provide sufficient capital for M to
commence its activities. Although A, the creator of Z, is one of the
nine members of M's governing body, was one of M's original
founders, and continues to lend his prestige to M's activities and
fund raising efforts, A does not, directly or indirectly, exercise
any control over M. M also receives a significant amount of support
from a number of smaller contributions and pledges from other
members of the general public. M charges admission to the ballet
performances to the general public.
(iii) Although the support received in 2010 will not impact M's
status as a public charity for its first 5 taxable years, it will be
relevant to the determination of whether M meets the one-third
support test under section 509(a)(2) for the 2014 taxable year,
using the computation period 2010 through 2014. Within the
appropriate timeframe, M may submit a request for a private letter
ruling that the $500,000 contribution from Z qualifies as an unusual
grant.
(iv) Under the above circumstances, even though A was a founder
and member of the governing body of M, M may exclude Z's
contribution of $500,000 in 2010 as an unusual grant under paragraph
(c)(3) of this section for purposes of determining whether M meets
the one-third support test under section 509(a)(2) for 2014.
Example 5. (i) Assume the same facts as Example 4. In 2013, B, a
widow, passes away and bequeaths $4 million to M. During 2009
through 2013, B made small contributions to M, none exceeding
$10,000 in any year. During 2009 through 2013, M received
approximately $550,000 from receipts for admissions and
contributions from the general public. At the time of B's death, no
person standing in a relationship to B described in section
4946(a)(1)(C) through (G) was a member of M's governing body. B's
bequest was in the form of cash and readily marketable securities.
The only condition placed upon the bequest was that it be used by M
to advance the art of ballet.
(ii) Although the support received in 2013 will not impact M's
status as a public charity for its first five taxable years, it will
be relevant to the determination of whether M meets the one-third
support test under section 509(a)(2) for future years. Within the
appropriate timeframe, M may submit a request for a private letter
ruling that the $4 million bequest from B qualifies as an unusual
grant.
(iii) Under the above circumstances, M may exclude B's bequest
of $4 million in 2013 as an unusual grant under paragraph (c)(3) of
this section for purposes of determining whether M meets the one-
third support test under section 509(a)(2) for 2014 and subsequent
years.
Example 6. (i) N is a research organization that was created by
A in 2009 for the purpose of carrying on economic studies primarily
through persons receiving grants from N and engaging in the sale of
economic publications. N received a determination letter that it is
described in section 501(c)(3) and that it is a public charity
described in 509(a)(2). N's five-member governing body consists of
A, A's sons, B and C, and two unrelated economists. In 2009, A made
a contribution to N of $100,000 to help establish the organization.
During 2009 through 2013, A made annual contributions to N averaging
$20,000 a year. During the same period, N received annual
contributions from members of the general public averaging $15,000
per year and receipts from the sale of its publications averaging
$50,000 per year. In 2013, B made an inter vivos contribution to N
of $600,000 in cash and readily marketable securities.
(ii) Although the support received in 2013 will not impact N's
status as a public charity for its first 5 taxable years, it will be
relevant to the determination of whether N meets the one-third
support test under section 509(a)(2) for future years. In
determining whether B's contribution of $600,000 in 2013 may be
excluded as an unusual grant, the support N received in 2009 through
2013 is relevant in considering the factor described in paragraph
(c)(4)(vi) of this section, notwithstanding that N received a
determination letter that it is described in section 509(a)(2).
(iii) Based on the application of the factors in paragraphs
(c)(4)(i) through (ix) of this section to N's circumstances, in
particular the facts that B is a disqualified person described in
section 4946(a)(1)(D) and N does not have a representative governing
body as described in paragraphs (c)(4)(viii) and (d)(3)(i) of this
section, N cannot exclude B's contribution of $600,000 in 2013 as an
unusual grant under paragraph (c)(3) of this section for purposes of
determining whether N meets the one-third support test under section
509(a)(2) for 2014 and future years.
Example 7. (i) O is an educational organization created in 2009.
O received a determination letter that it is described in section
501(c)(3) and that it is a public charity described in section
509(a)(2). The governing body of O has 9 members, consisting of A, a
prominent civic leader and 8 other unrelated civic leaders and
educators in the community, all of whom participated in the creation
of O. During 2009 through 2013, the principal source of income for O
has been receipts from the sale of its educational periodicals.
These sales have amounted to $200,000 for this period. Small
contributions amounting to $50,000 have also been received during
the same period from members of the governing body, including A, as
well as other members of the general public.
(ii) In 2013, A contributed $750,000 of the nonvoting stock of
S, a closely held corporation, to O. A retained a substantial
portion of the voting stock of S. By a majority vote, the governing
body of O decided to retain the S stock for a period of at least 5
years.
(iii) Although the support received in 2013 will not impact O's
status as a public charity for its first 5 taxable years, it will be
relevant to the determination of whether O meets the one-third
support test under section 509(a)(2) for future years. In
determining whether A's contribution of the S stock in 2013 may be
excluded as an unusual grant, the support O received in 2009 through
2013 is relevant in considering the factor described in paragraph
(c)(4)(vi) of this section, notwithstanding that O received a
determination letter that it is described in section 509(a)(2).
(iv) Based on the application of the factors in paragraphs
(c)(4)(i) through (ix) of this section to O's circumstances, in
particular the facts that A is a foundation manager within the
meaning of section 4946(b) and A's contribution is in the form of
closely held stock, O cannot exclude A's contribution of the S stock
in 2013 as an unusual grant under paragraph (c)(3) of this section
for purposes of determining whether O meets the one-third support
test under section 509(a)(2) for 2014 and future years.
(d) Definition of normally--first five years of an organization's
existence--(1) In general. An organization meets the one-third support
test and the not-more-than-one-third support test during its first five
taxable years as a section 501(c)(3) organization if the organization
can reasonably be expected to meet the requirements of the one-third
support test and the not-more-than-one-third support test during that
period. With respect to such organization's sixth taxable year, the
organization shall be described in section 509(a)(2) if it meets the
one-third support test and the not-more-than-one-third support test
under the definition of normally set forth in paragraph (c)(1)(i) of
this section for its sixth taxable year (based on support received in
its second through sixth taxable years), or for its fifth taxable year
(based on support received in its first through fifth taxable years).
(2) Basic consideration. In determining whether an organization can
reasonably be expected (within the meaning of paragraph (c)(1)(i) of
this section) to meet the one-third support test under section
509(a)(2)(A) and the not-more-than-one-third support test under section
509(a)(2)(B) described in paragraph (c) of this section during its
first 5 taxable years, the basic consideration is whether its
organizational structure, current or proposed programs or activities,
and actual or intended method of operation are such as to attract the
type of broadly based support from the general public, public
charities, and governmental units that is necessary to meet such tests.
The factors that are relevant to this determination, and the weight
accorded to each of them, may differ from case to case, depending on
the nature and functions of the organization. An organization cannot
reasonably be expected to meet the one-third support test and the not-
more-than-one-third support test where the facts indicate that an
organization is likely during its
[[Page 52553]]
first five taxable years to receive less than one-third of its support
from permitted sources (subject to the limitations of paragraph (b) of
this section) or to receive more than one-third of its support from
items described in section 509(a)(2)(B).
(3) Factors taken into account. All pertinent facts and
circumstances shall be taken into account under paragraph (d)(2) of
this section in determining whether the organizational structure,
programs or activities, and method of operation of an organization are
such as to enable it to meet the tests under section 509(a)(2) during
its first five taxable years. Some of the pertinent factors are:
(i) Whether the organization has or will have a governing body
which is comprised of public officials, or individuals chosen by public
officials acting in their capacity as such, of persons having special
knowledge in the particular field or discipline in which the
organization is operating, of community leaders, such as elected
officials, clergymen, and educators, or, in the case of a membership
organization, of individuals elected pursuant to the organization's
governing instrument or bylaws by a broadly based membership. This
characteristic does not exist if the membership of the organization's
governing body is such as to indicate that it represents the personal
or private interests of disqualified persons, rather than the interests
of the community or the general public.
(ii) Whether a substantial portion of the organization's initial
funding is to be provided by the general public, by public charities,
or by government grants, rather than by a limited number of grantors or
contributors who are disqualified persons with respect to the
organization. The fact that the organization plans to limit its
activities to a particular community or region or to a special field
which can be expected to appeal to a limited number of persons will be
taken into consideration in determining whether those persons providing
the initial support for the organization are representative of the
general public. On the other hand, the subsequent sources of funding
which the organization can reasonably expect to receive after it has
become established and fully operational will also be taken into
account.
(iii) Whether a substantial proportion of the organization's
initial funds are placed, or will remain, in an endowment, and whether
the investment of such funds is unlikely to result in more than one-
third of its total support being received from items described in
section 509(a)(2)(B).
(iv) In the case of an organization that carries on fundraising
activities, whether the organization has developed a concrete plan for
solicitation of funds from the general public on a community or area-
wide basis; whether any steps have been taken to implement such plan;
whether any firm commitments of financial or other support have been
made to the organization by civic, religious, charitable, or similar
groups within the community; and whether the organization has made any
commitments to, or established any working relationships with, those
organizations or classes of persons intended as the future recipients
of its funds.
(v) In the case of an organization that carries on community
services, such as combating community deterioration in an economically
depressed area that has suffered a major loss of population and jobs,
whether the organization has a concrete program to carry out its work
in the community; whether any steps have been taken to implement that
program; whether it will receive any part of its funds from a public
charity or governmental agency to which it is in some way held
accountable as a condition of the grant or contribution; and whether it
has enlisted the sponsorship or support of other civic or community
leaders involved in community service programs similar to those of the
organization.
(vi) In the case of an organization that carries on educational or
other exempt activities for, or on behalf of, members, whether the
solicitation for dues-paying members is designed to enroll a
substantial number of persons in the community, area, profession, or
field of special interest (depending on the size of the area and the
nature of the organization's activities); whether membership dues for
individual (rather than institutional) members have been fixed at rates
designed to make membership available to a broad cross-section of the
public rather than to restrict membership to a limited number of
persons; and whether the activities of the organization will be likely
to appeal to persons having some broad common interest or purpose, such
as educational activities in the case of alumni associations, musical
activities in the case of symphony societies, or civic affairs in the
case of parent-teacher associations.
(vii) In the case of an organization that provides goods, services,
or facilities, whether the organization is or will be required to make
its services, facilities, performances, or products available
(regardless of whether a fee is charged) to the general public, public
charities, or governmental units, rather than to a limited number of
persons or organizations; whether the organization will avoid executing
contracts to perform services for a limited number of firms or
governmental agencies or bureaus; and whether the service to be
provided is one which can be expected to meet a special or general need
among a substantial portion of the general public.
(4) Example. The application of this paragraph (d) may be
illustrated by the following example:
Example. (i) Organization X was formed in January 2008 and uses
a December 31 taxable year. After September 9, 2008, and before
December 31, 2008, Organization X filed Form 1023 requesting
recognition of exemption as an organization described in section
501(c)(3) and in section 509(a)(2). In its application, Organization
X established that it can reasonably be expected to operate as a
public charity under this paragraph (d). Subsequently, Organization
X received a ruling or determination letter that it is an
organization described in sections 501(c)(3) and 509(a)(2) effective
as of the date of its formation.
(ii) Organization X is described in section 509(a)(2) for its
first 5 taxable years (for the taxable years ending December 31,
2008, through December 31, 2012).
(iii) Organization X can qualify as a public charity beginning
with the taxable year ending December 31, 2013, if Organization X
can meet the requirements of Sec. 1.170A-9T(f)(4)(i) through (iii)
or paragraphs (a) through (b) of this section for the taxable years
ending December 31, 2009, through December 31, 2013, or for the
taxable years ending December 31, 2008, through December 31, 2012.
(e) Determinations on foundation classification and reliance. (1) A
ruling or determination letter that an organization is described in
section 509(a)(2) may be issued to an organization. Such determination
may be made in conjunction with the recognition of the organization's
tax-exempt status or at such other time as the organization believes it
is described in section 509(a)(2). The ruling or determination letter
that the organization is described in section 509(a)(2) may be revoked
if, upon examination, the organization has not met the requirements of
this section. The ruling or determination letter that the organization
is described in section 509(a)(2) also may be revoked if the
organization's application for a ruling or determination contained one
or more material misstatements of fact or such application was part of
a scheme or plan to avoid or evade any provision of the Internal
Revenue Code. The revocation of the determination that an
[[Page 52554]]
organization is described in section 509(a)(2) does not preclude
revocation of the determination that the organization is described in
section 501(c)(3).
(2) Status of grantors or contributors. For purposes of sections
170, 507, 545(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2), and 2522,
grantors and contributors may rely upon a determination letter or
ruling that an organization is described in section 509(a)(2) until the
Internal Revenue Service publishes notice of a change of status (for
example, in the Internal Revenue Bulletin or Publication 78,
``Cumulative List of Organizations described in Section 170(c) of the
Internal Revenue Code of 1986,'' which can be searched at www.irs.gov).
For this purpose, grantors or contributors may also rely on an advance
ruling that expires on or after June 9, 2008. However, a grantor or
contributor may not rely on such an advance ruling or any determination
letter or ruling if the grantor or contributor was responsible for, or
aware of, the act or failure to act that resulted in the organization's
loss of classification under section 509(a)(2) or acquired knowledge
that the Internal Revenue Service had given notice to such organization
that it would be deleted from such classification.
(3) Examples. The provisions of this paragraph (e) may be
illustrated by the following examples:
Example 1. Y, a calendar year organization described in section
501(c)(3), is created in February 2008 for the purpose of displaying
African art. On its exemption application Y shows, under penalties
of perjury, that it can reasonably, in accordance with the
requirements of paragraph (d) of this section, expect to receive
support from the public in 2008 through 2012 that will satisfy the
one-third support and not-more-than-one-third support tests
described in section 509(a)(2) for its first 5 taxable years, 2008
through 2012. Y may therefore receive a determination that it meets
the requirements of paragraph (a) of this section. Pursuant to such
determination, Y will be a public charity for its first five taxable
years (2008, 2009, 2010, 2011, and 2012), regardless of the public
support Y in fact receives during this period.
Example 2. Z, a calendar year organization described in section
501(c)(3), is created in July 2008. On its exemption application Z
shows, under penalties of perjury, that it can reasonably, in
accordance with the requirements of paragraph (d) of this section,
expect to receive support from the public in 2008 through 2012 that
will satisfy the one-third support and not-more-than-one-third
support tests described in section 509(a)(2) for its first 5 taxable
years, 2008 through 2012. Z receives a determination that it is
described in section 509(a)(2). However, the support actually
received from the public over Z's first 5 taxable years (2008
through 2012) does not satisfy the one-third support and not-more-
than-one-third support tests described in section 509(a)(2), nor
does the support Z receives from 2009 through and including its
sixth taxable year, 2013, meet the one-third support and not-more-
than-one-third support tests described in section 509(a)(2). Z is
described in section 509(a)(2) during its first five years for all
purposes. But, because Z has not met the requirements of paragraph
(a) of this section either for 2008 through 2012 or 2009 through
2013, Z is not described in section 509(a)(2) for its taxable year
2013. If Z is not described in section 509(a)(1), (3), or (4), then
Z is a private foundation as of 2013, and Z will be treated as a
private foundation for all purposes (except as provided in paragraph
(e)(2) of this section with respect to grantors and contributors).
(f) through (j) [Reserved]. For further guidance, see Sec.
1.509(a)-3(f) through (j).
(k) Method of accounting. For purposes of section 509(a)(2), an
organization's support will be determined under the method of
accounting on the basis of which the organization regularly computes
its income in keeping its books under section 446. For example, if a
grantor makes a grant to an organization payable over a term of years,
such grant will be includible in the support fraction of the grantee
organization under the method of accounting on the basis of which it
regularly computes its income in keeping its books under section 446.
(l) and (m) [Reserved]. For further guidance, see Sec. 1.509(a)-
3(l) and (m).
(n) Transition rules. (i) An organization that received an advance
ruling, that expires on or after June 9, 2008, that it will be treated
as an organization described in sections 170(b)(1)(A)(vi) and 509(a)(1)
or in section 509(a)(2) will be treated as meeting the requirements of
paragraph (d)(1) of this section for the first five taxable years of
its existence as a section 501(c)(3) organization unless the Internal
Revenue Service issued to the organization a proposed determination
prior to September 9, 2008, that the organization is not described in
sections 170(b)(1)(A)(vi) and 509(a)(1) or in section 509(a)(2).
(ii) Paragraph (d)(1) of this section shall not apply to an
organization that received an advance ruling that expired prior to June
9, 2008, and that did not timely file with the Internal Revenue Service
the required information to establish that it is an organization
described in sections 170(b)(1)(A)(vi) and 509(a)(1) or in section
509(a)(2).
(iii) An organization that fails to meet a public support test for
its first taxable year beginning on or after January 1, 2008, under the
regulations in this section may use the prior test set forth in Sec.
1.509(a)-3(c)(1) or Sec. 1.170A-9(e)(4)(i) or (ii) as in effect before
September 9, 2008, (as contained in 26 CFR part 1 revised April 1,
2008) to determine whether the organization may be publicly supported
for its 2008 taxable year based on its satisfaction of a public support
test for taxable year 2007, computed over the period 2003 through 2006.
(iv) Examples. The application of this paragraph (n) may be
illustrated by the following examples:
Example 1. (i) Organization M was formed in January 2004, and
uses a June 30 taxable year. Organization M received an advance
ruling letter that it is recognized as an organization described in
section 501(c)(3) effective as of the date of its formation and that
it is treated as a public charity under section 509(a)(2) during the
five-year advance ruling period that will end on June 30, 2008. This
date is within 90 days before September 9, 2008.
(ii) Under the transition rule, Organization M is a public
charity described in section 509(a)(2) for the taxable years ending
June 30, 2004, through June 30, 2008. Organization M does not need
to establish within 90 days after June 30, 2008, that it met a
public support test under Sec. 1.170A-9(e) or Sec. 1.509(a)-3, as
in effect prior to September 9, 2008, (as contained in 26 CFR part 1
revised April 1, 2008) for its advance ruling period.
(iii) Organization M can qualify as a public charity beginning
with the taxable year ending June 30, 2009, if Organization M can
meet the requirements of Sec. 1.170A-9T(f)(4)(i) or (ii) or
paragraph (c)(1) of this section for the taxable years ending June
30, 2005, through June 30, 2009, or for the taxable years ending
June 30, 2004, through June 30, 2008. In addition, for its taxable
year ending June 30, 2009, Organization M may qualify as a public
charity by availing itself of the transition rule contained in
paragraph (n)(iii) of this section, which looks to support received
by M in the taxable years ending June 30, 2004, through June 30,
2007.
Example 2. (i) Organization N was formed in January 2000 and
uses a December 31 taxable year. Organization N received a final
determination that it was recognized as tax-exempt under section
501(c)(3) and as a public charity prior to September 9, 2008.
(ii) For taxable year 2008, Organization N will qualify as
publicly supported if it meets the requirements under either Sec.
1.170A-9T(f)(4)(i) or (ii) or paragraph (c)(1) of this section for
the five-year period January 1, 2004, through December 31, 2008.
Organization N will also qualify as publicly supported for taxable
year 2008 if it meets the requirements under either Sec. 1.170A-
9(e)(4)(i) or (ii) or Sec. 1.509(a)-3(c)(1) as in effect prior to
September 9, 2008, (as contained in 26 CFR part 1 revised April 1,
2008) for taxable year 2007, using the four-year period from January
1, 2003, through December 31, 2006.
(o) Effective/applicability date--(1) Effective date. These
regulations are effective on September 9, 2008.
[[Page 52555]]
(2) Applicability date. The regulations in paragraphs (a)(2),
(a)(3)(i), (c), (d), (e) and (k) of this section shall apply to taxable
years beginning on or after January 1, 2008.
(3) Expiration date. The applicability of this section expires on
September 8, 2011.
0
Par. 8. Section 1.6033-2 is amended by revising paragraph (k) to read
as follows:
Sec. 1.6033-2 Returns by exempt organizations (taxable years
beginning after December 31, 1969) and returns by certain nonexempt
organizations (taxable years beginning after December 31, 1980).
* * * * *
(k) Effective/applicability date. The provisions of this section
shall apply with respect to returns filed for taxable years beginning
after December 31, 1969. The applicability of paragraphs (a)(2)(ii)(g)
and (a)(2)(ii)(h) of this section shall be limited to taxable years
beginning before January 1, 2008.
0
Par. 9. Section 1.6033-2T is added to read as follows:
Sec. 1.6033-2T Returns by exempt organizations (taxable years
beginning after December 31, 1969) and returns by certain nonexempt
organizations (taxable years beginning after December 31, 1980)
(temporary).
(a)(1) through (a)(2)(ii)(f) [Reserved]. For further guidance, see
Sec. 1.6033-2(a)(1) through (a)(2)(ii)(f).
(g) The names and addresses of all officers, directors, or trustees
(or any person having responsibilities or powers similar to those of
officers, directors or trustees) of the organization, and, in the case
of a private foundation, all persons who are foundation managers,
within the meaning of section 4946(b)(1). Organizations must also
attach a schedule showing the names and addresses and/or total numbers
of key employees, highly compensated employees and independent
contractors as prescribed by publication, form or instructions.
(h) A schedule showing the compensation and other payments made to
each person whose name is required to be listed in paragraph
(a)(2)(ii)(g) of this section during the calendar year ending within
the organization's annual accounting period, or during such other
period as prescribed by publication, form or instructions
(a)(2)(ii)(i) through (j) [Reserved]. For further guidance, see
Sec. 1.6033-2(a)(2)(ii)(i) through (j).
(k) Effective/applicability date--(1) Effective date. These
regulations are effective on September 9, 2008.
(2) Applicability date. The regulations in paragraphs (a)(2)(ii)(g)
and (a)(2)(ii)(h) of this section shall apply to taxable years
beginning on or after January 1, 2008.
(3) Expiration date. The applicability of this section expires
September 8, 2011.
0
Par. 10. Section 1.6043-3 is amended as follows:
0
1. The undesignated text following paragraph (b)(8) is designated as
paragraph (b)(9).
0
2. Paragraph (d)(3) is revised.
0
3. New paragraph (e) is added.
The addition and revision read as follows:
Sec. 1.6043-3 Returns regarding liquidation, dissolution,
termination, or substantial contraction of organizations exempt from
taxation under section 501(a).
* * * * *
(d)(3) For the definition of the term ``integrated auxiliaries'' as
used in paragraph (b)(1) of this section, see Sec. 1.6033-2(h).
(e) Effective/applicability date. The provisions of this section
shall apply with respect to returns filed for taxable years beginning
after December 31, 1969. The applicability of paragraphs (b)(8) and (d)
of this section shall be limited to returns filed for taxable years
beginning before January 1, 2008.
0
Par. 11. Section 1.6043-3T is added to read as follows:
Sec. 1.6043-3T Returns regarding liquidation, dissolution,
termination, or substantial contraction of organizations exempt from
taxation under section 501(a) (temporary).
(a) through (b)(7) [Reserved]. For further guidance, see Sec.
1.6043-3(a) through (b)(7).
(b)(8) Any organization no longer exempt from taxation under
section 501(a) and that during the period of its exemption under such
section was not an organization described in section 501(c)(3), a
corporation described in section 501(c)(2) that held title to property
for an organization described in section 501(c)(3), or an organization
described in such other section as prescribed by publication, form or
instructions.
(b)(9) and (c) [Reserved]. For further guidance, see Sec. 1.6043-
3(b)(9) and (c).
(d) Definitions. (1) For the definition of the term ``normally'' as
used in paragraph (b)(2) of this section, see Sec. 1.6033-2(g)(3).
(2) For the definition of the term ``integrated auxiliaries'' as
used in paragraph (b)(1) of this section, see Sec. 1.6033-2(h).
(e) Effective/applicability date--(1) Effective date. The
regulations in this section are effective on September 9, 2008.
(2) Applicability date. Paragraphs (b)(8) and (d) of this section
shall apply to returns filed for taxable years beginning on or after
January 1, 2008.
(3) Expiration date. The applicability of this section expires on
September 8, 2011.
PART 602--OMB CONTROL NUMBER UNDER THE PAPERWORK REDUCTION ACT
0
Par. 12. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 13. In Sec. 602.101, paragraph (b) is amended by adding the
following entry in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.6033-2T.................................................. 1545-2117
* * * * *
------------------------------------------------------------------------
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: August 21, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-20560 Filed 9-8-08; 8:45 am]
BILLING CODE 4830-01-P