Council Comments on Supporting Organization Regulations

The Council submitted comments to the IRS on a proposed rule that outlined a handful of regulations for Type I and Type III supporting organizations. Introduced in February 2016, we identified two proposed regulations that are relevant for our sector:

• The notification requirement for Type III supporting organization relationship test; and
• The annual distribution requirements for Type III non-functionally integrated supporting organizations.

Notification Requirement: Type III SOs were already required to provide an annual notification with certain documents to each supported organization. The proposed regulations clarify the due date for that notification. The proposed regulations (and the current regulations) require the SO to describe “the type and amount of all of the support” the SO provided to the supported organization during the year including all distributions that are further described in a later section of the regulations. However, the proposed regulations do not give any guidance regarding how or to what extent a supporting organization must describe “support” that is given in the form of programs and services that may not be easily quantified as distributions. Our comments request further clarification on this point.

Annual Distribution Requirement: Type III non-functionally integrated supporting organizations now have a minimum annual distribution requirement under the regulations. The proposed regulations create a definitive list of acceptable distributions that will satisfy this requirement. Among the acceptable distributions are certain expenses incurred by the SO from a solicitation or fundraising activity, but only if the proceeds from the solicitation or activity are “received directly by a supported organization” and then “substantiated in writing” by the supported organization. Our comments point out the challenge this can present to some SOs and ask that the regulations either delete the word “directly” or allow for proceeds to be received and aggregated by an agent of the supported organization (which could be the supporting organization). Our comments also request clarification of the timing and substance of the written substantiation.

If you have questions or would like to discuss either of these sets of comments, please don’t hesitate to reach out to our Policy and Legal team.