The IRS recently issued Notice 2014-4 (the “Notice”), which provides interim guidance for Type III supporting organizations seeking to qualify as functionally integrated by supporting governmental organizations. In December 2012, the IRS issued final and temporary regulations that, among other things, set forth the requirements for an organization to qualify as a functionally integrated Type III supporting organization. However, these regulations reserved Section 1.509(a)-4(i)(4)(iv) to provide additional guidance on the requirements for qualifying as a functionally integrated by supporting a governmental supported organization.
A supporting organization, described in Section 509(a)(3) of the Code, is an organization that supports one or more public charities (the “supported organizations”). A Type III supporting organization is “operated in connection with” one or more supported organizations. Under the Pension Protection Act of 2006, a Type III supporting organization that is “non-functionally integrated” must pay a certain amount to its supported organization, while a Type III “functionally integrated” supporting organization does not have any payout requirement.
Until the earlier of the date final regulations are published under Section 1.509(a)-4(i)(4)(iv) or the first day of the organization’s third taxable year beginning after December 31, 2013, a Type III supporting organization will be treated as meeting the requirements set forth in the regulations, and thus considered functionally integrated, if the organization:
- Supports at least one supported organization that is a governmental entity to which it is responsive (within the meaning of the regulations); and
- Engages in activities for or on behalf of the governmental supported organization that perform the functions of, or carry out the purposes of, that governmental supported organization and that, but for the involvement of the supporting organization, would normally be engaged in by the governmental supported organization itself.
The IRS notes that the transitional rule is not intended to signal what the proposed or final regulations will require.
The Notice also clarifies that until further guidance is issued, private foundations and sponsoring organizations that maintain donor-advised funds may continue to rely on the grantor reliance standards set forth in previous IRS guidance, as modified by the Notice. Pursuant to the Notice, for grants made after December 28, 2012, a Type III supporting organization must meet the requirements in Reg. § 1.509(a)-4(i)(4) or qualify as a governmental supported functionally integrated Type III under the Notice. Previous IRS guidance includes Section 3 of Notice 2006-109, which provides procedures under which grantors, acting in good faith, may rely on written representations or opinions of counsel in making a determination as to whether a grantee should be classified as a Type I, Type II or functionally integrated Type III supporting organization and Rev. Proc. 2011-33, which provided that grantors may rely on an organization’s classification in the IRS Business Master File.