The IRS substantially redesigned the Form 990 in 2008 and issued temporary regulations relating to those changes on Sept. 9, 2008. The IRS has now issued final regulations effective as of Sept. 8, 2011. All tax-exempt organizations required to file Form 990 are affected by these regulations.
Public Support Test. Under the prior regulations, an organization in existence for less than eight months when it filed its exemption application had to request an advance ruling on its publicly-supported status. Only organizations that had completed one tax year of at least eight months were allowed to request a definitive ruling. The proposed regulations eliminated the advance ruling process and changed the period for computing the public support to five years instead of four years. If an organization did not meet the public support test for a taxable year, it would be at risk of being classified as a private foundation as of the first day of the succeeding taxable year if it also failed the public support test for that year.
The final regulations provide that if an organization fails the public support test for two consecutive taxable years, it will be treated as a private foundation for the purposes of Internal Revenue Code section 507 (termination of private foundation status) and section 4940 (excise tax on investment income) as of the first day of the second taxable year. The organization will be treated as a private foundation for all purposes (including all excise taxes under Chapter 42) as of the first day of the third consecutive taxable year.
For example, in 2011, a calendar-based organization would calculate the public support test over the five-year period covering 2006 through 2010. If the organization failed the public support test during that period, it would be at risk for being treated as a private foundation as of Jan. 1, 2011, only for purposes of Internal Revenue Code sections 507 and 4940. In 2012, the organization would calculate the public support test over the five-year period covering 2007 through 2011. If the organization failed the public support test again, it would be treated as a private foundation as of Jan. 1, 2012, for all purposes.
Method of Accounting. The final regulations confirm that an organization is required to use the same accounting method that it uses to keep its books under Internal Revenue Code section 446 when it reports on Form 990 and calculates the public support test. This regulation is the same as the temporary regulation previously issued.
Reliance on Public Charity Status. The proposed regulations provided that grant-making organizations and donors may rely on an organization’s determination letter that it is publicly supported until the IRS provides notice of a change in status to the public, unless the person relying on such status was responsible for, or aware of, the act or failure to act that results in the loss of public charity status. The final regulations provide that a grantor or donor will not be responsible for, or aware of, an act or failure to act that resulted in the loss of public charity status if such grantor or donor made the grant or contribution in reliance upon a written statement by the grantee organization that such grant or contribution would not cause the loss of public charity status.
The final regulations also provide that sponsoring organizations of donor-advised funds may rely on an organization’s determination letter to the same extent as other grant-making organizations and donors for purposes of avoiding the excise tax on taxable distributions under Internal Revenue Code section 4966.
Termination of Private Foundation Status. The proposed and final regulations delete references to the four-year period for calculating the public support test and the transition rules for private foundations related to a 12-month termination. The regulations continue to allow a private foundation to request an advance ruling that it will qualify as a public charity at the end of the 60-month termination period. The final regulations also continue to require an organization to submit information to the IRS at the end of the 60-month termination period showing that the organization meets the public support test or other requirements for classification as a public charity.
The final regulations make additional minor changes to conform the regulations to the changes made by the Pension Protection Act of 2006. The final regulations were published in the Federal Register on Sept. 8, 2011, at 76 F.R. 55745. All tax-exempt organizations that file Form 990 should be aware of these changes.