Although the regulations eliminating the advance ruling process have been in place since the end of 2008, we continue to receive questions from public charity clients regarding the need to prove public support after an organization’s first five tax years.
In conjunction with the new Form 990, the IRS eliminated the advance ruling process, which previously required a public charity to file Form 8734 to prove it was publicly supported during its first five years. The new rules apply to organizations with advance ruling periods expiring on or after June 9, 2008, as well as organizations with applications currently pending with the IRS.
Under the new rules, upon application to the IRS, an otherwise qualified 501(c)(3) organization will automatically be classified as a public charity for its first five tax years if it shows in its application that it can “reasonably be expected” to be publicly supported. This classification will apply whether or not the organization receives the requisite public support during any of these first five years. In the organization’s sixth taxable year (and in all succeeding years), it must demonstrate that it is publicly supported on the Form 990. An organization will lose its public charity status if it cannot pass the public support test for two consecutive years. In this event, the organization will be reclassified as a private foundation for all purposes (and subject to the excise taxes under Sections 4941-4945 of the Internal Revenue Code) as of the start of the second consecutive year. For example, if an organization does not meet the test in year six, but it does in year seven, it will still be classified as a public charity. However, if an organization fails to meet the test in both years six and seven, it will be reclassified as a private foundation as of the start of the seventh year.