The IRS's "group exemption" process allows closely-related nonprofit organizations, such as a national organization and its affiliated chapters, to file for and maintain federal tax exemption as a group. In contrast to submitting individual applications, requiring detailed budgets and operational descriptions for each applicant, a group exemption is obtained by the parent organization through a one-time request for exempt status on behalf of any affiliate subject to its general "supervision or control."

The benefits of group exemption, however, come with added administrative obligations for the parent organization. As this article explains, these "downsides" of a group ruling generally can be managed by adopting simple processes within your organization, resulting in a more professional operation from top to bottom.

Obtaining and Maintaining a Group Exemption

In contrast to an individual application, group exemption relieves affiliates of the obligation to furnish individual documentation to support their claims of federal tax-exempt status. Instead, group exemption shifts responsibility from the IRS to the parent organization to evaluate whether its affiliate operations are consistent with the tax designation being sought. In this respect, group rulings create a legal duty for the parent organization to oversee affiliate operations.

This oversight obligation is expressed in the IRS's requirement that affiliates falling under a group exemption must operate as a "subordinate" organization to the parent organization applying on its behalf, such that the parent organization has general "supervision or control" over the affiliate. In practical terms, "supervision or control" typically amounts to the adoption by each affiliate of standard governing documents, a written agreement that the affiliate will operate consistent with the general mission and operations described in the group exemption application, and required annual reports detailing any significant changes in the affiliate's purposes, character or methods of operation.

Though maintaining oversight may be an administrative burden, it also reinforces a practice recommended for any organization which lends its name to another organization's efforts: quality control. Because affiliate organizations share the name and brand of the parent organization, and act as a local mouthpiece and member liaison for the national organization, these affiliate organizations can have a significant impact the national organization's reputation. For this reason, requiring affiliates to maintain certain standard operating procedures, and to update the parent organization on an annual basis, is a recommended practice, regardless of a group exemption.

To prepare for a group exemption request, the parent organization should first draw up a representative set of governing documents to be adopted by all affiliates participating in the group exemption. These documents should set forth standard provisions defining the mission, activities and common governing structure of the affiliates, though variations in governing procedures to reflect differences in state law should not preclude inclusion in a group ruling. In addition, a common narrative of basic activities, receipts and expenditures should be circulated and adopted by any affiliates to be included in the ruling. Each affiliate also should adopt the parent organization's fiscal year, if it desires to be included in a consolidated Form 990 (see more on this below). Finally, all affiliates should obtain a federal Employer Identification Number (EIN) and provide written authorization, signed by an officer of the affiliate, to be included in the parent organization's group exemption. Once these items are in place, the parent has the documents needed to begin a group exemption request.

Presuming the parent organization has established that it is itself entitled to exemption, the parent organization must follow the procedures outlined in Rev. Proc. 80-27 (available at, which generally requires that the parent organization submit a letter to the IRS listing the subordinate organizations under its direction or control that it proposes to include in the group exemption, along with certain other information, including:

  • a sample copy of a uniform or representative governing instrument (articles of incorporation, bylaws, etc.) adopted by the affiliates;
  • a detailed description of the purposes and activities of the affiliates, and;
  • each affiliate's sources of receipts and the nature of expenditures.

If the IRS grants a group exemption, it will issue a determination letter to the parent organization listing the subordinate organizations covered by the exemption. This letter can be used by the covered affiliates to substantiate their federal tax-exempt status.

To maintain the group exemption, the parent organization must submit an annual report to the IRS (at least 90 days before the close of its fiscal year) confirming that the affiliates are still active and included in the group exemption, adding or deleting any affiliates as appropriate (in this report, the parent organization may request exemption for affiliates not covered in the original group exemption application), and detailing any significant changes in the purposes, character or method of operation of the affiliates.

There are three ways in which a group exemption letter may be terminated. When a termination occurs, the tax-exempt status of the covered affiliate organizations is no longer recognized by the IRS, thereby requiring each subordinate to file an individual application for exemption with the IRS or become tax-exempt under a separate group exemption. Termination of a group exemption may occur where (1) the central organization dissolves or otherwise ceases to exist, (2) the IRS revokes the tax-exempt status of the central organization, or (3) the central organization fails to submit information required to maintain the group exemption.

Form 990

Separate and apart from annual reporting required by the group exemption rules, both the parent organization and its covered affiliates must comply with the IRS's annual Form 990 filing requirements. In this regard, the parent organization may (but is not required to) file a group Form 990 for its covered affiliates on a consolidated basis. The consolidated group return permits a parent organization to file a group return for all of its affiliates that are included under the parent's group exemption letter. Because the parent must file its own Form 990, this process results in two federal returns - one for the parent and one for all affiliates under the group exemption that elect to be included in the group return. It should be noted that most parent organizations elect not to undertake the burdens of preparing and filing a group return for their affiliates.

Importantly, beginning with calendar year 2008, most tax-exempt organizations with annual gross revenues of $25,000 or less are required to submit a new yearly notice to the Internal Revenue Service, Form 990-N, "Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ." Tax-exempt organizations with annual gross receipts of normally $25,000 or less, with some exceptions, previously had not been required to file a Form 990 (or Form 990-EZ).

Under this new law, any affected organization that fails to meet its annual reporting requirement for three consecutive years automatically loses its tax-exempt status. An organization that wants to regain its exempt status would then need to reapply to the IRS for recognition as a tax-exempt organization, either through its parent organization's group ruling or via a separate individual application. Either way, if and when approved, the new tax-exemption recognition would be prospective only. Central organizations with chapters, regions, affiliates, or other components that are separate legal entities should consider apprising them of this new requirement, as many are likely still unaware of this new law - and its harsh consequences for non-compliance.

IRS Publication 557 (06/2008), Tax-Exempt Status for Your Organization, provides additional detail on the group exemption process and can be found at: