Final regulations: Guidance under section 509(a) on requirements for Type III supporting organizations

Guidance on the prohibition on certain gifts or contributions to Type I and Type III supporting organizations

Guidance under section 509(a) on requirements for Type III supporting organizations

Article Posted date 13 October 2023

The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9981) providing guidance under section 509(a) on the prohibition on certain gifts or contributions to Type I and Type III supporting organizations from persons who control a supported organization, and on other requirements for Type III supporting organizations, including certain requirements for Type III supporting organizations to qualify as functionally integrated.

The final regulations [PDF 323 KB] (59 pages), which reflect changes to the law made by the section 1241 of the Pension Protection Act of 2006 (PPA), are applicable to tax years beginning on or after the date that they are published in the Federal Register, which is scheduled to be October 16, 2023. However, taxpayers may choose to apply the final regulations to tax years beginning on or after February 19, 2016, and before that date, so long as the taxpayer applies the provisions of the final regulations in their entirety and in a consistent manner.

Background

An organization described in section 501(c)(3) is classified as either a private foundation or a public charity. To be classified as a public charity, an organization must be described in section 509(a)(1), (2), or (3). Organizations described in section 509(a)(3) are known as “supporting organizations.” Supporting organizations achieve their public charity status by providing support to one or more organizations described in section 509(a)(1) or (2), referred to as “supported organizations.”

Sections 1241 through 1243 of the PPA revised the requirements for supporting organizations. The final regulations address section 1241’s changes to the requirements an organization must satisfy to qualify as a Type III supporting organization, as well as a new prohibition on contributions to Type I and III supporting organizations by persons who control a supported organization.

Prior guidance

The Treasury Department and IRS have previously issued numerous items of guidance regarding the changes made by the PPA to the requirements for qualification as a supporting organization including:

  • Proposed regulations (REG-155929-06) published in the Federal Register on August 2, 2007.
  • Proposed regulations (REG-155929-06) published in the Federal Register on September 24, 2009.
  • Final regulations (T.D. 9605) published in the Federal Register on December 28, 2012, finalizing previously proposed regulations [REG 155929–06], as well as proposed and temporary regulations that made significant changes to the distribution requirement for non-functionally integrated (NFI) Type III supporting organizations. 
  • Notice 2014-4, published on January 6, 2014, to provide additional transition relief for certain Type III supporting organizations that support at least one supported organization that is a governmental entity to which the supporting organization is responsive.
  • Final regulations (T.D. 9746) published in the Federal Register on December 23, 2015, finalizing the rule in the 2012 proposed and temporary regulations regarding the distribution requirement for NFI Type III supporting organizations with very minor changes.
  • Proposed regulations (REG-118867-10) published in the Federal Register on February 19, 2016, regarding the prohibition on certain contributions to Type I and Type III supporting organizations and certain requirements for Type III supporting organizations.

The final regulations released today adopt the 2016 proposed regulations with relatively few substantive revisions.


For more information, contact your usual KPMG tax professional or one of the following Washington National Tax professionals:

Ruth Madrigal | ruthmadrigal@kpmg.com

Preston Quesenberry | pquesenberry@kpmg.com

 

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