Implementation of Form 990, 52528-52555 [E8-20560]
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Federal Register / Vol. 73, No. 175 / Tuesday, September 9, 2008 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9423]
RIN 1545–BH85
Implementation of Form 990
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:
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SUMMARY: This document contains final
and temporary regulations necessary to
implement the redesigned Form 990,
‘‘Return of Organization Exempt From
Income Tax.’’ The final regulations
contained in this document make only
nonsubstantive revisions to comply
with Federal Register requirements. The
temporary regulations make revisions to
the regulations under section 6033 and
section 6043 to allow for new threshold
amounts for reporting compensation, to
require that compensation be reported
on a calendar year basis, and to modify
the scope of organizations subject to
information reporting requirements
upon a substantial contraction. The
temporary regulations also eliminate the
advance ruling process for new
organizations, change the public
support computation period for
organizations described in sections
170(b)(1)(A)(vi) and 509(a)(1) and in
section 509(a)(2) to five years, consistent
with the revised Form 990, and clarify
that support must be reported using the
organization’s overall method of
accounting. All tax-exempt
organizations required under section
6033 of the Internal Revenue Code
(Code) to file annual information returns
are affected by these temporary
regulations. The text of these temporary
regulations also serves as the text of the
proposed regulations (REG–142333–07)
published in the Proposed Rules section
in this issue of the Federal Register.
DATES: Effective Date: These regulations
are effective on September 9, 2008.
Applicability Date: These regulations
apply to taxable years beginning on or
after January 1, 2008.
FOR FURTHER INFORMATION CONTACT:
Terri Harris at (202) 622–6070 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in these temporary
regulations has been reviewed and
approved by the Office of Management
and Budget in accordance with the
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Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under control number
1545–2117. An agency may not conduct
or sponsor, and a person is not required
to respond to, a collection of
information unless it displays a valid
control number assigned by the Office of
Management and Budget. Books or
records relating to a collection of
information must be retained as long as
their contents may become material in
the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential,
as required by 26 U.S.C. 6103.
Background
Form 990
Under section 6033 of the Code,
organizations that are exempt from
Federal income tax under section 501(a)
are generally required to file an annual
information return reporting gross
income, receipts, disbursements and
such other information as the IRS
requires. Certain exceptions to this
filing requirement apply. For example,
churches are not required to file annual
information returns. The Treasury
regulations direct that the annual
information return shall be filed on
Form 990, ‘‘Return of Organization
Exempt From Income Tax’’ or Form
990–PF, ‘‘Return of Private Foundation
or Section 4947(a)(1) Nonexempt
Charitable Trust Treated as a Private
Foundation.’’ The regulations further
specify certain information to be
reported on the return.
The IRS revises forms and
instructions on an annual basis to reflect
changes in the law and evolving tax
administration needs. On December 20,
2007, the IRS released a redesigned
Form 990. The Form 990 had not been
significantly revised since 1979, and
both the IRS and stakeholders regarded
the form as needing major revision to
keep pace with changes in the law and
with the increasing size, diversity, and
complexity of the exempt sector. The
new form incorporates many
recommendations made in public
comments on the discussion draft
released on June 14, 2007. With the
exception of certain smaller
organizations for which there is a
graduated transition period,
organizations must begin using the new
form for the 2008 tax year (returns filed
in 2009). The current Form 990 will be
used for tax year 2007 (returns filed in
2008) but will be replaced with the
redesigned Form 990 beginning with the
2008 tax year. Earlier this year, the IRS
released draft instructions for the new
form and schedules for public comment.
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These regulations make the revisions
that must be made to the regulations
under sections 6033 and 6043 of the
Code to implement the Form 990
redesign. For example, the regulation
that currently gives organizations a
choice of using either the calendar year
or the organization’s annual accounting
period as the basis for reporting
compensation of officers, directors,
trustees and certain employees and
contractors is revised to require
calendar year reporting. Revisions are
also made to allow for new threshold
amounts for reporting compensation
and to expand the scope of
organizations subject to information
reporting requirements upon a
substantial contraction.
In addition, as discussed in further
detail in this preamble, these
regulations eliminate the advance ruling
process and change the public support
computation period for organizations
described in sections 170(b)(1)(A)(vi)
and 509(a)(1) and in section 509(a)(2) to
five years, consistent with the revised
Schedule A, ‘‘Public Charity Status and
Public Support’’ to the redesigned Form
990. These regulations also clarify that
support must be reported using the
organization’s overall method of
accounting.
Private Foundation Status and Advance
Rulings
Public Support Tests
Under present law, as established in
the Tax Reform Act of 1969, an
organization described in section
501(c)(3) of the Code is a private
foundation unless it meets one of the
exceptions described in sections
509(a)(1) through 509(a)(4).
Organizations that are described in
section 509(a)(1), (2), (3) or (4) are
classified as public charities, and are
not subject to various excise taxes in
Chapter 42 that apply to private
foundations. The Code defines two
major categories of organizations that
are considered public charities and not
private foundations because they are
broadly publicly supported: (1)
Organizations described in section
170(b)(1)(A)(vi), which are not private
foundations because they are referenced
in section 509(a)(1); and (2)
organizations described in section
509(a)(2).
Section 170(b)(1)(A)(vi) encompasses
organizations that normally receive a
substantial part of their support from a
governmental unit or from direct or
indirect contributions from the general
public. The regulations under section
170 provide that an organization will be
described in section 170(b)(1)(A)(vi) if it
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normally receives at least 331⁄3 percent
of its support from governmental units
or from the general public. See
§ 1.170A–9(f). Alternatively, an
organization can meet a ‘‘facts and
circumstances’’ test, under which it may
qualify as a section 170(b)(1)(A)(vi)
organization if it normally receives at
least 10 percent of its support from
governmental units or the general
public, and can establish that, under all
the facts and circumstances, it normally
receives a substantial part of its support
from governmental units or the general
public.
Section 509(a)(2) encompasses
organizations that normally receive
more than one-third of their support
from a combination of gifts, grants,
contributions, membership fees, and
gross receipts from performing exempt
function activities, and normally receive
not more than one-third of their support
from investment income and unrelated
business taxable income. The major
difference between the section 509(a)(2)
and section 170(b)(1)(A)(vi) tests is that
the former includes in support gross
receipts from exempt function activities,
for example, admission proceeds for a
museum or ticket sales for a symphony,
while the latter does not. As noted,
section 509(a)(2) also includes an
investment income limitation. For ease
of reference, the tests in sections
170(b)(1)(A)(vi) and 509(a)(2) will be
referred to collectively as the public
support tests.
The statute does not define, for either
provision, the meaning of ‘‘normally.’’
The current regulations for both public
support tests generally use a rolling
four-year computation period, with two
exceptions: New organizations and
organizations that experience
‘‘substantial and material changes’’ in
their sources of support for the current
year are permitted to use a five-year
computation period. For any particular
taxable year, the four-year computation
period is the four years immediately
preceding the current taxable year. For
example, for taxable year 1998, the
computation period would be taxable
years 1994, 1995, 1996, and 1997. The
regulations further provide that if the
public support test is met for the fouryear computation period, the
organization will be considered to meet
the public support test for the taxable
year being tested and the immediately
succeeding taxable year. In the example
above, a section 170(b)(1)(A)(vi)
organization would meet the public
support test for 1998 and 1999 if the
support it received from the general
public and from governmental units for
the years 1994 through 1997 exceeded
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331⁄3 percent of the total support it
received for those years.
The effect of the current rule
regarding the subsequent taxable year is
that an organization must fail to meet a
public support test two years in a row
to become a private foundation. In the
example above, the organization met the
public support test for 1998 and 1999,
based on support received during the
four-year computation period 1994
through 1997. If the organization does
not meet a public support test for the
1995 through 1998 computation period,
it is still a public charity in 1999
because it met a support test for taxable
year 1998. However, if the organization
again does not meet a public support
test for the 1996 through 1999
computation period, the organization
becomes a private foundation effective
at the beginning of its taxable year 2000.
Advance Rulings
In its application for recognition of
tax-exempt status (Form 1023,
‘‘Application for Recognition of
Exemption Under Section 501(c)(3) of
the Internal Revenue Code’’), a section
501(c)(3) organization also requests a
determination of its private foundation
status, that is, whether it is a private
foundation and, if not, the Code
provision excepting it from private
foundation classification. Under the
current statute and regulations, an
organization can request either an
advance ruling or a definitive ruling
addressing the organization’s exemption
under section 501(c)(3) and its private
foundation status under section 509(a).
Under the current regulations, a new
organization applying for exemption can
request a definitive ruling as to its
foundation status only if it has
completed its first tax year consisting of
at least eight full months. In lieu of the
general four-year computation period
for public support, a new organization
requesting a definitive ruling tests its
public support based on the years it has
been in existence. If an organization
qualifies as an organization described in
section 509(a)(1) or (2) based on the
support received in its initial year(s) of
existence, the IRS issues a definitive
ruling stating that the organization is
recognized as exempt under section
501(c)(3) and classified as a public
charity.
If a new organization has not yet
completed its first tax year consisting of
at least eight full months at the time it
applies for recognition of tax exemption,
or if the organization so elects, it
requests an ‘‘advance ruling’’ regarding
its private foundation status in its
application for exemption. Current
regulations provide for an advance
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ruling period of two or three years,
depending on the length of the
organization’s first tax year, and an
additional ‘‘extended advance ruling
period’’ of three more years if the
organization requests. These current
regulations have been overridden. In the
conference report to the Tax Reform Act
of 1984, Congress directed that the
advance ruling period in all cases be
five years. See H.R. Rep. No. 98–861,
98th Cong., 2d Sess. 1 (1984), 1984–3
CB (Vol. 2) 1090. The advance ruling
period gives new organizations time to
build up broad public support in the
first few years of their existence. In lieu
of the general four-year computation
period for public support, a new
organization requesting an advance
ruling tests its public support over the
first five years of its existence as an
organization described in section
501(c)(3). If an organization
demonstrates to the IRS’s satisfaction
that it can reasonably be expected to
meet a public support test during its
first five years, the IRS issues an
advance ruling stating that the
organization is recognized as exempt
under section 501(c)(3) and classified as
a public charity during its first five
years. With limited exceptions, donors
can rely on this advance ruling as to
public charity status.
At the end of the initial five-year
advance ruling period, the organization
is required to file Form 8734, ‘‘Support
Schedule for Advance Ruling Period’’ to
establish that it actually met a public
support test. As noted above, for this
purpose, public support is calculated
over the five-year advance ruling period,
rather than over a four-year period. If
the organization meets a public support
test for its advance ruling period, the
IRS issues a definitive ruling letter
classifying the organization as a public
charity. If the organization does not
meet a public support test for its
advance ruling period, or the
organization fails to submit Form 8734,
the IRS reclassifies the organization as
a private foundation as of its first
taxable year and publishes notice of the
change in status in the Internal Revenue
Bulletin and Publication 78,
‘‘Cumulative List of Organizations
described in Section 170(c) of the
Internal Revenue Code of 1986,’’ which
can be searched at www.irs.gov. Once
notice of a change in status is published,
donors can no longer automatically rely
on the advance ruling for charitable
contribution deduction purposes and
must assume that the organization is a
private foundation. See
§ 601.601(d)(2)(ii)(b).
An organization that is reclassified as
a private foundation is subject to the
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section 4940 investment income tax and
the section 507 termination tax for its
five-year advance ruling period. The
other Chapter 42 excise taxes applicable
to private foundations do not apply
during the five-year advance ruling
period. In year six, the reclassified
organization is subject to all Chapter 42
excise taxes that apply to private
foundations.
The advance ruling process is
complex and burdensome for both
taxpayers and the IRS and provides
little tax administration or compliance
benefit. While statistics vary from year
to year, approximately 95 percent of the
organizations that receive advance
rulings later receive definitive rulings
that the organizations are public
charities at the end of the advance
ruling period. The current regulations
governing advance rulings are complex,
and, as discussed above, were
overridden in part by the Tax Reform
Act of 1984. Moreover, the public
support information that is reported on
Form 8734 will be captured on
Schedule A of the redesigned Form 990.
For these reasons, in its 2003 report, the
IRS Advisory Committee for Tax
Exempt and Governmental Entities, a
group that includes representatives of
exempt organizations and practitioners,
recommended that the advance ruling
process be eliminated.
The IRS believes that it can more
effectively deploy its compliance
resources by eliminating the advance
ruling process and Form 8734 and
instead monitoring public charity status
based on public support information
reported on the revised Schedule A, to
the redesigned Form 990. The revised
Schedule A sets forth easier-to-follow
rules for calculating public support and
captures all of the information necessary
for the IRS to monitor and verify
compliance with the public support
tests.
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Explanation of Provisions
Private Foundation Status and Advance
Rulings
The temporary regulations eliminate
the advance ruling process and provide
instead that an organization will be a
public charity in its first five years if it
can show, in its application for
exemption, that it can reasonably be
expected to receive the requisite public
support during such period. The
temporary regulations also change the
public support computation period for
purposes of sections 170(b)(1)(A)(vi)
and 509(a)(1) and section 509(a)(2) from
a four-year period prior to the tested
year to a five-year period that includes
the current year. The temporary
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regulations also eliminate the
substantial and material changes
exception, which is made obsolete by
the establishment of a general five-year
computation period. In addition,
§ 1.170A–9T(f), which corresponds to
§ 1.170A–9(e) of the prior regulations
and governs section 170(b)(1)(A)(vi)
organizations, has been revised
throughout to simplify some of the
language and to provide a better ‘‘road
map’’ of what the provisions are
designed to do.
Elimination of Advance Ruling Process
The temporary regulations eliminate
advance rulings and the Form 8734
filing requirement for all new section
501(c)(3) organizations. Under the
temporary regulations, if, at the time of
the initial application for exemption, an
organization can establish to the
satisfaction of the IRS that the
organization can reasonably be expected
to meet a public support test during its
first five years, the organization
qualifies as publicly supported for its
first five years as a section 501(c)(3)
organization. The IRS will issue a
determination letter stating that the
organization is exempt under section
501(c)(3) and is classified as a public
charity. The organization will be a
public charity for its first five years,
regardless of the level of public support
it in fact receives during this period. In
addition, unlike a new organization’s
public charity status under an advance
ruling, which was conditioned on its
ultimate satisfaction of a public support
test on a Form 8734 filed with the IRS,
under the temporary regulations a new
organization that can show it can
reasonably be expected to meet a public
support test will be classified as a
public charity for all purposes during its
first five years. The organization will
not owe any section 4940 tax or section
507 termination tax with respect to its
first five years. Beginning with the
organization’s sixth year, if the
organization cannot establish that it is
not a private foundation, such as a
public charity or a supporting
organization under section 509(a)(3), it
will be liable for the section 4940 excise
tax and other Chapter 42 excise taxes
applicable to private foundations for
any year for which it cannot establish
that it is not a private foundation.
The standards for whether an
organization can reasonably be expected
to be publicly supported are drawn from
the existing regulations. A new
organization required to file Form 990
or Form 990–EZ, ‘‘Short Form Return of
Organization Exempt From Income
Tax,’’ will be required to report its
support on Schedule A every year, but
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it will not be required to file Form 8734
after its first five years. Organizations
will be required to meet a public
support test using the general five-year
computation period beginning in their
sixth taxable years. The five-year
computation period is discussed in
detail in this preamble.
Computation Period for Public Support
The temporary regulations change the
computation period for public support
from a four-year period comprised of the
four years prior to the tested year to a
five-year period that includes the
current year. Because all organizations
will use a five-year computation period
under the temporary regulations, the
temporary regulations eliminate the
substantial and material change
exception, which allowed organizations
to use a five-year computation period
rather than the four-year computation
period under certain circumstances.
An organization that meets a public
support test for the current taxable year
is treated as publicly supported for the
current taxable year and the
immediately succeeding taxable year.
Thus, for example, a calendar year
organization that meets a public support
test for taxable year 2011, based on the
five-year computation period 2007
through 2011, is a public charity for
taxable years 2011 and 2012. If the
organization cannot meet a public
support test for taxable year 2012 (based
on the five-year computation period
2008 through 2012), it still will be a
public charity for taxable year 2012,
because it met the public support test
for taxable year 2011 (based on the fiveyear computation period 2007 through
2011). If, however, the organization
cannot meet a public support test for
taxable year 2013 as well, based on the
computation period 2009 through 2013,
the organization will be classified as a
private foundation as of the beginning of
taxable year 2013. Because an
organization that cannot meet a public
support test for the current taxable year
is at risk of private foundation
classification as of the first day of the
subsequent taxable year, organizations
may wish to carefully monitor their
public support calculations.
The IRS and the Treasury Department
recognize that an organization may not
be able to compute its public support for
the current taxable year until some time
in the subsequent taxable year. In the
example above, taxable year 2013 may
have already begun by the time the
calendar year organization computes its
public support for taxable year 2012 and
realizes (perhaps for the first time) that
it is at risk of being classified as a
private foundation as of January 1, 2013.
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Moreover, the organization may not
know definitively that it is a private
foundation for taxable year 2013 until
some time in 2014, when it is able to
definitively calculate its public support.
Accordingly, the IRS will not assert
private foundation excise taxes and/or
penalties for all or part of the first
taxable year in which an organization is
reclassified as a private foundation due
to failure to satisfy a public support test
in cases where the imposition of such
taxes would lead to unfair or inequitable
results, such as where the change in the
organization’s public support was
unforeseeable or due to circumstances
beyond the organization’s control.
Organizations that believe that the
imposition of private foundation excise
taxes and/or penalties against them for
all or part of the first year in which they
are reclassified as a private foundation
would be unfair or inequitable should
contact the IRS, Exempt Organizations,
Rulings and Agreements, Washington,
DC, at (202) 283–4905. An organization
will be required to provide to the IRS all
of the relevant facts and circumstances
establishing that the imposition of
private foundation taxes would be
unfair or inequitable. Comments are
requested regarding the specific
circumstances that may warrant relief.
The existing regulations contain
numerous examples reflecting the fouryear computation period. The temporary
regulations update the examples to
reflect the new computation period.
These examples are in § 1.170A–
9T(f)(9), § 1.509(a)–3T(c)(6) and
§ 1.509(a)–3T(e)(3).
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Method of Accounting
Previously, when a section 501(c)(3)
organization computed its public
support, it was required to use the cash
method of accounting to report the
amount of public support it received on
Schedule A, even if it used the accrual
method of accounting in keeping its
books under section 446, and in
otherwise reporting on Form 990. Under
these temporary regulations, when a
section 501(c)(3) organization computes
its public support and reports the
information on Schedule A, it must use
the same accounting method that it uses
in keeping its books under section 446
and that it otherwise uses to report on
its Form 990. An organization that uses
the accrual method will not be able to
use the support information reported on
Form 990 for prior years (because that
support was reported using the cash
method) to compute its public support
for the current year, and instead must
report all support for the computation
period on the accrual method.
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Reliance
These temporary regulations provide
that donors may rely on an
organization’s ruling that the
organization is described in sections
170(b)(1)(A)(vi) and 509(a)(1) or in
section 509(a)(2) until notice of a change
in status is provided to the public (such
as by publication in the Internal
Revenue Bulletin), unless the donor was
responsible for or aware of the act or
failure to act that results in the
organization’s loss of public charity
status. This rule is substantively the
same as the rules contained in the
current regulations. The regulations
further provide that donors may rely on
advance rulings that expire on or after
June 9, 2008, until notice of a change in
status is provided to the public (such as
by publication in the Internal Revenue
Bulletin).
Effective/Applicability Date and
Transition Rules
These temporary regulations are
effective on September 9, 2008, and
apply to taxable years beginning on or
after January 1, 2008. All organizations,
including organizations that received a
definitive ruling prior to the effective
date of these regulations, must use the
new five-year computation period to
calculate public support for their first
taxable year beginning on or after
January 1, 2008 and for all subsequent
taxable years.
These regulations provide a transition
rule under which an organization that
cannot meet a public support test for its
first taxable year beginning on or after
January 1, 2008, using the five-year
computation period will continue to
qualify as a public charity for its 2008
taxable year if it satisfied a public
support test for its 2007 taxable year,
based on public support received over
the four-year period 2003 through 2006.
These regulations also provide a
transition rule under which
organizations that received advance
rulings that expire on or after June 9,
2008, are treated as new public charities
under the new regulations, that is,
public charities for all purposes without
regard to public support in fact received
during the first five years of their
existence as section 501(c)(3)
organizations. This rule effectively
applies the temporary regulations to all
organizations that are in their advance
ruling period as of the effective date of
these temporary regulations. As such,
these organizations will not have to file
Form 8734 at the end of the advance
ruling period. Grantors and contributors
can rely upon these organizations’
advance ruling letter as if it were a
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definitive ruling letter. The IRS plans to
send follow-up letters to such
organizations explaining the new rules.
An organization that did not timely file
Form 8734 at the expiration of its
advance ruling period is not covered by
the transition rule. Such an organization
must file information with the IRS
establishing that it met a public support
test during its advance ruling period in
order to qualify as a public charity
during its first five years.
Forms 1023 filed prior to the effective
date of these regulations that have not
yet been processed by the IRS will be
processed under the new regulations.
The IRS will issue definitive rulings
regarding private foundation status to
such organizations.
Community Trust Rules
Sections 1.170A–9(f)(10) through
1.170A–9(f)(14), which establish rules
for when multiple trusts can be treated
as a single entity for purposes of the
public support tests, provide old
transition rules that are obsolete, and,
therefore, the transition rules are being
deleted in these temporary regulations.
Compensation Reporting
Current § 1.6033–2(a)(2)(ii)(g) requires
that exempt organizations report on
Form 990 the names and addresses of all
officers, directors, trustees, and persons
having responsibilities or powers
similar to those of officers, directors or
trustees, of the organization. The
reference to a person having
responsibilities and powers similar to
those of officers, directors or trustees is
meant to capture those persons who
function as officers, directors or trustees
of the organization, regardless of title, as
well as the key employees of the
organization. The redesigned Form 990
expanded the definition of key
employee to cover not only persons
having responsibilities or powers
similar to those of officers, directors or
trustees, but also persons who manage
a discrete segment or activity of the
organization that represents a
substantial portion of the activities,
assets, income, or expenses of the
organization. The redesigned Form 990
requires reporting for only those key
employees whose compensation
exceeds $150,000. These temporary
regulations add key employees to the
list of persons in § 1.6033–2T(a)(2)(ii)(g)
who may be required to be reported on
Form 990, as prescribed by publication,
form or instructions.
Current § 1.6033–2(a)(2)(ii)(g) requires
that exempt organizations that make
payments of more than $30,000
annually to employees and independent
contractors report these persons’ names
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and addresses on Form 990. Current
§ 1.6033–2(a)(2)(ii)(h) requires a
schedule showing the compensation or
other payments made to the persons
listed in paragraph (a)(2)(ii)(g). The
redesigned Form 990 requires an
organization to report, for each person
listed (other than a key employee or a
former director or trustee of the
organization), compensation and other
payments totaling more than $100,000
annually paid by the organization and
its related organizations to the person.
For key employees, the redesigned Form
990 requires an organization to report
compensation and other payments
totaling more than $150,000 annually
paid by the organization and its related
organizations to the person. For former
directors and trustees, the redesigned
Form 990 requires an organization to
report compensation and other
payments totaling more than $10,000
annually paid by the organization and
its related organizations to the person
solely on account of the person’s past
services as a director or trustee of the
organization. As amended in these
temporary regulations, § 1.6033–
2T(a)(2)(ii)(g) gives the Commissioner
discretion to revise the threshold
amount for reporting by form and
instruction.
Furthermore, the current rule in
§ 1.6033–2(a)(2)(ii)(h), which requires
generally the reporting of compensation
paid by an organization during its
annual accounting period (or during the
calendar year ending within such
period), imposes no requirement that
the compensation reported on Form 990
be consistent with what is reported on
Form W–2, ‘‘Wage and Tax Statement,’’
or Form 1099–MISC, ‘‘Miscellaneous
Income.’’ The current rule permits, but
does not require, a fiscal year
organization to report paid
compensation on a calendar year basis.
The redesigned Form 990 (Part VII and
Schedule J) requires that compensation
reported as paid to officers and other
employees be consistent with Form W–
2 (box 5) and that compensation
reported as paid to directors, individual
trustees, and independent contractors be
consistent with Form 1099–MISC (box
7). As amended by these temporary
regulations, § 1.6033–2T(a)(2)(ii)(h)
requires an organization to report
compensation it has paid during the
calendar year ending with or within the
organization’s annual accounting
period, or during such other period as
specified by form or form instructions.
The rule in these temporary regulations
will ensure consistency in
compensation reporting, provide greater
certainty about what compensation is to
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be reported, and reduce the reporting
burden for most filing organizations. A
fiscal year organization will continue to
be required to use fiscal year accounting
when reporting aggregate compensation
as an expense item (Form 990, Part IX).
In addition, an organization will not be
required to reconcile compensation for
individuals reported in Part VII with
compensation for such individuals
included in its Part IX statement of
expenses.
Asset Disposition Reporting
Schedule N, ‘‘Liquidation,
Termination, Dissolution, or Significant
Disposition of Assets,’’ of the redesigned
Form 990 requires information about
organizations that liquidate, terminate,
or dissolve, or sell, exchange, dispose of
or otherwise transfer more than 25
percent of the organization’s assets. The
collection of this information is
authorized by section 6033, the general
authorization for the collection of
information on Form 990. The
collection of information with respect to
liquidations, dissolutions, terminations
and substantial contractions is also
authorized by section 6043(b). While
section 6043(b) and its companion
penalty provision section 6652(c)
contemplate a separate return, since
1981 this information has been collected
on Form 990.
In order to eliminate the potential for
inconsistency and confusion by
taxpayers, the regulations under section
6043(b) have been amended so that they
are consistent with section 6033 and the
redesigned Schedule N. Generally,
current § 1.6043–3(b)(8) excuses from
the information reporting requirement
of section 6043(b) organizations other
than former section 501(c)(3)
organizations. The IRS believes that this
exception is too broad, because
information reporting from other
exempt organizations may facilitate
sound tax administration. Therefore,
these temporary regulations amend
§ 1.6043–3(b)(8) to provide discretion to
narrow the exception and require
reporting from organizations exempt
under other Code sections by form or
form instructions. In addition, these
temporary regulations remove the
definition of ‘‘substantial contraction’’
in § 1.6043–3(d)(1), leaving this term to
be defined by form or form instructions.
Private Foundation Termination
Section 1.507–2, which addresses
private foundation terminations under
section 507(b), contains references to
the four-year computation period for
public support and old transition rules
related to 12-month terminations that
are obsolete. These temporary
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regulations revise § 1.507–2 to delete
references to the four-year computation
period and the transition rules related to
12-month terminations.
Revisions To Comply With Federal
Register
The final regulations make various
nonsubstantive revisions to comply
with Federal Register requirements. For
example, the undesignated flush
language preceding prior § 1.170A–9(a)
was designated as paragraph (a), and all
following paragraphs were redesignated
accordingly.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply.
It is hereby certified that the collection
of information in this regulation will not
have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact
that burden on tax-exempt entities will
be reduced by (1) eliminating the
separate advance ruling process and the
additional process for subsequently
seeking a definitive ruling, (2) clarifying
rules regarding the method of
accounting and period for reporting
certain items, and (3) providing
discretion for the IRS to narrow or
clarify circumstances under which
reporting is required. Accordingly, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, these
regulations have been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of this regulation
is Terri Harris, Office of Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel
from the IRS and the Treasury
Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
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Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
I
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
I
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.170A–9 is amended
as follows:
I 1. Paragraphs (a), (b), (c), (d), (e), (f),
(g), (h) and (i) are redesignated as
paragraphs (b), (c), (d), (e), (f), (g), (h),
(i) and (j), respectively.
I 2. The undesignated text following the
section heading is designated as
paragraph (a).
I 3. The newly-designated paragraphs
(a) and (d) are revised.
I 4. New paragraph (k) is added.
The addition and revisions read as
follows:
I
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§ 1.170A–9 Definition of section
170(b)(1)(A) organization.
(a) The term section 170(b)(1)(A)
organization as used in the regulations
under section 170 means any
organization described in paragraphs (b)
through (j) of this section, effective with
respect to taxable years beginning after
December 31, 1969, except as otherwise
provided. Section 1.170–2(b) shall
continue to be applicable with respect
to taxable years beginning prior to
January 1, 1970. The term one or more
organizations described in section
170(b)(1)(A) (other than clauses (vii)
and (viii)) as used in sections 507 and
509 of the Internal Revenue Code (Code)
and the regulations means one or more
organizations described in paragraphs
(b) through (f) of this section, except as
modified by the regulations under part
II of subchapter F of chapter 1 or under
chapter 42.
*
*
*
*
*
(d) Hospitals and medical research
organizations—(1) Hospitals. An
organization (other than one described
in paragraph (d)(2) of this section) is
described in section 170(b)(1)(A)(iii) if—
(i) It is a hospital; and
(ii) Its principal purpose or function
is the providing of medical or hospital
care or medical education or medical
research.
(A) The term hospital includes—
(1) Federal hospitals; and
(2) State, county, and municipal
hospitals which are instrumentalities of
governmental units referred to in
section 170(c)(1) and otherwise come
within the definition. A rehabilitation
institution, outpatient clinic, or
community mental health or drug
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treatment center may qualify as a
‘‘hospital’’ within the meaning of
paragraph (d)(1)(i) of this section if its
principal purpose or function is the
providing of hospital or medical care.
For purposes of this paragraph (d)(1)(ii),
the term medical care shall include the
treatment of any physical or mental
disability or condition, whether on an
inpatient or outpatient basis, provided
the cost of such treatment is deductible
under section 213 by the person treated.
An organization, all the
accommodations of which qualify as
being part of a ‘‘skilled nursing facility’’
within the meaning of 42 U.S.C.
1395x(j), may qualify as a ‘‘hospital’’
within the meaning of paragraph
(d)(1)(i) of this section if its principal
purpose or function is the providing of
hospital or medical care. For taxable
years ending after June 28, 1968, the
term hospital also includes cooperative
hospital service organizations which
meet the requirements of section 501(e)
and § 1.501(e)–1.
(B) The term hospital does not,
however, include convalescent homes
or homes for children or the aged, nor
does the term include institutions
whose principal purpose or function is
to train handicapped individuals to
pursue some vocation. An organization
whose principal purpose or function is
the providing of medical education or
medical research will not be considered
a ‘‘hospital’’ within the meaning of
paragraph (d)(1)(i) of this section, unless
it is also actively engaged in providing
medical or hospital care to patients on
its premises or in its facilities, on an
inpatient or outpatient basis, as an
integral part of its medical education or
medical research functions. See,
however, paragraph (d)(2) of this section
with respect to certain medical research
organizations.
(2) Certain medical research
organizations—(i) Introduction. A
medical research organization is
described in section 170(b)(1)(A)(iii) if
the principal purpose or functions of
such organization are medical research
and if it is directly engaged in the
continuous active conduct of medical
research in conjunction with a hospital.
In addition, for purposes of the 50
percent limitation of section
170(b)(1)(A) with respect to a
contribution, during the calendar year
in which the contribution is made such
organization must be committed to
spend such contribution for such
research before January 1 of the fifth
calendar year which begins after the
date such contribution is made. An
organization need not receive
contributions deductible under section
170 to qualify as a medical research
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organization and such organization need
not be committed to spend amounts to
which the limitation of section
170(b)(1)(A) does not apply within the
5-year period referred to in this
paragraph (d)(2)(i). However, the
requirement of continuous active
conduct of medical research indicates
that the type of organization
contemplated in this paragraph (d)(2) is
one which is primarily engaged directly
in the continuous active conduct of
medical research, as compared to an
inactive medical research organization
or an organization primarily engaged in
funding the programs of other medical
research organizations. As in the case of
a hospital, since an organization is
ordinarily not described in section
170(b)(1)(A)(iii) as a hospital unless it
functions primarily as a hospital,
similarly a medical research
organization is not so described unless
it is primarily engaged directly in the
continuous active conduct of medical
research in conjunction with a hospital.
Accordingly, the rules of this paragraph
(d)(2) shall only apply with respect to
such medical research organizations.
(ii) General rule. An organization
(other than a hospital described in
paragraph (d)(1) of this section) is
described in section 170(b)(1)(A)(iii)
only if within the meaning of this
paragraph (d)(2):
(A) The principal purpose or
functions of such organization are to
engage primarily in the conduct of
medical research; and
(B) It is primarily engaged directly in
the continuous active conduct of
medical research in conjunction with a
hospital which is—
(1) Described in section 501(c)(3);
(2) A Federal hospital; or
(3) An instrumentality of a
governmental unit referred to in section
170(c)(1).
(C) In order for a contribution to such
organization to qualify for purposes of
the 50 percent limitation of section
170(b)(1)(A), during the calendar year in
which such contribution is made or
treated as made, such organization must
be committed (within the meaning of
paragraph (d)(2)(viii) of this section) to
spend such contribution for such active
conduct of medical research before
January 1 of the fifth calendar year
beginning after the date such
contribution is made. For the meaning
of the term ‘‘medical research’’ see
paragraph (d)(2)(iii) of this section. For
the meaning of the term ‘‘principal
purpose or functions’’ see paragraph
(d)(2)(iv) of this section. For the
meaning of the term ‘‘primarily engaged
directly in the continuous active
conduct of medical research’’ see
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paragraph (d)(2)(v) of this section. For
the meaning of the term ‘‘medical
research in conjunction with a hospital’’
see paragraph (d)(2)(vii) of this section.
(iii) Definition of medical research.
Medical research means the conduct of
investigations, experiments, and studies
to discover, develop, or verify
knowledge relating to the causes,
diagnosis, treatment, prevention, or
control of physical or mental diseases
and impairments of man. To qualify as
a medical research organization, the
organization must have or must have
continuously available for its regular
use the appropriate equipment and
professional personnel necessary to
carry out its principal function. Medical
research encompasses the associated
disciplines spanning the biological,
social and behavioral sciences. Such
disciplines include chemistry
(biochemistry, physical chemistry,
bioorganic chemistry, etc.), behavioral
sciences (psychiatry, physiological
psychology, neurophysiology,
neurology, neurobiology, and social
psychology, etc.), biomedical
engineering (applied biophysics,
medical physics, and medical
electronics, for example, developing
pacemakers and other medically related
electrical equipment), virology,
immunology, biophysics, cell biology,
molecular biology, pharmacology,
toxicology, genetics, pathology,
physiology, microbiology, parasitology,
endocrinology, bacteriology, and
epidemiology.
(iv) Principal purpose or functions.
An organization must be organized for
the principal purpose of engaging
primarily in the conduct of medical
research in order to be an organization
meeting the requirements of this
paragraph (d)(2). An organization will
normally be considered to be so
organized if it is expressly organized for
the purpose of conducting medical
research and is actually engaged
primarily in the conduct of medical
research. Other facts and circumstances,
however, may indicate that an
organization does not meet the principal
purpose requirement of this paragraph
(d)(2)(iv) even where its governing
instrument so expressly provides. An
organization that otherwise meets all of
the requirements of this paragraph (d)(2)
(including this paragraph (d)(2)(iv)) to
qualify as a medical research
organization will not fail to so qualify
solely because its governing instrument
does not specifically state that its
principal purpose is to conduct medical
research.
(v) Primarily engaged directly in the
continuous active conduct of medical
research—(A) In order for an
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organization to be primarily engaged
directly in the continuous active
conduct of medical research, the
organization must either devote a
substantial part of its assets to, or
expend a significant percentage of its
endowment for, such purposes, or both.
Whether an organization devotes a
substantial part of its assets to, or makes
significant expenditures for, such
continuous active conduct depends
upon the facts and circumstances
existing in each specific case. An
organization will be treated as devoting
a substantial part of its assets to, or
expending a significant percentage of its
endowment for, such purposes if it
meets the appropriate test contained in
paragraph (d)(2)(v)(B) of this section. If
an organization fails to satisfy both of
such tests, in evaluating the facts and
circumstances, the factor given most
weight is the margin by which the
organization failed to meet such tests.
Some of the other facts and
circumstances to be considered in
making such a determination are—
(1) If the organization fails to satisfy
the tests because it failed to properly
value its assets or endowment, then
upon determination of the improper
valuation it devotes additional assets to,
or makes additional expenditures for,
such purposes, so that it satisfies such
tests on an aggregate basis for the prior
year in addition to such tests for the
current year;
(2) The organization acquires new
assets or has a significant increase in the
value of its securities after it had
developed a budget in a prior year based
on the assets then owned and the then
current values;
(3) The organization fails to make
expenditures in any given year because
of the interrelated aspects of its budget
and long-term planning requirements,
for example, where an organization
prematurely terminates an unsuccessful
program and because of long-term
planning requirements it will not be
able to establish a fully operational
replacement program immediately; and
(4) The organization has as its
objective to spend less than a significant
percentage in a particular year but make
up the difference in the subsequent few
years, or to budget a greater percentage
in an earlier year and a lower percentage
in a later year.
(B) For purposes of this section, an
organization which devotes more than
one half of its assets to the continuous
active conduct of medical research will
be considered to be devoting a
substantial part of its assets to such
conduct within the meaning of
paragraph (d)(2)(v)(A) of this section.
An organization which expends funds
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equaling 3.5 percent or more of the fair
market value of its endowment for the
continuous active conduct of medical
research will be considered to have
expended a significant percentage of its
endowment for such purposes within
the meaning of paragraph (d)(2)(v)(A) of
this section.
(C) Engaging directly in the
continuous active conduct of medical
research does not include the disbursing
of funds to other organizations for the
conduct of research by them or the
extending of grants or scholarships to
others. Therefore, if an organization’s
primary purpose is to disburse funds to
other organizations for the conduct of
research by them or to extend grants or
scholarships to others, it is not
primarily engaged directly in the
continuous active conduct of medical
research.
(vi) Special rules. The following rules
shall apply in determining whether a
substantial part of an organization’s
assets are devoted to, or its endowment
is expended for, the continuous active
conduct of medical research activities:
(A) An organization may satisfy the
tests of paragraph (d)(2)(v)(B) of this
section by meeting such tests either for
a computation period consisting of the
immediately preceding taxable year, or
for the computation period consisting of
the immediately preceding four taxable
years. In addition, for taxable years
beginning in 1970, 1971, 1972, 1973,
and 1974, if an organization meets such
tests for the computation period
consisting of the first four taxable years
beginning after December 31, 1969, an
organization will be treated as meeting
such tests, not only for the taxable year
beginning in 1974, but also for the
preceding four taxable years. Thus, for
example, if a calendar year organization
failed to satisfy such tests for a
computation period consisting of 1969,
1970, 1971, and 1972, but on the basis
of a computation period consisting of
the years 1970 through 1973, it
expended funds equaling 3.5 percent or
more of the fair market value of its
endowment for the continuous active
conduct of medical research, such
organization will be considered to have
expended a significant percentage of its
endowment for such purposes for the
taxable years 1970 through 1974. In
applying such tests for a four-year
computation period, although the
organization’s expenditures for the
entire four-year period shall be
aggregated, the fair market value of its
endowment for each year shall be
summed, even though, in the case of an
asset held throughout the four-year
period, the fair market value of such an
asset will be counted four times.
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Similarly, the fair market value of an
organization’s assets for each year of a
four-year computation period shall be
summed.
(B) Any property substantially all the
use of which is ‘‘substantially related’’
(within the meaning of section
514(b)(1)(A)) to the exercise or
performance of the organization’s
medical research activities will not be
treated as part of its endowment.
(C) The valuation of assets must be
made with commonly accepted methods
of valuation. A method of valuation
made in accordance with the principles
stated in the regulations under section
2031 constitutes an acceptable method
of valuation. Assets may be valued as of
any day in the organization’s taxable
year to which such valuation applies,
provided the organization follows a
consistent practice of valuing such asset
as of such date in all taxable years. For
purposes of paragraph (d)(2)(v) of this
section, an asset held by the
organization for part of a taxable year
shall be taken into account by
multiplying the fair market value of
such asset by a fraction, the numerator
of which is the number of days in such
taxable year that the organization held
such asset and the denominator of
which is the number of days in such
taxable year.
(vii) Medical research in conjunction
with a hospital. The organization need
not be formally affiliated with a hospital
to be considered primarily engaged
directly in the continuous active
conduct of medical research in
conjunction with a hospital, but in any
event there must be a joint effort on the
part of the research organization and the
hospital pursuant to an understanding
that the two organizations will maintain
continuing close cooperation in the
active conduct of medical research. For
example, the necessary joint effort will
normally be found to exist if the
activities of the medical research
organization are carried on in space
located within or adjacent to a hospital,
the organization is permitted to utilize
the facilities (including equipment, case
studies, etc.) of the hospital on a
continuing basis directly in the active
conduct of medical research, and there
is substantial evidence of the close
cooperation of the members of the staff
of the research organization and
members of the staff of the particular
hospital or hospitals. The active
participation in medical research by
members of the staff of the particular
hospital or hospitals will be considered
to be evidence of such close
cooperation. Because medical research
may involve substantial investigation,
experimentation and study not
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immediately connected with hospital or
medical care, the requisite joint effort
will also normally be found to exist if
there is an established relationship
between the research organization and
the hospital which provides that the
cooperation of appropriate personnel
and the use of facilities of the particular
hospital or hospitals will be required
whenever it would aid such research.
(viii) Commitment to spend
contributions. The organization’s
commitment that the contribution will
be spent within the prescribed time only
for the prescribed purposes must be
legally enforceable. A promise in
writing to the donor in consideration of
his making a contribution that such
contribution will be so spent within the
prescribed time will constitute a
commitment. The expenditure of
contributions received for plant,
facilities, or equipment, used solely for
medical research purposes (within the
meaning of paragraph (d)(2)(ii) of this
section), shall ordinarily be considered
to be an expenditure for medical
research. If a contribution is made in
other than money, it shall be considered
spent for medical research if the funds
from the proceeds of a disposition
thereof are spent by the organization
within the five-year period for medical
research; or, if such property is of such
a kind that it is used on a continuing
basis directly in connection with such
research, it shall be considered spent for
medical research in the year in which it
is first so used. A medical research
organization will be presumed to have
made the commitment required under
this paragraph (d)(2)(viii) with respect
to any contribution if its governing
instrument or by-laws require that every
contribution be spent for medical
research before January 1 of the fifth
year which begins after the date such
contribution is made.
(ix) Organizational period for new
organizations. A newly created
organization, for its ‘‘organizational’’
period, shall be considered to be
primarily engaged directly in the
continuous active conduct of medical
research in conjunction with a hospital
within the meaning of paragraphs
(d)(2)(v) and (d)(2)(vii) of this section if
during such period the organization
establishes to the satisfaction of the
Commissioner that it reasonably can be
expected to be so engaged by the end of
such period. The information to be
submitted shall include detailed plans
showing the proposed initial medical
research program, architectural
drawings for the erection of buildings
and facilities to be used for medical
research in accordance with such plans,
plans to assemble a professional staff
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and detailed projections showing the
timetable for the expected
accomplishment of the foregoing. The
‘‘organizational’’ period shall be that
period which is appropriate to
implement the proposed plans, giving
effect to the proposed amounts involved
and the magnitude and complexity of
the projected medical research program,
but in no event in excess of three years
following organization.
(x) Examples. The application of this
paragraph (d)(2) may be illustrated by
the following examples:
Example 1. N, an organization referred to
in section 170(c)(2), was created to promote
human knowledge within the field of
medical research and medical education. All
of N’s assets were contributed to it by A and
consist of a diversified portfolio of stocks and
bonds. N’s endowment earns 3.5 percent
annually, which N expends in the conduct of
various medical research programs in
conjunction with Y hospital. N is located
adjacent to Y hospital, makes substantial use
of Y’s facilities, and there is close
cooperation between the staffs of N and Y. N
is directly engaged in the continuous active
conduct of medical research in conjunction
with a hospital, meets the principal purpose
test described in paragraph (d)(2)(iv) of this
section, and is therefore an organization
described in section 170(b)(1)(A)(iii).
Example 2. O, an organization referred to
in section 170(c)(2), was created to promote
human knowledge within the field of
medical research and medical education. All
of O’s assets consist of a diversified portfolio
of stocks and bonds. O’s endowment earns
3.5 percent annually, which O expends in the
conduct of various medical research
programs in conjunction with certain
hospitals. However, in 1974, O receives a
substantial bequest of additional stocks and
bonds. O’s budget for 1974 does not take into
account the bequest and as a result O
expends only 3.1 percent of its endowment
in 1974. However, O establishes that it will
expend at least 3.5 percent of its endowment
for the active conduct of medical research for
taxable years 1975 through 1978. O is
therefore directly engaged in the continuous
active conduct of medical research in
conjunction with a hospital for taxable year
1975. Since O also meets the principal
purpose test described in paragraph (d)(2)(iv)
of this section, it is therefore an organization
described in section 170(b)(1)(A)(iii) for
taxable year 1975.
Example 3. M, an organization referred to
in section 170(c)(2), was created to promote
human knowledge within the field of
medical research and medical education. M’s
activities consist of the conduct of medical
research programs in conjunction with
various hospitals. Under such programs,
researchers employed by M engage in
research at laboratories set aside for M within
the various hospitals. Substantially all of M’s
assets consist of 100 percent of the stock of
X corporation, which has a fair market value
of approximately 100 million dollars. X pays
M approximately 3.3 million dollars in
dividends annually, which M expends in the
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conduct of its medical research programs.
Since M expends only 3.3 percent of its
endowment, which does not constitute a
significant percentage, in the active conduct
of medical research, M is not an organization
described in section 170(b)(1)(A)(iii) because
M is not engaged in the continuous active
conduct of medical research.
(xi) Special rule for organizations
with existing ruling. This paragraph
(d)(2)(xi) shall apply to an organization
that prior to January 1, 1970, had
received a ruling or determination letter
which has not been expressly revoked
holding the organization to be a medical
research organization described in
section 170(b)(1)(A)(iii) and with
respect to which the facts and
circumstances on which the ruling was
based have not substantially changed.
An organization to which this paragraph
(d)(2)(xi) applies shall be treated as an
organization described in section
170(b)(1)(A)(iii) for a period not ending
prior to 90 days after February 13, 1976
(or where appropriate, for taxable years
beginning before such 90th day). In
addition, with respect to a grantor or
contributor under sections 170, 507,
545(b)(2), 556(b)(2), 642(c), 4942, 4945,
2055, 2106(a)(2), and 2522, the status of
an organization to which this paragraph
(d)(2)(xi) applies will not be affected
until notice of change of status under
section 170(b)(1)(A)(iii) is made to the
public (such as by publication in the
Internal Revenue Bulletin). The
preceding sentence shall not apply if the
grantor or contributor had previously
acquired knowledge that the Internal
Revenue Service had given notice to
such organization that it would be
deleted from classification as a section
170(b)(1)(A)(iii) organization.
*
*
*
*
*
(k) Effective/applicability date. This
section shall apply to taxable years
beginning after December 31, 1969. The
applicability of paragraph (f) of this
section shall be limited to taxable years
beginning before January 1, 2008.
I Par. 3. Section 1.170A–9T is added to
read as follows:
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§ 1.170A–9T Definition of section
170(b)(1)(A) organization (temporary).
(a) through (e) [Reserved]. For further
guidance, see § 1.170A–9(a) through (e).
(f) Definition of section
170(b)(1)(A)(vi) organization—(1) In
general. An organization is described in
section 170(b)(1)(A)(vi) if it—
(i) Is referred to in section 170(c)(2)
(other than an organization specifically
described in paragraphs (b) through (e)
of this section); and
(ii) Normally receives a substantial
part of its support from a governmental
unit referred to in section 170(c)(1) or
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from direct or indirect contributions
from the general public (‘‘publicly
supported’’). For purposes of this
paragraph (f)(1)(ii), an organization is
publicly supported if it meets the
requirements of either paragraph (f)(2)
of this section (331⁄3 percent support
test) or paragraph (f)(3) of this section
(facts and circumstances test). Paragraph
(f)(4) of this section defines normally for
purposes of the 331⁄3 percent support
test, the facts and circumstances test
and for new organizations in the first 5
years of the organization’s existence as
a section 501(c)(3) organization.
Paragraph (f)(5) of this section provides
for determinations of foundation
classification and rules for reliance by
donors and contributors. Paragraphs
(f)(6), (7), and (8) of this section list the
items that are included and excluded
from the term support. Paragraph (f)(9)
of this section provides examples of the
application of this paragraph. Types of
organizations that, subject to the
provisions of this paragraph, generally
qualify under section 170(b)(1)(A)(vi) as
‘‘publicly supported’’ are publicly or
governmentally supported museums of
history, art, or science, libraries,
community centers to promote the arts,
organizations providing facilities for the
support of an opera, symphony
orchestra, ballet, or repertory drama or
for some other direct service to the
general public.
(2) Determination whether an
organization is ‘‘publicly supported’’;
331⁄3 percent support test. An
organization is publicly supported if the
total amount of support (see paragraphs
(f)(6), (7), and (8) of this section) that the
organization normally (see paragraph
(f)(4)(i) of this section) receives from
governmental units referred to in
section 170(c)(1), from contributions
made directly or indirectly by the
general public, or from a combination of
these sources, equals at least 331⁄3
percent of the total support normally
received by the organization. See
paragraph (f)(9) Example 1 of this
section.
(3) Determination whether an
organization is ‘‘publicly supported’’;
facts and circumstances test. Even if an
organization fails to meet the 331⁄3
percent support test, it is publicly
supported if it normally receives a
substantial part of its support from
governmental units, from contributions
made directly or indirectly by the
general public, or from a combination of
these sources, and meets the other
requirements of this paragraph (f)(3). In
order to satisfy the facts and
circumstances test, an organization must
meet the requirements of paragraphs
(f)(3)(i) and (f)(3)(ii) of this section. In
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addition, the organization must be in
the nature of an organization that is
publicly supported, taking into account
all relevant facts and circumstances,
including the factors listed in
paragraphs (f)(3)(iii)(A) through (E) of
this section.
(i) Ten percent support limitation.
The percentage of support (see
paragraphs (f)(6), (7) and (8) of this
section) normally (see paragraph (f)(4) of
this section) received by an organization
from governmental units, from
contributions made directly or
indirectly by the general public, or from
a combination of these sources, must be
substantial. For purposes of this
paragraph (f)(3), an organization will not
be treated as normally receiving a
substantial amount of governmental or
public support unless the total amount
of governmental and public support
normally received equals at least 10
percent of the total support normally
received by such organization.
(ii) Attraction of public support. An
organization must be so organized and
operated as to attract new and
additional public or governmental
support on a continuous basis. An
organization will be considered to meet
this requirement if it maintains a
continuous and bona fide program for
solicitation of funds from the general
public, community, or membership
group involved, or if it carries on
activities designed to attract support
from governmental units or other
organizations described in section
170(b)(1)(A)(i) through (vi). In
determining whether an organization
maintains a continuous and bona fide
program for solicitation of funds from
the general public or community,
consideration will be given to whether
the scope of its fundraising activities is
reasonable in light of its charitable
activities. Consideration will also be
given to the fact that an organization
may, in its early years of existence, limit
the scope of its solicitation to persons
deemed most likely to provide seed
money in an amount sufficient to enable
it to commence its charitable activities
and expand its solicitation program.
(iii) In addition to the requirements
set forth in paragraphs (f)(3)(i) and (ii)
of this section that must be satisfied, all
pertinent facts and circumstances,
including the following factors, will be
taken into consideration in determining
whether an organization is ‘‘publicly
supported’’ within the meaning of
paragraph (f)(1) of this section.
However, an organization is not
generally required to satisfy all of the
factors in paragraphs (f)(3)(iii)(A)
through (E) of this section. The factors
relevant to each case and the weight
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accorded to any one of them may differ
depending upon the nature and purpose
of the organization and the length of
time it has been in existence.
(A) Percentage of financial support.
The percentage of support received by
an organization from public or
governmental sources will be taken into
consideration in determining whether
an organization is ‘‘publicly supported.’’
The higher the percentage of support
above the 10 percent requirement of
paragraph (f)(3)(i) of this section from
public or governmental sources, the
lesser will be the burden of establishing
the publicly supported nature of the
organization through other factors
described in this paragraph (f)(3), while
the lower the percentage, the greater
will be the burden. If the percentage of
the organization’s support from public
or governmental sources is low because
it receives a high percentage of its total
support from investment income on its
endowment funds, such fact will be
treated as evidence of compliance with
this subdivision if such endowment
funds were originally contributed by a
governmental unit or by the general
public. However, if such endowment
funds were originally contributed by a
few individuals or members of their
families, such fact will increase the
burden on the organization of
establishing compliance with the other
factors described in paragraph (f)(3)(iii)
of this section.
(B) Sources of support. The fact that
an organization meets the requirement
of paragraph (f)(3)(i) of this section
through support from governmental
units or directly or indirectly from a
representative number of persons, rather
than receiving almost all of its support
from the members of a single family,
will be taken into consideration in
determining whether an organization is
‘‘publicly supported.’’ In determining
what is a ‘‘representative number of
persons,’’ consideration will be given to
the type of organization involved, the
length of time it has been in existence,
and whether it limits its activities to a
particular community or region or to a
special field which can be expected to
appeal to a limited number of persons.
(C) Representative governing body.
The fact that an organization has a
governing body which represents the
broad interests of the public, rather than
the personal or private interests of a
limited number of donors (or persons
standing in a relationship to such
donors which is described in section
4946(a)(1)(C) through (G)), will be taken
into account in determining whether an
organization is ‘‘publicly supported.’’
An organization will be treated as
meeting this requirement if it has a
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governing body (whether designated in
the organization’s governing instrument
or bylaws as a Board of Directors, Board
of Trustees, etc.) which is comprised of
public officials acting in their capacities
as such; of individuals selected by
public officials acting in their capacities
as such; of persons having special
knowledge or expertise in the particular
field or discipline in which the
organization is operating; of community
leaders, such as elected or appointed
officials, clergymen, educators, civic
leaders, or other such persons
representing a broad cross-section of the
views and interests of the community;
or, in the case of a membership
organization, of individuals elected
pursuant to the organization’s governing
instrument or bylaws by a broadly based
membership.
(D) Availability of public facilities or
services; public participation in
programs or policies. (1) The fact that an
organization is of the type which
generally provides facilities or services
directly for the benefit of the general
public on a continuing basis (such as a
museum or library which holds open its
building or facilities to the public, a
symphony orchestra which gives public
performances, a conservation
organization which provides
educational services to the public
through the distribution of educational
materials, or an old age home which
provides domiciliary or nursing services
for members of the general public) will
be considered evidence that such
organization is ‘‘publicly supported.’’
(2) The fact that an organization is an
educational or research institution
which regularly publishes scholarly
studies that are widely used by colleges
and universities or by members of the
general public will also be considered
evidence that such organization is
‘‘publicly supported.’’
(3) Similarly, the following factors
will also be considered evidence that an
organization is ‘‘publicly supported’’:
(i) The participation in, or
sponsorship of, the programs of the
organization by members of the public
having special knowledge or expertise,
public officials, or civic or community
leaders.
(ii) The maintenance of a definitive
program by an organization to
accomplish its charitable work in the
community, such as combating
community deterioration in an
economically depressed area that has
suffered a major loss of population and
jobs.
(iii) The receipt of a significant part of
its funds from a public charity or
governmental agency to which it is in
some way held accountable as a
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52537
condition of the grant, contract, or
contribution.
(E) Additional factors pertinent to
membership organizations. The
following are additional factors to be
considered in determining whether a
membership organization is ‘‘publicly
supported’’:
(1) Whether the solicitation for duespaying members is designed to enroll a
substantial number of persons in the
community or area, or in a particular
profession or field of special interest
(taking into account the size of the area
and the nature of the organization’s
activities).
(2) Whether membership dues for
individual (rather than institutional)
members have been fixed at rates
designed to make membership available
to a broad cross section of the interested
public, rather than to restrict
membership to a limited number of
persons.
(3) Whether the activities of the
organization will be likely to appeal to
persons having some broad common
interest or purpose, such as educational
activities in the case of alumni
associations, musical activities in the
case of symphony societies, or civic
affairs in the case of parent-teacher
associations. See Examples 2 through 5
contained in paragraph (f)(9) of this
section for illustrations of this
paragraph (f)(3).
(4) Definition of normally; general
rule—(i) Normally; 331⁄3 percent support
test. An organization meets the 331⁄3
percent support test for its current
taxable year and the taxable year
immediately succeeding its current year,
if, for the current taxable year and the
4 taxable years immediately preceding
the current taxable year, the
organization meets the 331⁄3 percent
support test on an aggregate basis.
(ii) Normally; facts and circumstances
test. An organization meets the facts and
circumstances test for its current taxable
year and the taxable year immediately
succeeding its current year, if, for the
current taxable year and the 4 taxable
years immediately preceding the current
taxable year, the organization meets the
facts and circumstances test on an
aggregate basis. In the case of
paragraphs (f)(3)(iii)(A) and (B) of this
section, facts pertinent to the 5-year
period may also be taken into
consideration. The combination of
factors set forth in paragraphs
(f)(3)(iii)(A) through (E) of this section
that an organization ‘‘normally’’ must
meet does not have to be the same for
each 5-year period so long as there
exists a sufficient combination of factors
to show compliance with the facts and
circumstances test.
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(iii) Special rule. The fact that an
organization has normally met the
requirements of the 331⁄3 percent
support test for a current taxable year,
but is unable normally to meet such
requirements for a succeeding taxable
year, will not in itself prevent such
organization from meeting the facts and
circumstances test for such succeeding
taxable year.
(iv) Example. The application of
paragraphs (f)(4)(i), (ii), and (iii) of this
section may be illustrated by the
following example:
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Example. (i) X is recognized as an
organization described in section 501(c)(3).
On the basis of support received during
taxable years 2008, 2009, 2010, 2011 and
2012, it meets the 331⁄3 percent support test
for taxable year 2012 (the current taxable
year). X also meets the 331⁄3 support test for
2013, as the immediately succeeding taxable
year.
(ii) In taxable years 2009, 2010, 2011, 2012
and 2013, in the aggregate, X does not receive
at least 331⁄3 percent of its support from
governmental units referred to in section
170(c)(1), from contributions made directly
or indirectly by the general public, or from
a combination of these sources. X still meets
the 331⁄3 percent support test for taxable year
2013 based on the aggregate support received
for taxable years 2008 through 2012.
(iii) In taxable years 2010, 2011, 2012, 2013
and 2014, in the aggregate, X does not receive
at least 331⁄3 percent of its support from
governmental units referred to in section
170(c)(1), from contributions made directly
or indirectly by the general public, or from
a combination of these sources. X does not
meet the 331⁄3 percent support test for taxable
year 2014.
(iv) Based on the aggregate support and
other factors listed in paragraphs (f)(3)(iii)(A)
through (E) of this section for taxable years
2009, 2010, 2011, 2012, and 2013, X meets
the facts and circumstances test for taxable
year 2013 and for taxable year 2014 (as the
immediately succeeding taxable year).
Therefore, X is still an organization described
in section 170(b)(1)(A)(vi) for taxable year
2014, even though X did not meet the 331⁄3
percent support test for that year.
(v) Normally; first five years of an
organization’s existence. (A) An
organization meets the 331⁄3 public
support test or the facts and
circumstances test during its first five
taxable years as a section 501(c)(3)
organization if the organization can
reasonably be expected to meet the
requirements of the 331⁄3 percent
support test or the facts and
circumstances test during that period.
With respect to such organization’s
sixth taxable year, the organization shall
be described in section 170(b)(1)(A)(vi)
if it meets the 331⁄3 percent support test
or the facts and circumstances test
under the definitions of normally set
forth in paragraphs (f)(4)(i) through (iii)
of this section for its sixth taxable year
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(based on support received in its second
through sixth taxable years), or for its
fifth taxable year (based on support
received in its first through fifth taxable
years).
(B) Basic consideration. In
determining whether an organization
can reasonably be expected (within the
meaning of paragraph (f)(4)(v)(A) of this
section) to meet the requirements of the
331⁄3 percent support test or the facts
and circumstances test during its first
five taxable years, the basic
consideration is whether its
organizational structure, current or
proposed programs or activities, and
actual or intended method of operation
are such as can reasonably be expected
to attract the type of broadly based
support from the general public, public
charities, and governmental units that is
necessary to meet such tests. The factors
that are relevant to this determination,
and the weight accorded to each of
them, may differ from case to case,
depending on the nature and functions
of the organization. The information to
be considered for this purpose shall
consist of all pertinent facts and
circumstances relating to the
requirements set forth in paragraph
(f)(3) of this section.
(vi) Example. The application of
paragraph (f)(4)(v) of this section may be
illustrated by the following example:
Example. (i) Organization Y was formed in
January 2008, and uses a December 31
taxable year. After September 9, 2008, and
before December 31, 2008, Organization Y
filed Form 1023 requesting recognition of
exemption as an organization described in
section 501(c)(3) and in sections
170(b)(1)(A)(vi) and 509(a)(1). In its
application, Organization Y established that
it can reasonably be expected to operate as
a public charity under paragraph (f)(4)(v) of
this section. Subsequently, Organization Y
received a ruling or determination letter that
it is an organization described in section
501(c)(3) and sections 170(b)(1)(A)(vi) and
509(a)(1) effective as of the date of its
formation.
(ii) Organization Y is described in sections
170(b)(1)(A)(vi) and 509(a)(1) for its first 5
taxable years (the taxable years ending
December 31, 2008, through December 31,
2012).
(iii) Organization Y can qualify as a public
charity beginning with the taxable year
ending December 31, 2013, if Organization Y
can meet the requirements of paragraphs
(f)(2) through (3) of this section or § 1.509(a)–
3T(a) through (b) for the taxable years ending
December 31, 2009, through December 31,
2013, or for the taxable years ending
December 31, 2008, through December 31,
2012.
(5) Determinations on foundation
classification and reliance. (i) A ruling
or determination letter that an
organization is described in section
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170(b)(1)(A)(vi) may be issued to an
organization. Such determination may
be made in conjunction with the
recognition of the organization’s taxexempt status or at such other time as
the organization believes it is described
in section 170(b)(1)(A)(vi). The ruling or
determination letter that the
organization is described in section
170(b)(1)(A)(vi) may be revoked if, upon
examination, the organization has not
met the requirements of paragraph (f) of
this section. The ruling or determination
letter that the organization is described
in section 170(b)(1)(A)(vi) also may be
revoked if the organization’s application
for a ruling or determination contained
one or more material misstatements of
fact or if such application was part of a
scheme or plan to avoid or evade any
provision of the Internal Revenue Code.
The revocation of the determination that
an organization is described in section
170(b)(1)(A)(vi) does not preclude
revocation of the determination that the
organization is described in section
501(c)(3).
(ii) Status of grantors or contributors.
For purposes of sections 170, 507,
545(b)(2), 642(c), 4942, 4945, 2055,
2106(a)(2), and 2522, grantors or
contributors may rely upon a
determination letter or ruling that an
organization is described in section
170(b)(1)(A)(vi) until the Internal
Revenue Service publishes notice of a
change of status (for example, in the
Internal Revenue Bulletin or Publication
78, ‘‘Cumulative List of Organizations
described in Section 170(c) of the
Internal Revenue Code of 1986,’’ which
can be searched at www.irs.gov). For this
purpose, grantors or contributors also
may rely on an advance ruling that
expires on or after June 9, 2008.
However, a grantor or contributor may
not rely on such an advance ruling or
any determination letter or ruling if the
grantor or contributor was responsible
for, or aware of, the act or failure to act
that resulted in the organization’s loss of
classification under section
170(b)(1)(A)(vi) or acquired knowledge
that the Internal Revenue Service had
given notice to such organization that it
would be deleted from such
classification.
(6) Definition of support; meaning of
general public—(i) In general. In
determining whether the 331⁄3 percent
support test or the 10 percent support
limitation described in paragraph
(f)(3)(i) of this section is met,
contributions by an individual, trust, or
corporation shall be taken into account
as support from direct or indirect
contributions from the general public
only to the extent that the total amount
of the contributions by any such
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individual, trust, or corporation during
the period described in paragraphs
(f)(4)(i) or (ii) of this section does not
exceed 2 percent of the organization’s
total support for such period, except as
provided in paragraph (f)(6)(ii) of this
section. Therefore, any contribution by
one individual will be included in full
in the denominator of the fraction
determining the 331⁄3 percent support or
the 10 percent support limitation, but
will be includible in the numerator of
such fraction only to the extent that
such amount does not exceed 2 percent
of the denominator. In applying the 2
percent limitation, all contributions
made by a donor and by any person or
persons standing in a relationship to the
donor that is described in section
4946(a)(1)(C) through (G) and the
regulations relating to section
4946(a)(1)(C) through (G) shall be
treated as made by one person. The 2
percent limitation shall not apply to
support received from governmental
units referred to in section 170(c)(1) or
to contributions from organizations
described in section 170(b)(1)(A)(vi),
except as provided in paragraph (f)(6)(v)
of this section. For purposes of
paragraphs (f)(2), (f)(3)(i) and
(f)(7)(iii)(A)(2) of this section, the term
indirect contributions from the general
public includes contributions received
by the organization from organizations
(such as section 170(b)(1)(A)(vi)
organizations) that normally receive a
substantial part of their support from
direct contributions from the general
public, except as provided in paragraph
(f)(6)(v) of this section. See the examples
in paragraph (f)(9) of this section for the
application of this paragraph (f)(6)(i).
For purposes of this paragraph (f), the
term contributions includes qualified
sponsorship payments (as defined in
§ 1.513–4) in the form of money or
property (but not services).
(ii) Exclusion of unusual grants. (A)
For purposes of applying the 2 percent
limitation described in paragraph
(f)(6)(i) of this section to determine
whether the 331⁄3 percent support test or
the 10 percent support limitation in
paragraph (f)(3)(i) of this section is
satisfied, one or more contributions may
be excluded from both the numerator
and the denominator of the applicable
support fraction if such contributions
meet the requirements of paragraph
(f)(6)(iii) of this section. The exclusion
provided by this paragraph (f)(6)(ii) is
generally intended to apply to
substantial contributions or bequests
from disinterested parties, which
contributions or bequests—
(1) Are attracted by reason of the
publicly supported nature of the
organization;
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(2) Are unusual or unexpected with
respect to the amount thereof; and
(3) Would, by reason of their size,
adversely affect the status of the
organization as normally being publicly
supported for the applicable period
described in paragraph (f)(4) of this
section.
(B) In the case of a grant (as defined
in § 1.509(a)–3(g)) that meets the
requirements of this paragraph (f)(6)(ii),
if the terms of the granting instrument
(whether executed before or after 1969)
require that the funds be paid to the
recipient organization over a period of
years, the amount received by the
organization each year pursuant to the
terms of such grant may be excluded for
such year. However, no item of gross
investment income may be excluded
under this paragraph (f)(6). The
provisions of this paragraph (f)(6) shall
apply to exclude unusual grants made
during any of the applicable periods
described in paragraph (f)(4) or (f)(6) of
this section. See paragraph (f)(6)(iv) of
this section as to reliance by a grantee
organization upon an unusual grant
ruling under this paragraph (f)(6).
(iii) Determining factors. In
determining whether a particular
contribution may be excluded under
paragraph (f)(6)(ii) of this section all
pertinent facts and circumstances will
be taken into consideration. No single
factor will necessarily be determinative.
For some of the factors similar to the
factors to be considered, see § 1.509(a)–
3T(c)(4).
(iv) Grantors and contributors. Prior
to the making of any grant or
contribution that will allegedly meet the
requirements for exclusion under
paragraph (f)(6)(ii) of this section, a
potential grantee organization may
request a determination whether such
grant or contribution may be so
excluded. Requests for such
determination may be filed by the
grantee organization. The issuance of
such determination will be at the sole
discretion of the Commissioner. The
organization must submit all
information necessary to make a
determination on the factors referred to
in paragraph (f)(6)(iii) of this section. If
a favorable ruling is issued, such ruling
may be relied upon by the grantor or
contributor of the particular
contribution in question for purposes of
sections 170, 507, 545(b)(2), 642(c),
4942, 4945, 2055, 2106(a)(2), and 2522
and by the grantee organization for
purposes of paragraph (f)(6)(ii) of this
section.
(v) Grants from public charities.
Pursuant to paragraph (f)(6)(i) of this
section, contributions received from a
governmental unit or from a section
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52539
170(b)(1)(A)(vi) organization are not
subject to the 2 percent limitation
described in paragraph (f)(6)(i) of this
section unless such contributions
represent amounts which have been
expressly or impliedly earmarked by a
donor to such governmental unit or
section 170(b)(1)(A)(vi) organization as
being for, or for the benefit of, the
particular organization claiming section
170(b)(1)(A)(vi) status. See § 1.509(a)–
3(j)(3) for examples illustrating the rules
of this paragraph (f)(6)(v).
(7) Definition of support; special rules
and meaning of terms—(i) Definition of
support. For purposes of this paragraph
(f)(7), the term ‘‘support’’ shall be as
defined in section 509(d) (without
regard to section 509(d)(2)). The term
‘‘support’’ does not include—
(A) Any amounts received from the
exercise or performance by an
organization of its charitable,
educational, or other purpose or
function constituting the basis for its
exemption under section 501(a). In
general, such amounts include amounts
received from any activity the conduct
of which is substantially related to the
furtherance of such purpose or function
(other than through the production of
income); or
(B) Contributions of services for
which a deduction is not allowable.
(ii) For purposes of the 331⁄3 percent
support test and the 10 percent support
limitation in paragraph (f)(3)(i) of this
section, all amounts received that are
described in paragraphs (f)(7)(i)(A) or
(B) of this section are to be excluded
from both the numerator and the
denominator of the fractions
determining compliance with such tests,
except as provided in paragraph
(f)(7)(iii) of this section.
(iii) Organizations dependent
primarily on gross receipts from related
activities. (A) Notwithstanding the
provisions of paragraph (f)(7)(i) of this
section, an organization will not be
treated as satisfying the 331⁄3 percent
support test or the 10 percent support
limitation in paragraph (f)(3)(i) of this
section if it receives—
(1) Almost all of its support (as
defined in section 509(d)) from gross
receipts from related activities; and
(2) An insignificant amount of its
support from governmental units
(without regard to amounts referred to
in paragraph (f)(7)(i)(A) of this section)
and contributions made directly or
indirectly by the general public.
(B) Example. The application of this
paragraph (f)(7)(iii) may be illustrated
by the following example:
Example. Z, an organization described in
section 501(c)(3), is controlled by A, its
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president. Z received $500,000 during the
period consisting of the current taxable year
and the four immediately preceding taxable
years under a contract with the Department
of Transportation, pursuant to which Z has
engaged in research to improve a particular
vehicle used primarily by the Federal
government. During this same period, the
only other support received by Z consisted of
$5,000 in small contributions primarily from
Z’s employees and business associates. The
$500,000 amount constitutes support under
sections 509(d)(2) and 509(a)(2)(A). Under
these circumstances, Z meets the conditions
of paragraphs (f)(7)(iii)(A)(1) and (2) of this
section and will not be treated as meeting the
requirements of either the 331⁄3 percent
support test or the facts and circumstances
test. As to the rules applicable to
organizations that fail to qualify under
section 170(b)(1)(A)(vi) because of the
provisions of this paragraph (f)(7)(ii), see
section 509(a)(2) and the accompanying
regulations. For the distinction between gross
receipts (as referred to in section 509(d)(2))
and gross investment income (as referred to
in section 509(d)(4)), see § 1.509(a)–3(m).
(iv) Membership fees. For purposes of
this paragraph (f)(7), the term support
shall include ‘‘membership fees’’ within
the meaning of § 1.509(a)–3(h) (that is,
if the basic purpose for making a
payment is to provide support for the
organization rather than to purchase
admissions, merchandise, services, or
the use of facilities).
(8) Support from a governmental unit.
(i) For purposes of the 331⁄3 percent
support test and the 10 percent support
limitation described in paragraph
(f)(3)(i) of this section, the term support
from a governmental unit includes any
amounts received from a governmental
unit, including donations or
contributions and amounts received in
connection with a contract entered into
with a governmental unit for the
performance of services or in
connection with a government research
grant. However, such amounts will not
constitute support from a governmental
unit for such purposes if they constitute
amounts received from the exercise or
performance of the organization’s
exempt functions as provided in
paragraph (f)(7)(i)(A) of this section.
(ii) For purposes of paragraph (f)(8)(i)
of this section, any amount paid by a
governmental unit to an organization is
not to be treated as received from the
exercise or performance of its charitable,
educational, or other purpose or
function constituting the basis for its
exemption under section 501(a) (within
the meaning of paragraph (f)(7)(i)(A) of
this section) if the purpose of the
payment is primarily to enable the
organization to provide a service to, or
maintain a facility for, the direct benefit
of the public (regardless of whether part
of the expense of providing such service
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or facility is paid for by the public),
rather than to serve the direct and
immediate needs of the payor. For
example—
(A) Amounts paid for the
maintenance of library facilities which
are open to the public;
(B) Amounts paid under government
programs to nursing homes or homes for
the aged in order to provide health care
or domiciliary services to residents of
such facilities; and
(C) Amounts paid to child placement
or child guidance organizations under
government programs for services
rendered to children in the community,
are considered payments the purpose of
which is primarily to enable the
recipient organization to provide a
service or maintain a facility for the
direct benefit of the public, rather than
to serve the direct and immediate needs
of the payor. Furthermore, any amount
received from a governmental unit
under circumstances such that the
amount would be treated as a ‘‘grant’’
within the meaning of § 1.509(a)–3(g)
will generally constitute ‘‘support from
a governmental unit’’ described in this
paragraph (f)(8), rather than an amount
described in paragraph (f)(7)(i)(A) of this
section.
(9) Examples. The application of
paragraphs (f)(1) through (8) of this
section may be illustrated by the
following examples:
Example 1. (i) M is recognized as an
organization described in section 501(c)(3).
For the years 2008 through 2012 (the
applicable period with respect to the taxable
year 2012 under paragraph (f)(4) of this
section), M received support (as defined in
paragraphs (f)(6) through (8) of this section)
of $600,000 from the following sources:
Investment income ....................
$300,000
City R (a governmental unit described in section 170(c)(1)) ..
40,000
United Fund (an organization
described in section
170(b)(1)(A)(vi)) .....................
40,000
Contributions .............................
220,000
Total support ......................
$600,000
(ii) With respect to the taxable year 2012,
M’s public support is computed as follows:
Support from a governmental
unit described in section
170(c)(1) ..................................
$40,000
Indirect contributions from the
general public (United Fund)
40,000
Contributions by various donors (no one having made
contributions that total in excess of $12,000—2 percent of
total support) ..........................
50,000
Six contributions (each in excess of $12,000—2 percent
total support) 6 × $12,000 .....
72,000
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(iii) M’s support from governmental units
referred to in section 170(c)(1) and from
direct and indirect contributions from the
general public (as defined in paragraph (f)(6)
of this section) with respect to the taxable
year 2012 normally exceeds 331⁄3 percent of
M’s total support ($202,000/$600,000 = 33.67
percent) for the applicable period (2008
through 2012). M meets the 331⁄3 percent
support test with respect to 2012 and is
therefore publicly supported for the taxable
years 2012 and 2013.
Example 2. N is recognized as an
organization described in section 501(c)(3). It
was created to maintain public gardens
containing botanical specimens and
displaying statuary and other art objects. The
facilities, works of art, and a large
endowment were all contributed by a single
contributor. The members of the governing
body of the organization are unrelated to its
creator. The gardens are open to the public
without charge and attract a substantial
number of visitors each year. For the current
taxable year and the four taxable years
immediately preceding the current taxable
year, 95 percent of the organization’s total
support was received from investment
income from its original endowment. N also
maintains a membership society that is
supported by members of the general public
who wish to contribute to the upkeep of the
gardens by paying a small annual
membership fee. Over the 5-year period in
question, these fees from the general public
constituted the remaining 5 percent of the
organization’s total support for such period.
Under these circumstances, N does not meet
the 331⁄3 percent support test for its current
taxable year. Furthermore, because only 5
percent of its total support is, with respect to
the current taxable year, normally received
from the general public, N does not satisfy
the 10 percent support limitation described
in paragraph (f)(3)(i) of this section and
therefore does not qualify as publicly
supported under the facts and circumstances
test. Because N has failed to satisfy the 10
percent support limitation under paragraph
(f)(3)(i) of this section, none of the other
requirements or factors set forth in
paragraphs (f)(3)(iii)(A) through (E) of this
section can be considered in determining
whether N qualifies as a publicly supported
organization. For its current taxable year, N
therefore is not an organization described in
section 170(b)(1)(A)(vi).
Example 3. (i) O, an art museum, is
recognized as an organization described in
section 501(c)(3). In 1930, O was founded in
S City by the members of a single family to
collect, preserve, interpret, and display to the
public important works of art. O is governed
by a Board of Trustees that originally
consisted almost entirely of members of the
founding family. However, since 1945,
members of the founding family or persons
standing in a relationship to the members of
such family described in section
4946(a)(1)(C) through (G) have annually
constituted less than one-fifth of the Board of
Trustees. The remaining board members are
citizens of S City from a variety of
professions and occupations who represent
the interests and views of the people of S
City in the activities carried on by the
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organization rather than the personal or
private interests of the founding family. O
solicits contributions from the general public
and for the current taxable year and each of
the four taxable years immediately preceding
the current taxable year, O has received total
contributions (in small sums of less than
$100, none of which exceeds 2 percent of O’s
total support for such period) in excess of
$10,000. These contributions from the
general public (as defined in paragraph (f)(6)
of this section) represent 25 percent of the
organization’s total support for such 5-year
period. For this same period, investment
income from several large endowment funds
has constituted 75 percent of O’s total
support. O expends substantially all of its
annual income for its exempt purposes and
thus depends upon the funds it annually
solicits from the public as well as its
investment income in order to carry out its
activities on a normal and continuing basis
and to acquire new works of art. O has, for
the entire period of its existence, been open
to the public and more than 300,000 people
(from S City and elsewhere) have visited the
museum in each of the current taxable year
and the four most recent taxable years.
(ii) Under these circumstances, O does not
meet the 331⁄3 percent support test for its
current year because it has received only 25
percent of its total support for the applicable
5-year period from the general public.
However, under the facts set forth above, O
has met the 10 percent support limitation
under paragraph (f)(3)(i) of this section, as
well as the requirements of paragraph
(f)(3)(ii) of this section. Under all of the facts
set forth in this example, O is considered as
meeting the requirements of the facts and
circumstances test on the basis of satisfying
paragraphs (f)(3)(i) and (ii) of this section and
the factors set forth in paragraphs (f)(3)(iii)(A)
through (D) of this section. O is therefore
publicly supported for its current taxable
year and the immediately succeeding taxable
year.
Example 4. (i) In 1960, the P Philharmonic
Orchestra was organized in T City through
the combined efforts of a local music society
and a local women’s club to present to the
public a wide variety of musical programs
intended to foster music appreciation in the
community. P is recognized as an
organization described in section 501(c)(3).
The orchestra is composed of professional
musicians who are paid by the association.
Twelve performances open to the public are
scheduled each year. A small admission fee
is charged for each of these performances. In
addition, several performances are staged
annually without charge. During the current
taxable year and the four taxable years
immediately preceding the current taxable
year, P has received separate contributions of
$200,000 each from A and B (not members
of a single family) and support of $120,000
from the T Community Chest, a public
federated fundraising organization operating
in T City. P depends on these funds in order
to carry out its activities and will continue
to depend on contributions of this type to be
made in the future. P has also begun a
fundraising campaign in an attempt to
expand its activities for the coming years. P
is governed by a Board of Directors
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comprised of 5 individuals. A faculty
member of a local college, the president of a
local music society, the head of a local
banking institution, a prominent doctor, and
a member of the governing body of the local
chamber of commerce currently serve on P’s
Board and represent the interests and views
of the community in the activities carried on
by P.
(ii) With respect to P’s current taxable year,
P’s sources of support are computed on the
basis of the current taxable year and the four
taxable years immediately preceding the
current taxable year, as follows:
Contributions .............................
$520,000
Receipts from performances .....
100,000
Total support ......................
$620,000
Less:
Receipts from performances
(excluded under paragraph
(f)(7)(i)(A) of this section) ..
100,000
Total support for purposes
of paragraphs (f)(2) and
(f)(3)(i) of this section .....
$520,000
Total ....................................
$140,800
(iv) P’s support from the direct and indirect
contributions from the general public does
not meet the 331⁄3 percent support test
($140,800/$520,000 = 27 percent of total
support). However, because P receives 27
percent of its total support from the general
public, it meets the 10 percent support
limitation under paragraph (f)(3)(i) of this
section. P also meets the requirements of
paragraph (f)(3)(ii) of this section. As a result
of satisfying these requirements and the
factors set forth in paragraphs (f)(3)(iii)(A)
through (D) of this section, P is considered
to meet the facts and circumstances test and
therefore qualifies as a publicly supported
organization under paragraph (f)(1) of this
section for its current taxable year and the
immediately succeeding taxable year.
Example 5. (i) Q is recognized as an
organization described in section 501(c)(3). It
is a philanthropic organization founded in
1965 by C for the purpose of making annual
contributions to worthy charities. C created
Q as a charitable trust by the transfer of
appreciated securities worth $500,000 to Q.
Pursuant to the trust agreement, C and two
other members of his family are the sole
trustees of Q and are vested with the right to
appoint successor trustees. In each of the
current taxable year and the four taxable
years immediately preceding the current
taxable year, Q received $15,000 in
investment income from its original
endowment. Each year Q makes a solicitation
for funds by operating a charity ball at C’s
residence. Guests are invited and requested
to make contributions of $100 per couple.
PO 00000
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During the 5-year period at issue, $15,000
was received from the proceeds of these
events. C and his family have also made
contributions to Q of $25,000 over the 5-year
period at issue. Q makes disbursements each
year of substantially all of its net income to
the public charities chosen by the trustees.
(ii) Q’s sources of support for the current
taxable year and the four taxable years
immediately preceding the current taxable
year as follows:
Investment income ....................
$60,000
Contributions .............................
40,000
Total support ......................
$100,000
(iii) For purposes of paragraphs (f)(2) and
(f)(3)(i) of this section, Q’s support is
computed as follows:
Contributions from the general
public ......................................
$15,000
One contribution (in excess of
$2,000—2 percent of total
support) 1 × $2,000 ................
2,000
Total ....................................
(iii) For purposes of paragraphs (f)(2) and
(f)(3)(i) of this section, P’s support is
computed as follows:
T Community Chest (indirect
support from the general
public) ....................................
$120,000
Two contributions (each in excess of $10,400—2 percent of
total support) 2 × $10,400 .....
20,800
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$17,000
(iv) Q’s support from the general public
does not meet the 331⁄3 percent support test
($17,000/$100,000 = 17 percent of total
support). Thus, Q’s classification as a
‘‘publicly supported’’ organization depends
on whether it meets the requirements of the
facts and circumstances test. Even though it
satisfies the 10 percent support limitation
under paragraph (f)(3)(i) of this section, its
method of solicitation makes it questionable
whether Q satisfies the requirements of
paragraph (f)(3)(ii) of this section. Because of
its method of operating, Q also has a greater
burden of establishing its publicly supported
nature under paragraph (f)(3)(iii)(A) of this
section. Based upon the foregoing and upon
Q’s failure to receive favorable consideration
under the remaining factors set forth in
paragraphs (f)(3)(iii)(B), (C) and (D) of this
section, Q does not satisfy the facts and
circumstances test.
(10) Community trust; introduction.
Community trusts have often been
established to attract large contributions
of a capital or endowment nature for the
benefit of a particular community or
area, and often such contributions have
come initially from a small number of
donors. While the community trust
generally has a governing body
comprised of representatives of the
particular community or area, its
contributions are often received and
maintained in the form of separate trusts
or funds, which are subject to varying
degrees of control by the governing
body. To qualify as a ‘‘publicly
supported’’ organization, a community
trust must meet the 331⁄3 percent
support test, or, if it cannot meet that
test, be organized and operated so as to
attract new and additional public or
governmental support on a continuous
basis sufficient to meet the facts and
circumstances test. Such facts and
circumstances test includes a
requirement of attraction of public
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support in paragraph (f)(3)(ii) of this
section which, as applied to community
trusts, generally will be satisfied if they
seek gifts and bequests from a wide
range of potential donors in the
community or area served, through
banks or trust companies, through
attorneys or other professional persons,
or in other appropriate ways that call
attention to the community trust as a
potential recipient of gifts and bequests
made for the benefit of the community
or area served. A community trust is not
required to engage in periodic,
community-wide, fundraising
campaigns directed toward attracting a
large number of small contributions in
a manner similar to campaigns
conducted by a community chest or
united fund. Paragraph (f)(11) of this
section provides rules for determining
the extent to which separate trusts or
funds may be treated as component
parts of a community trust, fund or
foundation (herein collectively referred
to as a ‘‘community trust’’, and
sometimes referred to as an
‘‘organization’’) for purposes of meeting
the requirements of this paragraph for
classification as a publicly supported
organization. Paragraph (f)(12) of this
section contains rules for trusts or funds
that are prevented from qualifying as
component parts of a community trust
by paragraph (f)(11) of this section.
(11) Community trusts; requirements
for treatment as a single entity—(i)
General rule. For purposes of sections
170, 501, 507, 508, 509, and Chapter 42,
any organization that meets the
requirements contained in paragraphs
(f)(11)(iii) through (iv) of this section
will be treated as a single entity, rather
than as an aggregation of separate funds,
and except as otherwise provided, all
funds associated with such organization
(whether a trust, not-for-profit
corporation, unincorporated association,
or a combination thereof) which meet
the requirements of paragraph (f)(11)(ii)
of this section will be treated as
component parts of such organization.
(ii) Component part of a community
trust. In order to be treated as a
component part of a community trust
referred to in this paragraph (f)(11)
(rather than as a separate trust or notfor-profit corporation or association), a
trust or fund:
(A) Must be created by a gift, bequest,
legacy, devise, or other transfer to a
community trust which is treated as a
single entity under this paragraph
(f)(11); and
(B) May not be directly or indirectly
subjected by the transferor to any
material restriction or condition (within
the meaning of § 1.507–2T(a)(7)) with
respect to the transferred assets. For
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purposes of this paragraph (f)(11)(ii)(B),
if the transferor is not a private
foundation, the provisions of § 1.507–
2T(a)(7) shall be applied to the trust or
fund as if the transferor were a private
foundation established and funded by
the person establishing the trust or fund
and such foundation transferred all its
assets to the trust or fund. Any transfer
made to a fund or trust which is treated
as a component part of a community
trust under this paragraph (f)(11)(ii) will
be treated as a transfer made ‘‘to’’ a
‘‘publicly supported’’ community trust
for purposes of section 170(b)(1)(A) and
507(b)(1)(A) if such community trust
meets the requirements of section
170(b)(1)(A)(vi) as a ‘‘publicly
supported’’ organization at the time of
the transfer, except as provided in
paragraph (f)(4)(v)(B) of this section or
§ 1.508–1(b)(4) and (6) (relating,
generally, to reliance by grantors and
contributors). See also paragraphs
(f)(12)(ii) and (iii) of this section for
special provisions relating to splitinterest trusts and certain private
foundations described in section
170(b)(1)(F)(iii).
(iii) Name. The organization must be
commonly known as a community trust,
fund, foundation or other similar name
conveying the concept of a capital or
endowment fund to support charitable
activities (within the meaning of section
170(c)(1) or (2)(B)) in the community or
area it serves.
(iv) Common instrument. All funds of
the organization must be subject to a
common governing instrument or a
master trust or agency agreement (herein
referred to as the ‘‘governing
instrument’’), which may be embodied
in a single document or several
documents containing common
language. Language in an instrument of
transfer to the community trust making
a fund subject to the community trust’s
governing instrument or master trust or
agency agreement will satisfy the
requirements of this paragraph
(f)(11)(iv). In addition, if a community
trust adopts a new governing instrument
(or creates a corporation) to put into
effect new provisions (applying to
future transfers to the community trust),
the adoption of such new governing
instrument (or creation of a corporation
with a governing instrument) which
contains common language with the
existing governing instrument shall not
preclude the community trust from
meeting the requirements of this
paragraph (f)(11)(iv).
(v) Common governing body. (A) The
organization must have a common
governing body or distribution
committee (herein referred to as the
‘‘governing body’’) which either directs
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or, in the case of a fund designated for
specified beneficiaries, monitors the
distribution of all of the funds
exclusively for charitable purposes
(within the meaning of section 170(c)(1)
or (2)(B)). For purposes of this
paragraph (f)(11)(v), a fund is designated
for specified beneficiaries only if no
person is left with the discretion to
direct the distribution of the fund.
(B) Powers of modification and
removal. The fact that the exercise of
any power described in this paragraph
(f)(11)(v)(B) is reviewable by an
appropriate State authority will not
preclude the community trust from
meeting the requirements of this
paragraph (f)(11)(v)(B). Except as
provided in paragraph (f)(11)(v)(C) of
this section, the governing body must
have the power in the governing
instrument, the instrument of transfer,
the resolutions or by-laws of the
governing body, a written agreement, or
otherwise—
(1) To modify any restriction or
condition on the distribution of funds
for any specified charitable purposes or
to specified organizations if in the sole
judgment of the governing body
(without the necessity of the approval of
any participating trustee, custodian, or
agent), such restriction or condition
becomes, in effect, unnecessary,
incapable of fulfillment, or inconsistent
with the charitable needs of the
community or area served;
(2) To replace any participating
trustee, custodian, or agent for breach of
fiduciary duty under State law; and
(3) To replace any participating
trustee, custodian, or agent for failure to
produce a reasonable (as determined by
the governing body) return of net
income (within the meaning of
paragraph (f)(11)(v)(F) of this section)
over a reasonable period of time (as
determined by the governing body).
(C) Transitional rule—(1)
Notwithstanding paragraph (f)(11)(v)(B)
of this section, if a community trust
meets the requirements of paragraph
(f)(11)(v)(C)(3) of this section, then in
the case of any instrument of transfer
which is executed before July 19, 1977,
and is not revoked or amended
thereafter (with respect to any
dispositive provision affecting the
transfer to the community trust), and in
the case of any instrument of transfer
which is irrevocable on January 19,
1982, the governing body must have the
power to cause proceedings to be
instituted (by request to the appropriate
State authority):
(i) To modify any restriction or
condition on the distribution of funds
for any specified charitable purposes or
to specified organizations if in the
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judgment of the governing body such
restriction or condition becomes, in
effect, unnecessary, incapable of
fulfillment, or inconsistent with the
charitable needs of the community or
area served; and
(ii) To remove any participating
trustee, custodian, or agent for breach of
fiduciary duty under State law.
(2) The necessity for the governing
body to obtain the approval of a
participating trustee to exercise the
powers described in paragraph
(f)(11)(v)(C)(1) of this section shall be
treated as not preventing the governing
body from having such power, unless
(and until) such approval has been (or
is) requested by the governing body and
has been (or is) denied.
(3) Paragraph (f)(11)(v)(C)(1) of this
section shall not apply unless the
community trust meets the requirements
of paragraph (f)(11)(v)(B) of this section,
with respect to funds other than those
under instruments of transfer described
in the first sentence of such paragraph
(f)(11)(v)(C)(1) of this section, by
January 19, 1978, or such later date as
the Commissioner may provide for such
community trust, and unless the
community trust does not, once it so
complies, thereafter solicit for funds
that will not qualify under the
requirements of paragraph (f)(11)(v)(B)
of this section.
(D) Inconsistent State law—(1) For
purposes of paragraphs (f)(11)(v)(B)(1),
(2), or (3), (f)(11)(v)(C)(1)(i) or (ii) or
(f)(11)(v)(E) of this section, if a power
described in such a provision is
inconsistent with State law even if such
power were expressly granted to the
governing body by the governing
instrument and were accepted without
limitation under an instrument of
transfer, then the community trust will
be treated as meeting the requirements
of such a provision if it meets such
requirements to the fullest extent
possible consistent with State law (if
such power is or had been so expressly
granted).
(2) For example, if, under the
conditions of paragraph (f)(11)(v)(D)(1)
of this section, the power to modify is
inconsistent with State law, but the
power to institute proceedings to
modify, if so expressly granted, would
be consistent with State law, the
community trust will be treated as
meeting such requirements to the fullest
extent possible if the governing body
has the power (in the governing
instrument or otherwise) to institute
proceedings to modify a condition or
restriction. On the other hand, if in such
a case the community trust has only the
power to cause proceedings to be
instituted to modify a condition or
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restriction, it will not be treated as
meeting such requirements to the fullest
extent possible.
(3) In addition, if, for example, under
the conditions of paragraph
(f)(11)(v)(D)(1) of this section, the power
to modify and the power to institute
proceedings to modify a condition or
restriction is inconsistent with State
law, but the power to cause such
proceedings to be instituted would be
consistent with State law, if it were
expressly granted in the governing
instrument and if the approval of the
State Attorney General were obtained,
then the community trust will be treated
as meeting such requirements to the
fullest extent possible if it has the power
(in the governing instrument or
otherwise) to cause such proceedings to
be instituted, even if such proceedings
can be instituted only with the approval
of the State Attorney General.
(E) Exercise of powers. The governing
body shall (by resolution or otherwise)
commit itself to exercise the powers
described in paragraphs (f)(11)(v)(B), (C)
and (D) of this section in the best
interests of the community trust. The
governing body will be considered not
to be so committed where it has grounds
to exercise such a power and fails to
exercise it by taking appropriate action.
Such appropriate action may include,
for example, consulting with the
appropriate State authority prior to
taking action to replace a participating
trustee.
(F) Reasonable return. In addition to
the requirements of paragraphs
(f)(11)(v)(B), (C), (D) or (E) of this
section, the governing body shall (by
resolution or otherwise) commit itself to
obtain information and take other
appropriate steps with the view to
seeing that each participating trustee,
custodian, or agent, with respect to each
restricted trust or fund that is, and with
respect to the aggregate of the
unrestricted trusts or funds that are, a
component part of the community trust,
administers such trust or fund in
accordance with the terms of its
governing instrument and accepted
standards of fiduciary conduct to
produce a reasonable return of net
income (or appreciation where not
inconsistent with the community trust’s
need for current income), with due
regard to safety of principal, in
furtherance of the exempt purposes of
the community trust (except for assets
held for the active conduct of the
community trust’s exempt activities). In
the case of a low return of net income
(and, where appropriate, appreciation),
the Internal Revenue Service will
examine carefully whether the
governing body has, in fact, committed
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52543
itself to take the appropriate steps. For
purposes of this paragraph (f)(11)(v)(F),
any income that has been designated by
the donor of the gift or bequest to which
such income is attributable as being
available only for the use or benefit of
a broad charitable purpose, such as the
encouragement of higher education or
the promotion of better health care in
the community, will be treated as
unrestricted. However, any income that
has been designated for the use or
benefit of a named charitable
organization or agency or for the use or
benefit of a particular class of charitable
organizations or agencies, the members
of which are readily ascertainable and
are less than five in number, will be
treated as restricted.
(vi) Common reports. The
organization must prepare periodic
financial reports treating all of the funds
which are held by the community trust,
either directly or in component parts, as
funds of the organization.
(12) Community trusts; treatment of
trusts and not-for-profit corporations
and associations not included as
components. (i) For purposes of sections
170, 501, 507, 508, 509 and Chapter 42,
any trust or not-for-profit corporation or
association that is alleged to be a
component part of a community trust,
but that fails to meet the requirements
of paragraph (f)(11)(ii) of this section,
shall not be treated as a component part
of a community trust and, if a trust,
shall be treated as a separate trust and
be subject to the provisions of section
501 or section 4947(a)(1) or (2), as the
case may be. If such organization is a
not-for-profit corporation or association,
it will be treated as a separate entity,
and, if it is described in section
501(c)(3), it will be treated as a private
foundation unless it is described in
section 509(a)(1), (2), (3), or (4). In the
case of a fund that is ultimately treated
as not being a component part of a
community trust pursuant to this
paragraph (f)(12), if the Forms 990 filed
annually by the community trust
included financial information with
respect to such fund and treated such
fund in the same manner as other
component parts thereof, such returns
filed by the community trust prior to the
taxable year in which the Commissioner
notifies such fund that it will not be
treated as a component part will be
treated as its separate return for purpose
of Subchapter A of Chapter 61 of
Subtitle F, and the first such return filed
by the community trust will be treated
as the notification required of the
separate entity for purposes of section
508(a).
(ii) If a transfer is made in trust to a
community trust to make income or
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other payments for a period of a life or
lives in being or a term of years to any
individual or for any noncharitable
purpose, followed by payments to or for
the use of the community trust (such as
in the case of a charitable remainder
annuity trust or a charitable remainder
unitrust described in section 664 or a
pooled income fund described in
section 642(c)(5)), such trust will be
treated as a component part of the
community trust upon the termination
of all intervening noncharitable interests
and rights to the actual possession or
enjoyment of the property if such trust
satisfies the requirements of paragraph
(f)(11) of this section at such time. Until
such time, the trust will be treated as a
separate trust. If a transfer is made in
trust to a community trust to make
income or other payments to or for the
use of the community trust, followed by
payments to any individual or for any
noncharitable purpose, such trust will
be treated as a separate trust rather than
as a component part of the community
trust. See section 4947(a)(2) and the
regulations relating to section 4947(a)(2)
for the treatment of such split-interest
trusts. The provisions of this paragraph
(f)(12)(ii) provide rules only for
determining when a charitable
remainder trust or pooled income fund
may be treated as a component part of
a community trust and are not intended
to preclude a community trust from
maintaining a charitable remainder trust
or pooled income fund. For purposes of
grantors and contributors, a pooled
income fund of a publicly supported
community trust shall be treated no
differently than a pooled income fund of
any other publicly supported
organization.
(iii) An organization described in
section 170(b)(1)(F)(iii) will not
ordinarily satisfy the requirements of
paragraph (f)(11)(ii) of this section
because of the unqualified right of the
donor to designate the recipients of the
income and principal of the trust. Such
organization will therefore ordinarily be
treated as other than a component part
of a community trust under paragraph
(f)(12)(i) of this section. However, see
section 170(b)(1)(F)(iii) and the
regulations relating to section
170(b)(1)(F)(iii) with respect to the
treatment of contributions to such
organizations.
(13) Method of accounting. For
purposes of section 170(b)(1)(A)(vi), an
organization’s support will be
determined under the method of
accounting on the basis of which the
organization regularly computes its
income in keeping its books under
section 446. For example, if a grantor
makes a grant to an organization payable
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over a term of years, such grant will be
includible in the support fraction of the
grantee organization under the method
of accounting on the basis of which the
grantee organization regularly computes
its income in keeping its books under
section 446.
(14) Transition rules. (i) An
organization that received an advance
ruling, that expires on or after June 9,
2008, that it will be treated as an
organization described in sections
170(b)(1)(A)(vi) and 509(a)(1) or in
section 509(a)(2) will be treated as
meeting the requirements of paragraph
(f)(4)(v) of this section for the first five
taxable years of its existence as a section
501(c)(3) organization unless the
Internal Revenue Service issued the
organization a proposed determination
prior to September 9, 2008, that the
organization is not described in sections
170(b)(1)(A)(vi) and 509(a)(1) or in
section 509(a)(2).
(ii) Paragraph (f)(4)(v) of this section
shall not apply to an organization that
received an advance ruling that expired
prior to June 9, 2008, and that did not
timely file with the Internal Revenue
Service the required information to
establish that it is an organization
described in sections 170(b)(1)(A)(vi)
and 509(a)(1) or in section 509(a)(2).
(iii) An organization that fails to meet
a public support test for its first taxable
year beginning on or after January 1,
2008, under the regulations in this
section may use the prior test set forth
in § 1.170A–9(e)(4)(i) and (ii) or
§ 1.509(a)–3(c)(1) as in effect before
September 9, 2008, (as contained in 26
CFR part 1 revised April 1, 2008) to
determine whether the organization may
be publicly supported for its 2008
taxable year based on its satisfaction of
a public support test for taxable year
2007, computed over the period 2003
through 2006.
(iv) Examples. The application of this
paragraph (f)(14) may be illustrated by
the following examples:
prior September 9, 2008, (as contained in 26
CFR part 1 revised April 1, 2008), for its
advance ruling period.
(iii) Organization X can qualify as a public
charity beginning with the taxable year
ending June 30, 2009, if Organization X can
meet the requirements of paragraphs (f)(4)(i)
or (ii) of this section or § 1.509(a)–3T(c)(1) for
the taxable years ending June 30, 2005,
through June 30, 2009, or for the taxable
years ending June 30, 2004, through June 30,
2008. In addition, for its taxable year ending
June 30, 2009, Organization X may qualify as
a public charity by availing itself of the
transition rule contained in paragraph
(f)(14)(iii) of this section, which looks to
support received by X in the taxable years
ending June 30, 2004, through June 30, 2007.
Example 2. (i) Organization Y was formed
in January 2000, and uses a December 31
taxable year. Organization Y received a final
determination that it was recognized as taxexempt under section 501(c)(3) and as a
public charity prior to September 9, 2008.
(ii) For taxable year 2008, Organization Y
will qualify as publicly supported if it meets
the requirements under either paragraphs
(f)(4)(i) or (ii) of this section or § 1.509(a)–
3T(c)(1) for the five-year period January 1,
2004, through December 31, 2008.
Organization Y will also qualify as publicly
supported for taxable year 2008 if it meets
the requirements under either § 1.170A–
9(e)(4)(i) or (ii) or § 1.509(a)–3(c)(1) as in
effect prior to September 9, 2008, (as
contained in 26 CFR part 1 revised April 1,
2008) for taxable year 2007, using the fouryear period from January 1, 2003, through
December 31, 2006.
Example 1. (i) Organization X was formed
in January 2004 and uses a June 30 taxable
year. Organization X received an advance
ruling letter that it is recognized as an
organization described in section 501(c)(3)
effective as of the date of its formation and
that it is treated as a public charity under
sections 170(b)(1)(A)(vi) and 509(a)(1) during
the five-year advance ruling period that will
end on June 30, 2008. This date is within 90
days before September 9, 2008.
(ii) Under the transition rule, Organization
X is a public charity described in sections
170(b)(1)(A)(vi) and 509(a)(1) for the taxable
years ending June 30, 2004, through June 30,
2008. Organization X does not need to
establish within 90 days after June 30, 2008,
that it met a public support test under
§ 1.170A–9(e) or § 1.509(a)–3, as in effect
§ 1.507–2 Special rules; transfer to, or
operation as, public charity.
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(g) through (j) [Reserved]. For further
guidance, see § 1.170A–9(g) through (j).
(k) Effective/applicability date—(1)
Effective date. These regulations are
effective on September 9, 2008.
(2) Applicability date. The regulations
in paragraph (f) of this section shall
apply to tax years beginning on or after
January 1, 2008.
(3) Expiration date. The applicability
of this section expires on September 8,
2011.
I Par. 4. Section 1.507–2 is amended by
adding new paragraph (h) to read as
follows:
*
*
*
*
*
(h) Effective/applicability date. This
section shall apply to tax years
beginning before January 1, 2008.
I Par. 5. Section 1.507–2T is added to
read as follows:
§ 1.507–2T Special rules; transfer to, or
operation as, public charity (temporary).
(a) Transfer to public charities—(1)
General rule. Under section 507(b)(1)(A)
a private foundation, with respect to
which there have not been either willful
repeated acts (or failures to act) or a
willful and flagrant act (or failure to act)
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giving rise to liability for tax under
chapter 42, may terminate its private
foundation status by distributing all of
its net assets to one or more
organizations described in section
170(b)(1)(A) (other than in clauses (vii)
and (viii)) each of which has been in
existence and so described for a
continuous period of at least 60
calendar months immediately preceding
such distribution. Because section
507(a) does not apply to such a
termination, a private foundation which
makes such a termination is not
required to give the notification
described in section 507(a)(1). A private
foundation that terminates its private
foundation status under section
507(b)(1)(A) does not incur tax under
section 507(c) and, therefore, no
abatement of such tax under section
507(g) is required.
(2) Effect of current ruling. A private
foundation seeking to terminate its
private foundation status pursuant to
section 507(b)(1)(A) may rely on a ruling
or determination letter issued to a
potential distributee organization that
such distributee organization is an
organization described in section
170(b)(1)(A)(i), (ii), (iii), (iv), (v) or (vi)
in accordance with the provisions of
§ 1.509(a)–7.
(3) Organizations described in more
than one clause of section 170(b)(1)(A).
For purposes of this paragraph and
section 507(b)(1)(A), the parenthetical
term ‘‘other than in clauses (vii) and
(viii)’’ shall refer only to an organization
that is described only in section
170(b)(1)(A)(vii) or (viii). Thus, an
organization described in section
170(b)(1)(A)(i), (ii), (iii), (iv), (v), or (vi)
will not be precluded from being a
distributee described in section
507(b)(1)(A) merely because it also
appears to meet the description of an
organization described in section
170(b)(1)(A) (vii) or (viii).
(4) Applicability of chapter 42 to
foundations terminating under section
507(b)(1)(A). An organization that
terminates its private foundation status
pursuant to section 507(b)(1)(A) will
remain subject to the provisions of
chapter 42 until the distribution of all
of its net assets to distributee
organizations described in section
507(b)(1)(A) has been completed.
(5) Return required from
organizations terminating private
foundation status under section
507(b)(1)(A).
(i) An organization that terminates its
private foundation status under section
507(b)(1)(A) is required to file a return
under the provisions of section 6043(b),
rather than under the provisions of
section 6050.
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(ii) An organization that terminates its
private foundation status under section
507(b)(1)(A) is not required to comply
with section 6104(d) for the taxable year
in which such termination occurs.
(6) Distribution of net assets. A
private foundation will meet the
requirement that it ‘‘distribute all of its
net assets’’ within the meaning of
section 507(b)(1)(A) only if it transfers
all of its right, title, and interest in and
to all of its net assets to one or more
organizations referred to in section
507(b)(1)(A).
(7) Effect of restrictions and
conditions upon distributions of net
assets—(i) In general. In order to
effectuate a transfer of ‘‘all of its right,
title, and interest in and to all of its net
assets’’ within the meaning of paragraph
(a)(6) of this section, a transferor private
foundation may not impose any material
restriction or condition that prevents the
transferee organization referred to in
section 507(b)(1)(A) (herein sometimes
referred to as the ‘‘public charity’’) from
freely and effectively employing the
transferred assets, or the income derived
therefrom, in furtherance of its exempt
purposes. Whether or not a particular
condition or restriction imposed upon a
transfer of assets is material (within the
meaning of this paragraph (a)(7)) must
be determined from all of the facts and
circumstances of the transfer. Some of
the more significant facts and
circumstances to be considered in
making such a determination are—
(A) Whether the public charity
(including a participating trustee,
custodian, or agent in the case of a
community trust) is the owner in fee of
the assets it receives from the private
foundation;
(B) Whether such assets are to be held
and administered by the public charity
in a manner consistent with one or more
of its exempt purposes;
(C) Whether the governing body of the
public charity has the ultimate authority
and control over such assets, and the
income derived therefrom; and
(D) Whether, and to what extent, the
governing body of the public charity is
organized and operated so as to be
independent from the transferor.
(ii) Independent governing body. As
provided in paragraph (a)(7)(i)(D) of this
section, one of the more significant facts
and circumstances to be considered in
making the determination whether a
particular condition or restriction
imposed upon a transfer of assets is
material within the meaning of this
paragraph (a)(7) is whether, and the
extent to which, the governing body is
organized and operated so as to be
independent from the transferor. In
turn, the determination as to such factor
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52545
must be determined from all of the facts
and circumstances. Some of the more
significant facts and circumstances to be
considered in making such a
determination are—
(A) Whether, and to what extent,
members of the governing body are
comprised of persons selected by the
transferor private foundation or
disqualified persons with respect
thereto, or are themselves such
disqualified persons;
(B) Whether, and to what extent,
members of the governing body are
selected by public officials acting in
their capacities as such; and
(C) How long a period of time each
member of the governing body may
serve as such. In the case of a transfer
that is to a community trust, the
community trust shall meet this
paragraph (a)(7)(ii)(C) if, with respect to
terms of office beginning after the date
of transfer:
(1) its governing body is comprised of
members who may serve a period of not
more than ten consecutive years; and
(2) Upon completion of a period of
service (beginning before or after the
date of transfer), no member may serve
again within a period consisting of the
lesser of 5 years or the number of
consecutive years the member has
immediately completed serving.
(iii) Factors not adversely affecting
determination. The presence of some or
all of the following factors will not be
considered as preventing the transferee
‘‘from freely and effectively employing
the transferred assets, or the income
derived therefrom, in furtherance of its
exempt purposes’’ (within the meaning
of paragraph (a)(7)(i) of this section):
(A) Name. The fund is given a name
or other designation which is the same
as or similar to that of the transferor
private foundation or otherwise
memorializes the creator of the
foundation or his family.
(B) Purpose. The income and assets of
the fund are to be used for a designated
purpose or for one or more particular
section 509(a)(1), (2), or (3)
organizations, and such use is
consistent with the charitable,
educational, or other basis for the
exempt status of the public charity
under section 501(c)(3).
(C) Administration. The transferred
assets are administered in an
identifiable or separate fund, some or all
of the principal of which is not to be
distributed for a specified period, if the
public charity (including a participating
trustee, custodian, or agent in the case
of a community trust) is the legal and
equitable owner of the fund and the
governing body exercises ultimate and
direct authority and control over such
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fund, as, for example, a fund to endow
a chair at a university or a medical
research fund at a hospital. In the case
of a community trust, the transferred
assets must be administered in or as a
component part of the community trust
within the meaning of § 1.170A–
9T(f)(11).
(D) Restrictions on disposition. The
transferor private foundation transfers
property the continued retention of
which by the transferee is required by
the transferor if such retention is
important to the achievement of
charitable or other similar purposes in
the community because of the peculiar
features of such property, as, for
example, where a private foundation
transfers a woodland preserve which is
to be maintained by the public charity
as an arboretum for the benefit of the
community. Such a restriction does not
include a restriction on the disposition
of an investment asset or the
distribution of income.
(iv) Adverse factors. The presence of
any of the following factors will be
considered as preventing the transferee
‘‘from freely and effectively employing
the transferred assets, or the income
derived therefrom, in furtherance of its
exempt purposes’’ (within the meaning
of paragraph (a)(7)(i) of this section):
(A) Distributions. (1) With respect to
distributions made after April 19, 1977,
the transferor private foundation, a
disqualified person with respect thereto,
or any person or committee designated
by, or pursuant to the terms of an
agreement with, such a person
(hereinafter referred to as donor),
reserves the right, directly or indirectly,
to name (other than by designation in
the instrument of transfer of particular
section 509(a)(1), (2), or (3)
organizations) the persons to which the
transferee public charity must
distribute, or to direct the timing of such
distributions (other than by direction in
the instrument of transfer that some or
all of the principal, as opposed to
specific assets, not be distributed for a
specified period) as, for example, by a
power of appointment. The Internal
Revenue Service will examine carefully
whether the seeking of advice by the
transferee from, or the giving of advice
by, any donor after the assets have been
transferred to the transferee constitutes
an indirect reservation of a right to
direct such distributions. In any such
case, the reservation of such a right will
be considered to exist where the only
criterion considered by the public
charity in making a distribution of
income or principal from a donor’s fund
is advice offered by the donor. Whether
there is a reservation of such a right will
be determined from all of the facts and
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Jkt 214001
circumstances, including, but not
limited to, the factors contained in
paragraphs (a)(7)(iv)(A)(2) and (3) of this
section.
(2) The presence of some or all of the
following factors will indicate that the
reservation of such a right does not
exist:
(i) There has been an independent
investigation by the staff of the public
charity evaluating whether the donor’s
advice is consistent with specific
charitable needs most deserving of
support by the public charity (as
determined by the public charity).
(ii) The public charity has
promulgated guidelines enumerating
specific charitable needs consistent with
the charitable purposes of the public
charity and the donor’s advice is
consistent with such guidelines.
(iii) The public charity has instituted
an educational program publicizing to
donors and other persons the guidelines
enumerating specific charitable needs
consistent with the charitable purposes
of the public charity.
(iv) The public charity distributes
funds in excess of amounts distributed
from the donor’s fund to the same or
similar types of organizations or
charitable needs as those recommended
by the donor.
(v) The public charity’s solicitations
(written or oral) for funds specifically
state that such public charity will not be
bound by advice offered by the donor.
(3) The presence of some or all of the
following factors will indicate the
reservation of such a right does exist:
(i) The solicitations (written or oral) of
funds by the public charity state or
imply, or a pattern of conduct on the
part of the public charity creates an
expectation, that the donor’s advice will
be followed.
(ii) The advice of a donor (whether or
not restricted to a distribution of income
or principal from the donor’s trust or
fund) is limited to distributions of
amounts from the donor’s fund, and the
factors described in paragraph
(a)(7)(iv)(A)(2)(i) or (ii) of this section
are not present.
(iii) Only the advice of the donor as
to distributions of such donor’s fund is
solicited by the public charity and no
procedure is provided for considering
advice from persons other than the
donor with respect to such fund.
(iv) For the taxable year and all prior
taxable years the public charity follows
the advice of all donors with respect to
their funds substantially all of the time.
(B) Other action or withholding of
action. The terms of the transfer
agreement, or any expressed or implied
understanding, required the public
charity to take or withhold action with
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Fmt 4701
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respect to the transferred assets which is
not designed to further one or more of
the exempt purposes of the public
charity, and such action or withholding
of action would, if performed by the
transferor private foundation with
respect to such assets, have subjected
the transferor to tax under chapter 42
(other than with respect to the
minimum investment return
requirement of section 4942(e)).
(C) Assumption of leases, contractual
obligations, or liabilities. The public
charity assumes leases, contractual
obligations, or liabilities of the
transferor private foundation, or takes
the assets thereof subject to such
liabilities (including obligations under
commitments or pledges to donees of
the transferor private foundation), for
purposes inconsistent with the purposes
or best interests of the public charity,
other than the payment of the
transferor’s chapter 42 taxes incurred
prior to the transfer to the public charity
to the extent of the value of the assets
transferred.
(D) Retention of investment assets.
The transferee public charity is required
by any restriction or agreement (other
than a restriction or agreement imposed
or required by law or regulatory
authority), express or implied, to retain
any securities or other investment assets
transferred to it by the private
foundation. In a case where such
transferred assets consistently produce a
low annual return of income, the
Internal Revenue Service will examine
carefully whether the transferee is
required by any such restriction or
agreement to retain such assets.
(E) Right of first refusal. An agreement
is entered into in connection with the
transfer of securities or other property
which grants directly or indirectly to the
transferor private foundation or any
disqualified person with respect thereto
a right of first refusal with respect to the
transferred securities or other property
when and if disposed of by the public
charity, unless such securities or other
property was acquired by the transferor
private foundation subject to such right
of first refusal prior to October 9, 1969.
(F) Relationships. An agreement is
entered into between the transferor
private foundation and the transferee
public charity which establishes
irrevocable relationships with respect to
the maintenance or management of
assets transferred to the public charity,
such as continuing relationships with
banks, brokerage firms, investment
counselors, or other advisors with
regard to the investments or other
property transferred to the public
charity (other than a relationship with a
trustee, custodian, or agent for a
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community trust acting as such). The
transfer of property to a public charity
subject to contractual obligations which
were established prior to November 11,
1976, between the transferor private
foundation and persons other than
disqualified persons with respect to
such foundation will not be treated as
prohibited under the preceding
sentence, but only if such contractual
obligations were not entered into
pursuant to a plan to terminate the
private foundation status of the
transferor under section 507(b)(1)(A)
and if the continuation of such
contractual obligations is in the best
interests of the public charity.
(G) Other conditions. Any other
condition is imposed on action by the
public charity which prevents it from
exercising ultimate control over the
assets received from the transferor
private foundation for purposes
consistent with its exempt purposes.
(v) Examples. The provisions of this
paragraph (a)(7) may be illustrated by
the following examples:
Example 1. The M Private Foundation
transferred all of its net assets to the V Cancer
Institute, a public charity described in
section 170(b)(1)(A)(iii). Prior to the transfer,
M’s activities consisted of making grants to
hospitals and universities to further research
into the causes of cancer. Under the terms of
the transfer, V is required to keep M’s assets
in a separate fund and use the income and
principal to further cancer research.
Although the assets may be used only for a
limited purpose, this purpose is consistent
with and in furtherance of V’s exempt
purposes, and does not prevent the transfer
from being a distribution for purposes of
section 507(b)(1)(A).
Example 2. The N Private Foundation
transferred all of its net assets to W
University, a public charity described in
section 170(b)(1)(A)(ii). Under the terms of
the transfer, W is required to use the income
and principal to endow a chair at the
university to be known as the ‘‘John J. Doe
Memorial Professorship’’, named after N’s
creator. Although the transferred assets are to
be used for a specified purpose by W, this
purpose is in furtherance of W’s exempt
educational purposes, and there are no
conditions on investment or reinvestment of
the principal or income. The use of the name
of the foundation’s creator for the chair is not
a restriction which would prevent the
transfer from being a distribution for
purposes of section 507(b)(1)(A).
Example 3. The O Private Foundation
transferred all of its net assets to X Bank as
trustee for the Q Community Trust, a
community trust that is a public charity
described in section 170(b)(1)(A)(vi). Under
the terms of the transfer, X is to hold the
assets in trust for Q and is directed to
distribute the income annually to the Y
Church, a public charity described in section
170(b)(1)(A)(i). The distribution of income to
Y Church is consistent with Q’s exempt
purposes. If the trust created by this transfer
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otherwise meets the requirements of
§ 1.170A–9T(f)(11) as a component part of the
Q Community Trust, the assets transferred by
O to X will be treated as distributed to one
or more public charities within the meaning
of section 507(b)(1)(A). The direction to
distribute the income to Y Church meets the
conditions of paragraph (a)(7)(iii)(B) of this
section and will therefore not disqualify the
transfer under section 507(b)(1)(A).
Example 4. (i) The P Private Foundation
transferred all of its net assets to Z Bank as
trustee for the R Community Trust, a
community trust that is a public charity
described in section 170(b)(1)(A)(vi). Under
the terms of the transfer, Z is to hold the
assets in trust for R and distribute the income
to those public charities described in section
170(b)(1)(A)(i) through (vi) that are
designated by B, the creator of P. R’s
governing body has no authority during B’s
lifetime to vary B’s direction. Under the
terms of the transfer, it is intended that Z
retain the transferred assets in their present
form for a period of 20 years, or until the date
of B’s death if it occurs before the expiration
of such period. Upon the death of B, R will
have the power to distribute the income to
such public charities as it selects and may
dispose of the corpus as it sees fit.
(ii) Under paragraph (a)(7)(iv)(A) or (D) of
this section, as a result of the restrictions
imposed with respect to the transferred
assets, there has been no distribution of all
P’s net assets within the meaning of section
507(b)(1)(A) at the time of the transfer. In
addition, P has not transferred its net assets
to a component part of R Community Trust,
but rather to a separate trust described in
§ 1.170A–9T(f)(12).
(b) Operation as a public charity—(1)
In general. Under section 507(b)(1)(B),
an organization can terminate its private
foundation status if the organization—
(i) Meets the requirements of section
509(a)(1), (2) or (3) for a continuous
period of 60 calendar months beginning
with the first day of any taxable year
that begins after December 31, 1969;
(ii) In compliance with section
507(b)(1)(B)(ii) and paragraph (b)(3) of
this section, properly notifies the
Internal Revenue Service, in such
manner as may be provided by
published guidance, publication, form
or instructions, before the
commencement of such 60-month
period, that it is terminating its private
foundation status; and
(iii) Properly establishes immediately
after the expiration of such 60-month
period that such organization has
complied with the requirements of
section 509(a)(1), (2) or (3) during the
60-month period, in the manner
described in paragraph (b)(4) of this
section.
(2) Relationship of section
507(b)(1)(B) to section 507(a), (c), and
(g). Because section 507(a) does not
apply to a termination described in
section 507(b)(1)(B), a private
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52547
foundation’s notification that it is
commencing a termination pursuant to
section 507(b)(1)(B) will not be treated
as a notification described in section
507(a) even if the private foundation
does not successfully terminate its
private foundation status pursuant to
section 507(b)(1)(B). A private
foundation that terminates its private
foundation status under section
507(b)(1)(B) does not incur tax under
section 507(c) and, therefore, no
abatement of such tax under section
507(g) is required.
(3) Notification of termination. In
order to comply with the requirements
under section 507(b)(1)(B)(ii), an
organization shall before the
commencement of the 60-month period
under section 507(b)(1)(B)(i) notify the
Internal Revenue Service, in such
manner as may be provided by
published guidance, publication, form
or instructions, of its intention to
terminate its private foundation status.
Such notification shall contain the
following information:
(i) The name and address of the
private foundation.
(ii) Its intention to terminate its
private foundation status.
(iii) The Code section under which it
seeks classification (section 509(a)(1),
(2) or (3)).
(iv) If section 509(a)(1) is applicable,
the clause of section 170(b)(1)(A)
involved.
(v) The date its regular taxable year
begins.
(vi) The date of commencement of the
60-month period.
(4) Establishment of termination. In
order to comply with the requirements
under section 507(b)(1)(B)(iii), an
organization shall within 90 days after
the expiration of the 60-month period
file such information with the Internal
Revenue Service, in such manner as
may be provided by published
guidance, publication, form or
instructions, as is necessary to make a
determination as to the organization’s
status as an organization described
under section 509(a)(1), (2) or (3) and
the accompanying regulations. See
paragraph (c) of this section as to the
information required to be submitted
under this paragraph (b)(4).
(5) Incomplete information. The
failure to supply, within the required
time, all of the information required by
paragraph (b)(3) or (4) of this section is
not alone sufficient to constitute a
failure to satisfy the requirements of
section 507(b)(1)(B). If the information
that is submitted within the required
time is incomplete and the organization
supplies the necessary additional
information at the request of the
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Commissioner within the additional
time period allowed by him, the original
submission will be considered timely.
(6) Application of special rules and
filing requirements. An organization
that has terminated its private
foundation status under section
507(b)(1)(B) is not required to comply
with the special rules set forth in
section 508(a) and (b). Such
organization is also not required to file
a return under the provisions of section
6043(b) or 6050 by reason of termination
of its private foundation status under
the provisions of section 507(b)(1)(B).
(7) Extension of time to assess
deficiencies. If a private foundation files
a notification (defined in paragraph
(b)(3) of this section) that it intends to
begin a 60-month termination pursuant
to section 507(b)(1)(B) and does not file
a request for an advance ruling pursuant
to paragraph (d) of this section, such
private foundation may file with the
notification described in paragraph
(b)(3) of this section a consent under
section 6501(c)(4) to the effect that the
period of limitation upon assessment
under section 4940 for any taxable year
within the 60-month termination period
shall not expire prior to one year after
the date of expiration of the time
prescribed by law for the assessment of
a deficiency for the last taxable year
within the 60-month period. Such
consents, if filed, will ordinarily be
accepted by the Commissioner. See
paragraph (e)(3) of this section for an
illustration of the procedure required to
obtain a refund of the tax imposed by
section 4940 in a case where such a
consent is not in effect.
(c) Sixty-month terminations—(1)
Method of determining normal sources
of support. (i) In order to meet the
requirements of section 507(b)(1)(B) for
the 60-month termination period as a
section 509(a)(1) or (2) organization, an
organization must meet the
requirements of section 509(a)(1) or (2),
as the case may be, for a continuous
period of at least 60 calendar months. In
determining whether an organization
seeking status under section 509(a)(1) as
an organization described in section
170(b)(1)(A)(iv) or (vi) or under section
509(a)(2) normally meets the
requirements set forth under such
sections, support received in taxable
years prior to the commencement of the
60-month period shall not be taken into
consideration, except as otherwise
provided in this section.
(ii) For purposes of section
507(b)(1)(B), an organization will be
considered to be a section 509(a)(1)
organization described in section
170(b)(1)(A)(vi) for a continuous period
of 60 calendar months only if the
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organization satisfies the provisions of
§ 1.170A–9T(f), other than § 1.170A–
9T(f)(4)(v), based upon aggregate data
for such entire period. The calculation
of public support shall be made over the
period beginning with the date of the
commencement of the 60-month period,
and ending with the last day of the 60month period.
(iii) For purposes of section
507(b)(1)(B), an organization will be
considered to be a section 509(a)(2)
organization only if such organization
meets the support requirements set forth
in section 509(a)(2)(A) and (B) and the
accompanying regulations, other than
§ 1.509(a)–3T(d), for the continuous
period of 60 calendar months prescribed
under section 507(b)(1)(B). The
calculation of public support shall be
made over the period beginning with
the date of the commencement of the
60-month period, and ending with the
last day of the 60-month period.
(2) Organizational and operational
tests. In order to meet the requirements
of section 507(b)(1)(B) for the 60-month
termination period as an organization
described in section 170(b)(1)(A)(i), (ii),
(iii), (iv), or (v) or section 509(a)(3), as
the case may be, an organization must
meet the requirements of the applicable
provisions for a continuous period of at
least 60 calendar months. For purposes
of section 507(b)(1)(B), an organization
will be considered to be such an
organization only if it satisfies the
requirements of the applicable provision
(including with respect to section
509(a)(3), the organizational and
operational test set forth in
subparagraph (A) thereof) at the
commencement of such 60-month
period and continuously thereafter
during such period.
(d) Advance rulings for 60-month
terminations—(1) In general. An
organization that files the notification
required by section 507(b)(1)(B)(ii) that
it is commencing a 60-month
termination may obtain an advance
ruling from the Commissioner that it
can be expected to satisfy the
requirements of section 507(b)(1)(B)(i)
during the 60-month period. Such an
advance ruling may be issued if the
organization can reasonably be expected
to meet the requirements of section
507(b)(1)(B)(i) during the 60-month
period. The issuance of a ruling will be
discretionary with the Commissioner.
(2) Basic consideration. In
determining whether an organization
can reasonably be expected (within the
meaning of paragraph (d)(1) of this
section) to meet the requirements of
section 507(b)(1)(B)(i) for the 60-month
period, the basic consideration is
whether its organizational structure
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(taking into account any revisions made
prior to the beginning of the 60-month
period), current or proposed programs
or activities, actual or intended method
of operation, and current or projected
sources of support are such as to
indicate that the organization is likely to
satisfy the requirements of section
509(a)(1), (2), or (3) and paragraph (d) of
this section during the 60-month period.
In making such a determination, all
pertinent facts and circumstances shall
be considered.
(3) Reliance by grantors and
contributors. For purposes of sections
170, 545(b)(2), 642(c), 4942, 4945, 2055,
2106(a)(2), and 2522, grants or
contributions to an organization which
has obtained a ruling referred to in this
paragraph will be treated as made to an
organization described in section
509(a)(1), (2), or (3), as the case may be,
until the Internal Revenue Service
publishes notice that such advance
ruling is being revoked (such as by
publication in the Internal Revenue
Bulletin). However, a grantor or
contributor may not rely on such an
advance ruling if the grantor or
contributor was responsible for, or
aware of, the act or failure to act that
resulted in the organization’s failure to
meet the requirements of section
509(a)(1), (2), or (3), or acquired
knowledge that the Internal Revenue
Service had given notice to such
organization that its advance ruling
would be revoked. Prior to the making
of any grant or contribution which
allegedly will not result in the grantee’s
failure to meet the requirements of
section 509(a)(1), (2), or (3), a potential
grantee organization may request a
ruling whether such grant or
contribution may be made without such
failure. A request for such ruling may be
filed by the grantee organization with
the Internal Revenue Service. The
issuance of such ruling will be at the
sole discretion of the Commissioner.
The organization must submit all
information necessary to make a
determination on the factors referred to
in paragraph (d)(2) of this section. If a
favorable ruling is issued, such ruling
may be relied upon by the grantor or
contributor of the particular
contribution in question for purposes of
sections 170, 507, 545(b)(2), 642(c),
4942, 4945, 2055, 2106(a)(2), and 2522.
(4) Reliance by organization. An
organization obtaining an advance
ruling pursuant to this paragraph cannot
rely on such a ruling. Consequently, if
the organization does not pay the tax
imposed by section 4940 for any taxable
year or years during the 60-month
period, and it is subsequently
determined that such tax is due for such
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year or years (because the organization
did not in fact complete a successful
termination pursuant to section
507(b)(1)(B) and was not treated as an
organization described in section
509(a)(1), (2), or (3) for such year or
years), the organization is liable for
interest in accordance with section 6601
if any amount of tax under section 4940
has not been paid on or before the last
date prescribed for payment. However,
because any failure to pay such tax
during the 60-month period (or prior to
the revocation of such ruling) is due to
reasonable cause, the penalty under
section 6651 with respect to the tax
imposed by section 4940 shall not
apply.
(5) Extension of time to assess
deficiencies. The advance ruling
described in paragraph (d)(1) of this
section shall be issued only if such
organization’s request for an advance
ruling is filed with a consent under
section 6501(c)(4) to the effect that the
period of limitation upon assessment
under section 4940 for any taxable year
within the advance ruling period shall
not expire prior to 1 year after the date
of the expiration of the time prescribed
by law for the assessment of a
deficiency for the last taxable year
within the 60-month period.
(e) Effect on grantors or contributors
and on the organization itself—(1) Effect
of satisfaction of requirements for
termination; treatment during the
termination period. In the event that an
organization satisfies the requirements
of section 507(b)(1)(B) for termination of
its private foundation status during the
continuous 60-month period, such
organization shall be treated for such
entire 60-month period in the same
manner as an organization described in
section 509(a)(1), (2) or (3), as the case
may be.
(2) Failure to meet termination
requirements—(i) In general. Except as
otherwise provided in paragraphs
(e)(2)(ii) and (d) of this section, any
organization that fails to satisfy the
requirements of section 507(b)(1)(B) for
termination of its private foundation
status during the continuous 60-month
period shall be treated as a private
foundation for the entire 60-month
period, for purposes of sections 507
through 509 and chapter 42, and grants
or contributions to such an organization
shall be treated as made to a private
foundation for purposes of sections 170,
507(b)(1)(A), 4942, and 4945.
(ii) Certain 60-month terminations.
Notwithstanding paragraph (e)(2)(i) of
this section, if an organization fails to
satisfy the requirements of section
509(a)(1), (2) or (3) for the continuous
60-month period but does satisfy the
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requirements of section 509(a)(1), (2) or
(3), as the case may be, for any taxable
year or years during such 60-month
period, the organization shall be treated
as a section 509(a)(1), (2) or (3)
organization for such taxable year or
years and grants or contributions made
during such taxable year or years shall
be treated as made to an organization
described in section 509(a)(1), (2) or (3).
In addition, sections 507 through 509
and chapter 42 shall not apply to such
organization for any taxable year within
such 60-month period for which it does
meet such requirements. For purposes
of determining whether an organization
satisfies the requirements of section
509(a)(1), (2) or (3) for any taxable year
in the 60-month period, the calculation
of public support shall be made over the
period beginning with the date of the
commencement of the 60-month period,
and ending with the last day of the
taxable year being tested. The
organization shall not be treated as a
section 509(a)(1) or (2) organization for
any taxable year during the 60-month
period solely by reason of having met a
public support test for the preceding
year. In addition, the transition rules in
§ 1.170–9T(f)(14)(iii) and § 1.509(a)–
3T(n)(iii) shall not apply.
(iii) Aggregate tax benefit. For
purposes of section 507(d), the
organization’s aggregate tax benefit
resulting from the organization’s section
501(c)(3) status shall continue to be
computed from the date from which
such computation would have been
made, but for the notice filed under
section 507(b)(1)(B)(ii), except that any
taxable year within such 60-month
period for which such organization
meets the requirements of section
509(a)(1), (2), or (3) shall be excluded
from such computations.
(iv) Excess business holdings. See
section 4943 and the accompanying
regulations for rules relating to
decreases in a private foundation’s
holdings in a business enterprise which
are caused by the foundation’s failure to
terminate its private foundation status
after giving the notification for
termination under section
507(b)(1)(B)(ii).
(3) Example. The provisions of this
paragraph (e) may be illustrated by the
following example:
Example. Y, a calendar year private
foundation, notifies the Internal Revenue
Service that it intends to terminate its private
foundation status by converting into a
publicly supported organization described in
section 170(b)(1)(A)(vi) and that its 60-month
termination period will commence on
January 1, 2010. Y does not obtain a ruling
described in paragraph (d) of this section.
Based upon its support for 2010, Y does not
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52549
qualify as a publicly supported organization
within the meaning of § 1.170A–9T(f) and
this paragraph for 2010. Consequently, in
order to avoid the risks of penalties and
interest if Y fails to terminate within the 60month period, Y files its 2010 return as a
private foundation and pays the tax imposed
by section 4940. Because a consent
(described in paragraph (b)(7) of this section),
which would prevent the period of
limitations for all years in the 60-month
period from expiring, is not in effect, in order
to be able to file a claim for refund, Y and
the Internal Revenue Service must agree to
extend the period of limitation for all taxes
imposed under chapter 42 for 2010. Based on
the aggregate data for the entire 60-month
period (2010 through 2014), Y does qualify
as a publicly-supported organization for the
entire 60-month period. Consequently, Y is
treated as a publicly-supported organization
for the entire 60-month period. Y files a
claim for refund for the taxes paid under
section 4940 for 2010, and such taxes are
refunded.
(f) Effective/applicability date—(1)
Effective date. These regulations are
effective on September 9, 2008.
(2) Applicability date. The regulations
in this section shall apply to taxable
years beginning on or after January 1,
2008.
(3) Expiration date. The applicability
of this section expires on September 8,
2011.
I Par. 6. Section 1.509(a)–3 is amended
by adding new paragraph (n) to read as
follows:
§ 1.509(a)–3 Broadly, publicly supported
organizations.
*
*
*
*
*
(n) Effective/applicability date. This
section shall apply to taxable years
beginning after December 31, 1969. The
applicability of paragraphs (a)(2),
(a)(3)(i), (c), (d), (e) and (k) of this
section shall be limited to taxable years
beginning before January 1, 2008.
I Par. 7. Section 1.509(a)–3T is added
to read as follows:
§ 1.509(a)–3T Broadly, publicly supported
organizations (temporary).
(a)(1) [Reserved]. For further guidance
see § 1.509(a)–3(a)(1).
(2) One-third support test. An
organization will meet the one-third
support test if it normally (within the
meaning of paragraph (c) or (d) of this
section) receives more than one-third of
its support in each taxable year from
any combination of—
(i) Gifts, grants, contributions, or
membership fees; and
(ii) Gross receipts from admissions,
sales of merchandise, performance of
services, or furnishing of facilities, in an
activity that is not an unrelated trade or
business (within the meaning of section
513), subject to certain limitations
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described in paragraph (b) of this
section, from permitted sources. For
purposes of this section, governmental
units, organizations described in section
509(a)(1) and persons other than
disqualified persons with respect to the
organization shall be referred to as
permitted sources. For purposes of this
section, the amount of support received
from the sources described in paragraph
(a)(2)(i) of this section and this
paragraph (a)(2)(ii) (subject to the
limitations referred to in this paragraph
(a)(2)) will be referred to as the
numerator of the one-third support
fraction, and the total amount of support
received (as defined in section 509(d))
will be referred to as the denominator of
the one-third support fraction. For
purposes of section 509(a)(2),
§ 1.509(a)–3(f) distinguishes gifts and
contributions from gross receipts;
§ 1.509(a)–3(g) distinguishes grants from
gross receipts; § 1.509(a)–3(h) defines
membership fees; § 1.509(a)–3(i) defines
‘‘any bureau or similar agency of a
governmental unit’’; § 1.509(a)–3(j)
describes the treatment of certain
indirect forms of support; paragraph (k)
of this section describes the method of
accounting for support; § 1.509(a)–3(l)
describes the treatment of gross receipts
from section 513(a)(1), (2), or (3)
activities; and § 1.509(a)–3(m)
distinguishes gross receipts from gross
investment income.
(3) Not-more-than-one-third support
test—(i) In general. An organization will
meet the not-more-than-one-third
support test under section 509(a)(2)(B) if
it normally (within the meaning of
paragraph (c) or (d) of this section)
receives not more than one-third of its
support in each taxable year from the
sum of its gross investment income (as
defined in section 509(e)) and the excess
(if any) of the amount of its unrelated
business taxable income (as defined in
section 512) derived from trades or
businesses that were acquired by the
organization after June 30, 1975, over
the amount of tax imposed on such
income by section 511. For purposes of
this section the amount of support
received from items described in section
509(a)(2)(B) will be referred to as the
numerator of the not-more-than-onethird support fraction, and the total
amount of support (as defined in section
509(d)) will be referred to as the
denominator of the not-more-than-onethird support fraction. For purposes of
section 509(a)(2), paragraph (m) of this
section distinguishes gross receipts from
gross investment income. For purposes
of section 509(e), gross investment
income includes the items of investment
income described in § 1.512(b)–1(a).
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(a)(3)(ii) through (b) [Reserved]. For
further guidance, see § 1.509(a)–
3(a)(3)(ii) through (b).
(c) Normally—(1) In general—(i)
Definition. The support tests set forth in
section 509(a)(2) are to be computed on
the basis of the nature of the
organization’s normal sources of
support. An organization will be
considered as normally receiving one
third of its support from any
combination of gifts, grants,
contributions, membership fees, and
gross receipts from permitted sources
(subject to the limitations described in
§ 1.509(a)–3(b)) and not more than one
third of its support from items described
in section 509(a)(2)(B) for its current
taxable year and the taxable year
immediately succeeding its current year,
if, for the current taxable year and the
four taxable years immediately
preceding the current taxable year, the
aggregate amount of the support
received during the applicable period
from gifts, grants, contributions,
membership fees, and gross receipts
from permitted sources (subject to the
limitations described in § 1.509(a)–3(b))
is more than one third, and the
aggregate amount of the support
received from items described in section
509(a)(2)(B) is not more than one third,
of the total support of the organization
for such 5-year period.
(ii) First five years of an
organization’s existence. See paragraph
(d)(1) of this section for the definition of
‘‘normally’’ for organizations in the first
five years of their existence.
(2) Terminations under section
507(b)(1)(B). For the special rules
applicable to the term normally as
applied to private foundations that elect
to terminate their private foundation
status pursuant to the 60-month
procedure provided in section
507(b)(1)(B), see the regulations under
such section.
(3) Exclusion of unusual grants. For
purposes of applying the 5-year
aggregation test for support set forth in
paragraph (c)(1) of this section, one or
more contributions may be excluded
from the numerator of the one-third
support fraction and from the
denominator of both the one-third
support and not-more-than-one-third
support fractions only if such a
contribution meets the requirements of
this paragraph (c)(3). The exclusion
provided by this paragraph (c)(3) is
generally intended to apply to
substantial contributions and bequests
from disinterested parties, which
contributions or bequests—
(i) Are attracted by reason of the
publicly supported nature of the
organization;
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(ii) Are unusual or unexpected with
respect to the amount thereof; and
(iii) Would by reason of their size,
adversely affect the status of the
organization as normally meeting the
one-third support test for any of the
applicable periods described in this
paragraph (c) or paragraph (d) of this
section. In the case of a grant (as defined
in § 1.509(a)–3(g)) that meets the
requirements of this paragraph (c)(3), if
the terms of the granting instrument
(whether executed before or after 1969)
require that the funds be paid to the
recipient organization over a period of
years, the amount received by the
organization each year pursuant to the
terms of such grant may be excluded for
such year. However, no item described
in section 509(a)(2)(B) may be excluded
under this paragraph (c)(3). The
provisions of this paragraph (c)(3) shall
apply to exclude unusual grants made
during any of the applicable periods
described in this paragraph (c) or
paragraph (d) of this section. See
paragraph (c)(5)(ii) of this section as to
reliance by a grantee organization upon
an unusual grant ruling under this
paragraph (c)(3).
(4) Determining factors. In
determining whether a particular
contribution may be excluded under
paragraph (c)(3) of this section, all
pertinent facts and circumstances will
be taken into consideration. No single
factor will necessarily be determinative.
Among the factors to be considered
are—
(i) Whether the contribution was
made by any person (or persons
standing in a relationship to such
person which is described in section
4946(a)(1)(C) through (G)) who created
the organization, previously contributed
a substantial part of its support or
endowment, or stood in a position of
authority, such as a foundation manager
(within the meaning of section 4946(b)),
with respect to the organization. A
contribution made by a person other
than those persons described in this
paragraph (c)(4)(i) will ordinarily be
given more favorable consideration than
a contribution made by a person
described in this paragraph (c)(4)(i);
(ii) Whether the contribution was a
bequest or an inter vivos transfer. A
bequest will ordinarily be given more
favorable consideration than an inter
vivos transfer;
(iii) Whether the contribution was in
the form of cash, readily marketable
securities, or assets which further the
exempt purposes of the organization,
such as a gift of a painting to a museum;
(iv) Except in the case of a new
organization, whether, prior to the
receipt of the particular contribution,
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the organization has carried on an actual
program of public solicitation and
exempt activities and has been able to
attract a significant amount of public
support;
(v) Whether the organization may
reasonably be expected to attract a
significant amount of public support
subsequent to the particular
contribution. In this connection,
continued reliance on unusual grants to
fund an organization’s current operating
expenses (as opposed to providing new
endowment funds) may be evidence that
the organization cannot reasonably be
expected to attract future support from
the general public;
(vi) Whether, prior to the year in
which the particular contribution was
received, the organization met the onethird support test described in
paragraph (c)(1) of this section without
the benefit of any exclusions of unusual
grants pursuant to paragraph (c)(3) of
this section;
(vii) Whether neither the contributor
nor any person standing in a
relationship to such contributor which
is described in section 4946(a)(1)(C)
through (G) continues directly or
indirectly to exercise control over the
organization;
(viii) Whether the organization has a
representative governing body as
described in § 1.509(a)–3(d)(3)(i); and
(ix) Whether material restrictions or
conditions (within the meaning of
§ 1.507–2T(a)(7)) have been imposed by
the transferor upon the transferee in
connection with such transfer.
(5) Grantors and contributors. Prior to
the making of any grant or contribution
expected to meet the requirements for
exclusion under paragraph (c)(3) of this
section, a potential grantee organization
may request a ruling whether such grant
or contribution may be so excluded.
Requests for such ruling may be filed by
the grantee organization. The issuance
of such determination will be at the sole
discretion of the Commissioner. The
organization must submit all
information necessary to make a
determination of the applicability of
paragraph (c)(3) of this section,
including all information relating to the
factors described in paragraph (c)(4) of
this section. If a favorable ruling is
issued, such ruling may be relied upon
by the grantor or contributor of the
particular contribution in question for
purposes of sections 170, 507, 545(b)(2),
642(c), 4942, 4945, 2055, 2106(a)(2), and
2522 and by the grantee organization for
purposes of paragraph (c)(3) of this
section.
(6) Examples. The application of the
principles set forth in this paragraph are
illustrated by the examples as follows.
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For purposes of these examples, the
term general public is defined as
persons other than disqualified persons
and other than persons from whom the
foundation received gross receipts in
excess of the greater of $5,000 or 1
percent of its support in any taxable
year, the term gross investment income
is as defined in section 509(e), and the
term gross receipts is limited to receipts
from activities which are not unrelated
trades or businesses (within the
meaning of section 513).
Example 1. (i) For the years 2008 through
2012, X, an organization exempt under
section 501(c)(3) that makes scholarship
grants to needy students of a particular city,
received support from the following sources:
2008:
Gross receipts (general public) .......................................
Contributions (substantial
contributors) .......................
Gross investment income ......
$35,000
36,000
29,000
Total support ......................
2009:
Gross receipts (general public) .......................................
Contributions (substantial
contributors) .......................
Gross investment income ......
100,000
Total support ......................
2010:
Gross receipts (general public) .......................................
Contributions (substantial
contributors) .......................
Gross investment income ......
100,000
Total support ......................
2011:
Gross receipts (general public) .......................................
Contributions (substantial
contributors) .......................
Gross investment income ......
100,000
Total support ......................
2012:
Gross receipts (general public) .......................................
Contributions (substantial
contributors) .......................
Gross investment income ......
100,000
Total support ......................
$100,000
34,000
35,000
31,000
35,000
30,000
35,000
33,000
32,000
35,000
31,000
39,000
30,000
(ii) In applying section 509(a)(2) to the
taxable year 2012, on the basis of paragraph
(c)(1)(i) of this section, the total amount of
support from gross receipts from the general
public ($168,000) for the period 2008 through
2012, was more than one third, and the total
amount of support from gross investment
income ($160,000) was less than one third, of
X’s total support for the same period
($500,000). For the taxable years 2012 and
2013, X is therefore considered normally to
receive more than one third of its support
from the public sources described in section
509(a)(2)(A) and less than one third of its
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support from items described in section
509(a)(2)(B). The fact that X received less
than one third of its support from section
509(a)(2)(A) sources in 2012 and more than
one third of its support from items described
in section 509(a)(2)(B) in 2011 does not affect
its status because it met the normally test
over a 5-year period.
Example 2. Assume the same facts as in
Example 1 except that in 2012, X also
received an unexpected bequest of $50,000
from A, an elderly widow who was interested
in encouraging the work of X, but had no
other relationship to it. Solely by reason of
the bequest, A became a disqualified person.
X used the bequest to create 5 new
scholarships. Its operations otherwise
remained the same. Under these
circumstances X could not meet the 5-year
support test because the total amount
received from gross receipts from the general
public ($168,000) would not be more than
one-third of its total support for the 5-year
period ($550,000). Because A is a
disqualified person, her bequest cannot be
included in the numerator of the one-third
support test under section 509(a)(2)(A).
However, based on the factors set forth in
paragraph (c)(4) of this section, A’s bequest
may be excluded as an unusual grant under
paragraph (c)(3) of this section. Therefore, X
will be considered to have met the support
test for the taxable years 2012 and 2013.
Example 3. Y, an organization described in
section 501(c)(3), was created by A, the
holder of all the common stock in M
corporation, B, A’s wife, and C, A’s business
associate. The purpose of Y was to sponsor
and equip athletic teams for underprivileged
children in the community. Each of the three
creators makes small cash contributions to Y.
A, B, and C have been active participants in
the affairs of Y since its creation. Y regularly
raises small amounts of contributions
through fundraising drives and selling
admission to some of the sponsored sporting
events. The operations of Y are carried out
on a small scale, usually being restricted to
the sponsorship of two to four baseball teams
of underprivileged children. In 2009, M
recapitalizes and creates a first and second
class of 6 percent nonvoting preferred stock,
most of which is held by A and B. In 2010,
A contributes 49 percent of his common
stock in M to Y. A’s contribution of M’s
common stock was substantial and
constitutes 90 percent of Y’s total support for
2010. A combination of the facts and
circumstances described in paragraph (c)(4)
of this section preclude A’s contribution of
M’s common stock in 2010 from being
excluded as an unusual grant under
paragraph (c)(3) of this section for purposes
of determining whether Y meets the onethird support test under section 509(a)(2).
Example 4. (i) M is organized in 2009 to
promote the appreciation of ballet in a
particular region of the United States. Its
principal activities consist of erecting a
theater for the performance of ballet and the
organization and operation of a ballet
company. M receives a determination letter
that it is an organization described in section
501(c)(3) and that it is a public charity
described in section 509(a)(2). The governing
body of M consists of 9 prominent unrelated
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citizens residing in the region who have
either an expertise in ballet or a strong
interest in encouraging appreciation of the art
form.
(ii) In 2010, Z, a private foundation,
proposes to makes a grant of $500,000 in cash
to M to provide sufficient capital for M to
commence its activities. Although A, the
creator of Z, is one of the nine members of
M’s governing body, was one of M’s original
founders, and continues to lend his prestige
to M’s activities and fund raising efforts, A
does not, directly or indirectly, exercise any
control over M. M also receives a significant
amount of support from a number of smaller
contributions and pledges from other
members of the general public. M charges
admission to the ballet performances to the
general public.
(iii) Although the support received in 2010
will not impact M’s status as a public charity
for its first 5 taxable years, it will be relevant
to the determination of whether M meets the
one-third support test under section 509(a)(2)
for the 2014 taxable year, using the
computation period 2010 through 2014.
Within the appropriate timeframe, M may
submit a request for a private letter ruling
that the $500,000 contribution from Z
qualifies as an unusual grant.
(iv) Under the above circumstances, even
though A was a founder and member of the
governing body of M, M may exclude Z’s
contribution of $500,000 in 2010 as an
unusual grant under paragraph (c)(3) of this
section for purposes of determining whether
M meets the one-third support test under
section 509(a)(2) for 2014.
Example 5. (i) Assume the same facts as
Example 4. In 2013, B, a widow, passes away
and bequeaths $4 million to M. During 2009
through 2013, B made small contributions to
M, none exceeding $10,000 in any year.
During 2009 through 2013, M received
approximately $550,000 from receipts for
admissions and contributions from the
general public. At the time of B’s death, no
person standing in a relationship to B
described in section 4946(a)(1)(C) through (G)
was a member of M’s governing body. B’s
bequest was in the form of cash and readily
marketable securities. The only condition
placed upon the bequest was that it be used
by M to advance the art of ballet.
(ii) Although the support received in 2013
will not impact M’s status as a public charity
for its first five taxable years, it will be
relevant to the determination of whether M
meets the one-third support test under
section 509(a)(2) for future years. Within the
appropriate timeframe, M may submit a
request for a private letter ruling that the $4
million bequest from B qualifies as an
unusual grant.
(iii) Under the above circumstances, M
may exclude B’s bequest of $4 million in
2013 as an unusual grant under paragraph
(c)(3) of this section for purposes of
determining whether M meets the one-third
support test under section 509(a)(2) for 2014
and subsequent years.
Example 6. (i) N is a research organization
that was created by A in 2009 for the purpose
of carrying on economic studies primarily
through persons receiving grants from N and
engaging in the sale of economic
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publications. N received a determination
letter that it is described in section 501(c)(3)
and that it is a public charity described in
509(a)(2). N’s five-member governing body
consists of A, A’s sons, B and C, and two
unrelated economists. In 2009, A made a
contribution to N of $100,000 to help
establish the organization. During 2009
through 2013, A made annual contributions
to N averaging $20,000 a year. During the
same period, N received annual contributions
from members of the general public averaging
$15,000 per year and receipts from the sale
of its publications averaging $50,000 per
year. In 2013, B made an inter vivos
contribution to N of $600,000 in cash and
readily marketable securities.
(ii) Although the support received in 2013
will not impact N’s status as a public charity
for its first 5 taxable years, it will be relevant
to the determination of whether N meets the
one-third support test under section 509(a)(2)
for future years. In determining whether B’s
contribution of $600,000 in 2013 may be
excluded as an unusual grant, the support N
received in 2009 through 2013 is relevant in
considering the factor described in paragraph
(c)(4)(vi) of this section, notwithstanding that
N received a determination letter that it is
described in section 509(a)(2).
(iii) Based on the application of the factors
in paragraphs (c)(4)(i) through (ix) of this
section to N’s circumstances, in particular
the facts that B is a disqualified person
described in section 4946(a)(1)(D) and N does
not have a representative governing body as
described in paragraphs (c)(4)(viii) and
(d)(3)(i) of this section, N cannot exclude B’s
contribution of $600,000 in 2013 as an
unusual grant under paragraph (c)(3) of this
section for purposes of determining whether
N meets the one-third support test under
section 509(a)(2) for 2014 and future years.
Example 7. (i) O is an educational
organization created in 2009. O received a
determination letter that it is described in
section 501(c)(3) and that it is a public
charity described in section 509(a)(2). The
governing body of O has 9 members,
consisting of A, a prominent civic leader and
8 other unrelated civic leaders and educators
in the community, all of whom participated
in the creation of O. During 2009 through
2013, the principal source of income for O
has been receipts from the sale of its
educational periodicals. These sales have
amounted to $200,000 for this period. Small
contributions amounting to $50,000 have also
been received during the same period from
members of the governing body, including A,
as well as other members of the general
public.
(ii) In 2013, A contributed $750,000 of the
nonvoting stock of S, a closely held
corporation, to O. A retained a substantial
portion of the voting stock of S. By a majority
vote, the governing body of O decided to
retain the S stock for a period of at least 5
years.
(iii) Although the support received in 2013
will not impact O’s status as a public charity
for its first 5 taxable years, it will be relevant
to the determination of whether O meets the
one-third support test under section 509(a)(2)
for future years. In determining whether A’s
contribution of the S stock in 2013 may be
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excluded as an unusual grant, the support O
received in 2009 through 2013 is relevant in
considering the factor described in paragraph
(c)(4)(vi) of this section, notwithstanding that
O received a determination letter that it is
described in section 509(a)(2).
(iv) Based on the application of the factors
in paragraphs (c)(4)(i) through (ix) of this
section to O’s circumstances, in particular
the facts that A is a foundation manager
within the meaning of section 4946(b) and
A’s contribution is in the form of closely held
stock, O cannot exclude A’s contribution of
the S stock in 2013 as an unusual grant under
paragraph (c)(3) of this section for purposes
of determining whether O meets the onethird support test under section 509(a)(2) for
2014 and future years.
(d) Definition of normally—first five
years of an organization’s existence—(1)
In general. An organization meets the
one-third support test and the not-morethan-one-third support test during its
first five taxable years as a section
501(c)(3) organization if the
organization can reasonably be expected
to meet the requirements of the onethird support test and the not-morethan-one-third support test during that
period. With respect to such
organization’s sixth taxable year, the
organization shall be described in
section 509(a)(2) if it meets the onethird support test and the not-morethan-one-third support test under the
definition of normally set forth in
paragraph (c)(1)(i) of this section for its
sixth taxable year (based on support
received in its second through sixth
taxable years), or for its fifth taxable
year (based on support received in its
first through fifth taxable years).
(2) Basic consideration. In
determining whether an organization
can reasonably be expected (within the
meaning of paragraph (c)(1)(i) of this
section) to meet the one-third support
test under section 509(a)(2)(A) and the
not-more-than-one-third support test
under section 509(a)(2)(B) described in
paragraph (c) of this section during its
first 5 taxable years, the basic
consideration is whether its
organizational structure, current or
proposed programs or activities, and
actual or intended method of operation
are such as to attract the type of broadly
based support from the general public,
public charities, and governmental units
that is necessary to meet such tests. The
factors that are relevant to this
determination, and the weight accorded
to each of them, may differ from case to
case, depending on the nature and
functions of the organization. An
organization cannot reasonably be
expected to meet the one-third support
test and the not-more-than-one-third
support test where the facts indicate
that an organization is likely during its
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first five taxable years to receive less
than one-third of its support from
permitted sources (subject to the
limitations of paragraph (b) of this
section) or to receive more than onethird of its support from items described
in section 509(a)(2)(B).
(3) Factors taken into account. All
pertinent facts and circumstances shall
be taken into account under paragraph
(d)(2) of this section in determining
whether the organizational structure,
programs or activities, and method of
operation of an organization are such as
to enable it to meet the tests under
section 509(a)(2) during its first five
taxable years. Some of the pertinent
factors are:
(i) Whether the organization has or
will have a governing body which is
comprised of public officials, or
individuals chosen by public officials
acting in their capacity as such, of
persons having special knowledge in the
particular field or discipline in which
the organization is operating, of
community leaders, such as elected
officials, clergymen, and educators, or,
in the case of a membership
organization, of individuals elected
pursuant to the organization’s governing
instrument or bylaws by a broadly based
membership. This characteristic does
not exist if the membership of the
organization’s governing body is such as
to indicate that it represents the
personal or private interests of
disqualified persons, rather than the
interests of the community or the
general public.
(ii) Whether a substantial portion of
the organization’s initial funding is to be
provided by the general public, by
public charities, or by government
grants, rather than by a limited number
of grantors or contributors who are
disqualified persons with respect to the
organization. The fact that the
organization plans to limit its activities
to a particular community or region or
to a special field which can be expected
to appeal to a limited number of persons
will be taken into consideration in
determining whether those persons
providing the initial support for the
organization are representative of the
general public. On the other hand, the
subsequent sources of funding which
the organization can reasonably expect
to receive after it has become
established and fully operational will
also be taken into account.
(iii) Whether a substantial proportion
of the organization’s initial funds are
placed, or will remain, in an
endowment, and whether the
investment of such funds is unlikely to
result in more than one-third of its total
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support being received from items
described in section 509(a)(2)(B).
(iv) In the case of an organization that
carries on fundraising activities,
whether the organization has developed
a concrete plan for solicitation of funds
from the general public on a community
or area-wide basis; whether any steps
have been taken to implement such
plan; whether any firm commitments of
financial or other support have been
made to the organization by civic,
religious, charitable, or similar groups
within the community; and whether the
organization has made any
commitments to, or established any
working relationships with, those
organizations or classes of persons
intended as the future recipients of its
funds.
(v) In the case of an organization that
carries on community services, such as
combating community deterioration in
an economically depressed area that has
suffered a major loss of population and
jobs, whether the organization has a
concrete program to carry out its work
in the community; whether any steps
have been taken to implement that
program; whether it will receive any
part of its funds from a public charity
or governmental agency to which it is in
some way held accountable as a
condition of the grant or contribution;
and whether it has enlisted the
sponsorship or support of other civic or
community leaders involved in
community service programs similar to
those of the organization.
(vi) In the case of an organization that
carries on educational or other exempt
activities for, or on behalf of, members,
whether the solicitation for dues-paying
members is designed to enroll a
substantial number of persons in the
community, area, profession, or field of
special interest (depending on the size
of the area and the nature of the
organization’s activities); whether
membership dues for individual (rather
than institutional) members have been
fixed at rates designed to make
membership available to a broad crosssection of the public rather than to
restrict membership to a limited number
of persons; and whether the activities of
the organization will be likely to appeal
to persons having some broad common
interest or purpose, such as educational
activities in the case of alumni
associations, musical activities in the
case of symphony societies, or civic
affairs in the case of parent-teacher
associations.
(vii) In the case of an organization that
provides goods, services, or facilities,
whether the organization is or will be
required to make its services, facilities,
performances, or products available
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(regardless of whether a fee is charged)
to the general public, public charities, or
governmental units, rather than to a
limited number of persons or
organizations; whether the organization
will avoid executing contracts to
perform services for a limited number of
firms or governmental agencies or
bureaus; and whether the service to be
provided is one which can be expected
to meet a special or general need among
a substantial portion of the general
public.
(4) Example. The application of this
paragraph (d) may be illustrated by the
following example:
Example. (i) Organization X was formed in
January 2008 and uses a December 31 taxable
year. After September 9, 2008, and before
December 31, 2008, Organization X filed
Form 1023 requesting recognition of
exemption as an organization described in
section 501(c)(3) and in section 509(a)(2). In
its application, Organization X established
that it can reasonably be expected to operate
as a public charity under this paragraph (d).
Subsequently, Organization X received a
ruling or determination letter that it is an
organization described in sections 501(c)(3)
and 509(a)(2) effective as of the date of its
formation.
(ii) Organization X is described in section
509(a)(2) for its first 5 taxable years (for the
taxable years ending December 31, 2008,
through December 31, 2012).
(iii) Organization X can qualify as a public
charity beginning with the taxable year
ending December 31, 2013, if Organization X
can meet the requirements of § 1.170A–
9T(f)(4)(i) through (iii) or paragraphs (a)
through (b) of this section for the taxable
years ending December 31, 2009, through
December 31, 2013, or for the taxable years
ending December 31, 2008, through
December 31, 2012.
(e) Determinations on foundation
classification and reliance. (1) A ruling
or determination letter that an
organization is described in section
509(a)(2) may be issued to an
organization. Such determination may
be made in conjunction with the
recognition of the organization’s taxexempt status or at such other time as
the organization believes it is described
in section 509(a)(2). The ruling or
determination letter that the
organization is described in section
509(a)(2) may be revoked if, upon
examination, the organization has not
met the requirements of this section.
The ruling or determination letter that
the organization is described in section
509(a)(2) also may be revoked if the
organization’s application for a ruling or
determination contained one or more
material misstatements of fact or such
application was part of a scheme or plan
to avoid or evade any provision of the
Internal Revenue Code. The revocation
of the determination that an
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organization is described in section
509(a)(2) does not preclude revocation
of the determination that the
organization is described in section
501(c)(3).
(2) Status of grantors or contributors.
For purposes of sections 170, 507,
545(b)(2), 642(c), 4942, 4945, 2055,
2106(a)(2), and 2522, grantors and
contributors may rely upon a
determination letter or ruling that an
organization is described in section
509(a)(2) until the Internal Revenue
Service publishes notice of a change of
status (for example, in the Internal
Revenue Bulletin or Publication 78,
‘‘Cumulative List of Organizations
described in Section 170(c) of the
Internal Revenue Code of 1986,’’ which
can be searched at www.irs.gov). For this
purpose, grantors or contributors may
also rely on an advance ruling that
expires on or after June 9, 2008.
However, a grantor or contributor may
not rely on such an advance ruling or
any determination letter or ruling if the
grantor or contributor was responsible
for, or aware of, the act or failure to act
that resulted in the organization’s loss of
classification under section 509(a)(2) or
acquired knowledge that the Internal
Revenue Service had given notice to
such organization that it would be
deleted from such classification.
(3) Examples. The provisions of this
paragraph (e) may be illustrated by the
following examples:
Example 1. Y, a calendar year organization
described in section 501(c)(3), is created in
February 2008 for the purpose of displaying
African art. On its exemption application Y
shows, under penalties of perjury, that it can
reasonably, in accordance with the
requirements of paragraph (d) of this section,
expect to receive support from the public in
2008 through 2012 that will satisfy the onethird support and not-more-than-one-third
support tests described in section 509(a)(2)
for its first 5 taxable years, 2008 through
2012. Y may therefore receive a
determination that it meets the requirements
of paragraph (a) of this section. Pursuant to
such determination, Y will be a public
charity for its first five taxable years (2008,
2009, 2010, 2011, and 2012), regardless of the
public support Y in fact receives during this
period.
Example 2. Z, a calendar year organization
described in section 501(c)(3), is created in
July 2008. On its exemption application Z
shows, under penalties of perjury, that it can
reasonably, in accordance with the
requirements of paragraph (d) of this section,
expect to receive support from the public in
2008 through 2012 that will satisfy the onethird support and not-more-than-one-third
support tests described in section 509(a)(2)
for its first 5 taxable years, 2008 through
2012. Z receives a determination that it is
described in section 509(a)(2). However, the
support actually received from the public
over Z’s first 5 taxable years (2008 through
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17:31 Sep 08, 2008
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2012) does not satisfy the one-third support
and not-more-than-one-third support tests
described in section 509(a)(2), nor does the
support Z receives from 2009 through and
including its sixth taxable year, 2013, meet
the one-third support and not-more-than-onethird support tests described in section
509(a)(2). Z is described in section 509(a)(2)
during its first five years for all purposes.
But, because Z has not met the requirements
of paragraph (a) of this section either for 2008
through 2012 or 2009 through 2013, Z is not
described in section 509(a)(2) for its taxable
year 2013. If Z is not described in section
509(a)(1), (3), or (4), then Z is a private
foundation as of 2013, and Z will be treated
as a private foundation for all purposes
(except as provided in paragraph (e)(2) of this
section with respect to grantors and
contributors).
(f) through (j) [Reserved]. For further
guidance, see § 1.509(a)–3(f) through (j).
(k) Method of accounting. For
purposes of section 509(a)(2), an
organization’s support will be
determined under the method of
accounting on the basis of which the
organization regularly computes its
income in keeping its books under
section 446. For example, if a grantor
makes a grant to an organization payable
over a term of years, such grant will be
includible in the support fraction of the
grantee organization under the method
of accounting on the basis of which it
regularly computes its income in
keeping its books under section 446.
(l) and (m) [Reserved]. For further
guidance, see § 1.509(a)–3(l) and (m).
(n) Transition rules. (i) An
organization that received an advance
ruling, that expires on or after June 9,
2008, that it will be treated as an
organization described in sections
170(b)(1)(A)(vi) and 509(a)(1) or in
section 509(a)(2) will be treated as
meeting the requirements of paragraph
(d)(1) of this section for the first five
taxable years of its existence as a section
501(c)(3) organization unless the
Internal Revenue Service issued to the
organization a proposed determination
prior to September 9, 2008, that the
organization is not described in sections
170(b)(1)(A)(vi) and 509(a)(1) or in
section 509(a)(2).
(ii) Paragraph (d)(1) of this section
shall not apply to an organization that
received an advance ruling that expired
prior to June 9, 2008, and that did not
timely file with the Internal Revenue
Service the required information to
establish that it is an organization
described in sections 170(b)(1)(A)(vi)
and 509(a)(1) or in section 509(a)(2).
(iii) An organization that fails to meet
a public support test for its first taxable
year beginning on or after January 1,
2008, under the regulations in this
section may use the prior test set forth
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Fmt 4701
Sfmt 4700
in § 1.509(a)–3(c)(1) or § 1.170A–
9(e)(4)(i) or (ii) as in effect before
September 9, 2008, (as contained in 26
CFR part 1 revised April 1, 2008) to
determine whether the organization may
be publicly supported for its 2008
taxable year based on its satisfaction of
a public support test for taxable year
2007, computed over the period 2003
through 2006.
(iv) Examples. The application of this
paragraph (n) may be illustrated by the
following examples:
Example 1. (i) Organization M was formed
in January 2004, and uses a June 30 taxable
year. Organization M received an advance
ruling letter that it is recognized as an
organization described in section 501(c)(3)
effective as of the date of its formation and
that it is treated as a public charity under
section 509(a)(2) during the five-year advance
ruling period that will end on June 30, 2008.
This date is within 90 days before September
9, 2008.
(ii) Under the transition rule, Organization
M is a public charity described in section
509(a)(2) for the taxable years ending June 30,
2004, through June 30, 2008. Organization M
does not need to establish within 90 days
after June 30, 2008, that it met a public
support test under § 1.170A–9(e) or
§ 1.509(a)–3, as in effect prior to September
9, 2008, (as contained in 26 CFR part 1
revised April 1, 2008) for its advance ruling
period.
(iii) Organization M can qualify as a public
charity beginning with the taxable year
ending June 30, 2009, if Organization M can
meet the requirements of § 1.170A–9T(f)(4)(i)
or (ii) or paragraph (c)(1) of this section for
the taxable years ending June 30, 2005,
through June 30, 2009, or for the taxable
years ending June 30, 2004, through June 30,
2008. In addition, for its taxable year ending
June 30, 2009, Organization M may qualify as
a public charity by availing itself of the
transition rule contained in paragraph (n)(iii)
of this section, which looks to support
received by M in the taxable years ending
June 30, 2004, through June 30, 2007.
Example 2. (i) Organization N was formed
in January 2000 and uses a December 31
taxable year. Organization N received a final
determination that it was recognized as taxexempt under section 501(c)(3) and as a
public charity prior to September 9, 2008.
(ii) For taxable year 2008, Organization N
will qualify as publicly supported if it meets
the requirements under either § 1.170A–
9T(f)(4)(i) or (ii) or paragraph (c)(1) of this
section for the five-year period January 1,
2004, through December 31, 2008.
Organization N will also qualify as publicly
supported for taxable year 2008 if it meets
the requirements under either § 1.170A–
9(e)(4)(i) or (ii) or § 1.509(a)–3(c)(1) as in
effect prior to September 9, 2008, (as
contained in 26 CFR part 1 revised April 1,
2008) for taxable year 2007, using the fouryear period from January 1, 2003, through
December 31, 2006.
(o) Effective/applicability date—(1)
Effective date. These regulations are
effective on September 9, 2008.
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(2) Applicability date. The regulations
in paragraphs (a)(2), (a)(3)(i), (c), (d), (e)
and (k) of this section shall apply to
taxable years beginning on or after
January 1, 2008.
(3) Expiration date. The applicability
of this section expires on September 8,
2011.
I Par. 8. Section 1.6033–2 is amended
by revising paragraph (k) to read as
follows:
§ 1.6033–2 Returns by exempt
organizations (taxable years beginning after
December 31, 1969) and returns by certain
nonexempt organizations (taxable years
beginning after December 31, 1980).
*
*
*
*
*
(k) Effective/applicability date. The
provisions of this section shall apply
with respect to returns filed for taxable
years beginning after December 31,
1969. The applicability of paragraphs
(a)(2)(ii)(g) and (a)(2)(ii)(h) of this
section shall be limited to taxable years
beginning before January 1, 2008.
I Par. 9. Section 1.6033–2T is added to
read as follows:
§ 1.6033–2T Returns by exempt
organizations (taxable years beginning after
December 31, 1969) and returns by certain
nonexempt organizations (taxable years
beginning after December 31, 1980)
(temporary).
mstockstill on PROD1PC66 with RULES2
(a)(1) through (a)(2)(ii)(f) [Reserved].
For further guidance, see § 1.6033–
2(a)(1) through (a)(2)(ii)(f).
(g) The names and addresses of all
officers, directors, or trustees (or any
person having responsibilities or powers
similar to those of officers, directors or
trustees) of the organization, and, in the
case of a private foundation, all persons
who are foundation managers, within
the meaning of section 4946(b)(1).
Organizations must also attach a
schedule showing the names and
addresses and/or total numbers of key
employees, highly compensated
employees and independent contractors
as prescribed by publication, form or
instructions.
(h) A schedule showing the
compensation and other payments made
to each person whose name is required
to be listed in paragraph (a)(2)(ii)(g) of
this section during the calendar year
ending within the organization’s annual
accounting period, or during such other
period as prescribed by publication,
form or instructions
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Jkt 214001
(a)(2)(ii)(i) through (j) [Reserved]. For
further guidance, see § 1.6033–
2(a)(2)(ii)(i) through (j).
(k) Effective/applicability date—(1)
Effective date. These regulations are
effective on September 9, 2008.
(2) Applicability date. The regulations
in paragraphs (a)(2)(ii)(g) and
(a)(2)(ii)(h) of this section shall apply to
taxable years beginning on or after
January 1, 2008.
(3) Expiration date. The applicability
of this section expires September 8,
2011.
I Par. 10. Section 1.6043–3 is amended
as follows:
I 1. The undesignated text following
paragraph (b)(8) is designated as
paragraph (b)(9).
I 2. Paragraph (d)(3) is revised.
I 3. New paragraph (e) is added.
The addition and revision read as
follows:
§ 1.6043–3 Returns regarding liquidation,
dissolution, termination, or substantial
contraction of organizations exempt from
taxation under section 501(a).
*
*
*
*
*
(d)(3) For the definition of the term
‘‘integrated auxiliaries’’ as used in
paragraph (b)(1) of this section, see
§ 1.6033–2(h).
(e) Effective/applicability date. The
provisions of this section shall apply
with respect to returns filed for taxable
years beginning after December 31,
1969. The applicability of paragraphs
(b)(8) and (d) of this section shall be
limited to returns filed for taxable years
beginning before January 1, 2008.
I Par. 11. Section 1.6043–3T is added to
read as follows:
§ 1.6043–3T Returns regarding liquidation,
dissolution, termination, or substantial
contraction of organizations exempt from
taxation under section 501(a) (temporary).
(a) through (b)(7) [Reserved]. For
further guidance, see § 1.6043–3(a)
through (b)(7).
(b)(8) Any organization no longer
exempt from taxation under section
501(a) and that during the period of its
exemption under such section was not
an organization described in section
501(c)(3), a corporation described in
section 501(c)(2) that held title to
property for an organization described
in section 501(c)(3), or an organization
described in such other section as
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Fmt 4701
Sfmt 4700
prescribed by publication, form or
instructions.
(b)(9) and (c) [Reserved]. For further
guidance, see § 1.6043–3(b)(9) and (c).
(d) Definitions. (1) For the definition
of the term ‘‘normally’’ as used in
paragraph (b)(2) of this section, see
§ 1.6033–2(g)(3).
(2) For the definition of the term
‘‘integrated auxiliaries’’ as used in
paragraph (b)(1) of this section, see
§ 1.6033–2(h).
(e) Effective/applicability date—(1)
Effective date. The regulations in this
section are effective on September 9,
2008.
(2) Applicability date. Paragraphs
(b)(8) and (d) of this section shall apply
to returns filed for taxable years
beginning on or after January 1, 2008.
(3) Expiration date. The applicability
of this section expires on September 8,
2011.
PART 602—OMB CONTROL NUMBER
UNDER THE PAPERWORK
REDUCTION ACT
Par. 12. The authority citation for part
602 continues to read as follows:
I
Authority: 26 U.S.C. 7805 * * *
Par. 13. In § 602.101, paragraph (b) is
amended by adding the following entry
in numerical order to the table to read
as follows:
I
§ 602.101
*
OMB Control numbers.
*
*
(b) * * *
*
*
Current
OMB control
No.
CFR part or section where
identified and described
*
*
*
*
*
1.6033–2T .................................
1545–2117
*
*
*
*
*
Linda E. Stiff,
Deputy Commissioner for Services and
Enforcement.
Approved: August 21, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. E8–20560 Filed 9–8–08; 8:45 am]
BILLING CODE 4830–01–P
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[Federal Register Volume 73, Number 175 (Tuesday, September 9, 2008)]
[Rules and Regulations]
[Pages 52528-52555]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-20560]
[[Page 52527]]
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Part IV
Department of the Treasury
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Internal Revenue Service
26 CFR Parts 1 and 602
-----------------------------------------------------------------------
Implementation of Form 990; Final Rule
Federal Register / Vol. 73, No. 175 / Tuesday, September 9, 2008 /
Rules and Regulations
[[Page 52528]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9423]
RIN 1545-BH85
Implementation of Form 990
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final and temporary regulations
necessary to implement the redesigned Form 990, ``Return of
Organization Exempt From Income Tax.'' The final regulations contained
in this document make only nonsubstantive revisions to comply with
Federal Register requirements. The temporary regulations make revisions
to the regulations under section 6033 and section 6043 to allow for new
threshold amounts for reporting compensation, to require that
compensation be reported on a calendar year basis, and to modify the
scope of organizations subject to information reporting requirements
upon a substantial contraction. The temporary regulations also
eliminate the advance ruling process for new organizations, change the
public support computation period for organizations described in
sections 170(b)(1)(A)(vi) and 509(a)(1) and in section 509(a)(2) to
five years, consistent with the revised Form 990, and clarify that
support must be reported using the organization's overall method of
accounting. All tax-exempt organizations required under section 6033 of
the Internal Revenue Code (Code) to file annual information returns are
affected by these temporary regulations. The text of these temporary
regulations also serves as the text of the proposed regulations (REG-
142333-07) published in the Proposed Rules section in this issue of the
Federal Register.
DATES: Effective Date: These regulations are effective on September 9,
2008.
Applicability Date: These regulations apply to taxable years
beginning on or after January 1, 2008.
FOR FURTHER INFORMATION CONTACT: Terri Harris at (202) 622-6070 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these temporary
regulations has been reviewed and approved by the Office of Management
and Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under control number 1545-2117. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number
assigned by the Office of Management and Budget. Books or records
relating to a collection of information must be retained as long as
their contents may become material in the administration of any
internal revenue law. Generally, tax returns and tax return information
are confidential, as required by 26 U.S.C. 6103.
Background
Form 990
Under section 6033 of the Code, organizations that are exempt from
Federal income tax under section 501(a) are generally required to file
an annual information return reporting gross income, receipts,
disbursements and such other information as the IRS requires. Certain
exceptions to this filing requirement apply. For example, churches are
not required to file annual information returns. The Treasury
regulations direct that the annual information return shall be filed on
Form 990, ``Return of Organization Exempt From Income Tax'' or Form
990-PF, ``Return of Private Foundation or Section 4947(a)(1) Nonexempt
Charitable Trust Treated as a Private Foundation.'' The regulations
further specify certain information to be reported on the return.
The IRS revises forms and instructions on an annual basis to
reflect changes in the law and evolving tax administration needs. On
December 20, 2007, the IRS released a redesigned Form 990. The Form 990
had not been significantly revised since 1979, and both the IRS and
stakeholders regarded the form as needing major revision to keep pace
with changes in the law and with the increasing size, diversity, and
complexity of the exempt sector. The new form incorporates many
recommendations made in public comments on the discussion draft
released on June 14, 2007. With the exception of certain smaller
organizations for which there is a graduated transition period,
organizations must begin using the new form for the 2008 tax year
(returns filed in 2009). The current Form 990 will be used for tax year
2007 (returns filed in 2008) but will be replaced with the redesigned
Form 990 beginning with the 2008 tax year. Earlier this year, the IRS
released draft instructions for the new form and schedules for public
comment.
These regulations make the revisions that must be made to the
regulations under sections 6033 and 6043 of the Code to implement the
Form 990 redesign. For example, the regulation that currently gives
organizations a choice of using either the calendar year or the
organization's annual accounting period as the basis for reporting
compensation of officers, directors, trustees and certain employees and
contractors is revised to require calendar year reporting. Revisions
are also made to allow for new threshold amounts for reporting
compensation and to expand the scope of organizations subject to
information reporting requirements upon a substantial contraction.
In addition, as discussed in further detail in this preamble, these
regulations eliminate the advance ruling process and change the public
support computation period for organizations described in sections
170(b)(1)(A)(vi) and 509(a)(1) and in section 509(a)(2) to five years,
consistent with the revised Schedule A, ``Public Charity Status and
Public Support'' to the redesigned Form 990. These regulations also
clarify that support must be reported using the organization's overall
method of accounting.
Private Foundation Status and Advance Rulings
Public Support Tests
Under present law, as established in the Tax Reform Act of 1969, an
organization described in section 501(c)(3) of the Code is a private
foundation unless it meets one of the exceptions described in sections
509(a)(1) through 509(a)(4). Organizations that are described in
section 509(a)(1), (2), (3) or (4) are classified as public charities,
and are not subject to various excise taxes in Chapter 42 that apply to
private foundations. The Code defines two major categories of
organizations that are considered public charities and not private
foundations because they are broadly publicly supported: (1)
Organizations described in section 170(b)(1)(A)(vi), which are not
private foundations because they are referenced in section 509(a)(1);
and (2) organizations described in section 509(a)(2).
Section 170(b)(1)(A)(vi) encompasses organizations that normally
receive a substantial part of their support from a governmental unit or
from direct or indirect contributions from the general public. The
regulations under section 170 provide that an organization will be
described in section 170(b)(1)(A)(vi) if it
[[Page 52529]]
normally receives at least 33\1/3\ percent of its support from
governmental units or from the general public. See Sec. 1.170A-9(f).
Alternatively, an organization can meet a ``facts and circumstances''
test, under which it may qualify as a section 170(b)(1)(A)(vi)
organization if it normally receives at least 10 percent of its support
from governmental units or the general public, and can establish that,
under all the facts and circumstances, it normally receives a
substantial part of its support from governmental units or the general
public.
Section 509(a)(2) encompasses organizations that normally receive
more than one-third of their support from a combination of gifts,
grants, contributions, membership fees, and gross receipts from
performing exempt function activities, and normally receive not more
than one-third of their support from investment income and unrelated
business taxable income. The major difference between the section
509(a)(2) and section 170(b)(1)(A)(vi) tests is that the former
includes in support gross receipts from exempt function activities, for
example, admission proceeds for a museum or ticket sales for a
symphony, while the latter does not. As noted, section 509(a)(2) also
includes an investment income limitation. For ease of reference, the
tests in sections 170(b)(1)(A)(vi) and 509(a)(2) will be referred to
collectively as the public support tests.
The statute does not define, for either provision, the meaning of
``normally.'' The current regulations for both public support tests
generally use a rolling four-year computation period, with two
exceptions: New organizations and organizations that experience
``substantial and material changes'' in their sources of support for
the current year are permitted to use a five-year computation period.
For any particular taxable year, the four-year computation period is
the four years immediately preceding the current taxable year. For
example, for taxable year 1998, the computation period would be taxable
years 1994, 1995, 1996, and 1997. The regulations further provide that
if the public support test is met for the four-year computation period,
the organization will be considered to meet the public support test for
the taxable year being tested and the immediately succeeding taxable
year. In the example above, a section 170(b)(1)(A)(vi) organization
would meet the public support test for 1998 and 1999 if the support it
received from the general public and from governmental units for the
years 1994 through 1997 exceeded 33\1/3\ percent of the total support
it received for those years.
The effect of the current rule regarding the subsequent taxable
year is that an organization must fail to meet a public support test
two years in a row to become a private foundation. In the example
above, the organization met the public support test for 1998 and 1999,
based on support received during the four-year computation period 1994
through 1997. If the organization does not meet a public support test
for the 1995 through 1998 computation period, it is still a public
charity in 1999 because it met a support test for taxable year 1998.
However, if the organization again does not meet a public support test
for the 1996 through 1999 computation period, the organization becomes
a private foundation effective at the beginning of its taxable year
2000.
Advance Rulings
In its application for recognition of tax-exempt status (Form 1023,
``Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code''), a section 501(c)(3) organization also
requests a determination of its private foundation status, that is,
whether it is a private foundation and, if not, the Code provision
excepting it from private foundation classification. Under the current
statute and regulations, an organization can request either an advance
ruling or a definitive ruling addressing the organization's exemption
under section 501(c)(3) and its private foundation status under section
509(a).
Under the current regulations, a new organization applying for
exemption can request a definitive ruling as to its foundation status
only if it has completed its first tax year consisting of at least
eight full months. In lieu of the general four-year computation period
for public support, a new organization requesting a definitive ruling
tests its public support based on the years it has been in existence.
If an organization qualifies as an organization described in section
509(a)(1) or (2) based on the support received in its initial year(s)
of existence, the IRS issues a definitive ruling stating that the
organization is recognized as exempt under section 501(c)(3) and
classified as a public charity.
If a new organization has not yet completed its first tax year
consisting of at least eight full months at the time it applies for
recognition of tax exemption, or if the organization so elects, it
requests an ``advance ruling'' regarding its private foundation status
in its application for exemption. Current regulations provide for an
advance ruling period of two or three years, depending on the length of
the organization's first tax year, and an additional ``extended advance
ruling period'' of three more years if the organization requests. These
current regulations have been overridden. In the conference report to
the Tax Reform Act of 1984, Congress directed that the advance ruling
period in all cases be five years. See H.R. Rep. No. 98-861, 98th
Cong., 2d Sess. 1 (1984), 1984-3 CB (Vol. 2) 1090. The advance ruling
period gives new organizations time to build up broad public support in
the first few years of their existence. In lieu of the general four-
year computation period for public support, a new organization
requesting an advance ruling tests its public support over the first
five years of its existence as an organization described in section
501(c)(3). If an organization demonstrates to the IRS's satisfaction
that it can reasonably be expected to meet a public support test during
its first five years, the IRS issues an advance ruling stating that the
organization is recognized as exempt under section 501(c)(3) and
classified as a public charity during its first five years. With
limited exceptions, donors can rely on this advance ruling as to public
charity status.
At the end of the initial five-year advance ruling period, the
organization is required to file Form 8734, ``Support Schedule for
Advance Ruling Period'' to establish that it actually met a public
support test. As noted above, for this purpose, public support is
calculated over the five-year advance ruling period, rather than over a
four-year period. If the organization meets a public support test for
its advance ruling period, the IRS issues a definitive ruling letter
classifying the organization as a public charity. If the organization
does not meet a public support test for its advance ruling period, or
the organization fails to submit Form 8734, the IRS reclassifies the
organization as a private foundation as of its first taxable year and
publishes notice of the change in status in the Internal Revenue
Bulletin and Publication 78, ``Cumulative List of Organizations
described in Section 170(c) of the Internal Revenue Code of 1986,''
which can be searched at www.irs.gov. Once notice of a change in status
is published, donors can no longer automatically rely on the advance
ruling for charitable contribution deduction purposes and must assume
that the organization is a private foundation. See Sec.
601.601(d)(2)(ii)(b).
An organization that is reclassified as a private foundation is
subject to the
[[Page 52530]]
section 4940 investment income tax and the section 507 termination tax
for its five-year advance ruling period. The other Chapter 42 excise
taxes applicable to private foundations do not apply during the five-
year advance ruling period. In year six, the reclassified organization
is subject to all Chapter 42 excise taxes that apply to private
foundations.
The advance ruling process is complex and burdensome for both
taxpayers and the IRS and provides little tax administration or
compliance benefit. While statistics vary from year to year,
approximately 95 percent of the organizations that receive advance
rulings later receive definitive rulings that the organizations are
public charities at the end of the advance ruling period. The current
regulations governing advance rulings are complex, and, as discussed
above, were overridden in part by the Tax Reform Act of 1984. Moreover,
the public support information that is reported on Form 8734 will be
captured on Schedule A of the redesigned Form 990. For these reasons,
in its 2003 report, the IRS Advisory Committee for Tax Exempt and
Governmental Entities, a group that includes representatives of exempt
organizations and practitioners, recommended that the advance ruling
process be eliminated.
The IRS believes that it can more effectively deploy its compliance
resources by eliminating the advance ruling process and Form 8734 and
instead monitoring public charity status based on public support
information reported on the revised Schedule A, to the redesigned Form
990. The revised Schedule A sets forth easier-to-follow rules for
calculating public support and captures all of the information
necessary for the IRS to monitor and verify compliance with the public
support tests.
Explanation of Provisions
Private Foundation Status and Advance Rulings
The temporary regulations eliminate the advance ruling process and
provide instead that an organization will be a public charity in its
first five years if it can show, in its application for exemption, that
it can reasonably be expected to receive the requisite public support
during such period. The temporary regulations also change the public
support computation period for purposes of sections 170(b)(1)(A)(vi)
and 509(a)(1) and section 509(a)(2) from a four-year period prior to
the tested year to a five-year period that includes the current year.
The temporary regulations also eliminate the substantial and material
changes exception, which is made obsolete by the establishment of a
general five-year computation period. In addition, Sec. 1.170A-9T(f),
which corresponds to Sec. 1.170A-9(e) of the prior regulations and
governs section 170(b)(1)(A)(vi) organizations, has been revised
throughout to simplify some of the language and to provide a better
``road map'' of what the provisions are designed to do.
Elimination of Advance Ruling Process
The temporary regulations eliminate advance rulings and the Form
8734 filing requirement for all new section 501(c)(3) organizations.
Under the temporary regulations, if, at the time of the initial
application for exemption, an organization can establish to the
satisfaction of the IRS that the organization can reasonably be
expected to meet a public support test during its first five years, the
organization qualifies as publicly supported for its first five years
as a section 501(c)(3) organization. The IRS will issue a determination
letter stating that the organization is exempt under section 501(c)(3)
and is classified as a public charity. The organization will be a
public charity for its first five years, regardless of the level of
public support it in fact receives during this period. In addition,
unlike a new organization's public charity status under an advance
ruling, which was conditioned on its ultimate satisfaction of a public
support test on a Form 8734 filed with the IRS, under the temporary
regulations a new organization that can show it can reasonably be
expected to meet a public support test will be classified as a public
charity for all purposes during its first five years. The organization
will not owe any section 4940 tax or section 507 termination tax with
respect to its first five years. Beginning with the organization's
sixth year, if the organization cannot establish that it is not a
private foundation, such as a public charity or a supporting
organization under section 509(a)(3), it will be liable for the section
4940 excise tax and other Chapter 42 excise taxes applicable to private
foundations for any year for which it cannot establish that it is not a
private foundation.
The standards for whether an organization can reasonably be
expected to be publicly supported are drawn from the existing
regulations. A new organization required to file Form 990 or Form 990-
EZ, ``Short Form Return of Organization Exempt From Income Tax,'' will
be required to report its support on Schedule A every year, but it will
not be required to file Form 8734 after its first five years.
Organizations will be required to meet a public support test using the
general five-year computation period beginning in their sixth taxable
years. The five-year computation period is discussed in detail in this
preamble.
Computation Period for Public Support
The temporary regulations change the computation period for public
support from a four-year period comprised of the four years prior to
the tested year to a five-year period that includes the current year.
Because all organizations will use a five-year computation period under
the temporary regulations, the temporary regulations eliminate the
substantial and material change exception, which allowed organizations
to use a five-year computation period rather than the four-year
computation period under certain circumstances.
An organization that meets a public support test for the current
taxable year is treated as publicly supported for the current taxable
year and the immediately succeeding taxable year. Thus, for example, a
calendar year organization that meets a public support test for taxable
year 2011, based on the five-year computation period 2007 through 2011,
is a public charity for taxable years 2011 and 2012. If the
organization cannot meet a public support test for taxable year 2012
(based on the five-year computation period 2008 through 2012), it still
will be a public charity for taxable year 2012, because it met the
public support test for taxable year 2011 (based on the five-year
computation period 2007 through 2011). If, however, the organization
cannot meet a public support test for taxable year 2013 as well, based
on the computation period 2009 through 2013, the organization will be
classified as a private foundation as of the beginning of taxable year
2013. Because an organization that cannot meet a public support test
for the current taxable year is at risk of private foundation
classification as of the first day of the subsequent taxable year,
organizations may wish to carefully monitor their public support
calculations.
The IRS and the Treasury Department recognize that an organization
may not be able to compute its public support for the current taxable
year until some time in the subsequent taxable year. In the example
above, taxable year 2013 may have already begun by the time the
calendar year organization computes its public support for taxable year
2012 and realizes (perhaps for the first time) that it is at risk of
being classified as a private foundation as of January 1, 2013.
[[Page 52531]]
Moreover, the organization may not know definitively that it is a
private foundation for taxable year 2013 until some time in 2014, when
it is able to definitively calculate its public support. Accordingly,
the IRS will not assert private foundation excise taxes and/or
penalties for all or part of the first taxable year in which an
organization is reclassified as a private foundation due to failure to
satisfy a public support test in cases where the imposition of such
taxes would lead to unfair or inequitable results, such as where the
change in the organization's public support was unforeseeable or due to
circumstances beyond the organization's control. Organizations that
believe that the imposition of private foundation excise taxes and/or
penalties against them for all or part of the first year in which they
are reclassified as a private foundation would be unfair or inequitable
should contact the IRS, Exempt Organizations, Rulings and Agreements,
Washington, DC, at (202) 283-4905. An organization will be required to
provide to the IRS all of the relevant facts and circumstances
establishing that the imposition of private foundation taxes would be
unfair or inequitable. Comments are requested regarding the specific
circumstances that may warrant relief.
The existing regulations contain numerous examples reflecting the
four-year computation period. The temporary regulations update the
examples to reflect the new computation period. These examples are in
Sec. 1.170A-9T(f)(9), Sec. 1.509(a)-3T(c)(6) and Sec. 1.509(a)-
3T(e)(3).
Method of Accounting
Previously, when a section 501(c)(3) organization computed its
public support, it was required to use the cash method of accounting to
report the amount of public support it received on Schedule A, even if
it used the accrual method of accounting in keeping its books under
section 446, and in otherwise reporting on Form 990. Under these
temporary regulations, when a section 501(c)(3) organization computes
its public support and reports the information on Schedule A, it must
use the same accounting method that it uses in keeping its books under
section 446 and that it otherwise uses to report on its Form 990. An
organization that uses the accrual method will not be able to use the
support information reported on Form 990 for prior years (because that
support was reported using the cash method) to compute its public
support for the current year, and instead must report all support for
the computation period on the accrual method.
Reliance
These temporary regulations provide that donors may rely on an
organization's ruling that the organization is described in sections
170(b)(1)(A)(vi) and 509(a)(1) or in section 509(a)(2) until notice of
a change in status is provided to the public (such as by publication in
the Internal Revenue Bulletin), unless the donor was responsible for or
aware of the act or failure to act that results in the organization's
loss of public charity status. This rule is substantively the same as
the rules contained in the current regulations. The regulations further
provide that donors may rely on advance rulings that expire on or after
June 9, 2008, until notice of a change in status is provided to the
public (such as by publication in the Internal Revenue Bulletin).
Effective/Applicability Date and Transition Rules
These temporary regulations are effective on September 9, 2008, and
apply to taxable years beginning on or after January 1, 2008. All
organizations, including organizations that received a definitive
ruling prior to the effective date of these regulations, must use the
new five-year computation period to calculate public support for their
first taxable year beginning on or after January 1, 2008 and for all
subsequent taxable years.
These regulations provide a transition rule under which an
organization that cannot meet a public support test for its first
taxable year beginning on or after January 1, 2008, using the five-year
computation period will continue to qualify as a public charity for its
2008 taxable year if it satisfied a public support test for its 2007
taxable year, based on public support received over the four-year
period 2003 through 2006.
These regulations also provide a transition rule under which
organizations that received advance rulings that expire on or after
June 9, 2008, are treated as new public charities under the new
regulations, that is, public charities for all purposes without regard
to public support in fact received during the first five years of their
existence as section 501(c)(3) organizations. This rule effectively
applies the temporary regulations to all organizations that are in
their advance ruling period as of the effective date of these temporary
regulations. As such, these organizations will not have to file Form
8734 at the end of the advance ruling period. Grantors and contributors
can rely upon these organizations' advance ruling letter as if it were
a definitive ruling letter. The IRS plans to send follow-up letters to
such organizations explaining the new rules. An organization that did
not timely file Form 8734 at the expiration of its advance ruling
period is not covered by the transition rule. Such an organization must
file information with the IRS establishing that it met a public support
test during its advance ruling period in order to qualify as a public
charity during its first five years.
Forms 1023 filed prior to the effective date of these regulations
that have not yet been processed by the IRS will be processed under the
new regulations. The IRS will issue definitive rulings regarding
private foundation status to such organizations.
Community Trust Rules
Sections 1.170A-9(f)(10) through 1.170A-9(f)(14), which establish
rules for when multiple trusts can be treated as a single entity for
purposes of the public support tests, provide old transition rules that
are obsolete, and, therefore, the transition rules are being deleted in
these temporary regulations.
Compensation Reporting
Current Sec. 1.6033-2(a)(2)(ii)(g) requires that exempt
organizations report on Form 990 the names and addresses of all
officers, directors, trustees, and persons having responsibilities or
powers similar to those of officers, directors or trustees, of the
organization. The reference to a person having responsibilities and
powers similar to those of officers, directors or trustees is meant to
capture those persons who function as officers, directors or trustees
of the organization, regardless of title, as well as the key employees
of the organization. The redesigned Form 990 expanded the definition of
key employee to cover not only persons having responsibilities or
powers similar to those of officers, directors or trustees, but also
persons who manage a discrete segment or activity of the organization
that represents a substantial portion of the activities, assets,
income, or expenses of the organization. The redesigned Form 990
requires reporting for only those key employees whose compensation
exceeds $150,000. These temporary regulations add key employees to the
list of persons in Sec. 1.6033-2T(a)(2)(ii)(g) who may be required to
be reported on Form 990, as prescribed by publication, form or
instructions.
Current Sec. 1.6033-2(a)(2)(ii)(g) requires that exempt
organizations that make payments of more than $30,000 annually to
employees and independent contractors report these persons' names
[[Page 52532]]
and addresses on Form 990. Current Sec. 1.6033-2(a)(2)(ii)(h) requires
a schedule showing the compensation or other payments made to the
persons listed in paragraph (a)(2)(ii)(g). The redesigned Form 990
requires an organization to report, for each person listed (other than
a key employee or a former director or trustee of the organization),
compensation and other payments totaling more than $100,000 annually
paid by the organization and its related organizations to the person.
For key employees, the redesigned Form 990 requires an organization to
report compensation and other payments totaling more than $150,000
annually paid by the organization and its related organizations to the
person. For former directors and trustees, the redesigned Form 990
requires an organization to report compensation and other payments
totaling more than $10,000 annually paid by the organization and its
related organizations to the person solely on account of the person's
past services as a director or trustee of the organization. As amended
in these temporary regulations, Sec. 1.6033-2T(a)(2)(ii)(g) gives the
Commissioner discretion to revise the threshold amount for reporting by
form and instruction.
Furthermore, the current rule in Sec. 1.6033-2(a)(2)(ii)(h), which
requires generally the reporting of compensation paid by an
organization during its annual accounting period (or during the
calendar year ending within such period), imposes no requirement that
the compensation reported on Form 990 be consistent with what is
reported on Form W-2, ``Wage and Tax Statement,'' or Form 1099-MISC,
``Miscellaneous Income.'' The current rule permits, but does not
require, a fiscal year organization to report paid compensation on a
calendar year basis. The redesigned Form 990 (Part VII and Schedule J)
requires that compensation reported as paid to officers and other
employees be consistent with Form W-2 (box 5) and that compensation
reported as paid to directors, individual trustees, and independent
contractors be consistent with Form 1099-MISC (box 7). As amended by
these temporary regulations, Sec. 1.6033-2T(a)(2)(ii)(h) requires an
organization to report compensation it has paid during the calendar
year ending with or within the organization's annual accounting period,
or during such other period as specified by form or form instructions.
The rule in these temporary regulations will ensure consistency in
compensation reporting, provide greater certainty about what
compensation is to be reported, and reduce the reporting burden for
most filing organizations. A fiscal year organization will continue to
be required to use fiscal year accounting when reporting aggregate
compensation as an expense item (Form 990, Part IX). In addition, an
organization will not be required to reconcile compensation for
individuals reported in Part VII with compensation for such individuals
included in its Part IX statement of expenses.
Asset Disposition Reporting
Schedule N, ``Liquidation, Termination, Dissolution, or Significant
Disposition of Assets,'' of the redesigned Form 990 requires
information about organizations that liquidate, terminate, or dissolve,
or sell, exchange, dispose of or otherwise transfer more than 25
percent of the organization's assets. The collection of this
information is authorized by section 6033, the general authorization
for the collection of information on Form 990. The collection of
information with respect to liquidations, dissolutions, terminations
and substantial contractions is also authorized by section 6043(b).
While section 6043(b) and its companion penalty provision section
6652(c) contemplate a separate return, since 1981 this information has
been collected on Form 990.
In order to eliminate the potential for inconsistency and confusion
by taxpayers, the regulations under section 6043(b) have been amended
so that they are consistent with section 6033 and the redesigned
Schedule N. Generally, current Sec. 1.6043-3(b)(8) excuses from the
information reporting requirement of section 6043(b) organizations
other than former section 501(c)(3) organizations. The IRS believes
that this exception is too broad, because information reporting from
other exempt organizations may facilitate sound tax administration.
Therefore, these temporary regulations amend Sec. 1.6043-3(b)(8) to
provide discretion to narrow the exception and require reporting from
organizations exempt under other Code sections by form or form
instructions. In addition, these temporary regulations remove the
definition of ``substantial contraction'' in Sec. 1.6043-3(d)(1),
leaving this term to be defined by form or form instructions.
Private Foundation Termination
Section 1.507-2, which addresses private foundation terminations
under section 507(b), contains references to the four-year computation
period for public support and old transition rules related to 12-month
terminations that are obsolete. These temporary regulations revise
Sec. 1.507-2 to delete references to the four-year computation period
and the transition rules related to 12-month terminations.
Revisions To Comply With Federal Register
The final regulations make various nonsubstantive revisions to
comply with Federal Register requirements. For example, the
undesignated flush language preceding prior Sec. 1.170A-9(a) was
designated as paragraph (a), and all following paragraphs were
redesignated accordingly.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply. It is hereby certified that the
collection of information in this regulation will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that burden on tax-exempt
entities will be reduced by (1) eliminating the separate advance ruling
process and the additional process for subsequently seeking a
definitive ruling, (2) clarifying rules regarding the method of
accounting and period for reporting certain items, and (3) providing
discretion for the IRS to narrow or clarify circumstances under which
reporting is required. Accordingly, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of the Code, these regulations
have been submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal author of this regulation is Terri Harris, Office of
Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the IRS and the Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
[[Page 52533]]
Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.170A-9 is amended as follows:
0
1. Paragraphs (a), (b), (c), (d), (e), (f), (g), (h) and (i) are
redesignated as paragraphs (b), (c), (d), (e), (f), (g), (h), (i) and
(j), respectively.
0
2. The undesignated text following the section heading is designated as
paragraph (a).
0
3. The newly-designated paragraphs (a) and (d) are revised.
0
4. New paragraph (k) is added.
The addition and revisions read as follows:
Sec. 1.170A-9 Definition of section 170(b)(1)(A) organization.
(a) The term section 170(b)(1)(A) organization as used in the
regulations under section 170 means any organization described in
paragraphs (b) through (j) of this section, effective with respect to
taxable years beginning after December 31, 1969, except as otherwise
provided. Section 1.170-2(b) shall continue to be applicable with
respect to taxable years beginning prior to January 1, 1970. The term
one or more organizations described in section 170(b)(1)(A) (other than
clauses (vii) and (viii)) as used in sections 507 and 509 of the
Internal Revenue Code (Code) and the regulations means one or more
organizations described in paragraphs (b) through (f) of this section,
except as modified by the regulations under part II of subchapter F of
chapter 1 or under chapter 42.
* * * * *
(d) Hospitals and medical research organizations--(1) Hospitals. An
organization (other than one described in paragraph (d)(2) of this
section) is described in section 170(b)(1)(A)(iii) if--
(i) It is a hospital; and
(ii) Its principal purpose or function is the providing of medical
or hospital care or medical education or medical research.
(A) The term hospital includes--
(1) Federal hospitals; and
(2) State, county, and municipal hospitals which are
instrumentalities of governmental units referred to in section
170(c)(1) and otherwise come within the definition. A rehabilitation
institution, outpatient clinic, or community mental health or drug
treatment center may qualify as a ``hospital'' within the meaning of
paragraph (d)(1)(i) of this section if its principal purpose or
function is the providing of hospital or medical care. For purposes of
this paragraph (d)(1)(ii), the term medical care shall include the
treatment of any physical or mental disability or condition, whether on
an inpatient or outpatient basis, provided the cost of such treatment
is deductible under section 213 by the person treated. An organization,
all the accommodations of which qualify as being part of a ``skilled
nursing facility'' within the meaning of 42 U.S.C. 1395x(j), may
qualify as a ``hospital'' within the meaning of paragraph (d)(1)(i) of
this section if its principal purpose or function is the providing of
hospital or medical care. For taxable years ending after June 28, 1968,
the term hospital also includes cooperative hospital service
organizations which meet the requirements of section 501(e) and Sec.
1.501(e)-1.
(B) The term hospital does not, however, include convalescent homes
or homes for children or the aged, nor does the term include
institutions whose principal purpose or function is to train
handicapped individuals to pursue some vocation. An organization whose
principal purpose or function is the providing of medical education or
medical research will not be considered a ``hospital'' within the
meaning of paragraph (d)(1)(i) of this section, unless it is also
actively engaged in providing medical or hospital care to patients on
its premises or in its facilities, on an inpatient or outpatient basis,
as an integral part of its medical education or medical research
functions. See, however, paragraph (d)(2) of this section with respect
to certain medical research organizations.
(2) Certain medical research organizations--(i) Introduction. A
medical research organization is described in section 170(b)(1)(A)(iii)
if the principal purpose or functions of such organization are medical
research and if it is directly engaged in the continuous active conduct
of medical research in conjunction with a hospital. In addition, for
purposes of the 50 percent limitation of section 170(b)(1)(A) with
respect to a contribution, during the calendar year in which the
contribution is made such organization must be committed to spend such
contribution for such research before January 1 of the fifth calendar
year which begins after the date such contribution is made. An
organization need not receive contributions deductible under section
170 to qualify as a medical research organization and such organization
need not be committed to spend amounts to which the limitation of
section 170(b)(1)(A) does not apply within the 5-year period referred
to in this paragraph (d)(2)(i). However, the requirement of continuous
active conduct of medical research indicates that the type of
organization contemplated in this paragraph (d)(2) is one which is
primarily engaged directly in the continuous active conduct of medical
research, as compared to an inactive medical research organization or
an organization primarily engaged in funding the programs of other
medical research organizations. As in the case of a hospital, since an
organization is ordinarily not described in section 170(b)(1)(A)(iii)
as a hospital unless it functions primarily as a hospital, similarly a
medical research organization is not so described unless it is
primarily engaged directly in the continuous active conduct of medical
research in conjunction with a hospital. Accordingly, the rules of this
paragraph (d)(2) shall only apply with respect to such medical research
organizations.
(ii) General rule. An organization (other than a hospital described
in paragraph (d)(1) of this section) is described in section
170(b)(1)(A)(iii) only if within the meaning of this paragraph (d)(2):
(A) The principal purpose or functions of such organization are to
engage primarily in the conduct of medical research; and
(B) It is primarily engaged directly in the continuous active
conduct of medical research in conjunction with a hospital which is--
(1) Described in section 501(c)(3);
(2) A Federal hospital; or
(3) An instrumentality of a governmental unit referred to in
section 170(c)(1).
(C) In order for a contribution to such organization to qualify for
purposes of the 50 percent limitation of section 170(b)(1)(A), during
the calendar year in which such contribution is made or treated as
made, such organization must be committed (within the meaning of
paragraph (d)(2)(viii) of this section) to spend such contribution for
such active conduct of medical research before January 1 of the fifth
calendar year beginning after the date such contribution is made. For
the meaning of the term ``medical research'' see paragraph (d)(2)(iii)
of this section. For the meaning of the term ``principal purpose or
functions'' see paragraph (d)(2)(iv) of this section. For the meaning
of the term ``primarily engaged directly in the continuous active
conduct of medical research'' see
[[Page 52534]]
paragraph (d)(2)(v) of this section. For the meaning of the term
``medical research in conjunction with a hospital'' see paragraph
(d)(2)(vii) of this section.
(iii) Definition of medical research. Medical research means the
conduct of investigations, experiments, and studies to discover,
develop, or verify knowledge relating to the causes, diagnosis,
treatment, prevention, or control of physical or mental diseases and
impairments of man. To qualify as a medical research organization, the
organization must have or must have continuously available for its
regular use the appropriate equipment and professional personnel
necessary to carry out its principal function. Medical research
encompasses the associated disciplines spanning the biological, social
and behavioral sciences. Such disciplines include chemistry
(biochemistry, physical chemistry, bioorganic chemistry, etc.),
behavioral sciences (psychiatry, physiological psychology,
neurophysiology, neurology, neurobiology, and social psychology, etc.),
biomedical engineering (applied biophysics, medical physics, and
medical electronics, for example, developing pacemakers and other
medically related electrical equipment), virology, immunology,
biophysics, cell biology, molecular biology, pharmacology, toxicology,
genetics, pathology, physiology, microbiology, parasitology,
endocrinology, bacteriology, and epidemiology.
(iv) Principal purpose or functions. An organization must be
organized for the principal purpose of engaging primarily in the
conduct of medical research in order to be an organization meeting the
requirements of this paragraph (d)(2). An organization will normally be
considered to be so organized if it is expressly organized for the
purpose of conducting medical research and is actually engaged
primarily in the conduct of medical research. Other facts and
circumstances, however, may indicate that an organization does not meet
the principal purpose requirement of this paragraph (d)(2)(iv) even
where its governing instrument so expressly provides. An organization
that otherwise meets all of the requirements of this paragraph (d)(2)
(including this paragraph (d)(2)(iv)) to qualify as a medical research
organization will not fail to so qualify solely because its governing
instrument does not specifically state that its principal purpose is to
conduct medical research.
(v) Primarily engaged directly in the continuous active conduct of
medical research--(A) In order for an organization to be primarily
engaged directly in the continuous active conduct of medical research,
the organization must either devote a substantial part of its assets
to, or expend a significant percentage of its endowment for, such
purposes, or both. Whether an organization devotes a substantial part
of its assets to, or makes significant expenditures for, such
continuous active conduct depends upon the facts and circumstances
existing in each specific case. An organization will be treated as
devoting a substantial part of its assets to, or expending a
significant percentage of its endowment for, such purposes if it meets
the appropriate test contained in paragraph (d)(2)(v)(B) of this
section. If an organization fails to satisfy both of such tests, in
evaluating the facts and circumstances, the factor given most weight is
the margin by which the organization failed to meet such tests. Some of
the other facts and circumstances to be considered in making such a
determination are--
(1) If the organization fails to satisfy the tests because it
failed to properly value its assets or endowment, then upon
determination of the improper valuation it devotes additional assets
to, or makes additional expenditures for, such purposes, so that it
satisfies such tests on an aggregate basis for the prior year in
addition to such tests for the current year;
(2) The organization acquires new assets or has a significant
increase in the value of its securities after it had developed a budget
in a prior year based on the assets then owned and the then current
values;
(3) The organization fails to make expenditures in any given year
because of the interrelated aspects of its budget and long-term
planning requirements, for example, where an organization prematurely
terminates an unsuccessful program and because of long-term planning
requirements it will not be able to establish a fully operational
replacement program immediately; and
(4) The organization has as its objective to spend less than a
significant percentage in a particular year but make up the difference
in the subsequent few years, or to budget a greater percentage in an
earlier year and a lower percentage in a later year.
(B) For purposes of this section, an organization which devotes
more than one half of its assets to the continuous active conduct of
medical research will be considered to be devoting a substantial part
of its assets to such conduct within the meaning of paragraph
(d)(2)(v)(A) of this section. An organization which expends funds
equaling 3.5 percent or more of the fair market value of its endowment
for the continuous active conduct of medical research will be
considered to have expended a significant percentage of its endowment
for such purposes within the meaning of paragraph (d)(2)(v)(A) of this
section.
(C) Engaging directly in the continuous active conduct of medical
research does not include the disbursing of funds to other
organizations for the conduct of research by them or the extending of
grants or scholarships to others. Therefore, if an organization's
primary purpose is to disburse funds to other organizations for the
conduct of research by them or to extend grants or scholarships to
others, it is not primarily engaged directly in the continuous active
conduct of medical research.
(vi) Special rules. The following rules shall apply in determining
whether a substantial part of an organization's assets are devoted to,
or its endowment is expended for, the continuous active conduct of
medical research activities:
(A) An organization may satisfy the tests of paragraph (d)(2)(v)(B)
of this section by meeting such tests either for a computation period
consisting of the immediately preceding taxable year, or for the
computation period consisting of the immediately preceding four taxable
years. In addition, for taxable years beginning in 1970, 1971, 1972,
1973, and 1974, if an organization meets such tests for the computation
period consisting of the first four taxable years beginning after
December 31, 1969, an organization will be treated as meeting such
tests, not only for the taxable year beginning in 1974, but also for
the preceding four taxable years. Thus, for example, if a calendar year
organization failed to satisfy such tests for a computation period
consisting of 1969, 1970, 1971, and 1972, but on the basis of a
computation period consisting of the years 1970 through 1973, it
expended funds equaling 3.5 percent or more of the fair market value of
its endowment for the continuous active conduct of medical research,
such organization will be considered to have expended a significant
percentage of its endowment for such purposes for the taxable years
1970 through 1974. In applying such tests for a four-year computation
period, although the organization's expenditures for the entire four-
year period shall be aggregated, the fair market value of its endowment
for each year shall be summed, even though, in the case of an asset
held throughout the four-year period, the fair market value of such an
asset will be counted four times.
[[Page 52535]]
Similarly, the fair market value of an organization's assets for each
year of a four-year computation period shall be summed.
(B) Any property substantially all the use of which is
``substantially related'' (within the meaning of section 514(b)(1)(A))
to the exercise or performance of the organization's medical research
activities will not be treated as part of its endowment.
(C) The valuation of assets must be made with commonly accepted
methods of valuation. A method of valuation made in accordance with the
principles stated in the regulations under section 2031 constitutes an
acceptable method of valuation. Assets may be valued as of any day in
the organization's taxable year to which such valuation applies,
provided the organization follows a consistent practice of valuing such
asset as of such date in all taxable years. For purposes of paragraph
(d)(2)(v) of this section, an asset held by the organization for part
of a taxable year shall be taken into account by multiplying the fair
market value of such asset by a fraction, the numerator of which is the
number of days in such taxable year that the organization held such
asset and the denominator of which is the number of days in such
taxable year.
(vii) Medical research in conjunction with a hospital. The
organization need not be formally affiliated with a hospital to be
considered primarily engaged directly in the continuous active conduct
of medical research in conjunction with a hospital, but in any event
there must be a joint effort on the part of the research organization
and the hospital pursuant to an understanding that the two
organizations will maintain continuing close cooperation in the active
conduct of medical research. For example, the necessary joint effort
will normally be found to exist if the activities of the medical
research organization are carried on in space located within or
adjacent to a hospital, the organization is permitted to utilize the
facilities (including equipment, case studies, etc.) of the hospital on
a continuing basis directly in the active conduct of medical research,
and there is substantial evidence of the close cooperation of the
members of the staff of the research organization and members of the
staff of the particular hospital or hospitals. The active participation
in medical research by members of the staff of the particular hospital
or hospitals will be considered to be evidence of such close
cooperation. Because medical research may involve substantial
investigation, experimentation and study not immediately connected with
hospital or medical care, the requisite joint effort will also normally
be found to exist if there is an established relationship between the
research organization and the hospital which provides that the
cooperation of appropriate personnel and the use of facilities of the
particular hospital or hospitals will be required whenever it would aid
such research.
(viii) Commitment to spend contributions. The organization's
commitment that the contribution will be spent within the prescribed
time only for the prescribed purposes must be legally enforceable. A
promise in writing to the donor in consideration of his making a
contribution that such contribution will be so spent within the
prescribed time will constitute a commitment. The expenditure of
contributions received for plant, facilities, or equipment, used solely
for medical research purposes (within the meaning of paragraph
(d)(2)(ii) of this section), shall ordinarily be considered to be an
expenditure for medical research. If a contribution is made in other
than money, it shall be considered spent for medical research if the
funds from the proceeds of a disposition thereof are spent by the
organization within the five-year period for medical research; or, if
such property is of such a kind that it is used on a continuing basis
directly in connection with such research, it shall be considered spent
for medical research in the year in which it is first so used. A
medical research organization will be presumed to have made the
commitment required under this paragraph (d)(2)(viii) with respect to
any contribution if its governing instrument or by-laws require that
every contribution be spent for medical research before January 1 of
the fifth year which begins after the date such contribution is made.
(ix) Organizational period for new organizations. A newly created
organization, for its ``organizational'' period, shall be considered to
be primarily engaged directly in the continuous active conduct of
medical research in conjunction with a hospital within the meaning of
paragraphs (d)(2)(v) and (d)(2)(vii) of this section if during such
period the organization establishes to the satisfaction of the
Commissioner that it reasonably can be expected to be so engaged by the
end of such period. The information to be submitted shall include
detailed plans showing the proposed initial medical research program,
architectural drawings for the erection of buildings and facilities to
be used for medical research in accordance with such plans, plans to
assemble a professional staff and detailed projections showing the
timetable for the expected accomplishment of the foregoing. The
``organizational'' period shall be that period which is appropriate to
implement the proposed plans, giving effect to the proposed amounts
involved and the magnitude and complexity of the projected medical
research program, but in no event in excess of three years following
organization.
(x) Examples. The application of this paragraph (d)(2) may be
illustrated by the following examples:
Example 1. N, an organization referred to in section 170(c)(2),
was created to promote human knowledge within the field of medical
research and medical education. All of N's assets were contributed
to it by A and consist of a diversified portfolio of stocks and
bonds. N's endowment earns 3.5 percent annually, which N expends in
the conduct of various medical research programs in conjunction with
Y hospital. N is located adjacent to Y hospital, makes substantial
use of Y's facilities, and there is close cooperation between the
staffs of N and Y. N is directly engaged in the continuous active
conduct of medical research in conjunction with a hospital, meets
the principal purpose test described in paragraph (d)(2)(iv) of this
section, and is therefore an organization described in section
170(b)(1)(A)(iii).
Example 2. O, an organization referred to in section 170(c)(2),
was created to promote human knowledge within the field of medical
research and medical education. All of O's assets consist of a
diversified portfolio of stocks and bonds. O's endowment earns 3.5
percent annually, which O expends in the conduct of various medical
research programs in conjunction with certain hospitals. However, in
1974, O receives a substantial bequest of additional stocks and
bonds. O's budget for 1974 does not take into account the bequest
and as a result O expends only 3.1 percent of its endowment in 1974.
However, O establishes that it will expend at least 3.5 percent of
its endowment for the active conduct of medical research for taxable
years 1975 through 1978. O is therefore directly engaged in the
continuous active conduct of medical research in conjunction with a
hospital for taxable year 1975. Since O also meets the principal
purpose test described in paragraph (d)(2)(iv) of this section, it
is therefore an organization described in section 170(b)(1)(A)(iii)
for taxable year 1975.
Example 3. M, an organization referred to in section 170(c)(2),
was created to promote human knowledge within the field of medical
research and medical education. M's activities consist of the
conduct of medical research programs in conjunction with various
hospitals. Under such programs, researchers employed by M engage in
research at laboratories set aside for M within the various
hospitals. Substantially all of M's assets consist of 100 percent of
the stock of X corporation, which has a fair market value of
approximately 100 million dollars. X pays M approximately 3.3
million dollars in dividends annually, which M expends in the
[[Page 52536]]
conduct of its medical research programs. Since M expends only 3.3
percent of its endowment, which does not constitute a significant
percentage, in the active conduct of medical research, M is not an
organization described in section 170(b)(1)(A)(iii) because M is not
engaged in the continuous active conduct of medical research.
(xi) Special rule for organizations with existing ruling. This
paragraph (d)(2)(xi) shall apply to an organization that prior to
January 1, 1970, had received a ruling or determination letter which
has not been expressly revoked holding the organization to be a medical
research organization described in section 170(b)(1)(A)(iii) and with
respect to which the facts and circumstances on which the ruling was
based have not substantially changed. An organization to which this
paragraph (d)(2)(xi) applies shall be treated as an organization
described in section 170(b)(1)(A)(iii) for a period not ending prior to
90 days after February 13, 1976 (or where appropriate, for taxable
years beginning before such 90th day). In addition, with respect to a
grantor or contributor under sections 170, 507, 545(b)(2), 556(b)(2),
642(c), 4942, 4945, 2055, 2106(a)(2), and 2522, the status of an
organization to which this paragraph (d)(2)(xi) applies will not be
affected until notice of change of status under section
170(b)(1)(A)(iii) is made to the public (such as by publication in the
Internal Revenue Bulletin). The preceding sentence shall not apply if
the grantor or contributor had previously acquired knowledge that the
Internal Revenue Service had given notice to such organization that it
would be deleted from classification as a section 170(b)(1)(A)(iii)
organization.
* * * * *
(k) Effective/applicability date. This section shall apply to
taxable years beginning after December 31, 1969. The applicability of
paragraph (f) of this section shall be limited to taxable years
beginning before January 1, 2008.
0
Par. 3. Section 1.170A-9T is added to read as follows:
Sec. 1.170A-9T Definition of section 170(b)(1)(A) organization
(temporary).
(a) through (e) [Reserved]. For further guidance, see Sec. 1.170A-
9(a) through (e).
(f) Definition of section 170(b)(1)(A)(vi) organization--(1) In
general. An organization is described in section 170(b)(1)(A)(vi) if
it--
(i) Is referred to in section 170(c)(2) (other than an organization
specifically described in paragraphs (b) through (e) of this section);
and
(ii) Normally receives a substantial part of its support from a
governmental unit referred to in section 170(c)(1) or from direct or
indirect contributions from the general public (``publicly
supported''). For purposes of this paragraph (f)(1)(ii), an
organization is publicly supported if it meets the requirements of
either paragraph (f)(2) of this section (33\1/3\ percent support test)
or paragraph (f)(3) of this section (facts and circumstances test).
Paragraph (f)(4) of this section defines normally for purposes of the
33\1/3\ percent support test, the facts and circumstances test and for
new organizations in the first 5 years of the organization's existence
as a section 501(c)(3) organization. Paragraph (f)(5) of this section
provides for determinations of foundation classification and rules for
reliance by donors and contributors. Paragraphs (f)(6), (7), and (8) of
this section list the items that are included and excluded from the
term support. Paragraph (f)(9) of this section provides examples of the
application of this paragraph. Types of organizations that, subject to
the provisions of this paragraph, generally qualify under section
170(b)(1)(A)(vi) as ``publicly supported'' are publicly or
governmentally supported museums of history, art, or scien