Requirements for Type I and Type III Supporting Organizations, 71287-71301 [2023-22286]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 88, Number 198 (Monday, October 16, 2023)]
[Rules and Regulations]
[Pages 71287-71301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22286]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 53

[TD 9981]
RIN 1545-BJ53


Requirements for Type I and Type III Supporting Organizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance on 
the prohibition on certain gifts or contributions to Type I and Type 
III supporting organizations from persons who control a supported 
organization and on certain other requirements for Type III supporting 
organizations. The regulations reflect changes to the law made by the 
Pension Protection Act of 2006. The regulations affect certain Type I 
and Type III supporting organizations and their supported 
organizations.

DATES: 
    Effective date: These regulations are effective on October 16, 
2023.
    Applicability date: For dates of applicability, see Sec.  1.509(a)-
4(I).

FOR FURTHER INFORMATION CONTACT: Michael Gruccio at (202) 317-4541 or 
Don Spellmann at (202) 317-4086.

SUPPLEMENTARY INFORMATION: 

Background

I. Overview

    This document amends the Income Tax Regulations (26 CFR part 1) by 
adding final regulations under section 509(a) of the Internal Revenue 
Code (Code). These final regulations amend Sec.  1.509(a)-4 to provide 
guidance on amendments to the Code enacted by section 1241 of the 
Pension Protection Act of 2006 (PPA), Public Law 109-280, 120 Stat. 780 
(August 17, 2006).
    An organization described in section 501(c)(3) of the Code is 
classified as either a private foundation or a public charity. To be 
classified as a public charity, an organization must be described in 
section 509(a)(1), (2), or (3). Organizations described in section 
509(a)(3) are known as ``supporting organizations.'' Supporting 
organizations achieve their public charity status by providing support 
to one or more organizations described in section 509(a)(1) or (2), 
which, in this context, are referred to as ``supported organizations.''
    To be described in section 509(a)(3), an organization must satisfy 
(1) an organizational test, (2) an operational test, (3) a relationship 
test, and (4) a disqualified person control test. The organizational 
and operational tests require that a supporting organization be 
organized, and at all times thereafter operated, exclusively for the 
benefit of, to perform the functions of, or to carry out the purposes 
of one or more supported organizations. The relationship test requires 
a supporting organization to establish one of three types of 
relationships with one or more supported organizations. A supporting 
organization that is operated, supervised, or controlled by one or more 
supported organizations is known as a ``Type I'' supporting 
organization. The relationship of a Type I supporting organization with 
its supported organization(s) is comparable to that of a corporate 
parent-subsidiary relationship. A supporting organization that is 
supervised or controlled in connection with one or more supported 
organizations is known as a ``Type II'' supporting organization. The 
relationship of a Type II supporting organization with its supported 
organization(s) involves common supervision or control by the persons 
supervising or controlling both the supporting organization and the 
supported organization(s). A supporting organization that is operated 
in connection with one or more supported organizations is known as a 
``Type III'' supporting organization and is discussed further in the 
remainder of this preamble. Finally, the disqualified person control 
test requires that a supporting organization not be controlled directly 
or indirectly by certain disqualified persons.
    Sections 1241 through 1243 of the PPA revised the requirements for 
supporting organizations. These final regulations under Sec.  1.509(a)-
4 address section 1241's five changes to the requirements an 
organization must satisfy to qualify as a Type III supporting 
organization.

II. PPA Changes to Type III Supporting Organizations

    The PPA made the following five changes to the requirements an 
organization must satisfy to qualify as a Type III supporting 
organization:
    (1) Section 1241(c) of the PPA removed the ability of a charitable 
trust to rely on the special rule under Sec.  1.509(a)-4(i)(2)(iii) as 
then in effect, which allowed a trust to satisfy the attentiveness 
requirement of the integral part test for non-functionally integrated 
Type III supporting organizations if the supported organization was a 
beneficiary of the trust and state law allowed the beneficiary to 
enforce the trust and compel an accounting of the trust;
    (2) Section 1241(d) of the PPA directed the Secretary of the 
Treasury or her delegate (Secretary) to promulgate regulations under 
section 509 that establish a new distribution requirement for Type III 
supporting organizations that are not ``functionally integrated'' (a 
non-functionally integrated (NFI) Type III supporting organization) to 
ensure that a ``significant amount'' is paid to supported 
organizations; for this purpose, the term ``functionally integrated'' 
means a Type III supporting organization that is not required under 
regulations to make payments to supported organizations, because the 
supporting organization engages in activities that relate to performing 
the functions of, or carrying out the purposes of, its supported 
organization(s);
    (3) Section 1241(b) of the PPA required a Type III supporting 
organization to provide annually to each of its supported organizations 
the information required by the Department of the Treasury (Treasury 
Department) and the IRS (referred to in Sec.  1.509(a)-4(i)(2) as the 
notification requirement)

[[Page 71288]]

to ensure that the supporting organization is responsive to the needs 
or demands of its supported organization(s);
    (4) Section 1241(b) of the PPA also prohibited a Type III 
supporting organization from supporting any supported organization not 
organized in the United States; and
    (5) Section 1241(b) of the PPA additionally prohibited a Type I or 
Type III supporting organization from accepting any gift or 
contribution from a person who, alone or together with certain related 
persons, directly or indirectly controls the governing body of a 
supported organization of the Type I or Type III supporting 
organization.

III. Prior Rulemaking

    On August 2, 2007, the Treasury Department and the IRS published in 
the Federal Register (72 FR 42335) an advanced notice of proposed 
rulemaking (ANPRM) (REG-155929-06) in response to the PPA. The ANPRM 
described proposed rules to implement the changes made by the PPA to 
the Type III supporting organization requirements and solicited 
comments regarding those proposed rules.
    On September 24, 2009, the Treasury Department and the IRS 
published a notice of proposed rulemaking (REG-155929-06) in the 
Federal Register (74 FR 48672) proposing regulations regarding certain 
requirements to qualify as a Type III supporting organization under the 
PPA (2009 proposed regulations). The 2009 proposed regulations set 
forth those proposed requirements in Sec.  1.509(a)-4(i).
    On December 28, 2012, the Treasury Department and the IRS published 
a Treasury Decision (TD 9605) in the Federal Register (77 FR 76382) 
containing final and temporary regulations under Sec.  1.509(a)-4 
regarding the requirements to qualify as a Type III supporting 
organization (2012 TD). Also on December 28, 2012, the Treasury 
Department and the IRS published a notice of proposed rulemaking (REG-
155929-06) in the Federal Register (77 FR 76426) containing proposed 
regulations that incorporated the text of the temporary regulations in 
the 2012 TD by cross-reference. The temporary regulations in the 2012 
TD made significant changes to the distribution requirement for NFI 
Type III supporting organizations. The 2012 TD adopted other aspects of 
the 2009 proposed regulations with some changes in response to comments 
and provided transition relief for Type III supporting organizations in 
existence on December 28, 2012, that met and continued to meet the test 
under former Sec.  1.509(a)-4(i)(3)(ii), known as the ``but for'' test, 
as in effect prior to December 28, 2012, treating them as functionally 
integrated until the first day of their second taxable year beginning 
after December 28, 2012. Upon expiration of this relief period, the 
2012 TD requires these organizations to meet the same rules as all 
other supporting organizations to be considered functionally 
integrated. The preamble to the 2012 TD also identified issues for 
possible future rulemaking and requested comments.
    On January 6, 2014, the Treasury Department and the IRS published 
Notice 2014-4, 2014-2 I.R.B. 274, to provide additional transition 
relief for any Type III supporting organization (1) supporting at least 
one supported organization that is a governmental entity to which the 
supporting organization is responsive (within the meaning of Sec.  
1.509(a)-4(i)(3)) and (2) engaging in activities for or on behalf of 
the governmental supported organization that perform the functions of, 
or carry out the purposes of, the governmental supported organization 
and that, but for the involvement of the supporting organization, would 
normally be engaged in by the governmental supported organization 
itself. Notice 2014-4 stated that such an organization will be treated 
as a functionally integrated Type III supporting organization until the 
earlier of the date final regulations under Sec.  1.509(a)-4(i)(4)(iv) 
are published in the Federal Register or the first day of the 
organization's third taxable year beginning after December 31, 2013.
    On December 23, 2015, the Treasury Department and the IRS published 
a Treasury Decision (TD 9746) in the Federal Register (80 FR 79684) 
containing final regulations under Sec.  1.509(a)-4(i) regarding the 
distribution requirement for NFI Type III supporting organizations, 
finalizing the rule in the 2012 proposed and temporary regulations with 
very minor changes (2015 final regulations). The preamble to the 2015 
final regulations indicated that additional proposed regulations would 
be forthcoming to provide additional guidance for Type III supporting 
organizations, including specific rules under Sec.  1.509(a)-
4(i)(4)(iv) for Type III supporting organizations that support 
governmental supported organizations; the 2012 TD had reserved Sec.  
1.509(a)-4(i)(4)(iv). In addition, the preamble to the 2015 final 
regulations indicated that supporting organizations that support a 
governmental supported organization could continue to rely on Notice 
2014-4 until the date of publication of the new proposed regulations.
    On February 19, 2016, the Treasury Department and the IRS published 
a notice of proposed rulemaking (REG-118867-10) in the Federal Register 
(81 FR 8446) containing proposed regulations under Sec.  1.509(a)-4(f) 
and (i) regarding the prohibition on certain contributions to Type I 
and Type III supporting organizations and the requirements for Type III 
supporting organizations (2016 proposed regulations). The 2016 proposed 
regulations addressed issues identified in the preamble to the 2012 TD 
as well as the comments (six in total) on the 2012 TD and Notice 2014-
4.
    The Treasury Department and the IRS received six comments in 
response to the 2016 proposed regulations. The comments are available 
for public inspection at https://www.regulations.gov or upon request. 
No public hearing was requested. After considering the comments 
received, the Treasury Department and the IRS adopt the 2016 proposed 
regulations in these final regulations with certain revisions described 
in the Summary of Comments and Explanation of Revisions.

Summary of Comments and Explanation of Revisions

I. Overview

    This Summary of Comments and Explanation of Revisions addresses the 
comments that the Treasury Department and the IRS received in response 
to the 2016 proposed regulations and describes the revisions adopted in 
these final regulations. As described in this Summary of Comments and 
Explanation of Revisions, these final regulations define the term 
``control'' for purposes of section 509(f)(2), which prohibits a Type I 
or Type III supporting organization from accepting any gift or 
contribution from any person who controls the governing body of the 
supported organization(s). These final regulations also set forth 
additional rules and requirements for Type III supporting 
organizations, including (1) additional requirements to meet the 
responsiveness test for all Type III supporting organizations; (2) 
additional rules regarding the qualification of an organization as a 
functionally integrated Type III supporting organization under Sec.  
1.509(a)-4(i)(4), including specific rules for supporting organizations 
that support governmental supported organizations; and (3) additional 
rules regarding the required annual distributions under Sec.  1.509(a)-
4(i)(5) by an NFI Type III supporting organization.

[[Page 71289]]

II. Contributions From Controlling Donors--Meaning of Control

    Section 509(f)(2) and Sec.  1.509(a)-4(f)(5) prohibit Type I and 
Type III supporting organizations from accepting any gift or 
contribution from any person (other than an organization described in 
section 509(a)(1), (2), or (4)) who, alone or together with certain 
related persons (as described in Sec.  1.509(a)-4(f)(5)(i)(B) or (C)), 
directly or indirectly controls the governing body of a supported 
organization of the Type I or Type III supporting organization, or from 
persons related to a person possessing such control. Section 509(f)(2) 
does not define ``directly or indirectly controls.'' The 2012 TD 
reserved Sec.  1.509(a)-4(f)(5)(ii), titled ``Meaning of control,'' for 
future proposed regulations.
    The 2016 proposed regulations proposed defining ``control'' 
consistently with the definition of control in Sec.  1.509(a)-4(j), 
which relates to control by disqualified persons for purposes of the 
disqualified person control test in section 509(a)(3)(C) and Sec.  
1.509(a)-4(a)(4). In general, under the 2016 proposed regulations, the 
governing body of a supported organization is considered ``controlled'' 
by a person if that person, alone or by aggregating his or her votes or 
positions of authority with certain related persons described in Sec.  
1.509(a)-4(f)(5)(i)(B) or (C), may require the governing body of the 
supported organization to perform any act that significantly affects 
its operations or may prevent the governing body of the supported 
organization from performing any such act.
    These final regulations adopt the definition of ``control'' 
proposed in the 2016 proposed regulations with minor changes to add 
clarity. These final regulations make clear that control exists if one 
or more persons described in Sec.  1.509(a)-4(f)(5)(i)(A), (B), or (C) 
hold 50 percent or more of the total voting power of the governing body 
or have the right to exercise veto power over the actions of the 
governing body. These final regulations also incorporate language from 
Sec.  1.509(a)-4(j)(1) to make clear that even if persons do not have 
control by virtue of having 50 percent or more of the voting power or a 
veto power, all pertinent facts and circumstances will be taken into 
consideration in determining whether such persons do in fact directly 
or indirectly control the governing body of a supported organization.
    One commenter stated that if a parent supporting organization 
controls a supported organization, section 509(f)(2) would prohibit 
Type I and Type III supporting organizations of that controlled 
supported organization from accepting any gift or contribution from the 
parent supporting organization. To allow these contributions, the 
commenter recommended excluding from the definition of control the 
control a parent supporting organization exercises over its supported 
organizations.
    Section 509(f)(2) only excepts gifts or contributions from 
organizations described in section 509(a)(1), (2), and (4). Congress 
did not provide an exception for section 509(a)(3) organizations. For 
this reason, the commenter's recommendation is not consistent with 
section 509(f)(2), and these final regulations do not adopt it.

III. Type III Supporting Organization Relationship Test

    Section 1.509(a)-4(i)(1) provides that, for each taxable year, a 
Type III supporting organization must satisfy (i) a notification 
requirement, (ii) a responsiveness test, and (iii) an integral part 
test provided in the regulations. The 2016 proposed regulations 
proposed additional rules regarding each of these requirements. These 
final regulations adopt the 2016 proposed rules with the modifications 
described in this part III.
A. Notification Requirement
    Section 509(f)(1)(A) provides that an organization will not be 
considered a Type III supporting organization unless the organization 
provides to each supported organization, for each taxable year, such 
information as the Secretary may require to ensure that the 
organization is responsive to the needs or demands of the supported 
organizations. To satisfy this notification requirement, Sec.  
1.509(a)-4(i)(2) requires a Type III supporting organization to provide 
to each of its supported organizations for each taxable year: (1) A 
written notice addressed to a principal officer of the supported 
organization describing the type and amount of all of the support it 
provided to the supported organization during the supporting 
organization's preceding taxable year; (2) a copy of the supporting 
organization's most recently filed Form 990, Return of Organization 
Exempt from Income Tax, or other annual information return required to 
be filed under section 6033; and (3) a copy of the supporting 
organization's governing documents, including any amendments (unless 
previously provided and not subsequently amended). The 2016 proposed 
regulations proposed clarifying that for NFI Type III supporting 
organizations the description of support in the written notice must 
include all of the distributions described in Sec.  1.509(a)-4(i)(6) to 
the supported organization. These final regulations adopt this 
clarification.
    Section 1.509(a)-4(i)(2)(iii) requires that the notification be 
transmitted by the last day of the fifth calendar month following the 
close of ``that taxable year.'' Due to the lack of clarity regarding 
the reference to ``that taxable year,'' the 2016 proposed regulations 
proposed amending Sec.  1.509(a)-4(i)(2) to clarify that a supporting 
organization must deliver the required documents to each of its 
supported organizations by the last day of the fifth month of the 
supporting organization's taxable year after the taxable year in which 
it provided the support it is reporting. The preamble to the 2016 
proposed regulations stated that the proposed change is intended to 
reduce confusion but does not substantively change the due date or the 
content of the required notification. The preamble also stated that the 
date of delivery is determined by applying the general principles of 
section 7502. The final regulations adopt this proposed amendment 
without change.
    One commenter requested clarification that the annual written 
notice may summarize all the programs and services a supporting 
organization performs for its supported organization. The Treasury 
Department and the IRS agree that a supporting organization may 
summarize its activities directly furthering the exempt purpose of the 
supported organization as long as that summary provides sufficient 
notice to the supported organization on the character of the activity 
and its related costs. The report must include a brief narrative 
description of the support provided and sufficient financial detail for 
the recipient to identify the types and amounts of support being 
reported.
B. Responsiveness Test
    Section 1.509(a)-4(i)(3)(i) provides that a supporting organization 
meets the responsiveness test if it is ``responsive to the needs or 
demands of a supported organization.'' To meet this responsiveness 
test, an organization must satisfy two elements--the ``relationship 
requirement'' and the ``significant voice requirement.'' Under the 
relationship requirement, described in Sec.  1.509(a)-4(i)(3)(ii), the 
officers, directors, or trustees of the organization must have one of 
three specified relationships with the officers, directors, or trustees 
(and in some cases the members) of the supported organization. Under 
the significant voice requirement, described in Sec.  1.509(a)-
4(i)(3)(iii), the

[[Page 71290]]

officers, directors, or trustees of the supported organization, by 
reason of their relationships described in Sec.  1.509(a)-4(i)(3)(ii), 
must have a significant voice in the investment policies of the 
supporting organization, the timing of grants, the manner of making 
grants, and the selection of grant recipients by the supporting 
organization, and in otherwise directing the use of the income or 
assets of the supporting organization.
    The preamble to the 2012 TD stated that, in determining the 
appropriate distribution amount for NFI Type III supporting 
organizations, the Treasury Department and the IRS considered the 
required relationship between a supporting organization and its 
supported organizations, and that the Treasury Department and the IRS 
intended to issue proposed regulations in the future that would amend 
the responsiveness test by requiring a Type III supporting organization 
to be responsive to all of its supported organizations.
    In response to this proposal in the preamble to the 2012 TD, one 
commenter stated that a supporting organization should not be required 
to be responsive to all of its supported organizations because the 
resulting administrative burden would effectively limit the total 
number of organizations a supporting organization could support. The 
commenter suggested alternatives under which a supporting organization 
would be responsive to only a subset of its supported organizations 
that would vary from year to year.
    As stated in the preamble to the 2016 proposed regulations, the 
distinguishing characteristic of Type III supporting organizations, and 
the basis for their public charity classification, is that they are 
responsive to and significantly involved in the operations of their 
publicly supported organizations. See Sec.  1.509(a)-4(f)(4). Unless a 
Type III supporting organization is responsive to each of its supported 
organizations, the supported organizations cannot exercise the 
requisite level of oversight of and engagement with the supporting 
organization. Limiting the responsiveness requirement to fewer than all 
of the supported organizations may result in the necessary oversight 
and accountability being present for less than all of a supporting 
organization's operations. Consistent with this view, the 2016 proposed 
regulations proposed revising Sec.  1.509(a)-4(i)(3)(i) to require a 
supporting organization to be responsive to the needs and demands of 
each of its supported organizations to meet the responsiveness test.
    In addition, to illustrate how concerns about potential 
administrative burdens may be addressed consistent with the revised 
responsiveness test, the 2016 proposed regulations proposed a new 
Example 3 in Sec.  1.509(a)-4(i)(3)(iv) to demonstrate one way in which 
a Type III supporting organization that supports multiple organizations 
may satisfy the responsiveness test in a manner that can be cost-
effective. The Example shows that a supporting organization can meet 
the relationship requirement in Sec.  1.509(a)-4(i)(3)(ii) in different 
ways with respect to each of its supported organizations. The Example 
also shows how a supporting organization can organize and hold regular 
meetings, provide information, and encourage communication to help 
ensure that its supported organizations have a significant voice in the 
operations of the supporting organization.
    As noted in the preamble to the 2016 proposed regulations, another 
commenter in response to the preamble of the 2012 TD requested 
additional guidance regarding the ability of trusts to satisfy the 
significant voice requirement of the responsiveness test. The new 
Example 3 in the 2016 proposed regulations provides further 
illustration of how Type III supporting organizations, including 
charitable trusts, might satisfy the significant voice requirement of 
the responsiveness test. The Treasury Department and the IRS note that 
although the examples in the regulations relating to the responsiveness 
test may involve a Type III supporting organization that is organized 
as either a corporation or a trust, the applicable law and relevant 
regulatory provisions, as modified by the final regulations, are 
applicable to all Type III supporting organizations in the same manner, 
whether they are organized as corporations or trusts.
    As the preamble to the 2016 proposed regulations stated, the 
Treasury Department and the IRS anticipate that Type III supporting 
organizations may be able to demonstrate that they satisfy the 
responsiveness test in a variety of ways, and that the determination 
will be based on all the facts and circumstances.
    As a result of the proposed changes to the responsiveness test, the 
2016 proposed regulations also include conforming changes to examples 
and other regulatory provisions, specifically, removing references to 
``supported organizations to which the supporting organization is 
responsive'' since the supporting organization is to be responsive to 
each supported organization.
    Two commenters to the 2016 proposed regulations address the 
responsiveness test, agreeing with the proposed amendments to Sec.  
1.509(a)-4(i)(3)(i) and the new example in Sec.  1.509(a)-4(i)(3)(iv). 
Thus, these final regulations adopt these proposed amendments without 
change.
C. Integral Part Test--Functionally Integrated Type III Supporting 
Organizations
    Section 1.509(a)-4(i)(1)(iii) provides that, for each taxable year, 
a Type III supporting organization must satisfy the integral part test. 
The integral part test under Sec.  1.509(a)-4(i)(1)(iii) is satisfied 
by maintaining significant involvement in the operations of one or more 
supported organizations and providing support on which the supported 
organizations are dependent. To satisfy this test, a Type III 
supporting organization must meet the requirements either for a 
functionally integrated Type III supporting organization or for an NFI 
Type III supporting organization, as set forth in Sec.  1.509(a)-
4(i)(4) or (5), respectively.
    One commenter to the 2016 proposed regulations stated that the 
cross reference in Sec.  1.509(a)-4(d)(4)(i)(C) to the integral part 
test should be corrected to conform to the amendments made by the 2012 
TD. The final regulations adopt this recommendation and revise Sec.  
1.509(a)-4(d)(4)(i)(C) to reference the requirements of the integral 
part test set forth in Sec.  1.509(a)-4(i)(1)(iii).
    A Type III supporting organization is functionally integrated under 
Sec.  1.509(a)-4(i)(4) if it (1) engages in activities substantially 
all of which directly further the exempt purposes of one or more 
supported organizations and otherwise meets the requirements described 
in paragraph (i)(4)(ii) of that section, (2) is the parent of each of 
its supported organizations as described in paragraph (i)(4)(iii) of 
that section, or (3) supports a governmental supported organization and 
otherwise meets the requirements of paragraph (i)(4)(iv) of that 
section.
1. ``Substantially All'' Test
    Section 1.509(a)-4(i)(4)(ii)(B) provides that all pertinent facts 
and circumstances will be taken into consideration in determining 
whether substantially all of a supporting organization's activities 
directly further the exempt purposes of its supported organization(s). 
One commenter to the 2016 proposed regulations requested that 
supporting organizations be given the option of meeting the 
``substantially all'' test on average over a three- or five-year 
period. The commenter also

[[Page 71291]]

recommended that transition relief be provided if an organization does 
not meet the test over the most recent three or five years before the 
promulgation of final regulations.
    The 2012 TD adopted the substantially all test in Sec.  1.509(a)-
4(i)(4)(ii). The 2012 TD also provided transition relief in Sec.  
1.509(a)-4(i)(11)(ii) for existing organizations to adjust to the new 
rules. The 2016 proposed regulations did not include any substantive 
changes to Sec.  1.509(a)-4(i)(4)(ii). Furthermore, the substantially 
all test in Sec.  1.509(a)-4(i)(4)(ii)(B) takes into consideration all 
pertinent facts and circumstances, which allows for some consideration 
of year-to-year changes in activities. Finally, the Treasury Department 
and the IRS note that the commenter's proposed multi-year averaging 
test would be complex, create uncertainty about a supporting 
organization's functionally integrated status at the close of each 
taxable year, and would be difficult to administer. For these reasons, 
the final regulations do not adopt this recommendation.
2. Parent of Each Supported Organization
    Under Sec.  1.509(a)-4(i)(4)(iii), a supporting organization is the 
parent of a supported organization, and thus is deemed to be 
functionally integrated, if the supporting organization exercises a 
substantial degree of direction over the policies, programs, and 
activities of the supported organization and a majority of the 
officers, directors, or trustees of the supported organization is 
appointed or elected, directly or indirectly, by the governing body, 
members of the governing body, or officers (acting in their official 
capacities) of the supporting organization.
    As the 2009 proposed regulations noted, the classification of a 
parent organization as functionally integrated was intended to ``apply 
to supporting organizations that oversee or facilitate the operation of 
an integrated system, such as hospital systems.'' To more fully 
accomplish this objective, the 2016 proposed regulations proposed a 
revision to Sec.  1.509(a)-4(i)(4)(iii) clarifying that for a 
supporting organization to qualify as the parent of each of its 
supported organizations, the supporting organization and its supported 
organizations must be part of an integrated system (such as a hospital 
system), and the supporting organization must engage in activities 
typical of the parent of an integrated system. The 2016 proposed 
regulations stated that examples of these activities include (but are 
not limited to) coordinating the activities of the supported 
organizations and engaging in overall planning, policy development, 
budgeting, and resource allocation for the supported organizations.
    One commenter requested that the final regulations provide 
additional examples of integrated systems, such as private schools and 
universities, continuing care retirement communities, and residential 
rehabilitation facilities. The parenthetical in the 2016 proposed 
regulations--such as a hospital system--is stated as only one example 
and is not exclusive. This section of the regulations applies to any 
type of integrated system of which the parent organization and its 
supported organizations are a part. The test is whether the structure 
is that of an integrated system and whether the requirements of Sec.  
1.509(a)-4(i)(4)(iii) are satisfied, not whether the system is in a 
particular industry. The Treasury Department and the IRS conclude that 
it is unnecessary to add other examples of industries that may have 
integrated systems; doing so at this time may indicate that any 
industries not specifically mentioned in the final regulations are 
excluded. Accordingly, the final regulations do not adopt the 
commenter's request to provide additional examples. Nevertheless, in 
response to the comment and to make clear that a hospital system is 
just one example of an integrated system, the final regulations revise 
the parenthetical in the 2016 proposed regulations to read as follows: 
(such as, for example, a hospital system).
    The commenter also recommended including additional examples of 
activities that are typical of a parent of an integrated system and 
suggested that the examples might include financial planning and 
forecasting, legal services, human resources, information management, 
billing and collection services, marketing, and community outreach and 
education. The Treasury Department and the IRS note that the list of 
activities in the 2016 proposed regulations was only illustrative of 
how a parent directs the overall policies, programs, and activities of 
the supported organizations within the integrated system and was not 
exclusive. Thus, the absence of any particular activity, such as 
financial planning, from this list is not determinative. The final 
regulations clarify that a parent of an integrated system of supported 
organizations must direct the overall policies, programs, and 
activities of the supported organizations (such as, for example, 
coordinating the activities of the supported organizations and engaging 
in overall planning, policy development, budgeting, and resource 
allocation). The Treasury Department and the IRS note that a parent of 
an integrated system may also perform system-wide administrative 
services, such as the examples provided by the commenter, in 
conjunction with directing the overall policies, programs, and 
activities of the supported organizations. For clarity, these final 
regulations omit the defined term ``activities typical of a parent'' in 
proposed Sec.  1.509(a)-4(i)(4)(iii). The 2016 proposed regulations 
proposed to retain the requirement in Sec.  1.509(a)-4(i)(4)(iii) that 
the governing body, members of the governing body, or officers of a 
parent supporting organization must appoint or elect a majority of the 
officers, directors, or trustees of the supported organization. The 
preamble to the 2016 proposed regulations stated that the use of the 
phrase ``appointed or elected, directly or indirectly'' means the 
supporting organization could qualify as a parent of a second-tier (or 
lower) subsidiary. Thus, for example, if the directors of supporting 
organization A appoint a majority of the directors of supported 
organization B, which in turn appoints a majority of the directors of 
supported organization C, the directors of supporting organization A 
will be treated as appointing the majority of the directors of both 
supported organization B and supported organization C. One commenter 
agreed with this interpretation and requested that it be addressed in 
the final regulations. These final regulations adopt this 
recommendation.
    As stated in the preamble to the 2016 proposed regulations, the 
Treasury Department and the IRS interpret the existing requirement 
under Sec.  1.509(a)-4(i)(4)(iii) that the parent organization have the 
power to appoint or elect a majority of the officers, directors, or 
trustees of each supported organization to include the requirement that 
the parent organization also have the power to remove and replace such 
officers, directors, or trustees, or otherwise have an ongoing power to 
appoint or elect with reasonable frequency. One commenter requested 
that language reflecting this interpretation be specifically added to 
Sec.  1.509(a)-4(i)(4)(iii). The final regulations adopt this 
commenter's recommendation.
3. Supporting a Governmental Supported Organization
    The 2012 TD reserved Sec.  1.509(a)-4(i)(4)(iv) for future guidance 
on how a Type III supporting organization can qualify as functionally 
integrated by supporting a governmental entity. As

[[Page 71292]]

interim guidance, Notice 2014-4 provided that a Type III supporting 
organization will be treated as functionally integrated if it (i) 
supports a supported organization that is a governmental entity to 
which the supporting organization is responsive; and (ii) engages in 
activities for or on behalf of that governmental supported organization 
that perform the functions of, or carry out the purposes of, that 
governmental supported organization and that, but for the involvement 
of the supporting organization, would normally be engaged in by the 
governmental supported organization itself. This interim guidance was 
subsequently extended by the 2015 final regulations. The 2016 proposed 
regulations proposed new rules under which a Type III supporting 
organization would qualify as functionally integrated by supporting 
governmental supported organizations. These final regulations adopt the 
proposed Sec.  1.509(a)-4(i)(4)(iv), with the modifications discussed 
in the following paragraphs.
    The 2016 proposed regulations proposed that a supporting 
organization that only supports governmental supported organizations 
would be considered functionally integrated if a substantial part of 
its total activities directly further the exempt purposes of its 
governmental supported organizations and, if the supporting 
organization supports more than one governmental supported 
organization, all of its governmental supported organizations either: 
(1) Operate within the same geographic region (defined as a city, 
county, or metropolitan area); or (2) work in close coordination or 
collaboration with each other to conduct a service, program, or 
activity that the supporting organization supports. The 2016 proposed 
regulations proposed defining a governmental supported organization as 
a governmental unit described in section 170(c)(1), or an organization 
described in section 170(c)(2) and (b)(1)(A) (other than in clauses 
(vii) and (viii)) that is an instrumentality of one or more 
governmental units described in section 170(c)(1). To satisfy the close 
coordination or collaboration requirement, the proposed regulations 
proposed requiring a supporting organization to maintain on file a 
letter from each of the governmental supported organizations (or a 
joint letter from all of them) describing their coordination or 
collaboration efforts with respect to the particular service, program, 
or activity. The 2016 proposed regulations proposed an exception to 
this rule for certain pre-existing organizations that support no more 
than one non-governmental supported organization along with one or more 
governmental supported organizations, as well as a transition rule for 
pre-existing organizations that continue to meet the requirements of 
Notice 2014-4.
    Two commenters recommended that Type III functionally integrated 
supporting organizations should not be limited to only supporting 
governmental supported organizations. One commenter proposed that a 
supporting organization which supports both governmental and non-
governmental supported organizations should qualify as functionally 
integrated if the supporting organization (i) conducts activities that 
perform the functions of or carry out the purposes of its governmental 
supported organization(s), (ii) its non-governmental supported 
organizations operate in the same geographic region or work in close 
coordination or collaboration with the governmental supported 
organization(s), and (iii) substantially all of the supporting 
organization's activities directly further the exempt purposes of its 
governmental supported organization(s).
    The other commenter recommended replacing the requirement that all 
supported organizations be governmental supported organizations with a 
new requirement that substantially all the activities of the supporting 
organization either (i) directly further the purposes of the 
governmental supported organizations, or (ii) consist of grantmaking, 
fundraising, or investing for governmental supported organizations that 
meet either the same geographic region or close coordination and 
collaboration requirements in the 2016 proposed regulations.
    A third commenter requested that, when a supporting organization 
supports more than one governmental supported organization, the 
governmental supported organizations should only be required to work in 
close coordination or collaboration. The commenter requested deleting 
the requirement that the governmental supported organizations conduct a 
service, program, or activity that the supporting organization 
supports.
    The 2016 proposed regulations proposed allowing certain Type III 
supporting organizations that support governmental supported 
organizations to be classified as functionally integrated on the basis 
that the involvement of the governmental supported organizations in the 
supporting organization's activities would minimize the potential for 
abuse. As stated in the preamble to the 2016 proposed regulations, 
requiring close cooperation and collaboration on a common service, 
program, or activity that the supporting organization supports helps 
ensure that the governmental supported organizations will provide 
sufficient input to and oversight of the supporting organization. 
Moreover, the coordination and collaboration between the governmental 
supported organizations would be greatly diminished if they engaged in 
different services, programs, or activities. Furthermore, governmental 
input and oversight would be diluted if the definition of functionally 
integrated were expanded to permit these supporting organizations to 
support and be responsive to non-governmental supported organizations 
as well. Additionally, for the reasons discussed later in this 
preamble, the Treasury Department and the IRS utilize the substantial 
part test for supporting governmental supported organizations (instead 
of the substantially all test) but specifically exclude grant making 
and other financial activities from the definition of activities that 
directly further the exempt purposes of the governmental supported 
organizations. Accordingly, these final regulations do not adopt these 
recommendations. For clarity, these final regulations omit the defined 
term ``geographic region'' contained in proposed Sec.  1.509(a)-
4(i)(4)(iv)(C).
    As noted previously in this preamble, the 2016 proposed regulations 
proposed that, for simplicity and administrability, the term 
``governmental supported organization'' be defined using an existing 
Code definition of governmental unit. Three commenters stated their 
support for this definition. Thus, the final regulations adopt the 
definition in the 2016 proposed regulations with the clarification 
described in the following paragraph.
    The preamble to the 2016 proposed regulations noted that, because a 
governmental unit described in section 170(c)(1) includes all of the 
agencies, departments, and divisions of that governmental unit, all 
such agencies, departments, and divisions will be treated as one 
governmental supported organization for purposes of Sec.  1.509(a)-
4(i)(4)(iv). One commenter stated its support for this position and 
requested that it be specifically written into the regulations. These 
final regulations adopt this commenter's recommendation. The final 
regulations specifically state that a governmental unit includes all of 
its agencies,

[[Page 71293]]

departments, and divisions, and that they will be treated as one 
governmental supported organization for these purposes.
    One commenter on the 2016 proposed regulations requested that an 
instrumentality of a governmental supported organization and the 
governmental supported organization with respect to which it is an 
instrumentality should be treated as one governmental supported 
organization. The final regulations do not adopt this recommendation 
because, unlike an agency, department, or division of a governmental 
unit, an instrumentality described in Sec.  1.509(a)-4(i)(4)(iv)(B)(2) 
is a separate legal entity.
    The 2016 proposed regulations also proposed that supporting 
organizations that support only governmental supported organizations 
may qualify as functionally integrated only if a ``substantial part'' 
of their activities directly furthers the exempt purposes of their 
governmental supported organization(s). The 2016 proposed regulations 
proposed using the same definition of ``directly further'' contained in 
Sec.  1.509(a)-4(i)(4)(ii)(C), the integral part test for functionally 
integrated Type III supporting organizations, as promulgated in the 
2012 TD. This definition provides that fundraising, making grants, and 
investing and managing non-exempt-use assets are not activities that 
directly further the exempt purposes of the supported organization.
    One commenter recommended that fundraising, making grants, and 
investing and managing non-exempt-use assets should be considered 
activities that directly further the exempt purposes of a governmental 
supported organization. The Treasury Department and the IRS determined 
that a Type III supporting organization should qualify as functionally 
integrated only if the supporting organization itself conducts 
activities that perform the functions of or carry out the purposes of 
its supported organization (as distinguished from providing financial 
support for the activities carried out by the supported organization). 
As the 2012 TD stated, fundraising, making grants, and investing and 
managing non-exempt-use assets relate to producing and distributing 
income to finance the charitable activities directly carried out by the 
supported organization. The 2016 proposed regulations did not adopt 
comments seeking to apply a different definition of ``directly 
further'' to supporting organizations that support governmental 
supported organizations. These final regulations do not adopt the 
commenter's proposal because using a different definition of ``directly 
further'' for governmental supported organizations would undermine a 
fundamental distinction that Sec.  1.509(a)-4(i)(4) makes between 
functionally integrated and NFI Type III supporting organizations, 
i.e., directly conducting charitable activities versus financing 
charitable activities. The Treasury Department and the IRS also note 
the complexity and administrative difficulty of applying different 
definitions of ``directly further'' under the integral part test.
    These final regulations adopt the requirement in the 2016 proposed 
regulations that a substantial part of the supporting organization's 
total activities must directly further the exempt purposes of its 
governmental supported organizations. These final regulations also add 
a new example to clarify that a supporting organization can meet this 
requirement and still make grants to one of its governmental supported 
organizations as a substantial part of its activities. As the preamble 
to the 2016 proposed regulations stated, the ``substantial part'' test 
in Sec.  1.509(a)-4(i)(4)(iv) allows these supporting organizations to 
conduct more fundraising and other financial activities, if certain 
requirements are met, than is permitted under the ``substantially all'' 
test of Sec.  1.509(a)-4(i)(4)(ii) that applies generally to be a 
functionally integrated Type III supporting organization. One commenter 
requested confirmation concerning the identity of these certain 
requirements that must be met. Under Sec.  1.509(a)-4(i)(4) as 
promulgated by the 2012 TD and amplified by these final regulations in 
providing the rules for supporting governmental supported 
organizations, the organization must meet the annual notification 
requirement in Sec.  1.509(a)-4(i)(2) and the responsiveness test in 
Sec.  1.509(a)-4(i)(3), in addition to the specific requirements in 
Sec.  1.509(a)-4(i)(4)(iv), in order to be a functionally integrated 
Type III supporting organization by virtue of supporting governmental 
supported organizations.
    One commenter recommended providing a clear definition of what 
constitutes a substantial part of a supporting organization's total 
activities for purposes of meeting Sec.  1.509(a)-4(i)(4)(iv). Another 
commenter recommended not adopting a bright line rule to measure the 
quantity of activities that equal a substantial part, but requested a 
statement in the final regulations that all pertinent facts and 
circumstances will be taken into account. This commenter also requested 
more examples of activities that directly further the exempt purpose of 
the governmental supported organization and clarification in the 
regulations to require that a substantial part of a supporting 
organization's activities directly further the exempt purposes of ``at 
least one'' (as opposed to all) of its governmental supported 
organizations when the governmental supported organizations share a 
common geographic region.
    In response to these comments, the final regulations revise 
proposed Sec.  1.509(a)-4(i)(4)(iv) to provide that, in determining 
whether a substantial part of a supporting organization's total 
activities directly further the exempt purposes of its governmental 
supported organization(s), all pertinent facts and circumstances will 
be taken into consideration. This approach is consistent with the 
approach in Sec.  1.509(a)-4(i)(4)(ii)(B), which determines 
``substantially all'' for the general test of being functionally 
integrated by considering all pertinent facts and circumstances. The 
final regulations also revise proposed Sec.  1.509(a)-4(i)(4)(iv)(A) 
and add a new example in Sec.  1.509(a)-4(i)(4)(v) to make clear that a 
supporting organization that supports more than one governmental 
supported organization as described in Sec.  1.509(a)-4(i)(4)(iv)(A) 
satisfies the substantial part test if a substantial part of its 
activities directly furthers the exempt purpose of at least one of its 
governmental supported organizations.
    One commenter stated that proposed Sec.  1.509(a)-
4(i)(4)(iv)(A)(1)(ii), which uses the phrase ``close coordination or 
collaboration,'' should be made consistent with proposed Sec.  
1.509(a)-4(i)(4)(iv)(D), which uses the phrase ``close cooperation or 
coordination.'' The final regulations adopt this recommendation and 
make the provisions consistent by changing the phrasing in Sec.  
1.509(a)-4(i)(4)(iv)(C) of the final regulations to ``close 
coordination or collaboration.'' No substantive change is intended by 
this revision.
    The 2016 proposed regulations proposed an exception to the general 
rule for supporting organizations that support governmental supported 
organizations. The exception would treat a Type III supporting 
organization in existence on or before February 19, 2016 (the date of 
the issuance of the 2016 proposed regulations), as functionally 
integrated if: (1) It supports one or more governmental supported 
organizations and no more than one supported organization that is not a 
governmental supported organization; (2) it designated each of its 
supported organizations as provided in Sec.  1.509(a)-

[[Page 71294]]

4(d)(4) on or before February 19, 2016; and (3) a substantial part of 
its total activities directly furthers the exempt purposes of its 
governmental supported organization(s). One commenter stated that the 
proposed exception would allow it and similar organizations currently 
to qualify as functionally integrated. The final regulations adopt the 
proposed exception without change.
    The 2016 proposed regulations also proposed further extending the 
transition relief provided in Notice 2014-4 and extended in the 
preamble to the 2015 final regulations. Under the 2016 proposed 
regulations, a Type III supporting organization in existence on or 
before February 19, 2016, that met and continues to meet the 
requirements of Notice 2014-4 would be treated as functionally 
integrated until the earlier of the first day of the organization's 
first taxable year beginning after the date final regulations are 
published under Sec.  1.509(a)-4(i)(4)(iv) or the first day of the 
organization's second taxable year beginning after February 19, 2016. 
The Treasury Department and the IRS did not receive any comments about 
the transition rule or any requests to extend the transition period in 
the 2016 proposed regulations, which now has expired. The Treasury 
Department and the IRS therefore conclude supporting organizations have 
had sufficient time to adjust to the new rules and further transition 
relief is not necessary. Accordingly, these final regulations do not 
provide a further extension of the transition relief proposed in the 
2016 proposed regulations.
D. Integral Part Test--Non-Functionally Integrated Type III Supporting 
Organizations
    Section 1.509(a)-4(i)(5) provides that a supporting organization 
meets the integral part test to be an NFI Type III supporting 
organization if it satisfies the distribution requirement of Sec.  
1.509(a)-4(i)(5)(ii) and the attentiveness requirement of Sec.  
1.509(a)-4(i)(5)(iii), or the pre-November 2, 1970, trust requirements 
of Sec.  1.509(a)-4(i)(9). Section 1.509(a)-4(i)(5)(ii) provides that, 
with respect to each taxable year, a supporting organization must 
distribute to or for the use of one or more supported organizations an 
amount equaling or exceeding its ``distributable amount.'' Section 
1.509(a)-4(i)(6) provides the amount of a distribution made to a 
supported organization is the amount of cash or the fair market value 
of the property distributed.
    The 2016 proposed regulations proposed revising Sec.  1.509(a)-
4(i)(5)(ii) to state that a supporting organization must make 
distributions as described in Sec.  1.509(a)-4(i)(6) in a total amount 
equaling or exceeding the supporting organization's distributable 
amount to satisfy the distribution requirement, and proposed revising 
Sec.  1.509(a)-4(i)(6) to describe in detail what distributions count 
toward satisfying the distribution requirement. These final regulations 
adopt these proposed revisions, explained as follows, without change.
1. No Reduction of Distributable Amount for Taxes Subtitle A Imposes
    Section 1.509(a)-4(i)(5)(ii)(B) provides that the distributable 
amount is equal to the greater of 85 percent of an organization's 
adjusted net income for the immediately preceding taxable year (as 
determined by applying the principles of section 4942(f) of the Code 
and Sec.  53.4942(a)-2(d)) or its minimum asset amount for the 
immediately preceding taxable year, reduced by the amount of taxes 
imposed on the supporting organization under subtitle A of the Code 
(subtitle A) during the immediately preceding taxable year.
    Because the taxes under subtitle A are imposed on a supporting 
organization's unrelated business taxable income (pursuant to section 
511 of the Code) and the activity that produces the unrelated business 
taxable income does not further the supported organization's exempt 
purposes, the preamble to the 2016 proposed regulations stated that 
these taxes should not be treated as the functional equivalent of an 
amount distributed to a supported organization. The 2016 proposed 
regulations, therefore, proposed removing the provision in Sec.  
1.509(a)-4(i)(5)(ii)(B) that reduces the distributable amount by the 
amount of taxes subtitle A imposed on a supporting organization during 
the immediately preceding taxable year.
    One commenter stated that the distributable amount should be 
reduced by the amount of taxes imposed on the supporting organization's 
unrelated business income, as section 4942(d) provides for private 
foundations. In advocating to retain the reduction in the distributable 
amount, the commenter suggested that only the supporting organization's 
after-tax income from unrelated business activities should be 
considered available for distribution to its supported organizations.
    A supporting organization's adjusted net income under Sec.  
1.509(a)-4(i)(5)(ii)(B) includes gross income from all sources, 
including investment income that is not subject to tax under section 
511. The 2012 TD and the 2015 final regulations, therefore, stated it 
was necessary to revise the distribution requirement to ensure that NFI 
Type III supporting organizations distribute significant amounts to 
their supported organizations, as Congress directed in the PPA. As 
stated in the 2015 final regulations, the 85 percent of adjusted net 
income test makes it more likely that supported organizations will 
timely benefit from higher returns received by their supported 
organizations. Reducing the distributable amount by any taxes on the 
income would be counter to this objective.
    The Treasury Department and the IRS further note that section 
4942(d) only applies to private non-operating foundations. As the 
preamble to the 2012 TD recounted, a number of commenters to the 2009 
proposed regulations stated that NFI Type III supporting organizations 
should not be subject to the higher payout for private non-operating 
foundations because they are distinguishable from them. These 
commenters stated that NFI Type III supporting organizations are more 
similar to private operating foundations and medical research 
organizations and therefore should be subject to their lower payout 
requirements. The 2012 TD and the 2015 final regulations adopted this 
recommendation, providing lower payout requirements for NFI Type III 
supporting organizations than for private non-operating foundations. 
Private operating foundations and medical research organizations are 
not able to reduce their payout requirements by the taxes imposed by 
subtitle A. See Sec.  1.170A-9(d)(2)(v)(B); Sec.  53.4942(b)-
1(a)(1)(ii). The Treasury Department and the IRS conclude for the 
foregoing reasons that it would be inconsistent to apply a different 
rule to NFI Type III supporting organizations. Therefore, these final 
regulations adopt the 2016 proposed revision to Sec.  1.509(a)-
4(i)(5)(ii)(B) without change.
2. Distributions That Count Toward Distribution Requirement
    Section 1.509(a)-4(i)(6) provides details on the distributions by a 
supporting organization that count toward satisfying the distribution 
requirement imposed in Sec.  1.509(a)-4(i)(5)(ii). The regulations 
provide that distributions include but are not limited to: (1) Any 
amount paid to a supported organization to accomplish the supported 
organization's exempt purposes; (2) any amount paid by the supporting 
organization to perform an activity that directly furthers the exempt 
purposes of the supported organization within the meaning of Sec.  
1.509(a)-4(i)(4)(ii), but only to the extent such amount exceeds any 
income derived by the supporting organization from the activity; (3) 
any reasonable and

[[Page 71295]]

necessary administrative expenses paid to accomplish the exempt 
purposes of the supported organization(s), which do not include 
expenses incurred in the production of investment income; (4) any 
amount paid to acquire an exempt-use asset described in Sec.  1.509(a)-
4(i)(8)(ii); and (5) any amount set aside for a specific project that 
accomplishes the exempt purposes of a supported organization to which 
the supporting organization is responsive.
    The list in Sec.  1.509(a)-4(i)(6) is not exhaustive and other 
distributions may count towards the distribution requirement. As stated 
in the preamble to the 2016 proposed regulations, the use of a non-
exclusive list creates uncertainty for supporting organizations and the 
IRS about what counts toward the distribution requirement. Therefore, 
the 2016 proposed regulations proposed revising and clarifying the list 
in Sec.  1.509(a)-4(i)(6) of what counts toward the distribution 
requirement and making it an exclusive list.
a. Reasonable and Necessary Administrative Expenses
    Under Sec.  1.509(a)-4(i)(6), reasonable and necessary 
administrative expenses paid to accomplish the exempt purposes of 
supported organizations, but not expenses incurred in the production of 
investment income, count toward the distribution requirement. For 
example, if a supporting organization conducts exempt activities that 
are for the benefit of, perform the functions of, or carry out the 
purposes of its supported organization(s) and also conducts nonexempt 
activities (such as investment activities or unrelated business 
activities), then the supporting organization's administrative expenses 
(such as salaries, rent, utilities and other overhead expenses) must be 
allocated between the exempt and nonexempt activities on a reasonable 
and consistently-applied basis. The supporting organization's 
administrative expenses attributable to the exempt activities are 
treated as distributions to its supported organization(s) if such 
expenses are reasonable and necessary. Conversely, the administrative 
expenses and operating costs attributable to the nonexempt activities 
are not treated as distributions to the supported organization(s). The 
2016 proposed regulations proposed retaining this provision, with 
additional guidance regarding fundraising expenses.
b. Fundraising Expenses
    Section 1.509(a)-4(i)(6) does not specifically address whether 
fundraising expenses count toward the distribution requirement. The 
2016 proposed regulations addressed the issue, specifying that 
reasonable and necessary administrative expenses paid to accomplish the 
exempt purposes of a supported organization generally do not include 
fundraising expenses the supporting organization incurs. For example, 
when a supporting organization conducts a fundraising event for its 
supported organization(s) and distributes the proceeds of the event, 
net of its fundraising expenses, to its supported organization(s), only 
the amount that the supporting organization actually distributes to its 
supported organization(s) counts towards the distribution requirement. 
Thus, under the 2016 proposed regulations, the supporting 
organization's fundraising expenses do not count towards the 
distribution requirement.
    If a supporting organization conducts a fundraising event at which 
the supporting organization instructs donors to make contributions 
directly to the supported organization, the 2016 proposed regulations 
proposed that those contributions would not count as a distribution 
from the supporting organization to its supported organization. 
However, in this situation the supporting organization could count 
towards the distribution requirement the reasonable and necessary 
expenses it incurs to solicit the contributions the donors pay directly 
to its supported organization: (1) to the extent that the amount of 
these solicitation expenses does not exceed the amount of contributions 
the supported organization actually receives; and (2) if the supporting 
organization can substantiate (as discussed later in this preamble) 
that those contributions were received as a result of the supporting 
organization's solicitation activities. The 2016 proposed regulations 
proposed this rule to provide consistency with the treatment of 
contributions that supporting organizations receive directly and then 
distribute to their supported organizations (net of the supporting 
organization's solicitation expenses).
    While commenters were generally supportive of the proposal to count 
as distributions the fundraising expenses incurred to solicit 
contributions directly to the supported organization, one commenter 
recommended deleting the requirement that contributions be received 
directly by the supported organization for the fundraising expenses to 
count. Alternatively, the commenter requested this special rule for 
fundraising expenses also apply if the contributions were received 
directly by an agent of the supported organization.
    Another commenter proposed that contributions the supporting 
organization received directly from the fundraising solicitation as a 
matter of convenience should be treated as contributions the supported 
organization received directly if the supporting organization is 
contractually obligated to remit the contributions to the supported 
organization and the supporting organization actually distributes the 
contributions to the supported organization within a reasonable time 
period. The commenter also proposed that the supporting organization be 
allowed to count its fundraising solicitation expenses in the year it 
incurred them so long as the supported organization received the 
corresponding contributions within a reasonable time period following 
the end of that year.
    In response to these comments, these final regulations adopt the 
proposed rules with certain modifications and clarifications. These 
final regulations provide that expenses the supporting organization 
incurs to solicit contributions count towards the distribution 
requirement when the resulting contributions are received directly by a 
supported organization, but only to the extent that the supporting 
organization's expenses for each solicitation do not exceed the amount 
of contributions a supported organization actually receives, and only 
if the supporting organization substantiates that those contributions 
were received as a result of the supporting organization's solicitation 
activities. This limitation is applied on a solicitation-by-
solicitation basis; the supporting organization may not aggregate its 
expenses, or the contributions a supported organization receives, from 
more than one solicitation to determine the amount of solicitation 
expenses that count towards its distribution requirement. The Treasury 
Department and the IRS intend that contributions are received directly 
by the supported organization when donors make their checks, credit 
card or other payments payable to the supported organization. The 
Treasury Department and the IRS also intend that when a supporting 
organization receives checks or processes credit card or other 
transactions that are payable to its supported organization, the 
supporting organization may count as distributions the expenses it 
incurs for soliciting those checks or credit card or other payments, 
but only up to the amount of contributions received directly by or paid 
directly to the supported organization and substantiated by the

[[Page 71296]]

supported organization. Thus, for purposes of meeting its distribution 
requirement, the supporting organization may not count as distributions 
from the supporting organization to the supported organization the 
amount of the check and credit card or other contributions the donors 
make payable to the supported organization. Contributions made payable 
to the supporting organization that are transferred to the supported 
organization, however, may be counted as distributions from the 
supporting organization to the supported organization at the time that 
the funds are given by the supporting organization to the supported 
organization. These final regulations do not adopt a rule permitting 
payments that are first deposited with the supporting organization to 
count as contributions received directly by the supported organization 
(for purposes of permitting additional solicitation expenses related to 
those contributions to count as distributions). Preventing the 
supporting organization from counting those amounts twice toward 
satisfying the supporting organization's annual distribution 
requirements and accounting for those funds in the supporting 
organization's account would be administratively difficult.
c. Joint Fundraising Expenses
    One commenter also requested guidance on how to allocate 
contributions when the supporting organization and the supported 
organization share the costs of a solicitation event. The Treasury 
Department and the IRS do not intend for the rule for fundraising 
expenses to apply with respect to a solicitation event if the supported 
organization incurs more than de minimis costs related to the same 
solicitation event. Section 1.509(a)-4(i)(6)(i) permits supporting 
organizations to count any amount they pay to their supported 
organization as a distribution for purposes of satisfying the annual 
distribution requirement described in Sec.  1.509(a)-4(i)(5)(ii). A 
supporting organization can, therefore, share the costs of a fundraiser 
by distributing to the supported organization an amount equal to the 
supporting organization's share of the joint fundraising expenses. 
Section 1.509(a)-4(i)(6)(i) would permit the supporting organization to 
count this payment as a distribution for purposes of Sec.  1.509(a)-
4(i)(5)(ii), negating the need for a special rule in proposed Sec.  
1.509(a)-4(i)(6)(iii)(B). The Treasury Department and the IRS note that 
it would be very difficult to determine and substantiate what portion 
of the contributions a supported organization receives are attributable 
to the supporting organization's expenditures. Thus, expanding the rule 
to cover joint solicitation efforts as the commenter suggests would 
increase the compliance burden on supporting organizations and 
supported organizations and would be difficult for the IRS to 
administer. These final regulations, therefore, do not adopt this 
recommendation.
d. Taxable Year to Which Fundraising Expenses Are Attributable
    One commenter requested a clarification that contributions made to 
a supported organization in response to a supporting organization's 
end-of-the-year fundraiser that the supported organization does not 
receive until the following year may be used to determine the portion 
of reasonable and necessary fundraising expenses the supporting 
organization may treat as a distribution for the year in which the 
fundraiser occurred. This commenter recommended a 90-day window in the 
second year for counting such contributions. These final regulations 
clarify that, for purposes of applying the limitation on the supporting 
organization's solicitation expenses for each taxable year that count 
toward its distribution requirement, any contributions the supported 
organization receives directly from donors that are attributable to a 
solicitation the supporting organization conducted in a particular 
taxable year includes any contributions the supported organization 
receives and substantiates in writing on or before the due date 
(without regard to extensions) of the supporting organization's Form 
990 for the year in which it conducted the solicitation.
    For example, assume a supporting organization makes a solicitation 
on December 15, 2024. The supported organization receives contributions 
from donors of $1x on December 26, 2024, and $2x on March 15, 2025, 
that are attributable to the solicitation made on December 15, 2024. 
The supported organization substantiates the total contributions of $3x 
in writing prior to May 15, 2025 (the due date without extensions of 
the supporting organization's Form 990 for 2024). The written 
substantiation indicates that these contributions were attributable to 
the December 15, 2024 solicitation. Under Sec.  1.509(a)-
4(i)(6)(iii)(B), the supporting organization may treat up to $3x of any 
reasonable and necessary expenses it incurred for the December 15, 2024 
solicitation toward its distribution requirement.
    A supporting organization may not take into account the same 
contributions in computing the fundraising expense limitation in more 
than one year or with respect to more than one solicitation. Thus, in 
the preceding example, the $2x contribution the supported organization 
received on March 15, 2025, may only be used by the supporting 
organization to determine its fundraising expense limitation for the 
December 15, 2024, solicitation. The supporting organization may not 
use the $2x again to determine its 2025 fundraising expense limitation.
e. Written Substantiation From Supported Organization
    The 2016 proposed regulations proposed requiring a supporting 
organization to obtain written substantiation from the supported 
organization of the amount of contributions the supported organization 
actually receives as a result of each of the supporting organization's 
solicitations. One commenter requested that the permitted written 
substantiation include an email from the supported organization that 
the supporting organization maintains in its electronic records. These 
final regulations adopt this recommendation, stating that the written 
substantiation may be provided by electronic media.
    Another commenter requested that a supported organization be 
allowed to aggregate into a single annual written report the 
substantiation of all the contributions it received from the supporting 
organization's fundraising activities. The commenter also requested 
that the supported organization should only be responsible for 
reporting the amount of the contributions it received and not be 
responsible for calculating the supporting organization's fundraising 
activities.
    These final regulations clarify that the supporting organization 
may substantiate the contributions provided to the supported 
organization by a single annual statement in writing from the supported 
organization, provided that the amount of contributions, if any, 
received by the supported organization as a result of each solicitation 
is separately identified. To satisfy Sec.  1.509(a)-4(i)(6)(iii)(B), 
the written substantiation must be postmarked or electronically 
transmitted to the supporting organization no later than the due date 
(without regard to extensions) of the supporting organization's Form 
990 for the year of the solicitation. In addition, written 
substantiation relied on by the supporting organization (whether

[[Page 71297]]

provided in one or multiple reports) must separately state the amount 
of contributions, if any, received directly by the supported 
organization allocable to each solicitation made by the supporting 
organization that is covered in the report. The supporting organization 
is responsible for determining its solicitation expenses. The written 
substantiation the supporting organization is required to receive from 
the supported organization need only provide information relevant to 
the amount of contributions the supported organization received; it 
does not need to address the supporting organization's expenses.
f. Program-Related Investments Not Taken Into Account
    Finally, one commenter requested that program-related investments 
(PRIs) count toward the distribution requirement. The preamble to the 
2016 proposed regulations stated that, for purposes of meeting the 
integral part test, PRIs are not treated as distributions to the 
supported organizations. As the preamble to the 2016 proposed 
regulations stated, the Treasury Department and the IRS recognize that 
private foundations may use PRIs in a variety of ways to accomplish 
their exempt purposes and that PRIs thus are treated as qualifying 
distributions under section 4942. However, because supporting 
organizations must be operated exclusively for the benefit of, to 
perform the functions of, or to carry out the purposes of their 
supported organizations, they differ from private foundations. 
Furthermore, other provisions relating to the distribution requirement, 
such as the availability of set-asides and the potential for carry-
forwards of excess distributions, provide significant flexibility for 
supporting organizations to meet the current and future needs of their 
supported organizations. For these reasons, these final regulations do 
not adopt this recommendation.

IV. Technical Corrections

    This Treasury Decision conforms the paragraphs throughout Sec.  
1.509(a)-4 to the Code of Federal Regulations by making non-substantive 
changes, including capitalizing letters of fourth level paragraphs. 
This Treasury Decision also modifies Sec.  53.4947-1 to correct certain 
cross-references to Sec.  1.509(a)-4.

V. Applicability Date

    These final regulations are applicable to taxable years beginning 
on or after October 16, 2023. Taxpayers may choose to apply these final 
regulations to taxable years beginning on or after February 19, 2016, 
and before October 16, 2023, so long as the taxpayer applies the 
provisions of these final regulations in their entirety and in a 
consistent manner.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6(b) of Executive Order 12866, as amended. Therefore, a 
regulatory impact assessment is not required.

II. Paperwork Reduction Act

    The collection of information contained in these 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 1545-2271.
    The collection of information in these regulations is in Sec.  
1.509(a)-4(i)(4)(iv)(C) (written record of close coordination or 
collaboration by certain governmental supported organizations) and 
Sec.  1.509(a)-4(i)(6)(iii)(B) (written record of contributions 
received by certain supported organizations). Requiring a supporting 
organization to collect (1) written records of its governmental 
supported organizations' close coordination or collaboration with each 
other and (2) written records of the contributions its supported 
organizations directly received from donors in response to 
solicitations by the supporting organization helps the IRS determine 
whether the supporting organization is a functionally integrated or 
non-functionally integrated Type III supporting organization. The 
record keepers are certain Type III supporting organizations.
    Estimated number of recordkeepers: 6,089.
    Estimated average annual burden hours per recordkeeper: 2 hours.
    Estimated total annual recordkeeping burden: 12,178 hours.
    Estimated frequency of collection of such information: Annual.
    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 
return information are confidential, as required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

    In connection with the requirements of the Regulatory Flexibility 
Act (5 U.S.C. chapter 6), it is hereby certified that these final 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these final regulations will not impact a substantial 
number of small entities.
    Based on IRS Statistics of Income data for 2019, there are 
1,365,744 active nonprofit charitable organizations recognized by the 
IRS under section 501(c)(3), of which only 6,089 organizations self-
identified as Type III supporting organizations. The universe of 
organizations that would be affected by Sec.  1.509(a)-4(i)(4)(iv)(C) 
and Sec.  1.509(a)-4(i)(6)(iii)(B) is a subset of all Type III 
supporting organizations, because those provisions apply either to 
organizations seeking to qualify as functionally integrated based on 
support of two or more governmental supported organizations or to non-
functionally integrated organizations that solicit contributions that 
are received directly by a supported organization (rather than by the 
supporting organization). Thus, the number of organizations that will 
be affected by the collection of information under Sec.  1.509(a)-
4(i)(4)(iv)(C) and (i)(6)(iii)(B) will not be substantial. Moreover, 
the time to complete the recordkeeping requirements is expected to be 
no more than 2 hours for each organization, thus the regulations will 
not have a significant economic impact. The requirements under Sec.  
1.509(a)-4(i)(4)(iv)(C) and (i)(6)(iii)(B), therefore, will not have a 
significant economic impact.
    Pursuant to section 7805(f) of the Code, this regulation was 
submitted to the Chief Counsel for the Office of Advocacy of the Small 
Business Administration for comment on its impact on small business and 
no comments were received.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The regulations

[[Page 71298]]

do not include any Federal mandate that may result in expenditures by 
State, local, or tribal governments, or by the private sector in excess 
of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. The regulations do not have 
federalism implications, impose substantial direct compliance costs on 
State and local governments, or preempt State law within the meaning of 
the Executive order.

VI. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Management and Budget's Office of Information and 
Regulatory Affairs designated this rule as not a ``major rule,'' as 
defined by 5 U.S.C. 804(2).

Statement of Availability of IRS Documents

    Notice 2014-4 is published in the Internal Revenue Bulletin and is 
available from the Superintendent of Documents, U.S. Government 
Printing Office, Washington, DC 20402, or by visiting the IRS website 
at: https://www.irs.gov/irb/20142_IRB/ar14.html?_ga=1.74171665.204111657.1425931511.

Drafting Information

    The principal authors of these regulations are Jonathan Carter and 
Don Spellmann, Office of Associate Chief Counsel (Employee Benefits, 
Exempt Organizations, and Employment Taxes). However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 53

    Excise taxes, Foundations, Investments, Lobbying, Reporting and 
recordkeeping requirements.

Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS amend 26 CFR parts 
1 and 53 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 1.509(a)-4 is amended by:
0
1. In paragraph (d)(2)(i) introductory text, removing ``subdivision 
(iv) of this subparagraph'' and ``subparagraph (1) of this paragraph'' 
and adding ``paragraph (d)(2)(iv) of this section'' and ``paragraph 
(d)(1) of this section'' in their places, respectively.
0
2. Redesignating paragraphs (d)(2)(i)(a) and (b) as paragraphs 
(d)(2)(i)(A) and (B), respectively.
0
3. In newly redesignated paragraph (d)(2)(i)(B)(1), removing ``(a) of 
this subdivision'' and adding ``paragraph (d)(2)(i)(A) of this 
section'' in its place.
0
4. In newly redesignated paragraph (d)(2)(i)(B)(2), removing 
``subdivision (i)(a) or this subparagraph'' and adding ``paragraph 
(d)(2)(i)(A) of this section or this paragraph (d)(2)(i)(B)(2)'' in its 
place.
0
5. In paragraph (d)(2)(ii), removing ``subdivision (i)(a) or this 
subparagraph'', ``subparagraph (1) of this paragraph'' and 
``subparagraphs (3)(i), (ii), and (iii) and (4)(i) (a) and (b) of this 
paragraph'' and adding ``paragraph (d)(2)(i)(A) of this section'', 
``paragraph (d)(1) of this section'', and ``paragraphs (d)(3)(i) 
through (iii) and (d)(4)(i)(A) and (B) of this section'' in their 
places, respectively.
0
6. In paragraph (d)(2)(iii) introductory text, removing 
``subparagraph'' and adding ``paragraph (d)(2)'' in its place.
0
7. Designating Examples 1 and 2 of paragraph (d)(2)(iii) as paragraphs 
(d)(2)(iii)(A) and (B), respectively.
0
8. In paragraph (d)(2)(iv) introductory text, removing ``subparagraph 
(1) of this paragraph'' and adding ``paragraph (d)(1) of this section'' 
in its place.
0
9. Redesignating paragraphs (d)(2)(iv)(a) and (b) as paragraphs 
(d)(2)(iv)(A) and (B), respectively.
0
10. In newly redesignated paragraph (d)(2)(iv)(A), removing ``, and'' 
and adding ``; and'' in its place.
0
11. In paragraph (d)(3) introductory text, removing ``subparagraph 
(2)(i) (a) of this paragraph'' and adding ``paragraph (d)(2)(i)(A) of 
this section'' in its place.
0
12. In paragraph (d)(4)(i) introductory text, removing ``subparagraph 
(2)(iv) of this paragraph'' and ``this subparagraph'' and adding 
``paragraph (d)(2)(iv) of this section'' and ``this paragraph (d)(4)'' 
in their places, respectively.
0
13. Redesignating paragraphs (d)(4)(i)(a) through (c) as paragraphs 
(d)(4)(i)(A) through (C), respectively.
0
14. Revising newly redesignated paragraph (d)(4)(i)(C).
0
15. In paragraph (d)(4)(ii), removing ``subdivision (i)(b) of this 
subparagraph'' and ``subdivision (i)(b)'' and adding ``paragraph 
(d)(4)(i)(B) of this section'' and ``paragraph (d)(4)(i)(B)'' in their 
places, respectively.
0
16. In paragraph (d)(4)(iii) introductory text, removing 
``subparagraph'' and adding ``paragraph (d)(4)'' in its place.
0
17. Designating the Example in paragraph (d)(4)(iii) as paragraph 
(d)(4)(iii)(A) and adding reserved paragraph (d)(4)(iii)(B).
0
18. In paragraph (e)(3) introductory text, removing ``paragraph'' and 
adding ``paragraph (e)'' in its place.
0
19. Designating Examples 1 through 5 of paragraph (e)(3) as paragraphs 
(e)(3)(i) through (v), respectively.
0
20. Revising paragraph (f)(5)(ii).
0
21. In paragraph (g)(2) introductory text, removing ``paragraph'' and 
adding ``paragraph (g)'' in its place.
0
22. Designating Examples 1 through 3 of paragraph (g)(2) as paragraphs 
(g)(2)(i) through (iii), respectively.
0
23. In newly redesignated paragraph (g)(2)(iii), removing 
``subparagraph (1)(ii) of this paragraph'' and adding ``paragraph 
(g)(1)(ii) of this section'' in its place.
0
24. In paragraph (h)(3) introductory text, removing ``paragraph'' and 
adding ``paragraph (h)'' in its place.
0
25. Designating Examples 1 through 3 of paragraph (h)(3) as paragraphs 
(h)(3)(i) through (iii), respectively.
0
26. Revising paragraphs (i)(2)(i) introductory text, (i)(2)(i)(A), 
(i)(2)(iii), and (i)(3)(i).
0
27. Designating Examples 1 and 2 of paragraph (i)(3)(iv) as paragraphs 
(i)(3)(iv)(A) and (B), respectively.
0
28. Adding paragraph (i)(3)(iv)(C).
0
29. Revising paragraphs (i)(4)(ii)(A)(1), (i)(4)(ii)(B), and 
(i)(4)(iii) and (iv).
0
30. Designating Examples 1 through 5 of paragraph (i)(4)(v) as 
paragraphs (i)(4)(v)(A) through (E), respectively.
0
31. Adding paragraph (i)(4)(v)(F).
0
32. Revising paragraphs (i)(5)(ii)(A) and (B) and (i)(5)(iii)(A).
0
33. Designating Examples 1 through 4 of paragraph (i)(5)(iii)(D) as 
paragraphs (i)(5)(iii)(D)(1) through (4), respectively.
0
34. Revising newly designated paragraph (i)(5)(iii)(D)(4), the third 
sentence of paragraph (i)(6) introductory text, and paragraphs 
(i)(6)(iii) and (v) introductory text.
0
35. In paragraph (k)(2) introductory text, removing ``paragraph'' and 
adding ``paragraph (k)'' in its place.

[[Page 71299]]

0
36. Designating the Example in paragraph (k)(2) as paragraph (k)(2)(i) 
and adding reserved paragraph (k)(2)(ii).
0
37. Revising paragraph (l).
    The revisions and additions read as follows:


Sec.  1.509(a)-4  Supporting organizations.

* * * * *
    (d) * * *
    (4) * * *
    (i) * * *
    (C) Permit the supporting organization to vary the amount of its 
support between different designated organizations, so long as it meets 
the requirements of the integral part test set forth in paragraph 
(i)(1)(iii) of this section with respect to at least one beneficiary 
organization.
* * * * *
    (f) * * *
    (5) * * *
    (ii) Meaning of control. For purposes of paragraph (f)(5)(i) of 
this section, the governing body of a supported organization will be 
considered controlled by a person described in paragraph (f)(5)(i)(A) 
of this section if that person, alone or by aggregating the person's 
votes or positions of authority with persons described in paragraph 
(f)(5)(i)(B) or (C) of this section, may require the governing body of 
the supported organization to perform any act that significantly 
affects its operations or may prevent the governing body of the 
supported organization from performing any such act. The governing body 
of a supported organization will be considered to be controlled 
directly or indirectly by one or more persons described in paragraph 
(f)(5)(i)(A), (B), or (C) of this section if the voting power of such 
persons is 50 percent or more of the total voting power of such 
governing body or if one or more of such persons have the right to 
exercise veto power over the actions of the governing body of the 
supported organization. Thus, if the governing body of a supported 
organization is composed of five members, none of whom has a veto power 
over the actions of the supported organization, and no more than two 
members are at any time described in paragraph (f)(5)(i)(A), (B), or 
(C) of this section, such supported organization will not be considered 
to be controlled directly or indirectly by such persons by reason of 
this fact alone. However, all pertinent facts and circumstances will be 
taken into consideration in determining whether one or more persons do 
in fact directly or indirectly control the governing body of a 
supported organization.
* * * * *
    (i) * * *
    (2) * * *
    (i) Annual notification. For each taxable year (Reporting Year), a 
Type III supporting organization must provide the following documents 
to each of its supported organizations:
    (A) A written notice addressed to a principal officer of the 
supported organization describing the type and amount of all of the 
support (including all of the distributions described in paragraph 
(i)(6) of this section, if applicable) the supporting organization 
provided to the supported organization during the supporting 
organization's taxable year immediately preceding the Reporting Year 
(and during any other taxable year of the supporting organization 
ending after December 28, 2012, for which such support information has 
not previously been provided), including a brief narrative description 
of the support provided and sufficient financial detail for the 
recipient to identify the types and amounts of support being reported;
* * * * *
    (iii) Due date. The notification documents required by this 
paragraph (i)(2) must be delivered or electronically transmitted by the 
last day of the fifth calendar month of the Reporting Year.
* * * * *
    (3) * * *
    (i) General rule. A supporting organization meets the 
responsiveness test only if it is responsive to the needs or demands of 
each of its supported organizations. Except as provided in paragraph 
(i)(3)(v) of this section, in order to meet this test, a supporting 
organization must satisfy the requirements of paragraphs (i)(3)(ii) and 
(iii) of this section with respect to each of its supported 
organizations.
* * * * *
    (iv) * * *
    (C) Example 3. Z is described in section 501(c)(3). Z's 
organizational documents provide that it supports ten different 
organizations, each of which is described in section 509(a)(1). One of 
the directors of S (one of the supported organizations) is a voting 
member of Z's board of directors and participates in Z's regular board 
meetings. Officers of Z hold regularly scheduled face-to-face or 
telephonic meetings during the year, to which officers of all the 
supported organizations are invited. Z's meetings with the supported 
organizations may be held jointly or separately. Prior to the meetings, 
Z makes available to the supported organizations (including by email) 
up-to-date information about its activities, including its assets and 
liabilities, receipts and distributions, and investment policies and 
returns. In the meetings, officers of each of the supported 
organizations have an opportunity to ask questions and discuss with 
officers of Z the projected needs of their organizations, as well as 
Z's investment and grant making policies and practices. In addition to 
holding these meetings with the supported organizations, Z provides the 
contact information of one of its officers to each of the supported 
organizations and encourages them to contact that officer if they have 
questions, or if they wish to schedule additional meetings to discuss 
the projected needs of their organization and how Z should distribute 
its income and invest its assets. Z provides the information required 
under paragraph (i)(2) of this section and a copy of its annual audited 
financial statements to the principal officers of the supported 
organizations. Z meets the relationship requirement of paragraph 
(i)(3)(ii)(B) or (C) of this section with respect to each of its 
supported organizations. Based on these facts, Z also satisfies the 
significant voice requirement of paragraph (i)(3)(iii) of this section, 
and therefore meets the responsiveness test of this paragraph (i)(3) 
with respect to each of its ten supported organizations.
* * * * *
    (4) * * *
    (ii) * * *
    (A) * * *
    (1) Directly further the exempt purposes of one or more supported 
organizations by performing the functions of, or carrying out the 
purposes of, such supported organization(s); and
* * * * *
    (B) Meaning of substantially all. For purposes of paragraph 
(i)(4)(ii)(A) of this section, in determining whether substantially all 
of a supporting organization's activities directly further the exempt 
purposes of one or more supported organization(s), all pertinent facts 
and circumstances will be taken into consideration.
* * * * *
    (iii) Parent of supported organization(s)--(A) In general. For 
purposes of paragraph (i)(4)(i)(B) of this section, in order for a 
supporting organization to qualify as the parent of each of its 
supported organizations--
    (1) The supporting organization and its supported organizations 
must be part of an integrated system (such as, for example, a hospital 
system);
    (2) The supporting organization must direct the overall policies, 
programs, and activities of the supported organizations (such as, for 
example,

[[Page 71300]]

coordinating the activities of the supported organizations and engaging 
in overall planning, policy development, budgeting, and resource 
allocation); and
    (3) The supporting organization's governing body, members of the 
governing body, or officers (acting in their official capacities) must 
appoint or elect, directly or indirectly, a majority of the officers, 
directors, or trustees of each supported organization and have the 
power to remove and replace such directors, officers, or trustees, or 
otherwise have an ongoing power to appoint or elect such directors, 
officers or trustees with reasonable frequency.
    (B) Subsidiary organizations. A supporting organization may meet 
the requirements of paragraph (i)(4)(iii)(A)(3) of this section with 
respect to a second-tier (or lower) subsidiary provided that the 
supporting organization, by control of its first-tier subsidiary, has 
the power to appoint or elect (as described in paragraph 
(i)(4)(iii)(A)(3) of this section) a majority of the officers, 
directors, or trustees of the lower-tier subsidiary. For example, if 
the board of directors of supporting organization A elects a majority 
of the directors of supported organization B, and the board of 
directors of B, in turn elect, by a simple majority vote, a majority of 
the directors of supported organization C, the directors of supporting 
organization A will be treated as electing a majority of the directors 
of both supported organization B and supported organization C.
    (iv) Supporting a governmental supported organization--(A) In 
general. A supporting organization satisfies the requirements of this 
paragraph (i)(4)(iv) if--
    (1) The supporting organization only supports one or more 
governmental supported organizations;
    (2) In any case in which the supporting organization supports more 
than one governmental supported organization, all of the governmental 
supported organizations either--
    (i) Operate within the same city, county, or metropolitan area; or
    (ii) Work in close coordination or collaboration with one another 
to conduct a service, program, or activity that the supporting 
organization supports; and
    (3) A substantial part of the supporting organization's total 
activities are activities that directly further, as defined by 
paragraph (i)(4)(ii)(C) of this section, the exempt purposes of at 
least one governmental supported organization.
    (B) Governmental supported organization defined. For purposes of 
paragraph (i)(4)(iv)(A) of this section, the term governmental 
supported organization means a supported organization that is:
    (1) A governmental unit described in section 170(c)(1), including 
all of its agencies, departments, and divisions (all of which will be 
treated as one governmental supported organization for purposes of this 
paragraph (i)(4)(iv)); or
    (2) An organization described in section 170(c)(2) and (b)(1)(A) 
(other than in clauses (vii) and (viii)) that is an instrumentality of 
one or more governmental units described in section 170(c)(1).
    (C) Close coordination or collaboration. To satisfy the close 
coordination or collaboration requirement of paragraph (i)(4)(iv)(A)(2) 
of this section, the supporting organization must maintain on file a 
letter from each of the governmental supported organizations (or a 
joint letter from all of them) describing their coordination or 
collaboration efforts with respect to the particular service, program, 
or activity.
    (D) Substantial part. For purposes of paragraph (i)(4)(iv)(A)(3) of 
this section, in determining whether a substantial part of a supporting 
organization's activities directly further the exempt purposes of one 
or more governmental supported organization(s), all pertinent facts and 
circumstances will be taken into consideration.
    (E) Exception for organizations supporting a governmental supported 
organization on or before February 19, 2016. A Type III supporting 
organization in existence on or before February 19, 2016, will be 
treated as meeting the requirements of this paragraph (i)(4)(iv) if it 
met and continues to meet the following requirements:
    (1) It supports one or more governmental supported organizations 
described in paragraph (i)(4)(iv)(B) of this section and does not 
support more than one supported organization that is not a governmental 
supported organization;
    (2) Each of the supported organizations is designated by the 
supporting organization as provided in paragraph (d)(4) of this section 
on or before February 19, 2016; and
    (3) A substantial part (as defined in paragraph (i)(4)(iv)(D) of 
this section) of the supporting organization's total activities are 
activities that directly further (as defined by paragraph (i)(4)(ii)(C) 
of this section) the exempt purposes of its governmental supported 
organization(s).
    (F) Transition rule for supporting organizations in existence on or 
before February 19, 2016. Until the first day of the organization's 
second taxable year beginning after February 19, 2016, a Type III 
supporting organization in existence on or before February 19, 2016, 
will be treated as meeting the requirements of this paragraph 
(i)(4)(iv) if it continuously met the following requirements prior to 
the first day of the organization's second taxable year beginning after 
February 19, 2016--
    (1) It supported at least one supported organization that was a 
governmental entity to which the supporting organization was responsive 
within the meaning of paragraph (i)(3) of this section; and
    (2) It engaged in activities for or on behalf of the governmental 
supported organization described in paragraph (i)(4)(iv)(E)(1) of this 
section that performed the functions of, or carried out the purposes 
of, that governmental supported organization and that, but for the 
involvement of the supporting organization, would normally have been 
engaged in by the governmental supported organization itself.
* * * * *
    (v) * * *
    (F) Example 6. X, an organization described in section 501(c)(3), 
is organized and operated as a supporting organization to two 
organizations, City and Park. X meets the responsiveness test described 
in paragraph (i)(3) of this section with respect to both City and Park. 
City and Park are both governmental units described in section 
170(c)(1). Park maintains a state park located within the same county 
as City. X does not support any other organizations. X supports Park by 
operating an information center for visitors to Park. The information 
center provides educational material and informational sessions to 
visitors to Park. X's activities related to operating the Park 
information center constitute a substantial part of X's activities. X 
also makes grants directly to City to fund City's other programs. X's 
grant making activities constitute a substantial part of X's 
activities. X meets the requirements of paragraph (i)(4)(iv)(A)(1) of 
this section because X only supports City and Park, both of which are 
governmental supported organizations described in paragraph 
(i)(4)(iv)(B) of this section. X meets the requirements of paragraph 
(i)(4)(iv)(A)(2) of this section because City and Park operate within 
the same county in accordance with paragraph (i)(4)(iv)(A)(2)(i) of 
this section. Finally, X meets the requirements of paragraph 
(i)(4)(iv)(A)(3) of this section because a substantial part of X's 
activities directly

[[Page 71301]]

further (within the meaning of paragraph (i)(4)(ii)(C) of this section) 
Park's exempt purposes, even though X's grants to City are also a 
substantial part of X's activities. Based on these facts, X qualifies 
as functionally integrated under paragraph (i)(4)(iv) of this section.
    (5) * * *
    (ii) * * *
    (A) Annual distribution. With respect to each taxable year, a 
supporting organization must make distributions described in paragraph 
(i)(6) of this section in a total amount equaling or exceeding the 
supporting organization's distributable amount for the taxable year, as 
defined in paragraph (i)(5)(ii)(B) of this section, on or before the 
last day of the taxable year.
    (B) Distributable amount. Except as provided in paragraphs 
(i)(5)(ii)(D) and (E) of this section, the distributable amount for a 
taxable year is an amount equal to the greater of 85 percent of the 
supporting organization's adjusted net income (as determined by 
applying the principles of section 4942(f) and Sec.  53.4942(a)-2(d) of 
this chapter) for the taxable year immediately preceding the taxable 
year of the required distribution (immediately preceding taxable year) 
or its minimum asset amount (as defined in paragraph (i)(5)(ii)(C) of 
this section) for the immediately preceding taxable year.
* * * * *
    (iii) * * *
    (A) General rule. With respect to each taxable year, a non-
functionally integrated Type III supporting organization must 
distribute one-third or more of its distributable amount to one or more 
supported organizations that are attentive to the operations of the 
supporting organization (within the meaning of paragraph (i)(5)(iii)(B) 
of this section).
* * * * *
    (D) * * *
    (4) Example 4. O is an organization described in section 501(c)(3). 
O is organized to support five private universities, V, W, X, Y, and Z, 
each of which is described in section 509(a)(1). O meets the 
responsiveness test described in paragraph (i)(3) of this section with 
respect to each of its supported organizations. Each year, O 
distributes an aggregate amount that equals its distributable amount 
described in paragraph (i)(5)(ii)(B) of this section and distributes an 
equal amount to each of the five universities. O distributes annually 
to each of V and W an amount that equals more than 10 percent of each 
university's total annual support received in its most recently 
completed taxable year. Based on these facts, O meets the requirements 
of paragraph (i)(5)(iii) of this section because it distributes two-
fifths (more than the required one-third) of its distributable amount 
to supported organizations that are attentive to O.
* * * * *
    (6) * * * Distributions by the supporting organization that count 
toward the distribution requirement imposed in paragraph (i)(5)(ii) of 
this section are limited to--
* * * * *
    (iii) Any reasonable and necessary--
    (A) Administrative expenses paid to accomplish the exempt purposes 
of the supported organization, which do not include expenses incurred 
in the production of investment income or expenses incurred in the 
conduct of fundraising activities (except solicitation expenses 
described in paragraph (i)(6)(iii)(B) of this section); and
    (B) Expenses incurred to solicit contributions that are received 
directly by a supported organization (rather than by the supporting 
organization), but only to the extent the amount of the reasonable and 
necessary expenses the supporting organization incurs for each 
solicitation does not exceed the amount of contributions that are 
actually received by the supported organization directly from donors as 
a result of each such solicitation, as substantiated in a written 
report by the supported organization to the supporting organization 
that is postmarked or electronically transmitted by the due date of the 
supporting organization's Form 990 (or successor form) for the year of 
the solicitation(s) (without regard to extensions);
* * * * *
    (v) Any amount set aside for a specific project that accomplishes 
the exempt purposes of a supported organization, with such set-aside 
counting toward the distribution requirement for the taxable year in 
which the amount is set aside but not in the year in which it is 
actually paid, if at the time of the set-aside, the supporting 
organization--
* * * * *
    (l) Applicability dates. (1) Paragraphs (a)(6), (f)(5), and (i) of 
this section are applicable on December 28, 2012, except--
    (i) Paragraphs (i)(4)(ii)(C), (i)(5)(ii)(C) and (D), (i)(6)(iv), 
(i)(7)(ii), and (i)(8) of this section are applicable on December 21, 
2015; and
    (ii) Paragraphs (d)(4)(i)(C), (f)(5)(ii), (i)(2)(i) and (iii), 
(i)(3)(i), (i)(3)(iv)(C) (Example 3), (i)(4)(ii)(A)(1), (i)(4)(ii)(B), 
(i)(4)(iii) and (iv), (i)(4)(v)(F) (Example 6), (i)(5)(ii)(A) and (B), 
(i)(5)(iii)(A), (i)(5)(iii)(D)(4) (Example 4), (i)(6) introductory 
text, and (i)(6)(iii) and (v) of this section are applicable to taxable 
years beginning on or after October 16, 2023.
    (2) Taxpayers may choose to apply the paragraphs listed in 
paragraph (I)(1)(ii) of this section to taxable years beginning on or 
after February 19, 2016, and before October 16, 2023, provided the 
taxpayer applies the provisions listed in paragraph (l)(1)(ii) of this 
section in their entirety and in a consistent manner.
    (3) See paragraphs (i)(5)(ii)(B) and (C) and (i)(8) of Sec.  
1.509(a)-4T contained in 26 CFR part 1, revised as of April 1, 2015, 
for certain rules regarding non-functionally integrated Type III 
supporting organizations effective before December 21, 2015. See 
paragraphs (i)(5)(ii)(A) and (B) and (i)(5)(iii)(D) of Sec.  1.509(a)-4 
contained in 26 CFR part 1, revised as of April 1, 2023, for certain 
rules regarding non-functionally integrated Type III supporting 
organizations effective before October 16, 2023.

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
Par. 3. The authority citation for part 53 continues to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *


Sec.  53.4947-1  [Amended]

0
Par. 4. Section 53.4947-1 is amended in paragraph (b)(3) by removing 
the language ``Sec. Sec.  1.509(a)-4(d)(2)(iv)(a), and 1.509(a)-4(i)(1) 
(ii) and (iii)(c)'' and ``the regulations under section 507(b)(1)'' and 
adding in their places ``Sec.  1.509(a)-4(d)(2)(iv)(A) and (i)(1)(ii) 
of this chapter'' and ``the regulations in this part under section 
507(b)(1)'', respectively.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
    Approved: August 20, 2023.
Lily L. Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2023-22286 Filed 10-13-23; 8:45 am]
BILLING CODE 4830-01-P