26 July 2019 IRS finalizes rules on IRC Section 501(c)(4) notification requirement without substantive change The IRS has issued final regulations (TD 9873) on the IRC Section 506 requirement for organizations to notify the IRS of their intent to operate under IRC Section 501(c)(4). The final regulations adopt without substantive change proposed regulations issued in 2016, and the IRS has removed the corresponding temporary regulations. The IRC Section 506 requirement for social welfare organizations to notify the IRS of their intent to operate under IRC Section 501(c)(4) within 60 days of formation was enacted as part of the Protecting Americans from Tax Hikes Act of 2015. In July 2016, the IRS issued temporary and proposed regulations incorporating the provisions of IRC Section 506. Concurrent with the issuance of the proposed regulations, the IRS also issued Revenue Procedure 2016-41 in July 2016 to provide additional guidance on how to satisfy the new notification requirement. For a detailed discussion of these regulations, which have now been adopted in final form, as well as additional background information, see Tax Alert 2016-1224. The Preamble to the final regulations discusses comments received after publication of the proposed regulations. One recommendation suggested the final regulations define the "date of organization" for an organization that was not initially formed as an IRC Section 501(c)(4) organization. For a domestic organization, the "date of organization" would be the date the change in status to IRC Section 501(c)(4) was established (such as the date that the organization's governing document was amended). For a foreign organization, the "date of organization" would be the date that the foreign organization first commenced activities or received income that would require it to file under IRC Section 6033. Noting the administrative difficulty of implementing this definition, the IRS declined to adopt the recommendation. The final regulations do not provide a procedure for automatic reasonable cause relief. However, organizations formed before December 18, 2015, foreign organizations, small organizations, and organizations that originally operated under sections other than IRC Section 501(c)(4) may seek reasonable cause relief by following the instructions in the penalty letter, as provided in Revenue Procedure 2016-41. The IRS reiterated that reasonable cause would be determined on a case-by-case basis and that the examples provided in Revenue Procedure 2016-41 were not intended to be illustrative of all situations in which reasonable cause relief may be appropriate. The final regulations do not require organizations organized on or before July 8, 2016 to submit a notification under IRC Section 506 (i.e. Form 8976) if the organization:
The Preamble clarified that subordinate organizations included on a group return on Form 990 also qualified for this exception. IRC Section 501(c)(4) organizations established after July 8, 2016, however, must separately file Form 8976 to individually meet the requirements of IRC Section 506, even if the IRC Section 501(c)(4) organization is listed as a subordinate organization in a group exemption letter. The Preamble explains that the information required on Form 8976 differs from what is required for the group exemption update; IRC Section 506 requires Form 8976 to be filed 60 days after entity formation, while the group exemption letter is required 90 days after the close of the central organization's accounting period. In response for clarification regarding single-member limited liability companies (LLC), the IRS clarified in the Preamble that disregarded entities should not submit Form 8976 if their sole member is an IRC Section 501(c)(4) organization. A commenter asked the IRS to clarify that there is no obligation to update Form 8976 for subsequent changes. The IRS declined, noting that Revenue Procedure 2016-41 clearly indicates that an organization is not obligated to submit a new Form 8976 if its information changes, or if the Form 8976 was accepted for processing. In lieu of an updated Form 8976, any updated information should be reported on the organization's annual information return or notice, as provided in the instructions to that form. Because the final regulations adopt without substantive change the rules included in the proposed and temporary regulations, which have applied since July 8, 2016, the final regulations apply on and after July 8, 2016, for clarity and continuity. Although the proposed regulations are adopted as final without substantive change, the Preamble to the final regulations offers some significant clarifications on how to analyze the regulations in conjunction with Revenue Procedure 2016-41 and other relevant authority, including IRC Section 6033, Revenue Procedure 80-27, and Forms 990 and 8976. Highlights include the following:
The Preamble also provides significant additional information that goes beyond the final regulations themselves. The flexibility offered in the Preamble is generally for organizations formed before June 8, 2016 - IRC Section 501(c)(4) organizations formed after that date generally must file Form 8976 within 60 days of formation to meet the IRC Section 506 requirement for organizations to notify the IRS of their intent to operate under IRC Section 501(c)(4). Accordingly, prospective IRC Section 501(c)(4) organizations must ensure that they begin preparing Form 8976 shortly after formation to timely file their notification. If an organization does not timely file and receives a penalty letter from the IRS, it may prepare and file a request for reasonable cause relief by following the instructions in the penalty letter, which the IRS will grant on a case-by-case basis. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
Document ID: 2019-1351 | |||||||||||||
