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October 4, 2024
2024-1826

IRS TE/GE releases three new, comprehensive technical guides on IRC Section 509(a)(3) supporting organizations

The IRS Tax Exempt and Government Entities (TE/GE) division on September 12, 2024, announced the release of three new Technical Guides (TGs) addressing IRC Section 509(a)(3) supporting organizations. TGs are comprehensive issue-specific documents that combine Audit Technique Guides (ATGs) and other technical content that, once completed, replace prior ATGs.

The three guides (TG 3-31, TG 3-32 and TG 3-33) address Type I, Type II and Type III supporting organizations, respectively, which are organizations that qualify as public charities under IRC Section 509(a)(3) due to being organized and operated exclusively to support one or more IRC Section 509(a)(1) or (2) organizations. The new TGs contain illustrations that diagram the relationship that must exist for each type of supporting organization and its supported organization(s) and explain other requirements to qualify as supporting organizations under IRC Section 509(a)(3). Each TG also contains detailed information on examination techniques used by TE/GE examiners for evaluating each supporting organization type's qualification for tax-exempt status.

TG 3-31 and TG 3-33 address final regulations (TD 9981) the IRS released in October 2023, which provide guidance on the prohibition on contributions from controlling donors of Type I and Type III supporting organizations and on certain other requirements for Type III supporting organizations. The regulations clarified Type III notification requirements, what constitutes "control" for purposes of the prohibition on contributions to Type I and Type III supporting organizations from controlling donors, how a Type III supporting organization can qualify as a functionally integrated supporting organization of a governmental organization, and that Type I and Type III supporting organizations may not accept donations from another supporting organization (e.g., health system parent) that controls their common supported organization(s) (see Tax Alert 2023-1772).

A tax-exempt public charity must indicate on its Form 990, Schedule A what type of public charity it qualifies as, which may be the same as or different than the type listed on the IRS's records. On examination, the IRS can reclassify an organization's foundation status if it does not meet the requirements for the type of organization identified on its Form 990. For instance, the IRS recently ruled that two organizations it previously recognized as public charities under IRC Section 501(c)(3), and as supporting organizations under IRC Section 509(a)(3), no longer qualified as supporting organizations, or as any other type of public charity, and reclassified both as non-operating private foundations (see Tax Alert 2024-0794). Although the organizations still qualified as tax-exempt under IRC Section 501(c)(3), the IRS concluded that they did not meet the definition of either a Type III functionally integrated or non-functionally integrated supporting organization because they did not meet the notification requirement, responsiveness test, or the integral part test, as required by Treas. Reg. 1.509(a)(4)(i)(2)-(5).

Implications

Though the newly released Technical Guides do not provide any new guidance, they do provide a compendium of the applicable regulations and IRS guidance on how IRC Section 501(c)(3) charities can qualify as Type I, Type II, and Type III supporting organizations. Together, these three Technical Guides provide a comprehensive overview — spanning over 200 pages — of the qualification requirements and IRS examination techniques for IRC Section 509(a)(3) supporting organizations. The guides are helpful resources to consult in complying with IRC Section 509(a)(3)'s requirements, and not jeopardizing public charity status.

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Contact Information

For additional information concerning this Alert, please contact:

Exempt Organization Tax Services

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor