The IRS has issued final regulations addressing payout amounts for Type III non-functionally integrated supporting organizations. These regulations close the loop on one large outstanding issue from final and temporary regulations that were issued in 2012, and finally provide some certainty for these organizations.
These new final regulations keep in place the payout requirement from the 2012 temporary regulations. This requires a Type III non-functionally integrated supporting organization to distribute annually the higher of (i) 85 percent of adjusted net income or (ii) 3.5 percent of the fair market value of the supporting organization’s non-exempt use assets. They also keep in place the concept that the value of non-exempt use assets will be established under the private foundation rules.
In addition, the IRS announced its intent to publish a notice of proposed rulemaking in the near future regarding Type III supporting organizations. This will address specific rules for Type III functionally integrated supporting organizations that support governmental organizations, and allow for transitional relief beyond the period provided in Notice 2014-4.
In the meantime, supporting organizations can rely on the transitional rule in Notice 2014-4, which states that a Type III organization will be considered functionally integrated if it (i) supports at least one governmental entity, and is responsive (within the meaning of the regulations) to that entity; and (ii) engages in activities for or on behalf of the governmental entity that perform the functions of, or carry out the purposes of, that entity and that, but for the involvement of the supporting organization, would be engaged in by the governmental entity itself. This transitional rule can be relied on until the date the proposed rulemaking is published in the Federal Register.