Almost a year after issuing regulations on Type III supporting organizations, the IRS has filled in some gaps by issuing Notice 2014-4. The notice provides a transitional rule for organizations that support governmental organizations, and also provides important reliance guidance for funders.
Supporting Governmental Organizations
As background, 501(c)(3) organizations are divided into two main subclasses—private foundations and public charities. Public charities are generally less regulated, but one type of public charity known as a supporting organization (or a 509(a)(3) organization) is in some ways regulated more like a private foundation. Specifically, a Type III non-functionally integrated supporting organization must comply with certain requirements that won’t apply to a Type I, Type II or Type III functionally integrated supporting organization. These differences and requirements are discussed extensively in one of our prior posts.
To be considered functionally integrated under the current regulations (and get out from under the requirements that apply to non-functionally Type IIIs) , an organization must either (i) engage in activities substantially all of which directly further the exempt purposes of the supported organization, and which would normally be engaged in by the supported organization
but for the involvement of the supporting organization (the “substantially all test”); (ii) be the parent of each of its supporting organizations (the “parent test”); or (iii) support a governmental supported organization and otherwise meet the requirements of Treas. Reg. § 1.509(a)-4(i)(4)(iv) (the “governmental support test”). However, the regulations (which were finalized in December 2012) reserved space to provide more express guidance for those organizations supporting governmental organizations.
Notice 2014-4 states that, until the earlier of publication of final regulations or the first day of the organization’s third taxable year beginning after December 31, 2013, 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.
Reliance for Grantmakers
On a related note, grantmaking private foundations and donor-advised funds face additional regulatory requirements for grants to Type III non-functionally integrated supporting organizations, and as such need to be certain which type of organization they are dealing with.
Initially, when the additional supporting organization requirements were enacted as part of the Pension Protection Act, the IRS issued interim guidance for funders in Notice 2006-109. This notice allows grantors acting in good faith to rely on written representations or reasoned opinions of counsel determining whether an organization was a Type I, Type II, or functionally integrated Type III supporting organization. The IRS also subsequently issued Rev. Proc. 2011-33, which supplemented this notice and allow grantors to rely on an organization’s classification as Type I, Type II or Type III functionally integrated as listed in the IRS Business Master File.
Since then, as described above, the IRS has issued both final regulations and additional interim guidance around the requirements for being functionally integrated. In Notice 2014-4goo, the IRS clarifies that funders can rely on the grantor reliance standards from Notice 2006-109 as supplemented by Rev. Proc. 2011-33 and the current notice. This means that, in order to rely on a written opinion of counsel as to the type of supporting organization, that opinion must be based on information that demonstrates that the organization either is functionally related under the current regulations (i.e., it meets the substantially all test or the parent test enacted as part of the 2012 regulations) or that it is functionally integrated under the terms of Notice 2014-4 (i.e., it meets the interim governmental support test).