Religious Organizations Criticize Proposed Group Exemption Rules

Published date01 November 2020
Date01 November 2020
November 2020 3
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
test along the lines of the rules for integrated auxiliaries
of churches and offers factors to be taken into account
in satisfying the affiliation test. As the comments note,
inclusion in a group ruling is likely a “sufficient condition
for affiliation in itself.”
The proposed definition of control is handled with
undue delicacy in these comments. The section is correct in
observing that the definition “appears to preclude indirect
control through multiple layers of controlled organizations,
and in this respect is narrower than more typical definitions
of control in the Code.” In a massive understatement, the
section writes that “in the case of the largest groups, with-
out the ability to delegate control to intermediate subor-
dinates, the central organization would be unable to give
sufficient attention to each appointment, or have sufficient
representatives in service, to ensure appropriate control.”
In short, the proposed definition of control, requiring
direct appointments or overlap of service, is unworkable.
The section’s comments note that there currently are
4,167 group exemptions, covering approximate 443,000
organizations — or nearly 25 percent of the exempt enti-
ties in the EO Business Master File. Some of these groups
have thousands of subordinates; some exceed over
10,000 entities. There aren’t enough bodies to meet the
proposed demand for trustees and directors, let alone
satisfy the requisite fiduciary standards concerning con-
temporary nonprofit governance.
The section’s recommendations on this point, com-
pared to the enormity of the problem, are tepid. For
example, one recommendation is that the final rule
define control “through the appointment of officers sep-
arately and without reference to a majority, and provide
that it exists only if the chief executive of the subordinate
is either a representative of the central organization, or
is appointed (or approved, or removable and replacea-
ble) by the central organization or its representatives.”
Another recommendation is that “either control over the
governing body [not likely with many groups] or control
over the chief executive officer would be sufficient for
a central organization to control a subordinate for pur-
poses of group exemption.”
The section recommends elimination of the proposal
that there be a minimum of five subordinate organiza-
tions or, alternatively, that the minimum be reduced to
three subordinates. The section recommends against (1)
the proposed rule requiring subordinates be described
in the same subsection of IRC § 501(c) as the central
organization, (2) the same National Taxonomy of Exempt
Entities code requirement, (3) the proposal that a central
organization may maintain only one group exemption,
and (4) the proposed uniform-governing-instrument
requirement (or that it be eased).
The section’s comments observe that many new
resources (particularly online ones) have become availa-
ble for prospective donors and grantors to confirm the
tax-exempt and public charity/private foundation status
of stand-alone entities with their own determination
letters. It is noted that the availability of comparable
information for subordinate organizations “has not kept
pace.” Recommendations are made in this regard.
The section recommends that the IRS withdraw a
group exemption designation “only in extraordinary cir-
cumstances showing that the central organization is sub-
stantially deficient in administering the group ruling.”
The section adds that if a central organization takes
“appropriate steps” to cure a subordinate’s noncom-
pliance or removes it from the group, “withdrawal of a
group ruling covering potentially hundreds or thousands
of subordinates seems like a severe response to an occa-
sional noncompliant subordinate.” It also recommends
a “grace period in which a particular noncompliant
subordinate’s failure to meet the matching requirements
will not be imputed to the group as a whole.” [26.11]
An extraordinary set of comments on the group exemp-
tion proposal was submitted, by letter dated August 14, by
a coalition of national religious denominations, each being
a central organization. It is noted that other denominations
have submitted comments. The letter states that none of
these denominations “exercises the sort of uniform control
or supervision over their faith communities envisioned” in
the proposed revenue procedure. All of them, it is said,
“share the conviction” that the proposal is “impractical,
impolitic and impermissibly burdensome to religious organ-
izations and the protected rights of religious communities.”
The denominations represented in this submission
cover nearly 100,000 subordinate organizations (such
as churches, schools, and camps). Their willingness
to participate in the group exemption program “has
depended from the outset upon an understanding that
the language employed, ‘subordinate,’ ‘control,’ and
‘supervision,’ connoted merely a nomenclature of con-
venience for the [IRS] and had no bearing on the internal
governance of the churches themselves.” The submis-
sion adds that these entities hold a group ruling “as an
accommodation both” to the IRS, “which is spared the
administration of tens of thousands of church groups,
and to the faith communities themselves, whose local
churches and agencies lack the resources and sophistica-
tion to parse the nuances of the Internal Revenue Code,
but yet are entitled by statute to [tax] exemption.”
The submission states that the proposal would “wreak
havoc in the broader religious community in that it
demands a sense of uniformity and redefines ‘supervision
or control’ in ways that are theologically anathema to them,
and thus both unworkable in practice and unconstitutional

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