Religious Organizations Criticize Proposed Group Exemption Rules

• Published date: 01 November 2020
• Date: 01 November 2020
• DOI: http://doi.org/10.1002/npc.30786

Bruce R. Hopkins’ NONPROFIT COUNSEL

November 2020 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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] ◆

RELIGIOUS ORGANIZATIONS

CRITICIZE PROPOSED GROUP

EXEMPTION RULES

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