Supporting organizations: a road map to the recent regulations.

• Author: Petroski, Matthew D.

On Feb. 19, 2016, the IRS published proposed regulations (REG-118867-10) providing guidance on certain requirements to qualify as Type I and Type III supporting organizations, which are described in Sec. 509(a)(3) and hence are eligible for public charity status. Final regulations published in 2015 (T.D. 9746) that govern how to qualify as Type III supporting organizations focus primarily on the "relationship test."

The new proposed regulations, which also follow on proposed regulations issued in 2007, 2009, and 2012, are part of a continuing regulatory process reflecting statutory changes made by the Pension Protection Act of 2006 (PPA), P.L. 109-280. The new regulations are proposed to be effective on the date final or temporary regulations are published. However, the IRS states that taxpayers may rely on the proposed rules until final regulations are published. Organizations should review the new proposed regulations and the lengthy preamble, as well as the 2015 final regulations, as a continuing reminder of what is required to obtain or maintain public charity status.

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New Proposed Regulations

The proposed regulations update or reinforce key concepts from the previous proposed regulations for supporting organizations, including:

* Clarification of the due date for delivery of the required supported organization notification;

* Confirmation that the responsiveness test must be met for all supported organizations;

* Updates to the definition of functionally integrated Type III supporting organizations as it relates to the parent and governmental tests; and

* Clarification of the list in Prop. Regs. Sec. 1.509(a)-4(i)(6) of what types of distributions count toward the distribution requirement.

2015 Final Regulations

The 2015 final regulations primarily relate to nonfunctionally integrated Type III supporting organizations, including:

* Confirmation that a distribution requirement equal to the greater of 85% of the organization's adjusted net income or 3.5% of the net fair market value of the organization's nonexempt use assets is appropriate;

* Confirmation that the calculation of adjusted net income applies to all organizations without carving out an exclusion for supporting organizations; and

* Confirmation in the regulation's preamble of the government's position that the same valuation principles that apply to private foundations should apply to nonfunctionally integrated Type III supporting organizations.

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