Group Exemption Update

John Christopher, Manley Burke, john.christopher@manleyburke.com

Since 1940, the IRS has provided procedures under which an organization recognized by the IRS as being exempt under Section 501(c) could submit a request for recognition of exemption for a group of organizations that are affiliated with it and under its general supervision or control. As a result of the group exemption procedures, subordinate organizations covered by group exemptions are relieved from filing their own individual applications for recognition of exemption with the IRS. These procedures have played an important role in streamlining the exemption process for local chapters, alumni and alumnae chapters and other organizations affiliated with our Fraternity clients.

Further, where a group exemption exists, the national organization may offer their chapters and other qualifying subordinate organizations the additional benefit of inclusion in a group Form 990, thus relieving those subordinate organizations from having to file separate Forms 990.

Under the currently applicable IRS rules, a group exemption will be granted with respect to subordinate organizations (e.g., chapters) that meet four requirements: (i) they are affiliated with the central organization (the Fraternity); (ii) they are subject to the central organization’s “general supervision or control;” (iii) they are all exempt under the same paragraph of section 501(c), although not necessarily the same paragraph as the central organization; and (iv) they provide written authorization to be included in the application for group exemption.

As we have reported previously, the Advisory Committee on Tax Exempt and Government Entities (ACT) issued a report on group exemptions in June 2011 recommending the elimination of group returns entirely. Recent activity by the IRS provides further evidence that significant changes may be on the horizon for chapters and subordinate organizations exempt under the authority of a group exemption ruling.

Recently, in the Fiscal Year 2012 Work Plan issued by the Director of Exempt Organizations, the Exempt Organizations division stated that it would continue the analysis of the group exemption issue begun by the ACT. According to the Work Plan, the first step in this continued analysis would be fact-finding by way of developing a questionnaire to be sent to a cross-section of group ruling holders. The questionnaire would explore the practices used by the central or parent organization to meet the requirements for group exemption described above, with particular attention to how the parent exercises such supervision and control over its subordinates, and how the supervision and control is reported.

Those questionnaires have been sent out by the IRS to “more than 2,000 randomly selected central organizations” as part of a process called a “compliance check”. Our Fraternity clients that are part of a group exemption are now starting to receive the questionnaires. In actuality, the questionnaires themselves are on the IRS website and are completed online. The recipients selected to participate in the compliance check will receive a notice with instructions, a user ID and a password to access the online questionnaire.

According to the IRS website, the information from these questionnaires will help Exempt Organizations better understand the relationship between central organizations and their subordinates, and how they satisfy their exemption and filing requirements. The impact of the results of the compliance check will not be known for a while, but it is clear that the IRS is seriously considering substantial changes to the group exemption and group return structure.

Additional information may be found at the IRS Website at: http://www.irs.gov/Charities-&-Non-Profits/Group-Rulings-Questionnaire.