[Federal Register Volume 59, Number 240 (Thursday, December 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30587]
[[Page Unknown]]
[Federal Register: December 15, 1994]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[EE-41-86]
RIN 1545-AI52
Exempt Organizations Not Required To File Annual Returns:
Integrated Auxiliaries
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed amendments to the regulations
that exempt certain tax-exempt organizations from filing information
returns. The proposed amendments affect integrated auxiliaries of
churches. These proposed amendments incorporate the rules of Rev. Proc.
86-23, 1986-1 C.B. 564, into the regulations defining ``integrated
auxiliary'' for purposes of determining what entities must file
information returns. The new definition focuses on the sources of an
organization's financial support in addition to the nature of the
organization's activities.
DATES: Written comments and requests for a public hearing must be
received by March 15, 1995.
ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (EE-41-86), room 5228,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (EE-41-86),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington DC.
FOR FURTHER INFORMATION CONTACT: Terri Harris or Paul Accettura, 202-
622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 6033(a)(1) of the Internal Revenue Code of 1986 requires
organizations that are exempt from income tax under section 501(a) to
file annual returns. Section 6033(a)(2)(A) provides exceptions to this
requirement for certain specified types of organizations, including,
among others, churches, their integrated auxiliaries, and conventions
or associations of churches. Section 6033(a)(2)(B) provides that the
Secretary may relieve any other organization from the filing
requirement where the Secretary determines that filing is not necessary
to the efficient administration of the internal revenue laws.
Section 1.6033-2(g)(5)(i) currently defines the term ``integrated
auxiliary of a church'' as an organization that is: (1) exempt from
taxation as an organization described in section 501(c)(3); (2)
affiliated with a church (within the meaning of Sec. 1.6033-
2(g)(5)(iii)); and (3) engaged in a principal activity that is
``exclusively religious.'' Section 1.6033-2(g)(5)(ii) provides that an
organization's principal activity is not ``exclusively religious'' if
that activity is educational, literary, charitable, or of another
nature (other than religious) that would serve as a basis for exemption
under section 501(c)(3).
The ``exclusively religious'' standard was litigated in Lutheran
Social Service of Minnesota v. United States, 583 F. Supp. 1298 (D.
Minn. 1984), rev'd 758 F.2d 1283 (8th Cir. 1985), and Tennessee Baptist
Children's Homes, Inc. v. United States, 604 F. Supp. 210 (M.D. Tenn.
1984) aff'd, 790 F.2d 534 (6th Cir. 1986). While the litigation over
the ``exclusively religious'' standard was proceeding, Congress enacted
section 3121(w) of the Internal Revenue Code, Tax Reform Act of 1984,
Pub. L. 98-369, section 2603(b), 98 Stat. 494, 1128 (1984), which sets
forth a financial support requirement for certain church-related
organizations that wish to elect out of social security coverage. In
light of this litigation and the enactment of section 3121(w), IRS
personnel met with representatives of various church organizations to
encourage voluntary compliance with the filing requirements and to
develop a less controversial and more objective standard for the term
``integrated auxiliary of a church.''
Subsequent to these meetings the IRS published Rev. Proc. 86-23
(1986-1 C.B. 564), which provides that, for tax years beginning after
December 31, 1975, an organization is not required to file Form 990 if
it is: (1) described in sections 501(c)(3) and 509(a)(1), (2), or (3);
(2) affiliated with a church or a convention or association of
churches; and (3) internally supported. Rev. Proc. 86-23 sets forth a
financial support requirement that is similar to, but more favorable
than, the financial support requirement in section 3121(w).
The proposed regulations adopt the rules of Rev. Proc. 86-23 as the
definition of ``integrated auxiliary of a church'' replacing the
current definition set forth in Sec. 1.6033-2(g)(5). Thus, any
organization that is exempted from filing a Form 990 by reason of Rev.
Proc. 86-23 would be an integrated auxiliary of a church within the
meaning of the proposed regulations.
The proposed regulations provide examples that apply the operative
rules to typical organizations. The examples are provided merely to
illustrate the rules, and not to narrow their scope. The examples
reflect the manner in which the IRS has applied Rev. Proc. 86-23. The
IRS requests comments on the consistency of the examples with the
operative rules and the application of Rev. Proc. 86-23.
Additionally, section 508(c) excepts integrated auxiliaries of a
church from the requirement that new organizations notify the Secretary
that they are applying for recognition of section 501(c)(3) status
(Form 1023). For consistency, Sec. 1.508-1(a)(3)(i)(a), which gives
several examples of integrated auxiliaries, is proposed to be amended
by deleting the examples and by cross-referencing to Sec. 1.6033-2(h)
for the definition of ``integrated auxiliaries of a church.''
Explanation of Provisions
An ``integrated auxiliary of a church'' is not required to file an
annual information return (Form 990). The proposed amendment to the
regulations defining an ``integrated auxiliary of a church'' focuses on
the sources of financial support of the organization in addition to the
nature of the organization's activity. The ``exclusively religious''
activity requirement contained in current Sec. 1.6033-2(g)(5) would be
removed.
Under the proposed amendments, an organization must first be
described in section 501(c)(3) and section 509(a)(1), (2), or (3), and
meet the standard of affiliation with a church. An organization meeting
those tests is an integrated auxiliary if it either: (1) offers
admissions, goods, services, or facilities for sale, other than on an
incidental basis, to the general public and not more than 50 percent of
its support comes from a combination of government sources, public
solicitation of contributions, and receipts other than those from an
unrelated trade or business; or (2) does not offer admissions, goods,
services, or facilities for sale, other than on an incidental basis, to
the general public.
Therefore, under the proposed amendments, a church affiliated
organization that does not offer admissions, goods, services, or
facilities for sale to the general public is an ``integrated auxiliary
of a church'' and is not required to file an annual information return.
A church affiliated organization that does offer admissions, goods,
services, or facilities for sale to the general public is an
``integrated auxiliary of a church'' only if 50 percent or less of its
support comes from a combination of government sources, public
solicitation of contributions and receipts from its sales (except for
receipts from an unrelated trade or business).
The IRS developed the support calculations contained in the
proposed amendments based on its conclusion that Congress intended that
organizations receiving a majority of their support from public and
government sources, as opposed to those receiving a majority of their
support from church sources, should file annual information returns in
order that the public have a means of inspecting the returns of these
organizations. The annual information return also was intended to serve
as a means by which the IRS could examine, if necessary, those
organizations receiving substantial non-church support.
The removal of Sec. 1.6033-2(g)(5) is proposed to be effective with
respect to returns filed for taxable years beginning after publication
of the final regulations. The remainder of the amendments are proposed
to be effective with respect to returns for taxable years beginning
after December 31, 1969. Therefore, for returns filed for taxable years
beginning after publication of the final regulations, the financial
support test contained in proposed Sec. 1.6033-2(h) will be the sole
test used in determining whether an entity is an integrated auxiliary
of a church. However, for returns filed for taxable years beginning
after December 31, 1969, but before publication of the final
regulations, the exclusively religious test contained in Sec. 1.6033-
2(g)(5) may, at the entity's option, be used as an alternative to the
proposed financial support test in determining whether an entity is an
integrated auxiliary of a church.
Special Analyses
It has been determined that these proposed rules are not major
rules as defined in EO 12866. Therefore, a regulatory assessment is not
required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations,
and, therefore, Regulatory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, a copy of
these proposed regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are submitted
timely (preferably a signed original and eight (8) copies) to the IRS.
All comments will be available for public inspection and copying. A
public hearing may be scheduled if requested in writing by any person
that timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place for the hearing will be published
in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Terri Harris,
Office of the Assistant Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, personnel from other offices of the IRS
and Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.508-1 is amended by revising paragraphs (a)(3)(i)
introductory text and (a)(3)(i)(a) to read as follows:
Sec. 1.508-1 Notices.
(a) * * *
(3) * * * (i) Paragraphs (a)(1) and (2) of this section are
inapplicable to the following organizations:
(a) Churches, interchurch organizations of local units of a church,
conventions or associations of churches, or integrated auxiliaries of a
church. See Sec. 1.6033-2(h) regarding the definition of integrated
auxiliary of a church;
* * * * *
Par. 3. Section 1.6033-2 is amended as follows:
1. Paragraphs (g)(1)(i) and (vii) are revised.
2. Paragraph (g)(5) is removed and reserved.
3. Paragraphs (h) through (j) are redesignated as paragraphs (i)
through (k).
4. New paragraph (h) is added.
5. The added and revised provisions read as follows:
Sec. 1.6033-2 Returns by exempt organizations (taxable years beginning
after December 31, 1980).
* * * * *
(g) * * * (1) * * *
(i) A church, an interchurch organization of local units of a
church, a convention or association of churches, or an integrated
auxiliary of a church (as defined in paragraph (h) of this section);
* * * * *
(vii) An educational organization (below college level) that is
described in section 170(b)(1)(A)(ii), that has a program of a general
academic nature, and that is affiliated (within the meaning of
paragraph (h)(2) of this section) with a church or operated by a
religious order.
* * * * *
(h) Integrated auxiliary--(1) In general. For purposes of this
title, the term integrated auxiliary of a church means an organization
that is--
(i) Described both in section 501(c)(3) and in section 509(a)(1),
(2), or (3);
(ii) Affiliated with a church or a convention or association of
churches; and
(iii) Internally supported.
(2) Affiliation. An organization is affiliated with a church or a
convention or association of churches, for purposes of paragraph
(h)(1)(ii) of this section, if--
(i) The organization is covered by a group exemption letter issued
under applicable administrative procedures, ((such as Rev. Proc. 80-27,
1980-1 C.B. 677) (See Sec. 601.601(a)(2)(ii)(b))), to a church or a
convention or association of churches;
(ii) The organization is operated, supervised, or controlled by or
in connection with (as defined in Sec. 1.509(a)-4) a church or a
convention or association of churches; or
(iii) Relevant facts and circumstances show that it is so
affiliated.
(3) Facts and circumstances. For purposes of paragraph (h)(2)(iii)
of this section, relevant facts and circumstances that indicate an
organization is affiliated with a church or a convention or association
of churches include the following factors. However, the absence of one
or more of the following factors does not necessarily preclude
classification of an organization as being affiliated with a church or
a convention or association of churches--
(i) The organization's enabling instrument (corporate charter,
trust instrument, articles of association, constitution or similar
document) or by-laws affirm that the organization shares common
religious doctrines, principles, disciplines, or practices with a
church or a convention or association of churches;
(ii) A church or a convention or association of churches has the
authority to appoint or remove, or to control the appointment or
removal of, at least one of the organization's officers or directors;
(iii) The corporate name of the organization indicates an
institutional relationship with a church or a convention or association
of churches;
(iv) The organization reports at least annually on its financial
and general operations to a church or a convention or association of
churches;
(v) An institutional relationship between the organization and a
church or a convention or association of churches is affirmed by the
church, or convention or association of churches, or a designee
thereof; and
(vi) In the event of dissolution, the organization's assets are
required to be distributed to a church or a convention or association
of churches, or to an affiliate thereof within the meaning of this
paragraph (h).
(4) Internal support. An organization is internally supported, for
purposes of paragraph (h)(1)(iii) of this section, unless it both--
(i) Offers admissions, goods, services or facilities for sale,
other than on an incidental basis, to the general public (except goods,
services, or facilities sold at a nominal charge or substantially less
than cost); and
(ii) Normally receives more than 50 percent of its support from a
combination of governmental sources, public solicitation of
contributions, and receipts from the sale of admissions, goods,
performance of services, or furnishing of facilities in activities that
are not unrelated trades or businesses.
(5) Effective date. This paragraph (h) applies for returns filed
for taxable years beginning after December 31, 1969. For returns filed
for taxable years beginning after December 31, 1969 but beginning
before the date these regulations are published as final regulations,
the definition for the term integrated auxiliary of a church set forth
in Sec. 1.6033-2(g)(5) (as contained in the 26 CFR edition revised as
of April 1, 1994) may be used as an alternative definition to such term
set forth in this paragraph (h).
(6) Examples of internal support. The internal support test of this
paragraph (h) is illustrated by the following examples, in each of
which it is assumed that the organization's provision of goods and
services does not constitute an unrelated trade or business:
Example 1. Organization A is described in sections 501(c)(3) and
509(a)(2) and is affiliated (within the meaning of this paragraph
(h)) with a church. Organization A publishes a weekly newspaper as
its only activity. On an incidental basis, some copies of
Organization A's publication are sold to nonmembers of the church
with which it is affiliated. Organization A advertises for
subscriptions at places of worship of the church. Organization A is
internally supported, regardless of its sources of financial
support, because it does not offer admissions, goods, services, or
facilities for sale, other than on an incidental basis, to the
general public. Organization A is an integrated auxiliary.
Example 2. Organization B is a retirement home described in
sections 501(c)(3) and 509(a)(2). Organization B is affiliated
(within the meaning of this paragraph (h)) with a church. Admission
to Organization B is open to all members of the community for a fee.
Organization B advertises in publications of general distribution
appealing to the elderly and maintains its name on non-
denominational listings of available retirement homes. Therefore,
Organization B offers its services for sale to the general public on
more than an incidental basis. Organization B receives a cash
contribution of $50,000 annually from the church. Fees received by
Organization B from its residents total $100,000 annually.
Organization B does not receive any government support or
contributions from the general public. Total support is $150,000
($100,000 + $50,000), and $100,000 of that total is from receipts
from the performance of services (66-2/3% of total support).
Therefore, Organization B receives more than 50 percent of its
support from receipts from the performance of services. Organization
B is not internally supported and is not an integrated auxiliary.
Example 3. Organization C is a hospital that is described in
sections 501(c)(3) and 509(a)(1). Organization C is affiliated
(within the meaning of this paragraph (h)) with a church.
Organization C is open to all persons in need of hospital care in
the community, although most of Organization C's patients are
members of the same denomination as the church with which
Organization C is affiliated. Organization C maintains its name on
hospital listings used by the general public, and participating
doctors are allowed to admit all patients. Therefore, Organization C
offers its services for sale to the general public on more than an
incidental basis. Organization C annually receives $250,000 in
support from the church, $1,000,000 in payments from patients and
third party payors (including Medicare, Medicaid and other insurers)
for patient care, $100,000 in contributions from the public,
$100,000 in grants from the federal government (other than Medicare
and Medicaid payments) and $50,000 in investment income. Total
support is $1,500,000 ($250,000 + $1,000,000 + $100,000 + $100,000 +
$50,000), and $1,200,000 ($1,000,000 + $100,000 + $100,000) of that
total is support from receipts from the performance of services,
government sources, and public contributions (80% of total support).
Therefore, Organization C receives more than 50 percent of its
support from receipts from the performance of services, government
sources, and public contributions. Organization C is not internally
supported and is not an integrated auxiliary.
Example 4. Organization D is a seminary for training ministers
of a church and is described in sections 501(c)(3) and 509(a)(1).
Organization D is affiliated (within the meaning of this paragraph
(h)) with a church. Organization D is open only to members of the
denomination of the church with which it is affiliated. Organization
D annually receives $100,000 in support from the church with which
it is affiliated and $300,000 in tuition payments from students.
Therefore, Organization D is internally supported (even though more
than 50 percent of its total support comes from receipts from the
performance of services) because it does not offer admissions,
goods, services, or facilities for sale, other than on an incidental
basis, to the general public. Organization D is an integrated
auxiliary.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-30587 Filed 12-14-94; 8:45 am]
BILLING CODE 4830-01-U