[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