[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Rules and Regulations]
[Pages 65550-65553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30839]



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DEPARTMENT OF THE TREASURY
26 CFR Part 1

[TD 8640]
RIN 1545-AI52


Exempt Organizations Not Required To File Annual Returns: 
Integrated Auxiliaries of Churches

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that exempt certain 
integrated auxiliaries of churches from filing information returns. 
These regulations 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: These regulations are effective December 20, 1995.
    For dates of applicability of these regulations, see Sec. 1.6033-
2(h)(6).

FOR FURTHER INFORMATION CONTACT: Terri Harris or Paul Accettura, of the 
Office of the Associate Chief Counsel (Employee Benefits and Exempt 
Organizations), IRS, at 202-622-6070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On December 15, 1994 proposed regulations Secs. 1.6033-2 and 1.508-
1 [EE-41-86 (1995-2 I.R.B. 20)] under sections 6033(a)(2) and 508 of 
the Internal Revenue Code of 1986, respectively, were published in the 
Federal Register (59 FR 64633). The proposed regulations adopted the 
rules of Rev. Proc. 86-23 (1986-1, C.B. 564) as the definition of 
integrated auxiliary of a church replacing the current definition set 
forth in Sec. 1.6033-2(g)(5). Additionally, section 508(c) excepts 
integrated auxiliaries of a church from the requirement that new 
organizations notify the Secretary of the Treasury 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, was proposed to be amended by deleting the 
examples and by adding a cross-reference to Sec. 1.6033-2(h) for the 
definition of integrated auxiliary of a church. After IRS and Treasury 
consideration of the public comments received regarding the proposed 
regulations, the regulations are adopted as revised by this Treasury 
decision.

Explanation of Provisions

    Section 6033(a)(1) 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 organization from the filing requirement where the Secretary 
determines that filing is not necessary to the efficient administration 
of the internal revenue laws.
    Prior to this Treasury decision, Sec. 1.6033-2(g)(5)(i) defined 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'' element of the definition 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 permits certain church-related organizations to elect out 
of social security coverage if they meet a standard based on the degree 
of financial support they receive from a church. 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 identifying an integrated 
auxiliary of a church.
    Subsequent to these meetings the IRS published Rev. Proc. 86-23, 
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. With respect to this last criterion, Rev. 
Proc. 86-23 sets forth an internal support standard that is similar to 
the financial support standard in section 3121(w).
    The proposed regulations adopted the rules of Rev. Proc. 86-23 as 
the definition of the term integrated auxiliary of a church replacing 
the current definition set forth in Sec. 1.6033-2(g)(5). The final 
regulations retain the definition of an integrated auxiliary of a 
church that is contained in the proposed regulations.
    Under this Treasury decision, to be an integrated auxiliary of a 
church an organization must first be described in section 501(c)(3) and 
section 509(a) (1), (2), or (3), and be affiliated with a church in 
accordance with standards set forth in the regulations. An organization 
meeting those tests is an integrated auxiliary if it either: (1) does 
not offer admissions, goods, services, or facilities for sale, other 
than on an incidental basis, to the general public; or (2) 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.
    Some commentators have noted that certain church-related 
organizations that finance, fund and manage pension programs were 
originally excused from filing by Notice 84-2 (1984-1 C.B. 331), which 
was issued pursuant to the Commissioner's discretionary authority 

[[Page 65551]]
under section 6033(a)(2)(B). Rev. Proc. 86-23 states that Notice 84-2 
is superseded by Rev. Proc. 86-23 because the organizations excused 
from filing under the notice are excused from filing by the revenue 
procedure. The commentators have expressed concern that the proposed 
regulations did not relieve church pension plans described in Notice 
84-2 from the filing requirement. The organizations excused from filing 
under Notice 84-2 do not necessarily meet the definition of an 
integrated auxiliary of a church under these final regulations. 
Nevertheless, the proposed regulations were not intended to alter the 
exemption from filing provided in Notice 84-2 and reaffirmed in Rev. 
Proc. 86-23. To make this intent clear, the IRS is issuing Revenue 
Procedure 96-10 at the same time that it issues these final 
regulations. Rev. Proc. 96-10 carries over the exemption from filing 
for church pension plan organizations that was set forth in Notice 84-
2. Having reaffirmed those parts of Rev. Proc. 86-23 that were not 
incorporated into these final regulations, Rev. Proc. 96-10 also 
obsoletes Rev. Proc. 86-23.
    The IRS developed the internal support test contained in the 
proposed regulations 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.
    One commentator has suggested that the definition of an integrated 
auxiliary of a church should consist of a church-related structural 
test rather than an internal support test. The IRS and the Treasury 
Department believe that the use of a structural test could lead to 
problems similar to those caused by the ``exclusively religious'' test. 
Additionally, the suggested definition would frustrate Congress' 
intended objective of allowing ongoing public scrutiny of organizations 
receiving the majority of their support from public and government 
sources.
    A commentator has also suggested that by using the internal support 
test as part of the new definition of an integrated auxiliary of a 
church, the IRS is attempting to ``overrule'' the holdings in the 
previously mentioned court cases (i.e. Tennessee Baptist Children's 
Home and Lutheran Social Service of Minnesota).
    The IRS and the Treasury Department believe that the courts' 
rulings questioned the validity of the ``exclusively religious'' 
activity requirement contained in the former regulation on the basis 
that it is not within the Service's discretion to assess the religious 
nature of a church's activities. Having eliminated the ``exclusively 
religious'' activity test from the definition of integrated auxiliary 
of a church, the IRS and the Treasury Department believe that the 
definition in the final regulation is consistent with the courts' 
holdings as well as the statute and the legislative history.
    Some commentators have suggested that the first sentence of 
Sec. 1.6033-2(g)(5)(iv) of the regulations in effect prior to this 
Treasury decision should be included in the final regulations. That 
sentence identified specific types of organizations as integrated 
auxiliaries of churches in accordance with legislative history. 
Although Sec. 1.6033-2(h) of the proposed regulations was intended to 
provide a general definition that could apply in all instances, the IRS 
and the Treasury Department agree that, in order to be consistent with 
the legislative history, parts of Sec. 1.6033-2(g)(5)(iv) of the 
regulations should be included in these final regulations. Therefore, 
these final regulations include Sec. 1.6033-2(h)(5) that states that 
``a men's or women's organization, a seminary, a mission society, or a 
youth group'' is an integrated auxiliary of a church regardless of 
whether it meets the internal support test in to Sec. 1.6033-
2(h)(1)(iii). (The tests under Sec. 1.6033-2(h)(1) (i) and (ii) must 
still be met.)
    Comments were received objecting that Example 4 relating to 
seminaries did not describe a realistic set of facts and, therefore, 
could lead to confusion. Accordingly, Example 4 has been eliminated. 
Also, the treatment of seminaries has been clarified by Sec. 1.6033-
2(h)(5). We also note that, in addition to the exception for 
seminaries, Sec. 1.6033-2(g)(1)(vii) of the regulations excepts certain 
schools below college level that are affiliated with a church or 
operated by a religious order from the filing requirements of section 
6033. Except for a paragraph numbering change contained in a cross-
reference, Sec. 1.6033-2(g)(1)(vii) is unchanged by these final 
regulations.
    Several commentators have suggested that expanded definitions of 
certain terms used in the internal support test be included in this 
Treasury decision. The final regulations do not incorporate this 
suggestion. The IRS and the Treasury Department intend for these final 
regulations to reissue the test published in Rev. Proc. 86-23 as the 
new definition for an integrated auxiliary of a church. If guidance is 
necessary on the application of the definition to specific cases, that 
guidance is more appropriately provided in non-regulatory form, such as 
through private letter rulings or revenue rulings.
    The amendment to Sec. 1.6033-2(g)(5) is effective with respect to 
returns filed for taxable years beginning after December 31, 1969. 
However, for returns filed for taxable years beginning after December 
31, 1969, but before December 20, 1995, the exclusively religious test 
contained in Sec. 1.6033-2(g)(5) prior to its amendment by these final 
regulations may, at the entity's option, be used as an alternative to 
the financial support test in determining whether an entity is an 
integrated auxiliary of a church. The remainder of the amendments are 
effective with respect to returns for taxable years beginning after 
December 31, 1969. Therefore, for returns filed for taxable years 
beginning after December 20, 1995, the definition of integrated 
auxiliary of a church contained in Sec. 1.6033-2(h) will be used in 
determining whether an entity is an integrated auxiliary of a church.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action 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, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of this Treasury decision is Terri Harris, 
Office of the Associate Chief Counsel (Employee Benefits and Exempt 
Organizations), IRS. However, personnel from other offices of the IRS 
and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.
    
[[Page 65552]]


Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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 (g)(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.
    The added and revised provisions read as follows:


Sec. 1.6033-2  Returns by exempt organizations (taxable years beginning 
after December 31, 1969) and returns by certain nonexempt 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 sections 501(c)(3) and 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 for an 
insubstantial portion of the 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) Special rule. Men's and women's organizations, seminaries, 
mission societies, and youth groups that satisfy paragraphs (h)(1) (i) 
and (ii) of this section are integrated auxiliaries of a church 
regardless of whether such an organization meets the internal support 
requirement under paragraph (h)(1)(iii) of this section.
    (6) 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 December 20, 1995, 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, 1995) may be used as an 
alternative definition to such term set forth in this paragraph (h).
    (7) 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 

[[Page 65553]]
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.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: November 27, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30839 Filed 12-19-95; 8:45 am]
BILLING CODE 4830-01-U