[Federal Register Volume 77, Number 249 (Friday, December 28, 2012)]
[Rules and Regulations]
[Pages 76382-76400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-31050]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 53, and 602

[TD 9605]
RIN 1545-BG31; 1545-BL38


Payout Requirements for Type III Supporting Organizations That 
Are Not Functionally Integrated

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains both final regulations and temporary 
regulations regarding the requirements to qualify as a Type III 
supporting organization that is operated in connection with one or more 
supported organizations. The regulations reflect changes to the law 
made by the Pension Protection Act of 2006. The regulations will affect 
Type III supporting organizations and their supported organizations. 
The text of the temporary regulations also serves as the text of the 
proposed regulations set forth in the Proposed Rules section in this 
issue of the Federal Register.

DATES: Effective Date: These regulations are effective on December 28, 
2012.

FOR FURTHER INFORMATION CONTACT: Preston J. Quesenberry at (202) 622-
6070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in the final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2157. The collection of information 
in the final regulations is in Sec.  1.509(a)-4(i)(2) and Sec.  
1.509(a)-4(i)(6)(v). The collection of information under Sec.  
1.509(a)-4(i)(2) flows from section 509(f)(1)(A) of the Internal 
Revenue Code (Code), which requires a Type III supporting organization 
to provide to each of its supported organizations such information as 
the Secretary may require to ensure that the Type III supporting 
organization is responsive to the needs or demands of its supported 
organization(s). The collection of information under Sec.  1.509(a)-
4(i)(6)(v) is required only if a Type III supporting organization that 
is not functionally integrated wishes for certain amounts set aside for 
a specific project to count toward the distribution requirement imposed 
by Sec.  1.509(a)-4(i)(5)(ii). The likely recordkeepers are Type III 
supporting organizations and certain of their supported organizations.
    Estimated total annual reporting burden: 15,122 hours.
    Estimated average annual burden hours per recordkeeper: 2 hours.
    Estimated number of recordkeepers: 7,556.
    Estimated frequency of collection of such information: Annual.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) and Foundation Excise Tax Regulations (26 CFR part 53) 
regarding organizations described in section

[[Page 76383]]

509(a)(3) of the Code. An organization described in section 501(c)(3) 
of the Code is classified as either a private foundation or a public 
charity. To be classified as a public charity, an organization must 
meet the requirements of section 509(a)(1), (2), (3), or (4). 
Organizations described in section 509(a)(3) are known as supporting 
organizations. Supporting organizations achieve their public charity 
status by providing support to one or more organizations described in 
section 509(a)(1) or (2), which in this context are referred to as 
supported organizations.
    To meet the requirements of section 509(a)(3), an organization must 
satisfy an organizational test, an operational test, a relationship 
test, and a disqualified person control test. The organizational and 
operational tests require that the supporting organization be organized 
and at all times thereafter operated exclusively for the benefit of, to 
perform the functions of, or to carry out the purposes of one or more 
supported organizations. The relationship test requires the supporting 
organization to establish one of three types of relationships with one 
or more supported organizations. Finally, the disqualified person 
control test requires that the supporting organization not be 
controlled directly or indirectly by certain disqualified persons. 
Although each of these tests is a necessary requirement for an 
organization to establish that it qualifies as a supporting 
organization, these final regulations and temporary regulations focus 
primarily on one of the relationship tests: the test for supporting 
organizations that are ``operated in connection with'' their supported 
organization(s), otherwise known as ``Type III'' supporting 
organizations. Specifically, the temporary regulations address the 
amount that Type III supporting organizations that are not 
``functionally integrated'' must annually distribute and explain how 
assets are valued for purposes of this distribution requirement. The 
final regulations describe all of the other requirements of the 
relationship test for Type III supporting organizations.

1. Three Types of Supporting Organizations

    To meet the requirements of section 509(a)(3), a supporting 
organization must satisfy one of three relationship tests with respect 
to its supported organization(s). A supporting organization that is 
operated, supervised or controlled by one or more supported 
organizations is commonly known as a Type I supporting organization. 
The relationship of a Type I supporting organization with its supported 
organization(s) is comparable to that of a corporate parent-subsidiary 
relationship. A supporting organization that is supervised or 
controlled in connection with one or more supported organizations is 
commonly known as a Type II supporting organization. The relationship 
of a Type II supporting organization with its supported organization(s) 
involves common supervision or control by the persons supervising or 
controlling both the supporting organization and the supported 
organizations. A supporting organization that is operated in connection 
with one or more supported organizations is commonly known as a Type 
III supporting organization.

2. Qualification Requirements for Type III Supporting Organizations 
Prior to Enactment of the Pension Protection Act of 2006

    Prior to the enactment of the Pension Protection Act of 2006, 
Public Law 109-280 (120 Stat. 780 (2006)) (PPA), the regulations under 
section 509(a)(3) (hereinafter referred to as the ``existing'' 
regulations) generally provided that an organization is ``operated in 
connection with'' one or more supported organizations if it meets a 
``responsiveness test'' and an ``integral part test.''
a. Responsiveness Test
    Existing Sec.  1.509(a)-4(i)(2)(i) provides that an organization 
meets the responsiveness test if the organization is responsive to the 
needs or demands of its supported organizations. Existing Sec.  
1.509(a)-4(i)(2)(ii) (hereinafter referred to as the ``significant 
voice responsiveness test'') provides that a supporting organization 
can demonstrate responsiveness to a supported organization if the 
relationship between the supporting and supported organization meets 
one of the following three criteria: (1) The supported organization 
appoints or elects one or more of the officers, directors, or trustees 
of the supporting organization; (2) one or more members of the 
governing body of the supported organization serve as officers, 
directors, or trustees of, or hold other important offices in, the 
supporting organization; or (3) the officers, directors, or trustees of 
the supporting organization maintain a close continuous working 
relationship with the officers, directors, or trustees of the supported 
organization. In addition, as a result of one of these three criteria 
being satisfied, the supported organization has to have a ``significant 
voice'' in the investment policies of the supporting organization, the 
timing and the manner of making grants, the selection of the grant 
recipients of the supporting organization, and in otherwise directing 
the use of the income or assets of the supporting organization.
    The existing regulations also provide an alternative means for 
charitable trusts to satisfy the responsiveness test. Under existing 
Sec.  1.509(a)-4(i)(2)(iii), a supporting organization is responsive 
if: (1) It is a charitable trust under State law; (2) each specified 
supported organization is a named beneficiary under the charitable 
trust's governing instrument; and (3) each beneficiary organization has 
the power to enforce the trust and compel an accounting under State 
law.
    In the case of an organization that is supporting one or more 
supported organizations before November 20, 1970, existing Sec.  
1.509(a)-4(i)(1)(ii) provides that additional facts and circumstances, 
such as a historic and continuing relationship between the supporting 
organization and its supported organization(s), also can be taken into 
account to establish compliance with the responsiveness test.
b. Integral Part Test
    The integral part test under existing Sec.  1.509(a)-4(i)(3)(i) 
requires a supporting organization to maintain a significant 
involvement in the operations of one or more supported organizations 
that are dependent upon the supporting organization for the type of 
support that it provides. Under the existing regulations, there are two 
alternative ways to meet the integral part test: (1) the ``but for'' 
test under existing Sec.  1.509(a)-4(i)(3)(ii); or (2) the payout test 
under existing Sec.  1.509(a)-4(i)(3)(iii).
    Under existing Sec.  1.509(a)-4(i)(3)(ii), the ``but for'' test is 
satisfied if the activities engaged in by the supporting organization 
for or on behalf of the supported organizations are activities to 
perform the functions of, or to carry out the purposes of, such 
organizations, and, but for the involvement of the supporting 
organization, would normally be engaged in by the supported 
organizations themselves.
    The payout test under existing Sec.  1.509(a)-4(i)(3)(iii) requires 
a supporting organization to: (1) Make payments of substantially all of 
its income to or for the use of one or more supported organizations; 
(2) provide enough support to one or more supported organizations to 
ensure the attentiveness of such organization(s) to the operations of 
the supporting

[[Page 76384]]

organization; and (3) pay a substantial amount of the total support of 
the supporting organization to those supported organizations that meet 
the attentiveness requirement. The phrase ``substantially all of its 
income'' in existing Sec.  1.509(a)-4(i)(3)(iii) has been interpreted 
to mean at least 85 percent of adjusted net income. See Rev. Rul. 76-
208, 1976-1 CB 161.

3. PPA Changes to Qualification Requirements for Type III Supporting 
Organizations

    The PPA made five changes to the requirements an organization must 
meet to qualify as a Type III supporting organization:
    (1) It removed the ability to rely solely on the alternative test 
for charitable trusts as a means of meeting the responsiveness test;
    (2) To ensure that a ``significant amount'' is paid to supported 
organizations, it directed the Secretary of the Treasury to establish a 
new payout requirement for Type III supporting organizations that are 
not ``functionally integrated'' (with the term ``functionally 
integrated'' referring to Type III supporting organizations that are 
not required to meet a payout requirement due to their activities 
related to performing the functions of, or carrying out the purposes 
of, their supported organization(s));
    (3) It required a Type III supporting organization to annually 
provide to each of its supported organizations such information as the 
Secretary may require to ensure that the supporting organization is 
responsive to the needs or demands of its supported organization(s);
    (4) It prohibited a Type III supporting organization from 
supporting any supported organization not organized in the United 
States; and
    (5) It prohibited a Type I or Type III supporting organization from 
accepting a gift or contribution from a person who, alone or together 
with certain related persons, directly or indirectly controls the 
governing body of a supported organization of the Type I or Type III 
supporting organization.

4. Advanced Notice of Proposed Rulemaking

    On August 2, 2007, the Treasury Department and the IRS published in 
the Federal Register (72 FR 42335) an advanced notice of proposed 
rulemaking (ANPRM) (REG-155929-06). The ANPRM described proposed rules 
to implement the PPA changes to the Type III supporting organization 
requirements and solicited comments regarding those proposed rules. 
Forty comments were received in response to the ANPRM and were 
considered in drafting the notice of proposed rulemaking and these 
final and temporary regulations. No public hearing was requested or 
held.

5. Notice of Proposed Rulemaking

    On September 24, 2009, the Treasury Department and the IRS 
published in the Federal Register (74 FR 48672) a notice of proposed 
rulemaking (NPRM) (REG-155929-06). The NPRM contained proposed 
regulations (the ``2009 proposed regulations'') setting forth the 
requirements to qualify as a Type III supporting organization under the 
PPA. The IRS received more than 30 comments in response to the NPRM. 
These comments were considered in drafting these final and temporary 
regulations and are available for public inspection at 
www.regulations.gov or upon request. No public hearing was requested or 
held.
    After reviewing all comments received, the Treasury Department and 
the IRS believe that certain topics require further consideration. The 
Treasury Department and the IRS will continue to study these topics and 
will request comments on these topics in a separate notice of proposed 
rulemaking. Nonetheless, the Treasury Department and the IRS believe 
that immediate effective guidance is needed for Type III supporting 
organizations. Accordingly, the Treasury Department and the IRS are 
issuing both final regulations and temporary regulations. The 
provisions in the 2009 proposed regulations regarding the amount that 
non-functionally integrated Type III supporting organizations must 
annually distribute have been significantly revised in response to 
comments. As a result, these provisions (as well as provisions related 
to how assets are valued for purposes of this distribution requirement) 
are being issued as temporary and proposed regulations, to permit 
additional opportunity for comment. The other provisions of the 2009 
proposed regulations are being issued as final regulations, which are 
substantially similar to the 2009 proposed regulations but reflect 
certain revisions that were made based on comments received. The 
comments and revisions are discussed in the following section.

Explanation of Provisions and Summary of Comments

    Based largely on comments received from commenters, the final and 
temporary regulations make revisions to various provisions in the 2009 
proposed regulations, including (1) the definition of ``supported 
organization'' in Sec.  1.509(a)-4(a)(6); (2) the prohibition on 
receiving gifts or contributions from persons that control the 
governing body of a supported organization set forth in Sec.  1.509(a)-
4(f)(5); (3) the notification requirement set forth in Sec.  1.509(a)-
4(i)(2); (4) the responsiveness test set forth in Sec.  1.509(a)-
4(i)(3); (5) the requirements to qualify as a functionally integrated 
Type III supporting organization set forth in Sec.  1.509(a)-4(i)(4); 
(6) the requirements to qualify as a non-functionally integrated (NFI) 
Type III supporting organization set forth in Sec.  1.509(a)-4(i)(5); 
and (7) the transition rules provided in Sec.  1.509(a)-4(i)(11).

1. Definition of Supported Organization

    Section 1.509(a)-4(a)(5) defines a ``publicly supported 
organization'' as ``an organization described in section 509(a)(1) or 
(2).'' This defined term is used throughout Sec.  1.509(a)-4. The 2009 
proposed regulations proposed removing the term ``publicly supported 
organization'' wherever it appears in Sec.  1.509(a)-4 and replacing it 
with a new defined term, ``supported organization.'' The new defined 
term ``supported organization'' was narrower than the term ``publicly 
supported organization'' because it was limited to those organizations 
described in section 509(a)(1) or (2) that the supporting organization 
was organized and operated to support. As a result, the new defined 
term does not necessarily work in every instance in Sec.  1.509(a)-4 in 
which the term ``publicly supported organization'' is used. 
Accordingly, the final regulations maintain the term ``publicly 
supported organization'' and continue to use it in every paragraph of 
Sec.  1.509(a)-4 other than Sec.  1.509(a)-4(i).
    The final regulations also revise the definition of ``supported 
organization'' in the 2009 proposed regulations and apply the term only 
in newly amended Sec.  1.509(a)-4(i). While the definition of supported 
organization provided in the 2009 proposed regulations tracked the 
language of section 509(f)(3), the final regulations clarify the 
definition of supported organization by cross-referencing the 
previously-existing Sec.  1.509(a)-4(d)(4) and Sec.  1.509(a)-
4(d)(2)(iv). Thus, for purposes of Sec.  1.509(a)-4(i), a supported 
organization of a Type III supporting organization is defined as any 
publicly supported organization designated by name in the supporting 
organization's articles of organization. In addition, a supported 
organization of a Type III supporting organization can include a 
publicly supported organization that is not designated by name in the 
supporting organization's articles if there has been

[[Page 76385]]

a historic and continuing relationship between the supporting 
organization and the publicly supported organization and, by reason of 
such relationship, there has developed a substantial identity of 
interests between such organizations.

2. Gifts From Controlling Donors

    Like the 2009 proposed regulations, the final regulations prohibit 
a Type I or Type III supporting organization from accepting a gift or 
contribution from a person who, alone or together with certain related 
persons, directly or indirectly controls the governing body of a 
supported organization of the Type I or Type III supporting 
organization, or from persons related to a person possessing such 
control. For these purposes, related persons include family members and 
35-percent controlled entities within the meaning of section 4958(f).
    One commenter requested a definition of ``control'' for purposes of 
this provision. The Treasury Department and the IRS agree that a 
definition of ``control'' for these purposes would be beneficial and 
intend to issue proposed regulations in the near future that will 
provide such a definition.

3. Requirement To Notify Supported Organizations

    Like the 2009 proposed regulations, these final regulations require 
that, for each taxable year, a Type III supporting organization must 
provide to each of its supported organizations: (1) A written notice 
addressed to a principal officer of the supported organization 
describing the amount and type of support provided to the supported 
organization; (2) a copy of the supporting organization's most recently 
filed Form 990, ``Return of Organization Exempt from Income Tax,'' or 
other annual information return required to be filed under section 
6033; and (3) a copy of the supporting organization's governing 
documents, including any amendments. The required notification 
documents must be postmarked or electronically transmitted by the last 
day of the fifth calendar month following the close of the supporting 
organization's taxable year.
    Several commenters suggested that the due date for the required 
notification be amended to correspond to the Form 990 due date, with 
extensions. Alternatively, some commenters requested clarification that 
the ``most recently filed Form 990'' can be a Form 990 filed in a prior 
year.
    The Form 990 is due by the 15th day of the fifth calendar month 
following the close of the filing organization's taxable year. However, 
an organization required to file a Form 990 can request two three-month 
extensions (the first of which is granted automatically) by filing a 
Form 8868, ``Application for Extension of Time to File an Exempt 
Organization Return.'' As a result, if the due date for the required 
notification were the same as the Form 990 due date, with extensions, a 
supported organization might not receive its notification from a 
supporting organization until almost a year after the close of the 
supporting organization's preceding taxable year. In such cases, a 
supported organization would have little or no opportunity to use the 
information in the notification to make recommendations regarding the 
amount and type of support it wishes to receive from the supporting 
organization during the taxable year it receives the notification. In 
addition, if the due date for the notification were the same as the due 
date for the Form 990, with extensions, a supported organization would 
not know when to expect or request a notification from a supporting 
organization unless it knew whether or not a supporting organization 
requested extensions in any given year. For these reasons, the final 
regulations retain the due date of the last day of the fifth calendar 
month following the close of the supporting organization's taxable 
year.
    However, the Treasury Department and the IRS agree with commenters 
that if an organization has not filed a Form 990 for a taxable year by 
the last day of the fifth calendar month following the close of the 
taxable year (because, for example, it has received an extension), the 
organization's ``most recently filed'' Form 990 as of that last day of 
the fifth calendar month is the Form 990 for the supporting 
organization's immediately preceding taxable year. As a result, the 
final regulations clarify the relationship between the filing date of 
the Form 990 and the date notification is provided by referring to the 
Form 990 ``that was most recently filed as of the date the notification 
is provided'' rather than simply the ``most recently filed Form 990.'' 
Thus, for example, if a Type III supporting organization reporting on a 
calendar year basis has not filed its 2013 Form 990 by May 31, 2014, 
because it requested an extension, it can satisfy the Form 990 portion 
of its notification requirement for 2013 (which it needs to meet by May 
31, 2014) by providing a copy of the 2012 Form 990 that it filed in 
2013.
    In addition, the Treasury Department and the IRS recognize that 
some Type III supporting organizations that request extensions to file 
their Forms 990 may need additional time to prepare their first 
notification. As a result, as described further in section 8.a. of this 
preamble, the final regulations provide transition relief for 
supporting organizations in existence on the effective date of these 
final and temporary regulations under which the due date for a Type III 
supporting organization's first required notification is the later of 
the last day of the fifth calendar month following the close of the 
supporting organization's taxable year or the due date for the Form 990 
for that taxable year, including extensions.
    One commenter requested clarification that the required written 
notice must describe the amount and type of support the supporting 
organization provided to the supported organization in the supporting 
organization's ``immediately preceding taxable year,'' rather than ``in 
the past year,'' as provided in the 2009 proposed regulations. The 
final regulations clarify that the written notice must describe the 
support provided in the supporting organization's taxable year ending 
immediately before the taxable year in which the written notice is 
provided. Thus, for example, if a Type III supporting organization 
operating on a calendar year provided the required notification for 
2013 on May 31, 2014, the written notice would describe the support the 
supporting organization provided in 2013.
    Another commenter stated that the term ``principal officer'' as 
used in the 2009 proposed regulations is ambiguous and requested that 
the regulations expressly designate the treasurer or chief financial 
officer (CFO) as the principal officer to whom notification should be 
given. The final regulations make clear that a person who, regardless 
of title, has ultimate responsibility for managing the finances of a 
supported organization (which could include a CFO or treasurer) can be 
a principal officer of that organization for purposes of the 
notification requirement. In addition, the final regulations provide 
that a principal officer can include a person who, regardless of title, 
has ultimate responsibility for implementing the decisions of the 
supported organization's governing body or for supervising the 
management, administration, or operation of the supported organization.
    One commenter recommended that a supporting organization be 
permitted to send the required written notice to the supported 
organization's general address rather than to its principal officer. 
The Treasury Department and the IRS have concluded that the

[[Page 76386]]

notification should be sent to a principal officer of the supported 
organization to ensure receipt by a person with sufficient 
responsibility over the organization. Accordingly, the final and 
temporary regulations do not adopt this comment.
    The same commenter asked that supporting organizations be allowed 
to satisfy the notification requirement by sending supported 
organizations an internet link to the Form 990. Like the 2009 proposed 
regulations, the final regulations provide that the notification 
requirement may be satisfied by electronic media, which can include a 
working internet link. However, because all components of the 
notification requirement must be satisfied, providing only an internet 
link to the Form 990 would not be sufficient.
    One commenter recommended that a Type III supporting organization 
that is included in a group exemption and supports not only the central 
organization in the group exemption but also the other subordinate 
organizations that are part of the group exemption should only be 
required to provide notice to the central organization, not to all of 
the other subordinate organizations. Another commenter stated that 
notification is unnecessary if the principal officer of the supported 
organization is also the principal officer of the supporting 
organization. Because section 509(f)(1)(A) of the Code provides that 
Type III supporting organizations must provide the required 
notification ``to each supported organization,'' the Treasury 
Department and the IRS have concluded that a Type III supporting 
organization must provide notice to all of the organizations it is 
organized to support. Accordingly, the final and temporary regulations 
do not adopt these comments.
    Finally, because section 6104(d)(3)(A) of the Code and Sec.  
301.6104(d)-1(b)(4)(ii) except the name and address of contributors 
from the general requirement that tax-exempt organizations disclose 
their annual information returns, the final regulations clarify that a 
supporting organization may redact the name and address of any 
contributor to the organization from the Form 990 (or other annual 
information return) it is required to provide to the supported 
organization(s) as part of the notification requirement.

4. Responsiveness Test

    Like the 2009 proposed regulations, in implementing section 1241(c) 
of the PPA, the final regulations remove the alternative responsiveness 
test for charitable trusts contained in existing Sec.  1.509(a)-
4(i)(2)(iii). Accordingly, the final regulations provide that all Type 
III supporting organizations must satisfy the ``significant voice'' 
responsiveness test by (1) demonstrating one of three necessary 
relationships between their officers, directors, or trustees and those 
of their supported organization(s), and (2) showing that this 
relationship results in the officers, directors, or trustees of the 
supported organization having a significant voice in directing the use 
of the income and assets of the supporting organization.
    Numerous commenters suggested that Example 1 of Sec.  1.509(a)-
4(i)(3)(iv) of the 2009 proposed regulations, which illustrates how a 
charitable trust may satisfy the significant voice responsiveness test, 
imposes too onerous of a requirement for meeting the responsiveness 
test by describing ``quarterly face-to face-meetings'' between a bank 
trustee's representative and an officer of the supported organization. 
However, Example 1 does not impose specific requirements on charitable 
trusts seeking to satisfy the responsiveness test; rather, the example 
merely illustrates one way the officers, directors, or trustees of a 
supported organization could maintain a close and continuous 
relationship with the officers, directors, or trustees of a supporting 
organization organized as a trust and thereby have a significant voice 
in directing the use of the income or assets of that supporting 
organization. In order to better illustrate options for satisfying the 
significant voice responsiveness test, Example 1 has been amended in 
the final regulations to refer to ``quarterly face-to-face or 
telephonic meetings'' rather than only face-to-face meetings. As a 
general matter, the Treasury Department and the IRS anticipate that 
charitable trusts will be able to demonstrate that they satisfy the 
responsiveness test in a variety of ways, and whether a supported 
organization has a close and continuous relationship with, or a 
significant voice in directing the use of the income or assets of, a 
supporting organization will be determined based on all the relevant 
facts and circumstances.
    A few commenters requested additional examples of how Type III 
supporting organizations can satisfy the responsiveness test. The final 
and temporary regulations do not provide any such additional examples, 
but these comments will continue to be considered. The Treasury 
Department and the IRS intend to issue proposed regulations in the near 
future that amend the responsiveness test by clarifying that Type III 
supporting organizations must be responsive to all of their supported 
organizations. In the preamble to those proposed regulations, the 
Treasury Department and the IRS intend to request additional comments 
regarding examples of how to satisfy the responsiveness test.
    Several commenters requested clarification that the responsiveness 
test does not require a supporting organization to follow all of the 
directions or recommendations of a supported organization's officers, 
directors, or trustees and that the latter's role can be only advisory. 
The Treasury Department and the IRS have concluded that the term 
``significant voice'' makes clear that the responsiveness test requires 
only that the officers, directors, or trustees of a supported 
organization have the ability to influence the supporting 
organization's decisions regarding the supporting organization's use of 
its income or assets--not that the officers, directors, or trustees of 
the supported organization have control over such decisions.
    One commenter noted that some trust instruments specify the 
recipients, timing, manner, and amount of grants and requested that the 
regulations provide that a supported organization can still be deemed 
to have a significant voice over these matters if its supporting 
organization has such a governing instrument. The Treasury Department 
and the IRS are continuing to consider the best approach for supporting 
organizations with such trust instruments and intend to issue proposed 
regulations in the near future that will provide further clarification 
on this issue.
    Finally, the 2009 proposed regulations stated that a supporting 
organization is responsive to the needs or demands of a supported 
organization if it satisfies the requirements of Sec.  1.509(a)-
4(i)(3)(ii) and (iii). In order to conform more closely to existing 
Sec.  1.509(a)-4(i)(2)(i), the final regulations amend this language to 
state that a supporting organization must satisfy the requirements of 
Sec.  1.509(a)-4(i)(3)(ii) and (iii) in order to satisfy the 
responsiveness test.

5. Integral Part Test--Functionally Integrated Type III Supporting 
Organizations

    Like the 2009 proposed regulations, the final regulations provide 
that a Type III supporting organization is functionally integrated, and 
thus not subject to a distribution requirement, if it either: (1) 
Engages in activities substantially all of which directly further the 
exempt purposes of the supported organization(s) to which it is 
responsive by performing the functions

[[Page 76387]]

of, or carrying out the purposes of, such supported organization(s) and 
which, but for the involvement of the supporting organization, would 
normally be engaged in by the supported organization(s); or (2) is the 
parent of each of its supported organizations. In addition, the final 
regulations reserve a provision for a special rule for supporting 
organizations that support a governmental supported organization.
a. Substantially All Activities Directly Further the Exempt Purposes of 
Supported Organizations
    With respect to the test to qualify as functionally integrated by 
engaging in activities substantially all of which directly further the 
exempt purposes of the supported organization(s), one commenter 
recommended that the term ``directly further the exempt purposes'' be 
defined with reference to the phrase ``directly for the active conduct 
of activities constituting'' the exempt purposes, as used in the 
definition of a private operating foundation under section 4942(j)(3) 
and the accompanying regulations at Sec.  53.4942(b)-1(b)(1). The same 
commenter noted that Sec.  53.4942(b)-1(b)(2) treats certain grants, 
scholarships, or other payments made or awarded by a private operating 
foundation to individual beneficiaries as qualifying distributions made 
directly for the active conduct of exempt activities as long as those 
payments are to support active programs in which the operating 
foundation maintains significant involvement. This commenter 
recommended that similar grants, scholarships, or other payments made 
or awarded by Type III supporting organizations should be treated as 
activities that directly further the exempt purposes of a supported 
organization (``direct furtherance activities'').
    The Treasury Department and the IRS agree that the meaning of the 
phrase ``directly further the exempt purposes,'' as used in the 
functionally integrated test, is similar to the meaning of the phrase 
``directly for the active conduct of activities constituting'' the 
exempt purposes, as used in the definition of a private operating 
foundation and as described in detail in Sec.  53.4942(b)-1(b)(1). 
Consequently, in defining direct furtherance activities, the final 
regulations use language similar to that used in Sec.  53.4942(b)-
1(b)(1) by clarifying that direct furtherance activities are activities 
conducted by the supporting organization itself, rather than by a 
supported organization. However, most of the remaining language in 
Sec.  53.4942(b)-1(b)(1) used to define ``directly for the active 
conduct of activities'' is not used in the definition of direct 
furtherance activities in the final regulations because the former 
definition is based only on expenditures while the latter concept is 
based more broadly on the activities of a Type III supporting 
organization. As a result, the definition of direct furtherance 
activities in the final regulations is otherwise the same as the 
definition contained in the 2009 proposed regulations.
    The final regulations also provide that certain payments to 
individual beneficiaries similar to those that would qualify as 
``directly for the active conduct of activities constituting'' a 
private operating foundation's exempt purposes under Sec.  53.4942(b)-
1(b)(2) will be treated as direct furtherance activities under the Type 
III supporting organization functionally integrated test. Similar to 
the payments to individual beneficiaries described in Sec.  53.4942(b)-
1(b)(2), the final regulations provide that making or awarding grants, 
scholarships, or other payments to individual beneficiaries will be 
treated as an activity that directly furthers the exempt purposes of a 
supported organization only if the making or awarding of such payments 
is part of an active program of the supporting organization that 
directly furthers the exempt purposes of the supported organization(s) 
and in which the supporting organization maintains significant 
involvement (as defined in Sec.  53.4942(b)-1(b)(2)(ii)). However, 
unlike distributions directly for the active conduct of activities 
constituting a private operating foundation's exempt purposes, the 
direct furtherance activities of a functionally integrated Type III 
supporting organization must directly further the exempt purposes of 
one or more supported organizations. As a result, the final regulations 
impose three additional requirements that a supporting organization's 
grants, scholarships, or other payments to individual beneficiaries 
must satisfy in order to be considered direct furtherance activities. 
First, the individual beneficiaries must be members of the charitable 
class benefitted by a supported organization. Second, the officers, 
directors, or trustees of that supported organization must have a 
significant voice in the timing of the payments, the manner of making 
them, and the selection of recipients. Third, the individual 
beneficiaries must be selected on an objective and nondiscriminatory 
basis (as described in Sec.  53.4945-4(b)).
    A number of commenters suggested that fundraising, making grants, 
and investing and managing non-exempt-use assets should be considered 
direct furtherance activities in certain situations, including those in 
which the supported organization (1) is a community foundation or other 
publicly-supported grantmaker, (2) is a religiously-affiliated entity, 
(3) has a close historic and continuing relationship with the 
supporting organization, or (4) created the supporting organization 
specifically to house fundraising, grantmaking, and/or investment 
activities. One commenter further suggested that a Type III supporting 
organization's fundraising, grantmaking, and/or investment and 
management of non-exempt-use assets should be treated as direct 
furtherance activities as long as a ``preponderance'' of the supporting 
organization's other activities otherwise directly further the 
supported organization's exempt purposes. Another commenter recommended 
that the regulations include an exception that would treat a supporting 
organization as functionally integrated (or otherwise not subject to a 
distribution requirement) even if it engaged in grantmaking and the 
production of investment income as more than an insubstantial part of 
its activities as long as it (1) has not received any contribution from 
its founder or family members since 1970, (2) has no substantial 
contributor (or family member thereof) who is alive, and (3) has 
already distributed to its supported organization(s), in the aggregate, 
an amount equal to the amount of its donor contributions.
    The Treasury Department and the IRS have determined that a Type III 
supporting organization should qualify as functionally integrated, and 
therefore not be subject to the payout requirement, if substantially 
all of its support for its supported organization(s) consists of 
charitable activities that the supporting organization itself directly 
carries out (as distinguished from charitable activities carried out by 
the supported organization(s) that the supporting organization helps 
finance by producing and distributing income). This is because a 
supporting organization that operates substantial, direct charitable 
programs itself may need more flexibility in structuring its annual 
operational budget than the annual payout requirement for NFI Type III 
supporting organizations would allow. The examples of activities that 
commenters want to be treated as direct furtherance activities or to 
otherwise qualify them for an exception from the distribution 
requirement--all of which involve producing income and

[[Page 76388]]

distributing a portion of it to the supported organization--are not 
consistent with this rationale and hence the Treasury Department and 
the IRS do not adopt these comments.
    Commenters also requested additional guidance on how direct 
furtherance activities will be measured for purposes of determining 
whether they constitute ``substantially all'' of a supporting 
organization's activities. A number of commenters suggested that all 
facts and circumstances should be considered in making this 
determination, including not only the supporting organization's 
expenditures but also, for example, the time and effort spent by the 
organization's employees and volunteers. The final regulations clarify 
that all pertinent facts and circumstances are considered in measuring 
activities for purposes of determining whether substantially all of an 
organization's activities are direct furtherance activities.
    One commenter stated that the example in the 2009 proposed 
regulations of a supporting organization that qualifies as a 
functionally integrated Type III supporting organization by performing 
publishing and printing functions for churches was not ``realistic'' 
because several churches would be unlikely to jointly establish such a 
publishing operation. Instead of a publishing operation, this commenter 
suggested that churches would be more likely to jointly establish a 
charitable organization that performs a social welfare function. As a 
result, the final regulations replace the example of a nonprofit 
publishing organization with an example of a nonprofit food pantry.
b. Being the Parent of Each Supported Organization
    Like the 2009 proposed regulations, the final regulations provide 
that a Type III supporting organization can qualify as functionally 
integrated by being the parent of each supported organization. In 
defining ``parent'' for these purposes, the final regulations repeat 
the definition set forth in the 2009 proposed regulations and state 
that a supporting organization is the parent of a supporting 
organization if the supporting organization exercises a substantial 
degree of direction over the policies, programs, and activities of the 
supported organization, and a majority of the officers, directors, or 
trustees of the supported organization is appointed or elected, 
directly or indirectly, by the governing body, members of the governing 
body, or officers of the supporting organization acting in their 
official capacity. However, the Treasury Department and the IRS have 
determined that this definition of ``parent'' is insufficiently 
specific. Consequently, the Treasury Department and the IRS intend to 
issue proposed regulations in the near future that will provide a new 
definition of parent that specifically addresses the power to remove 
and replace officers, directors, or trustees of the supporting 
organization.
c. Supporting a Governmental Supported Organization
    The 2009 proposed regulations provided a ``governmental entity 
exception'' under which a Type III supporting organization that 
supports one supported organization whose assets are subject to the 
appropriations process of a federal, state, local, or Indian tribal 
government may treat grantmaking to the supported organization and 
investing and managing non-exempt-use assets on behalf of the supported 
organization as direct furtherance activities, as long as a substantial 
part of the supporting organization's total activities are otherwise 
direct furtherance activities.
    Several commenters requested that this governmental entity 
exception be expanded to allow supporting organizations to support more 
than one supported organization. For example, commenters recommended 
that a supporting organization be allowed to qualify for this exception 
if it supports (1) up to five governmental supported organizations; (2) 
not only a governmental entity but also other supported organizations 
that are responsive to, and have a substantial operational connection 
with, that governmental entity; or (3) a governmental system, such as a 
parent and subsidiary units.
    The Treasury Department and the IRS are continuing to consider 
these comments regarding the governmental entity exception and intend 
to issue proposed regulations in the near future that will provide 
guidance on how supporting organizations can qualify as functionally 
integrated by supporting a governmental entity. These proposed 
regulations will also provide one or more examples of how a Type III 
supporting organization can qualify as functionally integrated by 
supporting a governmental entity (similar to the examples contained in 
the 2009 proposed regulations but omitted from these final and 
temporary regulations).
    In the meantime, as discussed further in section 8.b. of this 
preamble, Type III supporting organizations can qualify as functionally 
integrated by meeting the requirements of the ``but for'' test under 
existing Sec.  1.509(a)-4(i)(3)(ii) until the first day of their second 
taxable year beginning after December 28, 2012. The Treasury Department 
and the IRS intend to release the proposed regulations on the 
governmental entity rule sufficiently in advance of the beginning of 
this second taxable year to enable Type III SOs to determine their 
eligibility. The Treasury Department and the IRS also anticipate that, 
for taxable years beginning prior to the date of issuance of the future 
final regulations on the governmental entity rule, Type III SOs would 
be permitted to rely on the governmental entity rule as stated in 
either the future proposed or final regulations.

6. Integral Part Test--Non-Functionally Integrated Type III Supporting 
Organizations

a. Distribution Requirement
    The 2009 proposed regulations provided that a NFI Type III 
supporting organization would have to annually distribute a 
``distributable amount'' equal to 5 percent of the fair market value of 
its non-exempt-use assets. The Treasury Department and the IRS decided 
to base this distribution requirement on non-exempt-use assets, rather 
than on income, due to concerns that the income-based payout test under 
existing Sec.  1.509(a)-4(i)(3)(iii) could result in little or nothing 
being paid to charity if the supporting organization's assets produced 
little to no income.
    Several commenters stated that the 5-percent payout rate in the 
2009 proposed regulations would be too high and would erode a 
supporting organization's assets over time on a real (inflation-
adjusted) basis. A few commenters noted that private non-operating 
foundations must annually pay out 5 percent of their non-exempt-use 
assets under section 4942 of the Code but stated that NFI Type III 
supporting organizations should not be subject to the same payout rate 
as private non-operating foundations because they are distinguishable 
from these foundations. For example, some commenters noted that private 
non-operating foundations can fund any number of charitable 
organizations in a given year, while Type III supporting organizations 
are obligated to benefit designated supported organizations and also 
must satisfy the responsiveness and attentiveness tests with respect to 
these supported organizations. Commenters also noted that substantial 
contributors to a supporting organization (as well as certain related 
persons) cannot control the supporting organization, while private 
foundations face no such restriction. Some of these commenters

[[Page 76389]]

noted that lower effective payout requirements are imposed on private 
operating foundations and medical research organizations and 
recommended that similar payout requirements should apply to NFI Type 
III supporting organizations. Other commenters asked that the final 
regulations maintain the payout test under existing Sec.  1.509(a)-
4(i)(3)(iii), which requires payments of substantially all of the 
supporting organization's income.
    The Treasury Department and the IRS recognize that NFI Type III 
supporting organizations face a number of requirements and restrictions 
that do not apply to private foundations, including the organizational, 
operational, and disqualified person control tests under section 
509(a)(3) and the responsiveness and attentiveness test under the 
regulations regarding Type III supporting organizations. These 
requirements and restrictions should significantly reduce the 
likelihood that substantial contributors to a NFI Type III supporting 
organization will be able to use the supporting organization's assets 
to further their own interests. These requirements also result in a 
relationship between the supporting organization and the supported 
organizations that does not necessarily exist between private 
foundations and their grantees.
    As a result, the Treasury Department and the IRS have determined 
that an asset-based payout percentage lower than the payout percentage 
for private non-operating foundations is justified for NFI Type III 
supporting organizations. At the same time, the payout test under 
existing Sec.  1.509(a)-4(i)(3)(iii), which requires payments of 
substantially all of the supporting organization's income (with 
``substantially all'' considered to mean 85 percent or more), has 
helped prevent unreasonable accumulations of income by NFI Type III 
supporting organizations that generate significant amounts of current 
income in a particular taxable year. Accordingly, the temporary 
regulations require NFI Type III supporting organizations to annually 
distribute a ``distributable amount'' equal to the greater of 85 
percent of adjusted net income or 3.5 percent of the fair market value 
of the supporting organization's non-exempt-use assets. For these 
purposes, ``adjusted net income'' is determined by applying the 
principles of section 4942(f) and Sec.  53.4942(a)-2(d). Because this 
distributable amount is significantly different than the distributable 
amount described in the 2009 proposed regulations, the Treasury 
Department and the IRS have issued the provisions describing the 
distributable amount as temporary and proposed regulations to provide 
an opportunity for comment.
    In recommending an asset-based payout percentage of less than 5 
percent, a number of commenters emphasized that supporting 
organizations have a relationship with their supported organizations 
that private foundations do not have with their grantees and that this 
relationship helps ensure responsiveness to the needs and demands of 
the supported organization. The Treasury Department and the IRS 
considered this relationship in determining the appropriate payout rate 
for NFI Type III supporting organizations. Accordingly, the Treasury 
Department and the IRS intend to ensure that this relationship exists 
between a supporting organization and each of its supported 
organizations by proposing regulations requiring that NFI Type III 
supporting organizations meet the responsiveness test with respect to 
each of their supported organizations.
    Many commenters recommended that the distributable amount be based 
on the average fair market value of non-exempt-use assets over the 
three years (as opposed to just one year) preceding the year of the 
required distribution, in order to reduce fluctuations in payments to 
the supported organization(s) from year to year and avoid significant 
cuts to supported organizations' budgets during downward market 
fluctuations. The Treasury Department and the IRS expect that the new 
notification requirement and the application of the ``significant 
voice'' responsiveness test to all Type III supporting organizations, 
including those organized as trusts, will give supported organizations 
the opportunity to influence the timing of payments. In addition, the 
Treasury Department and the IRS expect that the significantly lower 
payout percentage set forth in the temporary regulations should provide 
NFI Type III supporting organizations with additional flexibility to 
respond to requests from supported organizations to adjust the timing 
of payments to anticipate and respond to market fluctuations. 
Flexibility to respond to such requests from supported organizations is 
also made possible by the carryover rule that the final regulations 
adopt without change from the 2009 proposed regulations. This rule 
allows a Type III supporting organization that distributes more than 
its annual distributable amount during a taxable year to carry over 
that excess amount for five subsequent taxable years. Accordingly, the 
final and temporary regulations do not adopt the three-year valuation 
period suggested by commenters and, like the 2009 proposed regulations, 
provide that the distributable amount is based on the fair market value 
of the organization's non-exempt-use assets in the immediately 
preceding taxable year.
    One commenter asked that the reasonable cause exception to the 
distribution requirement be expanded to expressly include times of 
great financial distress. Like the 2009 proposed regulations, the final 
regulations allow the Secretary to provide for a temporary reduction in 
the annual distributable amount in the case of a disaster or emergency, 
which the Treasury Department and the IRS intend to include a time of 
great financial distress. Thus, the final and temporary regulations do 
not make any changes to the reasonable cause exception.
b. Distributions That Count Toward the Distribution Requirement
    A number of commenters recommended that a NFI Type III supporting 
organization should, like a private foundation, be able to count toward 
its distribution requirement amounts set aside for specific charitable 
projects that accomplish the exempt purposes of one or more supported 
organization(s). In response to this recommendation, the final 
regulations provide that a supporting organization may count a set-
aside toward its distribution requirement if it establishes to the 
satisfaction of the IRS, in a manner similar to that required of 
private foundations making set-asides under section 4942(g)(2)(B)(i) 
and the accompanying regulations, that the project is one that can be 
better accomplished by the set-aside than by the immediate payment of 
funds. In particular, the supporting organization must apply for IRS 
approval of the set-aside before the end of the taxable year in which 
the amount is set aside, establish to the satisfaction of the IRS that 
the amount set aside will be paid for the specific project within 60 
months after it is set aside and that the project is one that can 
better be accomplished by the set-aside than by the immediate payment 
of funds, and meet the other approval and information requirements set 
forth in Sec.  53.4942(a)-3(b)(7)(i). The supporting organization must 
also obtain a written statement from the supported organization, signed 
by one of the supported organization's principal officers under penalty 
of perjury. This written statement must confirm that the specific 
project accomplishes the exempt purposes of the supported organization 
and that the supported organization approves the

[[Page 76390]]

supporting organization's determination that the project is one that 
can be better accomplished by the set-aside than by the immediate 
payment of funds or distribution of assets. The final and temporary 
regulations do not incorporate a test similar to the ``cash 
distribution test'' for set-asides described in section 
4942(g)(2)(B)(ii) and the accompanying regulations because such a test 
would not provide sufficient assurance that the project is one better 
accomplished by means of a set aside than by an immediate distribution 
to the supported organization.
    A few commenters requested that the regulations clarify that a 
supporting organization will be able to count toward the distribution 
requirement expenditures on activities that directly further the exempt 
purposes of its supported organization(s). Accordingly, the final 
regulations provide that a NFI Type III supporting organization can 
count toward the distribution requirement amounts expended on 
activities that directly further the exempt purposes of the supported 
organization(s) to which the supporting organization is responsive and 
that, but for the involvement of the supporting organization, would 
normally be engaged in by the supported organization(s) (that is, that 
meet the requirements of Sec.  1.509(a)-4(i)(4)(i)(A)). However, in the 
case of such a direct furtherance activity that generates revenue for 
the supporting organization, the supporting organization can only count 
expenditures on that activity toward its distribution requirement to 
the extent the expenditures exceed the revenue derived. Thus, for 
example, if a NFI Type III supporting organization spent $1 million in 
a taxable year operating a museum that generated $800,000 in receipts 
for the supporting organization during that same year, the supporting 
organization could only count $200,000 of the $1 million spent toward 
the distribution requirement (assuming the operation of the museum was 
an activity described in Sec.  1.509(a)-4(i)(4)(i)(A)).
    Like the 2009 proposed regulations, the final regulations provide 
that reasonable and necessary administrative expenses also count toward 
the distribution requirement. The final regulations clarify, however, 
that such expenses must be paid to accomplish the exempt purposes of 
the supported organization(s) and thus do not include expenses incurred 
in the production of investment income. The list of distributions that 
count toward the distribution requirement contained in Sec.  1.509(a)-
4(i)(6) is not an exhaustive list and other distributions may count 
toward the distribution requirement. The Treasury Department and the 
IRS intend to propose regulations in the near future that will more 
fully describe the expenditures (including expenditures for 
administrative and additional charitable activities) that do and do not 
count toward the distribution requirement.
    One commenter recommended that Sec.  1.509(a)-4(i)(6)(i) of the 
2009 proposed regulations be revised to conform to Sec.  1.509(a)-
4(i)(5)(ii) of the 2009 proposed regulations by providing that 
distributions made ``for the use of'' one or more supported 
organizations, as well as ``to'' one or more supported organizations, 
can count toward satisfying the distribution requirement. The commenter 
stated that such a conforming provision would clarify that supporting 
organizations have the flexibility to make payments to third parties 
directly ``on behalf of'' supported organizations. The Treasury 
Department and the IRS do not agree that the term ``for the use of'' is 
synonymous with ``on behalf of'' or that it permits grants to 
organizations other than the supported organizations to count toward 
the distribution requirement. Accordingly, the final and temporary 
regulations do not adopt this comment.
    Several commenters recommended that program-related investments 
(PRIs), which count toward satisfying a private foundation's 
distribution requirement under section 4942, should count toward the 
distribution requirement of NFI Type III supporting organizations. One 
commenter further recommended that the value of a PRI be excluded in 
calculating a supporting organization's distributable amount for a 
taxable year. These final and temporary regulations do not specifically 
address whether or not PRIs may count toward the distribution 
requirement for NFI Type III supporting organizations or be excluded in 
calculating a supporting organization's distributable amount for a 
taxable year. The Treasury Department and IRS are continuing to 
consider these comments and intend to provide further clarification in 
future proposed regulations.
c. Attentiveness Requirement
    Like the 2009 proposed regulations, the final regulations modify 
the attentiveness requirement in existing Sec.  1.509(a)-4(i)(3)(iii) 
to provide that an organization must distribute one-third or more of 
its required, annual distributable amount to one or more supported 
organizations that are attentive to the supporting organization and 
with respect to which the supporting organization meets the 
responsiveness test. Also like the 2009 proposed regulations, the final 
regulations provide that, to demonstrate that a supported organization 
is attentive, a supporting organization must: (1) Provide 10 percent or 
more of the supported organization's total support; (2) provide support 
that is necessary to avoid the interruption of the carrying on of a 
particular function or activity of the supported organization; or (3) 
provide an amount of support that, based on ``all pertinent factors,'' 
is a sufficient part of a supported organization's total support. For 
purposes of the second test listed above, support is considered 
necessary if the supporting organization or the supported organization 
earmarks the support for a particular program or activity of the 
supported organization, even if such program or activity is not the 
supported organization's primary activity, as long as the program or 
activity is a substantial one.
    One commenter suggested that the regulations clarify that, for 
purposes of determining whether a supporting organization provides 10 
percent of a supported organization's total support, the supported 
organization's total support is its total support received in the 
immediately preceding taxable year. The final regulations adopt this 
comment.
    Other commenters recommended changes to portions of the 
attentiveness test in the 2009 proposed regulations that are 
substantially identical to those in the existing regulations. The final 
and temporary regulations do not amend or supplement any of these 
portions of the attentiveness test, none of which were directly changed 
or affected by the PPA.
    One commenter requested that the regulations include a safe harbor 
under which the attentiveness test would be automatically satisfied if 
a certain stated dollar amount of support (possibly indexed for 
inflation) were distributed to a supported organization. The final and 
temporary regulations do not adopt this suggestion because of the 
difficulty in identifying a specific dollar threshold that would be 
sufficient in all cases to ensure the supported organization's 
attentiveness.
    Finally, one commenter requested guidance on how a supporting 
organization to a community foundation could satisfy the attentiveness 
test if it makes distributions to third-party organizations that 
fulfill the mission of the supported organization(s). Grants to 
organizations other than the supported organization will not ensure the 
attentiveness of a supported

[[Page 76391]]

organization. Moreover, Type III supporting organizations generally are 
not permitted to make grants to organizations other than their 
supported organizations. See Sec.  1.509(a)-4(e)(1). Thus, the final 
and temporary regulations do not permit supporting organizations to 
satisfy the attentiveness test by making distributions to third-party 
organizations.
d. Valuation of Assets
    In describing how a NFI Type III supporting organization determines 
the fair market value of its non-exempt-use assets for purposes of 
determining its distributable amount, the 2009 proposed regulations 
incorporated language used in Sec.  53.4942(a)-2(c), which describes 
how a private foundation values its assets for purposes of determining 
its distributable amount. The 2009 proposed regulations also 
incorporated language used in Sec.  53.4942(a)-2(c) in describing the 
assets (including exempt-use assets) that are excluded in determining 
the distributable amount.
    Rather than duplicate all of the language in Sec.  53.4942(a)-2(c), 
the temporary regulations accomplish the same result as the 2009 
proposed regulations by cross-referencing Sec.  53.4942(a)-2(c). More 
specifically, the temporary regulations state that the determination of 
the aggregate fair market value of a NFI Type III supporting 
organization's non-exempt-use assets will be made using the valuation 
methods described in Sec.  53.4942(a)-2(c). The temporary regulations 
also state that, for these purposes, the ``non-exempt-use'' assets of 
the supporting organization do not include assets described in Sec.  
53.4942(a)-2(c)(2) or assets used (or held for use) to carry out the 
exempt purposes of the supported organization(s) (as defined by 
applying the principles described in Sec.  53.4942(a)-2(c)(3)).
    The Treasury Department and the IRS do not intend for cross-
referencing (rather than duplicating the language of) Sec.  53.4942(a)-
2(c) to result in any substantive changes from the 2009 proposed 
regulations in how NFI Type III supporting organizations value their 
assets or in what assets are excluded in determining the distributable 
amount. However, to the extent that cross-referencing Sec.  53.4942(a)-
2(c) could result in any unintended uncertainty on this point, the 
Treasury Department and the IRS have issued this change in temporary 
and proposed regulations to provide an opportunity for comment.

7. Consequences of Failure To Meet Requirements

    A Type III supporting organization that fails to meet the 
requirements of these final and temporary regulations--and that also 
fails to meet the requirements of a Type I or II supporting 
organization and otherwise fails to qualify as a public charity under 
section 509(a)(1), (2), or (4)--will be classified as a private 
foundation. Once classified as a private foundation, the section 507 
rules regarding termination of private foundation status apply.
    One commenter requested that the regulations reclassify a Type III 
supporting organization that fails to meet the requirements of the 
regulations as a private foundation as of the beginning of the taxable 
year in which the failure occurred only for purposes of section 507 and 
section 4940 (regarding excise taxes on net investment income) and as 
of the first day of the next taxable year for all other provisions of 
Chapter 42 (which contains other excise taxes applicable to private 
foundations). This commenter also recommended that, for purposes of 
Chapter 42, the identity of substantial contributors to a supporting 
organization within the meaning of section 507(d)(2) be determined by 
taking into account only contributions received after the date the 
organization is reclassified as a private foundation.
    In addition, this same commenter made two recommendations related 
to termination of private foundation status under section 507. First, 
the commenter recommended that a Type III supporting organization that 
is reclassified as a private foundation for certain ``non-structural'' 
reasons (such as accepting gifts from persons that control the 
supported organization(s), failing to provide an annual notice, not 
making the required payout, or not satisfying the attentiveness test) 
be treated as having received an advance ruling that it can be expected 
to satisfy the requirements of a supporting organization during the 60-
month termination period under Sec.  1.507-2(d) if the supporting 
organization includes certain explanatory information in its notice of 
termination of private foundation status. Second, the commenter 
recommended allowing a supporting organization to provide a notice of 
termination after the commencement of the 60-month termination period 
in appropriate cases--for example, during the one or two years after 
the regulations become effective.
    The PPA changes did not impact the timing of when a Type III 
supporting organization is reclassified as a private foundation or when 
the various provisions of Chapter 42 apply after the Type III 
supporting organization fails to meet one or more of the requirements 
necessary to maintain its classification as a Type III supporting 
organization (or other type of public charity). The PPA changes also 
did not impact the contributions that are taken into account when 
determining whether donors are substantial contributors. With respect 
to termination of private foundation status under section 507, section 
507(b)(1)(B)(ii) states that organizations terminating their private 
foundation status to operate as a supporting organization or other 
public charity must notify the Secretary before, not after, the 
commencement of the 60-month termination period. Accordingly, the final 
and temporary regulations do not adopt this commenter's 
recommendations.

8. Transition and Other Relief Provisions

a. Notification Requirement
    The final regulations provide that a Type III supporting 
organization in existence on December 28, 2012, the effective date of 
the final regulations, must meet its notification requirement for its 
taxable year that includes December 28, 2012, by the later of the last 
day of the fifth calendar month following the close of that taxable 
year or the due date, including extensions, of its Form 990 (or other 
annual information return described in section 6033) for that taxable 
year. Thus, for example, a Type III supporting organization reporting 
on a calendar year basis that does not have to file its 2012 Form 990 
until November 15, 2013, because it was granted two three-month 
extensions of time to file will have until November 15, 2013, to 
satisfy its notification requirement for 2012.
b. Responsiveness Test
    The final regulations, like the 2009 proposed regulations, provide 
that additional facts and circumstances, such as a historic and 
continuing relationship with supported organization(s), may be taken 
into account in establishing compliance with the responsiveness test 
for organizations that were supporting such supported organization(s) 
prior to November 20, 1970.
    One commenter asked that the final regulations clarify whether this 
alternative responsiveness test for pre-November 20, 1970 organizations 
requires a Type III supporting organization to also satisfy the 
significant voice prong of the responsiveness test under Sec.  
1.509(a)-

[[Page 76392]]

4(i)(3)(iii). Consistent with the existing regulations, the final 
regulations clarify that the significant voice prong is simply one 
factor along with other facts and circumstances that will be taken into 
account in determining compliance with the responsiveness test for pre-
November 20, 1970 organizations.
c. Integral Part Test
    The final regulations provide transition rules with respect to the 
integral part test for Type III supporting organizations in existence 
on December 28, 2012, the effective date of the final regulations. The 
2009 proposed regulations included a transition rule under which an 
organization that met and continued to meet the requirements of 
existing Sec.  1.509(a)-4(i)(3)(ii) (that is, an organization meeting 
the integral part test by satisfying the ``but for'' test) would be 
treated as meeting the requirements of a functionally integrated Type 
III supporting organization set forth in Sec.  1.509(a)-4(i)(4) until 
the first day of the organization's first taxable year beginning after 
the publication of the final or temporary regulations. However, the 
Treasury Department and the IRS realize that because the final 
regulations are being published on December 28, 2012, Type III 
supporting organizations reporting on a calendar year basis that wish 
to qualify as functionally integrated may need additional time to 
comply with Sec.  1.509(a)-4(i)(4). As a result, the final regulations 
amend this transition rule to provide that a Type III supporting 
organization that met and continues to meet the ``but for'' test under 
existing Sec.  1.509(a)-4(i)(3)(ii) will be treated as meeting the 
requirements of a functionally integrated Type III supporting 
organization set forth in Sec.  1.509(a)-4(i)(4) until the first day of 
the organization's second taxable year beginning after December 28, 
2012.
    Like the 2009 proposed regulations, the final regulations provide 
that a Type III supporting organization in existence on December 28, 
2012, that met and continues to meet the requirements of existing Sec.  
1.509(a)-4(i)(3)(iii) (that is, an organization meeting the integral 
part test by satisfying the existing ``payout'' test) will be treated 
as meeting the requirements of a NFI Type III supporting organization 
set forth in Sec.  1.509(a)-4(i)(5) until the first day of the 
organization's second taxable year beginning after December 28, 2012. 
However, for purposes of determining whether a Type III supporting 
organization treated as NFI under this transition relief creates an 
``excess amount'' that can be carried over for five years, the 
distributable amount for the supporting organization's first taxable 
year beginning after December 28, 2012, is the greater of 85 percent of 
net adjusted income or 3.5 percent of the value of assets in the 
immediately preceding taxable year (that is, the distributable amount 
as ordinarily determined under the temporary regulations).
    Section 1.509(a)-4(i)(11)(iii) of the 2009 proposed regulations 
provided that the distributable amount for NFI Type III supporting 
organizations is zero for the first taxable year beginning after the 
effective date of the final or temporary regulations. The Treasury 
Department and the IRS did not intend for this provision to apply to a 
NFI Type III supporting organization that had been meeting the payout 
test under existing Sec.  1.509(a)-4(i)(3)(iii), as is clear from the 
example provided in the preamble to the 2009 proposed regulations 
illustrating the application of the transition rules for a NFI Type III 
supporting organization. Rather, Sec.  1.509(a)-4(i)(11)(iii) of the 
2009 proposed regulations more appropriately applies only to Type III 
supporting organizations that had been meeting the ``but for'' test 
under existing Sec.  1.509(a)-4(i)(3)(ii) in the taxable year of the 
final regulations' publication but seek to qualify as NFI (rather than 
functionally integrated) Type III supporting organizations in 
succeeding taxable years. Indeed, one commenter specifically asked for 
clarification regarding the transition relief applicable to Type III 
supporting organizations that had been satisfying the existing ``but 
for'' test but intend to convert to NFI status because they cannot or 
do not wish to qualify as functionally integrated under the final 
regulations.
    The final regulations provide clarification regarding these 
transition rules. In particular, the final regulations provide that a 
Type III supporting organization in existence on December 28, 2012, 
that meets the requirements of the ``but for'' test under existing 
Sec.  1.509(a)-4(i)(3)(ii) in its taxable year including December 28, 
2012, but not in its first taxable year beginning after December 28, 
2012, is a NFI Type III supporting organization during that first 
taxable year and will be treated as having a distributable amount of 
zero for purposes of meeting the distribution and attentiveness 
requirements under Sec.  1.509(a)-4(i)(5)(ii)-(iii). Notwithstanding 
this transition relief, for purposes of determining whether such a NFI 
Type III supporting organization creates an ``excess amount'' that can 
be carried over for five years, the distributable amount for the first 
taxable year beginning after December 28, 2012, is the greater of 85 
percent of net adjusted income or 3.5 percent of the value of assets in 
the immediately preceding taxable year (that is, the distributable 
amount as ordinarily determined under the temporary regulations). The 
same rule applies for purposes of determining the excess amount of an 
organization that has a distributable amount of zero in its first 
taxable year as a NFI Type III supporting organization under Sec.  
1.509(a)-4(i)(5)(ii)(D).
    Beginning in the second taxable year beginning after December 28, 
2012, and in all succeeding taxable years, all Type III supporting 
organizations must meet either the requirements of Sec.  1.509(a)-
4(i)(4) or Sec.  1.509(a)-4(i)(5). A Type III supporting organization 
intending to meet the requirements of a NFI Type III supporting 
organization under Sec.  1.509(a)-4(i)(5) in its second taxable year 
beginning after December 28, 2012, should value its assets in 
accordance with the valuation methods described in the final 
regulations beginning in its first taxable year beginning after 
December 28, 2012.
    In addition, a Type III supporting organization treated as a 
functionally integrated Type III supporting organization during its 
first taxable year beginning after December 28, 2012, by virtue of 
satisfying the ``but for'' test under existing Sec.  1.509(a)-
4(i)(3)(ii) but intending to meet the requirements of a NFI Type III 
supporting organization under Sec.  1.509(a)-4(i)(5) during its second 
taxable year beginning after December 28, 2012, will have a 
distributable amount for that second taxable year based on its income 
or the value of its assets in the immediately preceding taxable year. 
Such a Type III supporting organization will not have a distributable 
amount of zero in its second taxable year beginning after December 28, 
2012, notwithstanding the general rule under Sec.  1.509(a)-
4(i)(5)(ii)(D) that the distributable amount for the first taxable year 
an organization is treated as a NFI Type III supporting organization is 
zero.
    Two commenters requested that the regulations provide transition 
relief to NFI Type III supporting organizations whose governing 
instrument or other instrument prohibits distributions from capital or 
corpus, similar to the transition rules provided to certain private 
foundations organized before May 27, 1969, under Sec.  53.4942(a)-2(e). 
The final regulations provide transition relief to each NFI Type III 
supporting organization organized before September 24, 2009, that 
commences judicial proceedings before June 26, 2013, that are necessary 
to reform its

[[Page 76393]]

governing or other instrument to allow it to meet the distribution 
requirement. During any taxable year in which such a judicial 
proceeding is pending, a NFI Type III supporting organization is 
excepted from the distribution requirement to the extent it is 
prevented from meeting the requirement by one or more mandatory 
provisions in its governing instrument or other instrument that 
prohibits distributions from capital or corpus. The transition relief 
applies only if the governing or other instrument at issue was executed 
(and the mandatory provisions were in effect) before September 24, 
2009, the date the 2009 proposed regulations were published in the 
Federal Register, and if the judicial proceeding is not subject to any 
unreasonable delay for which the supporting organization is 
responsible. Beginning with the first taxable year following the 
termination of a judicial proceeding, a NFI Type III supporting 
organization must satisfy the distribution requirement regardless of 
the outcome of the judicial proceeding--a requirement materially 
identical to the requirements imposed by Sec.  53.4942(a)-2(e)(3) on 
pre-May 27, 1969 private foundations whose governing instruments 
prohibited distributions out of capital or corpus.
    Numerous commenters responded to the request in the 2009 proposed 
regulations for comments regarding the need for a transition rule for 
NFI Type III supporting organizations whose assets consist 
predominantly of assets that are not readily marketable. Commenters 
suggested a longer transition period, varying from four to ten years, 
for supporting organizations with such assets. Some commenters 
suggested providing the longer transition period to all supporting 
organizations with a sufficiently high proportion (for example, a 
``material'' threshold of 20 percent or more) of not-readily-marketable 
assets. Other commenters recommended allowing a NFI Type III supporting 
organization to exclude the value of its not-readily-marketable assets 
from the assets used to calculate the distributable amount during the 
longer transition period (while possibly also requiring the 
organization to pay out substantially all of the income generated by 
its not-readily-marketable assets). A few commenters recommended a 
phase-in of the required distribution rate during a transition period 
(either for all NFI Type III supporting organizations or those holding 
substantial not-readily-marketable assets). As an alternative to 
transition relief, one commenter recommended a reasonable cause 
exception for NFI Type III supporting organizations that are unable to 
reasonably liquidate their assets that are not readily marketable.
    The final and temporary regulations do not include a transition 
rule, or a reasonable cause exception, for NFI Type III supporting 
organizations with assets that are not readily marketable. After 
consideration of the comments received, the Treasury Department and the 
IRS have concluded that any such transition rule would unfairly impose 
a higher distribution requirement on those NFI Type III supporting 
organizations that invested primarily in liquid assets, as compared to 
those organizations that stayed heavily invested in not-readily-
marketable assets. Moreover, all NFI Type III supporting organizations 
have at least two years after December 28, 2012, to satisfy the 
distribution requirement, and the Treasury Department and the IRS have 
concluded that this transition relief will give supporting 
organizations sufficient time to make any sales of not-readily-
marketable assets that may be necessary to meet the distribution 
requirement.
    Finally, like the 2009 proposed regulations, the final regulations 
continue to provide that a trust that on November 20, 1970, met and 
continues to meet the requirements under existing Sec.  1.509(a)-
4(i)(4) and Sec.  1.509(a)-4(i)(9) of the final regulations will 
satisfy the integral part test as a NFI Type III supporting 
organization under Sec.  1.509(a)-4(i)(5). One organization questioned 
why a pre-November 20, 1970 trust that meets all of the requirements 
set forth in Sec.  1.509(a)-4(i)(9) should have to petition the IRS for 
a ruling. In lieu of a ruling, the commenter requested a form on which 
the trust's trustee could certify that the trust meets all of the 
requirements of Sec.  1.509(a)-4(i)(9) or, if a ruling were required, 
some assurance that the trust could operate on the assumption that it 
met the requirements of Sec.  1.509(a)-4(i)(9) until a ruling was 
issued. Like existing Sec.  1.509(a)-4(i)(4), Sec.  1.509(a)-4(i)(9) of 
the final regulations states that applicable trusts may (not ``must'') 
obtain a ruling that they meet the requirements set forth in the 
provision. Accordingly, a trust that meets the requirements of Sec.  
1.509(a)-4(i)(9) is not required to obtain a ruling. The final and 
temporary regulations do not alter this long-standing, optional ruling 
procedure.
c. Regulations Under Section 4943
    This Treasury decision also includes final regulations under 
section 4943 that provide two transition rules to address excess 
business holdings for Type III supporting organizations affected by the 
PPA. The Treasury Department and the IRS did not receive any comments 
on these transition rules. The final regulations adopt the 2009 
proposed regulations without change.

9. Miscellaneous

    Several other incidental changes were made throughout the final 
regulations in order to increase clarity and consistency, none of which 
are intended to modify the substance of the 2009 proposed regulations.

10. Effective/Applicability Date

    Both the final and temporary regulations are effective and 
applicable on December 28, 2012. However, supporting organizations 
should note that section 509(f), which was added by the PPA, is 
effective on and after August 17, 2006. In the case of section 
509(f)(1)(B), which prohibits Type III supporting organizations from 
supporting foreign organizations, a transition rule applies under which 
Type III supporting organizations that were supporting a foreign 
organization on August 17, 2006, could continue supporting the foreign 
organization until the first day of its third taxable year beginning 
after August 17, 2006. In addition, pursuant to section 1241(c) of the 
PPA, the responsiveness test for charitable trusts in existing Sec.  
1.509(a)-4(i)(2)(iii) cannot support classification as a Type III 
supporting organization, effective August 17, 2007, in the case of 
trusts operated in connection with a supported organization on August 
17, 2006. See PPA section 1241(e)(2)(A).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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) does 
not apply to the temporary or the final regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) to 
the temporary regulations, refer to the Special Analyses section of the 
preamble to the cross-reference notice of proposed rulemaking published 
in the Proposed Rules section in this issue of the Federal Register.
    It is hereby certified that the collection of information contained 
in the final regulations will not have a significant economic impact on 
a substantial number of small entities.

[[Page 76394]]

This certification is based on the fact that the final regulations will 
not impact a substantial number of small entities.
    Based on IRS Statistics of Income data for 2009, there are 
1,238,201 active nonprofit charitable organizations recognized by the 
IRS under section 501(c)(3), of which only 7,556 organizations self-
identified as Type III supporting organizations. Thus, the number of 
organizations affected by the collection of information under Sec.  
1.509(a)-4(i)(2) will not be substantial. In addition, the collection 
of information under Sec.  1.509(a)-4(i)(2) will impose a minimal 
burden on the affected organizations because all of the information 
that must be provided is information that the organizations are already 
required to maintain. Therefore, the collection of information under 
Sec.  1.509(a)-4(i)(2) will not have a significant economic impact.
    The collection of information under Sec.  1.509(a)-4(i)(6)(v) is 
required only if a NFI Type III supporting organization wishes to 
obtain the benefit of having certain amounts set aside for a specific 
project count toward the distribution requirement imposed by these 
proposed regulations. Based on IRS Statistics of Income data for 2009, 
only 4,438 organizations self-identified as Type III supporting 
organizations that are not functionally integrated. Because only a very 
small proportion of private foundations (less than 0.02 percent) submit 
ruling requests for set-asides each year, the Treasury Department and 
the IRS similarly expect that this elective provision will apply to 
only a very small subset of NFI Type III supporting organizations in 
any given year. Therefore, the number of organizations affected by the 
collection of information under Sec.  1.509(a)-4(i)(6)(v) will not be 
substantial. Accordingly, a regulatory flexibility analysis is not 
required for the final regulations.
    Pursuant to section 7805(f) of the Code, the 2009 proposed 
regulations preceding the final regulations were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business and no comments were received. The 
temporary regulations (and the cross-reference notice of proposed 
rulemaking published in the Proposed Rules section in this issue of the 
Federal Register) will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on their impact on 
small business.

Drafting Information

    The principal authors of these regulations are Preston J. 
Quesenberry, and Stephanie N. Robbins, Office of Associate Chief 
Counsel (Tax-Exempt and Government Entities). However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 53

    Excise taxes, Foundations, Investments, Lobbying, Reporting and 
recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 53, and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.509(a)-4 is amended by:
    1. Adding paragraphs (a)(6), (f)(5), and (l).
    2. Revising paragraph (i).
    The revision and additions read as follows:


Sec.  1.509(a)-4  Supporting organizations.

    (a) * * *
    (6) For purposes of paragraph (i) of this section, the term 
``supported organization'' means a specified publicly supported 
organization described in paragraphs (d)(2)(iv) or (d)(4) of this 
section.
* * * * *
    (f) * * *
    (5) Contributions from controlling donors--(i) In general. For any 
taxable year, a supporting organization shall not be considered to be 
operated, supervised, or controlled by, or operated in connection with, 
one or more publicly supported organizations, if the supporting 
organization accepts any gift or contribution from any person who is--
    (A) A person (other than an organization described in section 
509(a)(1), (2), or (4)) who directly or indirectly controls, either 
alone or together with persons described in paragraphs (f)(5)(i)(B) or 
(f)(5)(i)(C) of this section, the governing body of a specified 
publicly supported organization supported by such supporting 
organization;
    (B) A member of the family (determined under section 4958(f)(4)) of 
an individual described in paragraph (f)(5)(i)(A) of this section; or
    (C) A 35-percent controlled entity (as defined in section 
4958(f)(3) by substituting ``clause (i) or (ii) of section 
509(f)(2)(B)'' for ``subparagraph (A) or (B) of paragraph (1)'' in 
paragraph (f)(3)(A)(i) thereof).
    (ii) Meaning of control. [Reserved]
* * * * *
    (i) Meaning of operated in connection with--(1) General rule. For 
each taxable year, a supporting organization is operated in connection 
with one or more supported organizations (that is, is a ``Type III 
supporting organization'') only if it is not disqualified by reason of 
paragraph (f)(5) (relating to acceptance of contributions from 
controlling donors) or paragraph (i)(10) (relating to foreign supported 
organizations) of this section, and it satisfies--
    (i) The notification requirement, which is set forth in paragraph 
(i)(2) of this section;
    (ii) The responsiveness test, which is set forth in paragraph 
(i)(3) of this section; and
    (iii) The integral part test, which is satisfied by maintaining 
significant involvement in the operations of one or more supported 
organizations and providing support on which the supported 
organization(s) are dependent; in order to satisfy this test, the 
supporting organization must meet the requirements either for--
    (A) Functionally integrated Type III supporting organizations set 
forth in paragraph (i)(4) of this section; or
    (B) Non-functionally integrated Type III supporting organizations 
set forth in paragraph (i)(5) of this section.
    (2) Notification requirement--(i) Annual notification. For each 
taxable year, a Type III supporting organization must provide the 
following documents to each of its supported organizations:
    (A) A written notice addressed to a principal officer of the 
supported organization describing the type and amount of all of the 
support the supporting organization provided to the supported 
organization during the supporting organization's taxable year 
immediately preceding the taxable year in which the written notice is 
provided (and during any other taxable year of the supporting 
organization ending after December 28, 2012, for which such

[[Page 76395]]

support information has not previously been provided);
    (B) A copy of the supporting organization's Form 990, ``Return of 
Organization Exempt from Income Tax,'' or other annual information 
return required to be filed under section 6033 (although the supporting 
organization may redact from the return the name and address of any 
contributor to the organization) that was most recently filed as of the 
date the notification is provided (and any such return for any other 
taxable year of the supporting organization ending after December 28, 
2012, that has not previously been provided to the supported 
organization); and
    (C) A copy of the supporting organization's governing documents as 
in effect on the date the notification is provided, including its 
articles of organization and bylaws (if any) and any amendments to such 
documents, unless such documents have been previously provided and not 
subsequently amended.
    (ii) Electronic media. The notification documents required by this 
paragraph (i)(2) may be provided by electronic media.
    (iii) Due date. The notification documents required by this 
paragraph (i)(2) for any taxable year shall be postmarked or 
electronically transmitted by the last day of the fifth calendar month 
following the close of that taxable year.
    (iv) Principal officer. For purposes of paragraph (i)(2)(i)(A) of 
this section, a principal officer includes, but is not limited to, a 
person who, regardless of title, has ultimate responsibility for--
    (A) Implementing the decisions of the governing body of a supported 
organization;
    (B) Supervising the management, administration, or operation of the 
supported organization; or
    (C) Managing the finances of the supported organization.
    (3) Responsiveness test--(i) General rule. A supporting 
organization meets the responsiveness test if it is responsive to the 
needs or demands of a supported organization. Except as provided in 
paragraph (i)(3)(v) of this section, in order to meet this test, a 
supporting organization must satisfy the requirements of paragraphs 
(i)(3)(ii) and (i)(3)(iii) of this section.
    (ii) Relationship of officers, directors, or trustees. A supporting 
organization satisfies the requirements of this paragraph (i)(3)(ii) 
with respect to a supported organization only if--
    (A) One or more officers, directors, or trustees of the supporting 
organization are elected or appointed by the officers, directors, 
trustees, or membership of the supported organization;
    (B) One or more members of the governing body of the supported 
organization are also officers, directors, or trustees of, or hold 
other important offices in, the supporting organization; or
    (C) The officers, directors, or trustees of the supporting 
organization maintain a close and continuous working relationship with 
the officers, directors, or trustees of the supported organization.
    (iii) Significant voice. A supporting organization satisfies the 
requirements of this paragraph (i)(3)(iii) only if, by reason of 
paragraphs (i)(3)(ii)(A), (i)(3)(ii)(B), or (i)(3)(ii)(C) of this 
section, the officers, directors, or trustees of the supported 
organization have a significant voice in the investment policies of the 
supporting organization, the timing of grants, the manner of making 
grants, and the selection of grant recipients by such supporting 
organization, and in otherwise directing the use of the income or 
assets of the supporting organization.
    (iv) Examples. The provisions of this paragraph (i)(3) may be 
illustrated by the following examples:

    Example 1.  X, an organization described in section 501(c)(3), 
is a trust created under the last will and testament of Decedent. 
The trustee of X (Trustee) is a bank. Under the trust instrument, X 
supports M, a private university described in section 509(a)(1). The 
trust instrument provides that Trustee has discretion regarding the 
timing and amount of distributions consistent with the Trustee's 
fiduciary duties. Representatives of Trustee and an officer of M 
have quarterly face-to-face or telephonic meetings during which they 
discuss M's projected needs and ways in which M would like X to use 
its income and invest its assets. Additionally, Trustee communicates 
regularly with that officer of M regarding X's investments and plans 
for distributions from X. Trustee provides the officer of M with 
quarterly investment statements, the information required under 
paragraph (i)(2) of this section, and an annual accounting 
statement. Based on these facts, X meets the responsiveness test of 
this paragraph (i)(3) with respect to M.
    Example 2.  Y is an organization described in section 501(c)(3) 
and is a trust under State law. The trustee of Y (Trustee) is a 
bank. Y supports charities P, Q, and R, each an organization 
described in section 509(a)(1). Y makes annual cash payments to P, 
Q, and R. Once a year, Trustee sends to P, Q, and R the cash 
payment, the information required under paragraph (i)(2) of this 
section, and an accounting statement. Trustee has no other 
communication with P, Q, or R. Y does not meet the responsiveness 
test of this paragraph (i)(3).

    (v) Exception for pre-November 20, 1970 organizations. In the case 
of a supporting organization that was supporting or benefiting a 
supported organization before November 20, 1970, additional facts and 
circumstances, such as a historic and continuing relationship between 
the organizations, may be taken into account, in addition to the 
factors described in paragraphs (i)(3)(ii) and (i)(3)(iii) of this 
section, to establish compliance with the responsiveness test.
    (4) Integral part test--functionally integrated Type III supporting 
organization--(i) General rule. A supporting organization meets the 
integral part test and will be considered functionally integrated 
within the meaning of section 4943(f)(5)(B), if it--
    (A) Engages in activities substantially all of which directly 
further the exempt purposes of one or more supported organizations and 
otherwise meets the requirements described in paragraph (i)(4)(ii) of 
this section;
    (B) Is the parent of each of its supported organizations, as 
described in paragraph (i)(4)(iii) of this section; or
    (C) Supports a governmental supported organization and otherwise 
meets the requirements of paragraph (i)(4)(iv) of this section.
    (ii) Substantially all activities directly further exempt 
purposes--(A) In general. A supporting organization meets the 
requirements of this paragraph (i)(4)(ii) if it engages in activities 
substantially all of which--
    (1) Directly further the exempt purposes of one or more supported 
organizations to which the supporting organization is responsive by 
performing the functions of, or carrying out the purposes of, such 
supported organization(s); and
    (2) But for the involvement of the supporting organization, would 
normally be engaged in by such supported organization(s).
    (B) Meaning of substantially all. For purposes of paragraph 
(i)(4)(ii)(A) of this section, in determining whether substantially all 
of a supporting organization's activities directly further the exempt 
purposes of one or more supported organization(s) to which the 
supporting organization is responsive, all pertinent facts and 
circumstances will be taken into consideration.
    (C) Meaning of directly further. Activities ``directly further'' 
the exempt purposes of one or more supported organizations for purposes 
of this paragraph (i)(4) only if they are conducted by the supporting 
organization itself, rather than by a supported organization. Holding 
title to and managing exempt-use assets described in Sec.  1.509(a)-
4T(i)(8)(ii) are activities that directly further the exempt purposes 
of the supported

[[Page 76396]]

organization within the meaning of this paragraph (i)(4). Conversely, 
except as provided in paragraph (i)(4)(ii)(D) of this section, 
fundraising, making grants (whether to the supported organization or to 
third parties), and investing and managing non-exempt-use assets are 
not activities that directly further the exempt purposes of the 
supported organization within the meaning of this paragraph (i)(4).
    (D) Payments to individual beneficiaries. The making or awarding of 
grants, scholarships, or other payments to individual beneficiaries who 
are members of the charitable class benefited by a supported 
organization will be treated as an activity that directly furthers the 
exempt purposes of that supported organization for purposes of this 
paragraph (i)(4) only if--
    (1) The individual beneficiaries are selected on an objective and 
nondiscriminatory basis (as described in Sec.  53.4945-4(b));
    (2) The officers, directors, or trustees of the supported 
organization have a significant voice in the timing of the payments, 
the manner of making them, and the selection of recipients; and
    (3) The making or awarding of such payments is part of an active 
program of the supporting organization that directly furthers the 
exempt purposes of the supported organization and in which the 
supporting organization maintains significant involvement, as defined 
in Sec.  53.4942(b)-1(b)(2)(ii) (except that ``supporting 
organization'' shall be substituted for ``foundation'').
    (iii) Parent of supported organization(s). For purposes of 
paragraph (i)(4)(i)(B) of this section, a supporting organization is 
the parent of a supported organization if the supporting organization 
exercises a substantial degree of direction over the policies, 
programs, and activities of the supported organization and a majority 
of the officers, directors, or trustees of the supported organization 
is appointed or elected, directly or indirectly, by the governing body, 
members of the governing body, or officers (acting in their official 
capacity) of the supporting organization.
    (iv) Supporting a governmental entity. [Reserved]
    (v) Examples. The provisions of this paragraph (i)(4) may be 
illustrated by the following examples:

    Example 1. N, an organization described in section 501(c)(3), is 
the parent organization of a healthcare system consisting of two 
hospitals (Q and R) and an outpatient clinic (S), each of which is 
described in section 509(a)(1), and a taxable subsidiary (T). N is 
the sole member of each of Q, R, and S. Under the charter and bylaws 
of each of Q, R, and S, N appoints all members of the board of 
directors of each corporation. N engages in the overall coordination 
and supervision of the healthcare system's exempt subsidiary 
corporations Q, R, and S in approval of their budgets, strategic 
planning, marketing, resource allocation, securing tax-exempt bond 
financing, and community education. N also manages and invests 
assets that serve as endowments of Q, R, and S. Based on these 
facts, N qualifies as a functionally integrated Type III supporting 
organization under paragraph (i)(4)(i)(B) of this section.
    Example 2.  V, an organization described in section 501(c)(3), 
is organized and operated as a supporting organization to L, a 
church described in section 509(a)(1). V meets the responsiveness 
test described in paragraph (i)(3) of this section with respect to 
L. L transferred to V title to the buildings in which L conducts 
religious services, Bible study, and community enrichment programs. 
Substantially all of V's activities consist of holding and 
maintaining these buildings, which L continues to use, free of 
charge, to further its exempt purposes. But for the activities of V, 
L would hold and maintain the buildings. Based on these facts, V 
satisfies the requirements of paragraph (i)(4)(ii) of this section.
    Example 3. O is a local nonprofit food pantry described in 
section 501(c)(3). O collects donated food from local growers, 
grocery stores, and individuals and distributes this food free of 
charge to poor and needy people in O's community. O is organized and 
operated as a supporting organization to eight churches of a 
particular denomination located in O's community, each of which is 
described in section 509(a)(1). Control of O is vested in a five-
member Board of Directors, which includes an official from one of 
the churches as well as four lay members of the churches' 
congregations. The officers of O maintain a close and continuing 
working relationship with each of the eight churches and as a result 
of such relationship, each of the eight churches has a significant 
voice in directing the use of the income and assets of O. As a 
result, O is responsive to its supported organizations. All of O's 
activities directly further the exempt purposes of the eight 
supported organizations to which it is responsive. Additionally, but 
for the activities of O, the churches would normally operate food 
pantries themselves. Based on these facts, O satisfies the 
requirements of paragraph (i)(4)(ii) of this section.
    Example 4. M, an organization described in section 501(c)(3), 
was created by B, an individual, to provide scholarships for 
students of U, a private secondary school and an organization 
described in section 509(a)(1). U establishes the scholarship 
criteria, publicizes the scholarship program, solicits and reviews 
applications, and selects the scholarship recipients. M invests its 
assets and disburses the funds for scholarships to the recipients 
selected by U. M does not provide the scholarships as part of an 
active program in which it maintains significant involvement, as 
defined in Sec.  53.4942(b)-1(b)(2)(ii). Based on these facts, M 
does not satisfy the requirements of paragraph (i)(4)(ii) of this 
section.
    Example 5. J, an organization described in section 501(c)(3), is 
organized as a supporting organization to community foundation G, an 
organization described in section 509(a)(1). J meets the 
responsiveness test described in paragraph (i)(3) of this section 
with respect to G. In addition to maintaining field-of-interest 
funds, sponsoring donor advised funds, and conducting general 
grantmaking activities, G also engages in activities to beautify and 
maintain local parks. Substantially all of J's activities consist of 
maintaining all of the local parks in the area of community 
foundation G by performing activities such as establishing and 
maintaining trails, planting trees, and removing trash. But for the 
activities of J, G would normally engage in these efforts to 
beautify and maintain the local parks. Based on these facts, J 
satisfies the requirements of paragraph (i)(4)(ii) of this section.

    (5) Integral part test--non-functionally integrated Type III 
supporting organization--(i) General rule. A supporting organization 
meets the integral part test and will be considered non-functionally 
integrated if it satisfies either--
    (A) The distribution requirement of paragraph (i)(5)(ii) of this 
section and the attentiveness requirement of paragraph (i)(5)(iii) of 
this section; or
    (B) The pre-November 20, 1970 trust requirements of paragraph 
(i)(9) of this section.
    (ii) Distribution requirement--(A) Annual distribution. With 
respect to each taxable year, a supporting organization must distribute 
to or for the use of one or more supported organizations an amount 
equaling or exceeding the supporting organization's distributable 
amount for the taxable year, as defined in Sec.  1.509(a)-
4T(i)(5)(ii)(B), on or before the last day of the taxable year.
    (B) Distributable amount. [Reserved]. For further guidance, see 
Sec.  1.509(a)-4T(i)(5)(ii)(B).
    (C) Minimum asset amount. [Reserved]. For further guidance, see 
Sec.  1.509(a)-4T(i)(5)(ii)(C).
    (D) First taxable year. The distributable amount for the first 
taxable year an organization is treated as a non-functionally 
integrated Type III supporting organization is zero. Notwithstanding 
the foregoing, for purposes of determining whether an excess amount is 
created under paragraph (i)(7)(ii) of this section, the distributable 
amount for the first taxable year an organization is treated as a non-
functionally integrated Type III supporting organization is the 
distributable amount that would apply under Sec.  1.509(a)-
4T(i)(5)(ii)(B) in the absence of this paragraph (i)(5)(ii)(D).

[[Page 76397]]

    (E) Emergency temporary reduction. The Secretary may provide by 
publication in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) for a temporary reduction in the 
distributable amount in the case of a disaster or emergency.
    (F) Reasonable cause exception. A non-functionally integrated Type 
III supporting organization that fails to meet the distribution 
requirement of this paragraph (i)(5)(ii) will not be classified as a 
private foundation for the taxable year in which it fails to meet the 
distribution requirement if the organization establishes to the 
satisfaction of the Secretary that--
    (1) The failure was due solely to unforeseen events or 
circumstances that are beyond the organization's control, a clerical 
error, or an incorrect valuation of assets;
    (2) The failure was due to reasonable cause and not to willful 
neglect; and
    (3) The distribution requirement is met within 180 days after the 
organization is first able to distribute its distributable amount 
notwithstanding the unforeseen events or circumstances, or 180 days 
after the date the incorrect valuation or clerical error was or should 
have been discovered; however, no amounts paid to meet a distribution 
requirement for a prior taxable year under this paragraph 
(i)(5)(ii)(F)(3) may be counted toward the distribution requirement for 
the taxable year in which such amounts are paid.
    (iii) Attentiveness requirement--(A) General rule. With respect to 
each taxable year, a non-functionally integrated Type III supporting 
organization must distribute one-third or more of its distributable 
amount to one or more supported organizations that are attentive to the 
operations of the supporting organization (within the meaning of 
paragraph (i)(5)(iii)(B) of this section) and to which the supporting 
organization is responsive (within the meaning of paragraph (i)(3) of 
this section).
    (B) Attentiveness. A supported organization is attentive to the 
operations of the supporting organization during a taxable year if, in 
the taxable year, at least one of the following requirements is 
satisfied:
    (1) The supporting organization distributes to the supported 
organization amounts equaling or exceeding 10 percent of the supported 
organization's total support (or, in the case of a particular 
department or school of a university, hospital, or church, the total 
support of the department or school) received during the supported 
organization's last taxable year ending before the beginning of the 
supporting organization's taxable year.
    (2) The amount of support received from the supporting organization 
is necessary to avoid the interruption of the carrying on of a 
particular function or activity of the supported organization. The 
support is necessary if the supporting organization or the supported 
organization earmarks the support for a particular program or activity 
of the supported organization, even if such program or activity is not 
the supported organization's primary program or activity, as long as 
such program or activity is a substantial one.
    (3) Based on the consideration of all pertinent factors, including 
the number of supported organizations, the length and nature of the 
relationship between the supported organization and supporting 
organization, and the purpose to which the funds are put, the amount of 
support received from the supporting organization is a sufficient part 
of a supported organization's total support (or, in the case of a 
particular department or school of a university, hospital, or church, 
the total support of the department or school) to ensure attentiveness. 
Normally the attentiveness of a supported organization is influenced by 
the amounts received from the supporting organization. Thus, the more 
substantial the amount involved in terms of a percentage of the 
supported organization's total support, the greater the likelihood that 
the required degree of attentiveness will be present. However, in 
determining whether the amount received from the supporting 
organization is sufficient to ensure the attentiveness of the supported 
organization to the operations of the supporting organization 
(including attentiveness to the nature and yield of the supporting 
organization's investments), evidence of actual attentiveness by the 
supported organization is of almost equal importance. A supported 
organization is not considered to be attentive solely because it has 
enforceable rights against the supporting organization under state law.
    (C) Distribution to donor advised fund disregarded. Notwithstanding 
paragraph (i)(5)(iii)(B) of this section, in determining whether a 
supported organization will be considered attentive to the operations 
of a supporting organization, any amount received from the supporting 
organization that is held by the supported organization in a donor 
advised fund described in section 4966(d)(2) will be disregarded.
    (D) Examples. This paragraph (i)(5)(iii) is illustrated by the 
following examples:

    Example 1. K, an organization described in section 501(c)(3), 
annually pays an aggregate amount equaling or exceeding its 
distributable amount described in Sec.  1.509(a)-4T(i)(5)(ii)(B) to 
L, a museum described in section 509(a)(2). K meets the 
responsiveness test described in paragraph (i)(3) of this section 
with respect to L. In recent years, L has earmarked the income 
received from K to underwrite the cost of carrying on a chamber 
music series consisting of 12 performances a year that are performed 
for the general public free of charge at its premises. The chamber 
music series is not L's primary activity but it is a substantial 
activity. L could not continue the performances without K's support. 
Based on these facts, K meets the requirements of paragraph 
(i)(5)(iii)(B)(2) of this section.
    Example 2. M, an organization described in section 501(c)(3), 
annually pays an aggregate amount equaling or exceeding its 
distributable amount described in Sec.  1.509(a)-4T(i)(5)(ii)(B) to 
the Law School of N University, an organization described in section 
509(a)(1). M meets the responsiveness test described in paragraph 
(i)(3) of this section with respect to N. M has earmarked the income 
paid over to N's Law School to endow a chair in International Law. 
Without M's continued support, N could not continue to maintain this 
chair. The chair is not N's primary activity but it is a substantial 
activity. Based on these facts, M meets the requirements of 
paragraph (i)(5)(iii)(B)(2) of this section.
    Example 3. R is a charitable trust created under the will of B, 
who died in 1969. R's purpose is to hold assets as an endowment for 
S (a hospital), T (a university), and U (a national medical research 
organization), all organizations described in section 509(a)(1) and 
specifically named in the trust instrument, and to distribute all of 
the income each year in equal shares among the three named 
beneficiaries. Each year, R pays to S, T, and U an aggregate amount 
equaling or exceeding its distributable amount described in Sec.  
1.509(a)-4T(i)(5)(ii)(B). Such payments equal less than one percent 
of the total support that each supported organization received in 
its most recently completed taxable year. Based on these facts, R 
does not meet the requirements of paragraph (i)(5)(iii)(B)(1) of 
this section. However, because B died prior to November 20, 1970, R 
could meet the requirements of paragraph (i)(5)(i)(B) of this 
section upon meeting all of the requirements of paragraph (i)(9) of 
this section.
    Example 4. O is an organization described in section 501(c)(3). 
O is organized to support five private universities, V, W, X, Y, and 
Z, each of which is described in section 509(a)(1). O meets the 
responsiveness test under paragraph (i)(3) of this section only as 
to V. Each year, O distributes an aggregate amount that equals its 
distributable amount described in Sec.  1.509(a)-4T(i)(5)(ii)(B) and 
distributes an equal amount to each of the five universities. 
Accordingly, O distributes only one-fifth of its distributable 
amount to

[[Page 76398]]

a supported organization to which O is also responsive (V). Because 
O does not distribute at least one-third of its distributable amount 
to supported organizations that are both attentive to the operations 
of O and to which the O is responsive, O does not meet the 
attentiveness requirements of this paragraph (i)(5)(iii).

    (6) Distributions that count toward distribution requirement. For 
purposes of this paragraph (i)(6), the amount of a distribution made to 
a supported organization is the amount of cash distributed or the fair-
market value of the property distributed as of the date the 
distribution is made. The amount of a distribution will be determined 
solely on the cash receipts and disbursements method of accounting 
described in section 446(c)(1). Distributions by the supporting 
organization that count toward the distribution requirement imposed in 
paragraph (i)(5)(ii) of this section shall include, but not be limited 
to--
    (i) Any amount paid to a supported organization to accomplish the 
supported organization's exempt purposes;
    (ii) Any amount paid by the supporting organization to perform an 
activity that satisfies the requirements of paragraph (i)(4)(ii) of 
this section, but only to the extent such amount exceeds any income 
derived by the supporting organization from the activity;
    (iii) Any reasonable and necessary administrative expenses paid to 
accomplish the exempt purposes of the supported organization(s), which 
do not include expenses incurred in the production of investment 
income;
    (iv) Any amount paid to acquire an exempt-use asset described in 
Sec.  1.509(a)-4T(i)(8)(ii); and
    (v) Any amount set aside for a specific project that accomplishes 
the exempt purposes of a supported organization to which the supporting 
organization is responsive, with such set aside counting toward the 
distribution requirement for the taxable year in which the amount is 
set aside but not in the year in which it is actually paid, if at the 
time of the set-aside, the supporting organization--
    (A) Obtains a written statement from each supported organization 
whose exempt purposes the specific project accomplishes, signed under 
penalty of perjury by one of the supported organization's principal 
officers, as defined in paragraph (i)(2)(iv) of this section, stating 
that the supported organization approves the project as one that 
accomplishes one or more of the supported organization's exempt 
purposes and also approves the supporting organization's determination 
that the project is one that can be better accomplished by such a set-
aside than by the immediate payment of funds;
    (B) Establishes to the satisfaction of the Commissioner, by meeting 
the approval and information requirements described in Sec.  
53.4942(a)-3(b)(7)(i) of this chapter and by providing the written 
statement described in paragraph (i)(6)(v)(A) of this section, that the 
amount set aside will be paid for the specific project within 60 months 
after it is set aside and that the project is one that can better be 
accomplished by the set-aside than by the immediate payment of funds; 
and
    (C) Evidences the set-aside by the entry of a dollar amount on the 
books and records of the supporting organization as a pledge or 
obligation to be paid at a future date or dates within 60 months of the 
set aside.
    (7) Carryover of excess amounts--(i) In general. If with respect to 
any taxable year, an excess amount, as defined in paragraph (i)(7)(ii) 
of this section, is created, such excess amount may be used to reduce 
the distributable amount in any of the five taxable years immediately 
following the taxable year in which the excess amount is created. An 
excess amount created in a taxable year can only be carried over for 
five taxable years.
    (ii) Excess amount. An excess amount is created for any taxable 
year beginning after December 28, 2012, if the total distributions made 
in that taxable year that count toward the distribution requirement 
exceed the supporting organization's distributable amount for the 
taxable year, as determined under Sec.  1.509(a)-4T(i)(5)(ii)(B). With 
respect to any taxable year to which an excess amount is carried over, 
in determining whether an excess amount is created in that taxable 
year, the distributable amount is first reduced by any excess amounts 
carried over (with the oldest excess amounts applied first) and then by 
any distributions made in that taxable year.
    (8) Valuation of non-exempt-use assets. [Reserved]. For further 
guidance, see Sec.  1.509(a)-4T(i)(8).
    (9) Alternate integral part test for certain trusts. A trust 
(whether or not exempt from taxation under section 501(a)) that on 
November 20, 1970, met and continues to meet the requirements of 
paragraphs (i)(9)(i) through (i)(9)(v) of this section, shall be 
treated as meeting the requirements of paragraph (i)(5) of this section 
if for taxable years beginning after October 16, 1972, the trustee of 
such trust makes annual written reports to all of the trust's supported 
organizations, setting forth a description of the trust's assets, 
including a detailed list of the assets and the income produced by such 
assets. A trust that meets the requirements of this paragraph (i)(9) 
may request a ruling that it is described in section 509(a)(3) in such 
manner as the Commissioner may prescribe. The requirements of this 
paragraph (i)(9) are as follows:
    (i) All the unexpired interests in the trust are devoted to one or 
more purposes described in section 170(c)(1) or (c)(2)(B) and a 
deduction was allowed with respect to such interests under sections 
170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), 2522, or 
corresponding provisions of prior law (or would have been allowed such 
a deduction if the trust had not been created before 1913).
    (ii) The trust was created prior to November 20, 1970, and did not 
receive any grant, contribution, bequest or other transfer on or after 
such date. For purposes of this paragraph (i)(9)(ii), a split-interest 
trust described in section 4947(a)(2) that was created prior to 
November 20, 1970, was irrevocable on such date, and that becomes a 
charitable trust described in section 4947(a)(1) after such date shall 
be treated as having been created prior to such date.
    (iii) The trust is required by its governing instrument to 
distribute all of its net income currently to a designated beneficiary 
supported organization. If more than one beneficiary supported 
organization is designated in the governing instrument of a trust, all 
of the net income must be distributable and must be distributed 
currently to each of such supported organizations in fixed shares 
pursuant to such governing instrument. For purposes of this paragraph 
(i)(9)(iii), the governing instrument of a charitable trust shall be 
treated as requiring distribution to a designated supported 
organization when the trust instrument describes the charitable purpose 
of the trust so completely that such description can apply to only one 
existing supported organization and is of sufficient particularity as 
to vest in such organization rights against the trust enforceable in a 
court possessing equitable powers.
    (iv) The trustee of the trust does not have discretion to vary 
either the beneficiary supported organizations or the amounts payable 
to the supported organizations. For purposes of this paragraph 
(i)(9)(iv), a trustee shall not be treated as having such discretion if 
the trustee has discretion to make payments of principal to the single 
supported organization that is currently entitled to receive all of the 
trust's income or if the trust instrument provides that the trustee may 
cease making income payments to a particular

[[Page 76399]]

supported organization in the event of certain specific occurrences, 
such as the loss of exemption under section 501(c)(3) or classification 
under section 509(a)(1) or (a)(2) by the supported organization or the 
failure of the supported organization to carry out its charitable 
purpose properly.
    (v) None of the trustees would be disqualified persons within the 
meaning of section 4946(a) (other than foundation managers under 
section 4946(a)(1)(B)) with respect to the trust if such trust were 
treated as a private foundation.
    (10) Foreign supported organizations. A supporting organization is 
not operated in connection with one or more supported organizations if 
it supports any supported organization organized outside of the United 
States.
    (11) Transition rules--(i) Notification requirement. A Type III 
supporting organization will be treated as having satisfied the 
notification requirement described in paragraph (i)(2) of this section 
for its taxable year that includes December 28, 2012, if the required 
notification is postmarked or electronically transmitted by the later 
of the last day of the fifth calendar month following the close of that 
taxable year or the due date (including extensions) of the supporting 
organization's annual information return described in section 6033 for 
that taxable year.
    (ii) Integral part test--(A) Qualification as a functionally 
integrated Type III supporting organization. A Type III supporting 
organization in existence on December 28, 2012, that met and continues 
to meet the requirements of Treas. Reg. Sec.  1.509(a)-4(i)(3)(ii), as 
in effect prior to December 28, 2012, will be treated as meeting the 
requirements of paragraph (i)(4) of this section until the first day of 
the organization's second taxable year beginning after December 28, 
2012.
    (B) Qualification as a non-functionally integrated Type III 
supporting organization. A Type III supporting organization in 
existence on December 28, 2012, that met and continues to meet the 
requirements of Treas. Reg. Sec.  1.509(a)-4(i)(3)(iii), as in effect 
prior to December 28, 2012, will be treated as meeting the requirements 
of paragraph (i)(5)(i)(A) of this section until the first day of its 
second taxable year beginning after December 28, 2012. Notwithstanding 
the foregoing, in determining whether an excess amount is created under 
paragraph (i)(7)(ii) of this section in the first taxable year 
beginning after December 28, 2012, the distributable amount for that 
taxable year of a Type III supporting organization treated as meeting 
the requirements of paragraph (i)(5)(i)(A) of this section under this 
paragraph (i)(11)(ii)(B) is the amount described in Sec.  1.509(a)-
4T(i)(5)(ii)(B).
    (C) Transitioning to a non-functionally integrated Type III 
supporting organization in the first taxable year after effective date. 
A Type III supporting organization in existence on December 28, 2012, 
that meets the requirements of Treas. Reg. Sec.  1.509(a)-4(i)(3)(ii), 
as in effect prior to December 28, 2012, in its taxable year including 
December 28, 2012, but not in its first taxable year beginning after 
December 28, 2012, is a non-functionally integrated Type III supporting 
organization and will be treated as having a distributable amount of 
zero for purposes of meeting the requirements of paragraph (i)(5)(i)(A) 
of this section during the organization's first taxable year beginning 
after December 28, 2012. Notwithstanding the foregoing, in determining 
whether an excess amount is created under paragraph (i)(7)(ii) of this 
section in the first taxable year beginning after December 28, 2012, 
the distributable amount for that taxable year of a Type III supporting 
organization described in this paragraph (i)(11)(ii)(C) is the amount 
described in Sec.  1.509(a)-4T(i)(5)(ii)(B), determined without regard 
to paragraph (i)(5)(ii)(D) of this section.
    (D) Second taxable year after effective date. Beginning in the 
second taxable year beginning after December 28, 2012, and in all 
succeeding taxable years, all Type III supporting organizations 
described in this paragraph (i)(11)(ii) must meet either the 
requirements of paragraph (i)(4) or (i)(5) of this section. If a Type 
III supporting organization described in paragraph (i)(11)(ii)(A) of 
this section does not meet the requirements of paragraph (i)(4) of this 
section during its second taxable year beginning after December 28, 
2012, its distributable amount for that second taxable year will be 
determined under Sec.  1.509(a)-4T(i)(5)(ii)(B), without regard to 
paragraph (i)(5)(ii)(D) of this section. Any Type III supporting 
organization intending to meet the requirements of paragraph (i)(5) of 
this section in its second taxable year beginning after December 28, 
2012, must value its assets in accordance with Sec.  1.509(a)-4T(i)(8) 
beginning in its first taxable year beginning after December 28, 2012.
    (E) Judicial proceedings to reform instruments. During any taxable 
years in which there is pending a judicial proceeding that meets the 
requirements of this paragraph (i)(11)(ii)(E), a non-functionally 
integrated Type III supporting organization organized before September 
24, 2009, will not have to comply with the distribution requirement 
under paragraph (i)(5)(ii) of this section to the extent such 
compliance would be inconsistent with mandatory provisions of a 
governing instrument or other instrument executed before September 24, 
2009, that prohibits distributing capital or corpus. Beginning with the 
first taxable year following the taxable year in which such judicial 
proceeding is terminated, such a non-functionally integrated Type III 
supporting organization must satisfy the distribution requirement under 
paragraph (i)(5)(ii) of this section, regardless of the outcome of the 
judicial proceeding. Thus, if, during a taxable year after such a 
judicial proceeding, an organization fails to comply with paragraph 
(i)(5)(ii) of this section, the organization will not qualify as a non-
functionally integrated Type III supporting organization, regardless of 
whether such failure to comply was a result of the organization 
operating in accordance with its governing instrument or other 
instrument. To meet the requirements of this paragraph (i)(11)(ii)(E), 
a judicial proceeding must be--
    (1) Necessary to reform, or to excuse the supporting organization 
from compliance with, a governing instrument or other instrument (as in 
effect on September 24, 2009, and all times thereafter) in order to 
permit the organization to satisfy paragraph (i)(5)(ii) of this 
section;
    (2) Commenced before June 26, 2013; and
    (3) Not subject to any unreasonable delay for which the supporting 
organization is responsible.
* * * * *
    (l) Effective/applicability date. Paragraphs (a)(6), (f)(5), and 
(i) of this section are effective on December 28, 2012.
    Par. 3. Section 1.509(a)-4T is added to read as follows:


Sec.  1.509(a)-4T  Supporting organizations (temporary).

    (a) through (i)(5)(ii)(A) [Reserved]. For further guidance, see 
Sec.  1.509(a)-4(a) through (i)(5)(ii)(A).
    (B) Distributable amount. Except as provided in Sec. Sec.  
1.509(a)-4(i)(5)(ii)(D) and 1.509(a)-4(i)(5)(ii)(E), the distributable 
amount for a taxable year is an amount equal to the greater of 85 
percent of the supporting organization's adjusted net income (as 
determined by applying the principles of section 4942(f) and Sec.  
53.4942(a)-2(d) of this chapter) for the taxable year immediately 
preceding the taxable year of the required distribution (``immediately 
preceding taxable year'')

[[Page 76400]]

or its minimum asset amount (as defined in paragraph (i)(5)(ii)(C) of 
this section) for the immediately preceding taxable year, reduced by 
the amount of taxes imposed on the supporting organization under 
subtitle A of the Internal Revenue Code during the immediately 
preceding taxable year.
    (C) Minimum asset amount. For purposes of this paragraph (i)(5), a 
supporting organization's minimum asset amount for the immediately 
preceding taxable year is 3.5 percent of the excess of the aggregate 
fair market value of all of the supporting organization's non-exempt-
use assets (determined under paragraph (i)(8) of this section) in that 
immediately preceding taxable year over the acquisition indebtedness 
with respect to such non-exempt-use assets (determined under section 
514(c)(1) without regard to the taxable year in which the indebtedness 
was incurred), increased by--
    (1) Amounts received or accrued during the immediately preceding 
taxable year as repayments of amounts which were taken into account by 
the organization to meet the distribution requirement imposed in Sec.  
1.509(a)-4(i)(5)(ii)(A) for any taxable year;
    (2) Amounts received or accrued during the immediately preceding 
taxable year from the sale or other disposition of property to the 
extent that the acquisition of such property was taken into account by 
the organization to meet the distribution requirement imposed in Sec.  
1.509(a)-4(i)(5)(ii)(A) for any taxable year; and
    (3) Any amount set aside under Sec.  1.509(a)-4(i)(6)(v) to the 
extent it is determined during the immediately preceding taxable year 
that such amount is not necessary for the purposes for which it was set 
aside and such amount was taken into account by the organization to 
meet the distribution requirement imposed in Sec.  1.509(a)-
4(i)(5)(ii)(A) for any taxable year.
    (i)(5)(ii)(D) through (i)(7) [Reserved]. For further guidance, see 
Sec.  1.509(a)-4(i)(5)(ii)(D) through (i)(7).
    (8) Valuation of non-exempt-use assets. For purposes of determining 
its distributable amount for a taxable year, a supporting organization 
determines its minimum asset amount, as defined in paragraph 
(i)(5)(ii)(C) of this section, by determining the aggregate fair market 
value of all of its non-exempt-use assets in the immediately preceding 
taxable year. For these purposes, the determination of the aggregate 
fair market value of all non-exempt-use assets shall be made using the 
valuation methods described in Sec.  53.4942(a)-2(c) of this chapter. 
The aggregate fair market value of the supporting organization's non-
exempt-use assets shall not be reduced by any amount that is set aside 
under Sec.  1.509(a)-4(i)(6)(v). For these purposes, the non-exempt-use 
assets of the supporting organization are all assets of the supporting 
organization other than--
    (i) Assets described in Sec.  53.4942(a)-2(c)(2)(i) through (iv) of 
this chapter (with ``supporting organization'' being substituted for 
``foundation'' or ``private foundation'' and ``August 17, 2006'' being 
substituted for ``December 31, 1969''); and
    (ii) Exempt-use assets, which are assets that are used (or held for 
use) to carry out the exempt purposes of the supporting organization's 
supported organization(s) (determined by applying the principles 
described in Sec.  53.4942(a)-2(c)(3) of this chapter) by either--
    (A) The supporting organization; or
    (B) One or more supported organizations, but only if the supporting 
organization makes the asset available to the supported organization(s) 
at no cost (or nominal rent) to the supported organization(s).
    (i)(9) through (l) [Reserved]. For further guidance, see Sec.  
1.509(a)-4(i)(9) through (l).
    (m) Effective/applicability date. This section is effective on 
December 28, 2012. The applicability of this section expires on or 
before December 21, 2015.

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
Par. 4. The authority citation for part 53 continues to read as 
follows:

    Authority: 26 U.S.C. 7805 * * *
0
Par. 5. Section 53.4943-11 is amended by revising the section heading 
and adding paragraphs (f) and (g) to read as follows:


Sec.  53.4943-11  Effective/applicability date.

* * * * *
    (f) Special transitional rule for private foundations that 
qualified as Type III supporting organizations before August 17, 2006. 
The present holdings of a private foundation that qualified as a Type 
III supporting organization under section 509(a)(3) immediately before 
August 17, 2006, and that was reclassified as a private foundation 
under section 509(a) on or after August 17, 2006, solely as a result of 
the rules enacted by section 1241 of the Pension Protection Act of 
2006, Public Law 109-280 (120 Stat. 780), will be determined using the 
same rules that apply to Type III supporting organizations under 
section 4943(f)(7).
    (g) Special transitional rule for Type III supporting organizations 
created as trusts before November 20, 1970. A trust that qualifies as a 
Type III supporting organization under section 509(a)(3) and meets the 
requirements of Sec.  1.509(a)-4(i)(9) of this chapter will be treated 
as a ``functionally integrated Type III supporting organization'' for 
purposes of section 4943(f)(3)(A).

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 7. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       Control No.
------------------------------------------------------------------------
 
                                * * * * *
1.509(a)-4..............................................       1545-2157
 
                                * * * * *
------------------------------------------------------------------------


Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: December 19, 2012.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-31050 Filed 12-21-12; 4:15 pm]
BILLING CODE 4830-01-P