[Federal Register Volume 81, Number 33 (Friday, February 19, 2016)]
[Proposed Rules]
[Pages 8446-8455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02858]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118867-10]
RIN 1545-BJ53


Requirements for Type I and Type III Supporting Organizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding the 
prohibition on certain contributions to Type I and Type III supporting 
organizations and the requirements for Type III supporting 
organizations. The regulations reflect changes to the law made by the 
Pension Protection Act of 2006. The regulations will affect Type I and 
Type III supporting organizations and their supported organizations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by May 19, 2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-118867-10), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8:00 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
118867-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, 20224 or sent electronically via the 
Federal eRulemaking Portal at http://www.regulations.gov/ (IRS REG-
118867-10).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jonathan Carter at (202) 317-5800 or Mike Repass at (202) 317-4086; 
concerning submissions of comments and requests for a public hearing, 
Regina Johnson at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review and approval in accordance with the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information 
should be sent to the Office of Management and Budget, Attn: Desk 
Officer for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503, with copies to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of 
information should be received by April 19, 2016.
    Comments are specifically requested concerning:
     Whether the proposed collection of information is 
necessary for the proper performance of the functions of the IRS, 
including whether the information will have practical utility;
     The accuracy of the estimated burden associated with the 
proposed collection of information;
     How the quality, utility, and clarity of the information 
to be collected may be enhanced;
     How the burden of complying with the proposed collection 
of information may be minimized, including through forms of information 
technology; and
     Estimates of capital or start-up costs and costs of 
operation, maintenance, and purchase of services to provide 
information.
    The collection of information in these proposed regulations is in 
Sec.  1.509(a)-4(i)(4)(iv)(D) (written record of close cooperation and 
coordination by the governmental supported organizations) and Sec.  
1.509(a)-4(i)(6)(iii)(B) (written record of contributions received by 
the supported organization). Requiring the supporting organization to 
collect written records of its governmental supported organizations' 
close cooperation and coordination with each other and written records 
of the contributions its supported organizations directly received in 
response to solicitations by the supporting organization permits the 
IRS to determine whether the supporting organization satisfies the 
requirements to be a functionally integrated or non-functionally 
integrated Type III supporting organization. The record keepers are 
Type III supporting organizations.
    Estimated number of recordkeepers: 7,872.
    Estimated average annual burden hours per recordkeeper: 2 hours.
    Estimated total annual recordkeeping burden: 15,744.
    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

[[Page 8447]]

of any internal revenue law. Generally, tax returns and return 
information are confidential, as required by 26 U.S.C. 6103.

Background

1. Overview

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) regarding organizations described in 
section 509(a)(3) of the Internal Revenue Code (Code). An organization 
described in section 501(c)(3) is classified as either a private 
foundation or a public charity. To be classified as a public charity, 
an organization must be described in section 509(a)(1), (2), or (3). 
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 be described in section 509(a)(3), an organization must satisfy 
(1) an organizational test, (2) an operational test, (3) a relationship 
test, and (4) a disqualified person control test. The organizational 
and operational tests require that a 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 
a supporting organization to establish one of three types of 
relationships with one or more supported organizations. A supporting 
organization that is operated, supervised or controlled by one or more 
supported organizations is 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 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 organization(s). A supporting organization that is operated 
in connection with one or more supported organizations is known as a 
``Type III'' supporting organization and is discussed further in the 
remainder of this preamble. Finally, the disqualified person control 
test requires that a supporting organization not be controlled directly 
or indirectly by certain disqualified persons.
    These proposed regulations focus primarily on the relationship test 
for Type III supporting organizations. Specifically, the proposed 
regulations reflect statutory changes enacted by sections 1241 through 
1243 of the Pension Protection Act of 2006, Public Law 109-280 (120 
Stat. 780) (2006) (PPA)), which made the following five changes to the 
requirements an organization must satisfy to qualify as a Type III 
supporting organization:
    (1) Removed the ability of a charitable trust to rely on the 
special rule under Sec.  1.509(a)-4(i)(2)(iii) of the regulations then 
in effect;
    (2) Directed the Secretary of the Treasury to promulgate 
regulations under section 509 that establish a new distribution 
requirement for Type III supporting organizations that are not 
``functionally integrated'' (a non-functionally integrated (NFI) Type 
III supporting organization) to ensure that a ``significant amount'' is 
paid to supported organizations (for this purpose the term 
``functionally integrated'' means a Type III supporting organization 
that is not required under Treasury regulations to make payments to 
supported organizations, because the supporting organization engages in 
activities that relate to performing the functions of, or carrying out 
the purposes of, its supported organization(s));
    (3) Required a Type III supporting organization to provide annually 
to each of its supported organizations the information required by the 
Treasury Department and the IRS to ensure that the supporting 
organization is responsive to the needs or demands of its supported 
organization(s);
    (4) Prohibited a Type III supporting organization from supporting 
any supported organization not organized in the United States; and
    (5) 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.
    These proposed regulations set forth additional rules on the 
requirements for Type III supporting organizations, including 
additional requirements to meet the responsiveness test for all Type 
III supporting organizations; additional rules regarding the 
qualification of an organization as a functionally integrated Type III 
supporting organization under Sec.  1.509(a)-4(i)(4), including 
provisions for supporting organizations that support governmental 
entities; and additional rules regarding the required annual 
distributions under Sec.  1.509(a)-4(i)(5) by a NFI Type III supporting 
organization. The proposed regulations also define the term ``control'' 
for purposes of section 509(f)(2), which prohibits a Type I supporting 
organization or a Type III supporting organization from accepting 
contributions from persons who control the governing body of its 
supported organization(s).

2. Prior 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) in response to the PPA. The ANPRM 
described proposed rules to implement the changes made by the PPA to 
the Type III supporting organization requirements and solicited 
comments regarding those proposed rules.
    On September 24, 2009, the Treasury Department and the IRS 
published in the Federal Register (74 FR 48672) a notice of proposed 
rulemaking (the 2009 NPRM) (REG-155929-06). The 2009 NPRM contained 
proposed regulations (the 2009 proposed regulations) setting forth the 
requirements to qualify as a Type III supporting organization under the 
PPA.
    On December 28, 2012, the Treasury Department and the IRS published 
in the Federal Register (77 FR 76382) a Treasury decision (TD 9605) 
containing final and temporary regulations (the 2012 TD) regarding the 
requirements to qualify as a Type III supporting organization. Based on 
the comments received, the 2012 TD made certain changes to the rules 
proposed in the 2009 NPRM, included in the temporary regulations 
significant changes to the distribution requirement, and reserved 
certain topics for further consideration. Also on December 28, 2012, 
the Treasury Department and the IRS published in the Federal Register 
(77 FR 76426) a notice of proposed rulemaking (the 2012 NPRM) (REG-
155929-06) that incorporated the text of the temporary regulations in 
the 2012 TD by cross-reference. The 2012 TD provided transition relief 
for Type III supporting organizations in existence on December 28, 
2012, that met and continued to meet the test under former Sec.  
1.509(a)-4(i)(3)(ii), as in effect prior to December 28, 2012, treating 
them as functionally integrated until the first day of their second 
taxable years

[[Page 8448]]

beginning after December 28, 2012. The preamble to the 2012 TD also 
identified issues for possible future rulemaking and requested 
comments. The IRS received three comments on these issues. The comments 
were considered in developing these proposed regulations and are 
available for public inspection at www.regulations.gov or upon request. 
No public hearing was requested.
    The Treasury Department and the IRS published Notice 2014-4, 2014-2 
I.R.B. 274, to provide additional transition relief for any Type III 
supporting organization that (1) supports at least one governmental 
supported organization to which the supporting organization is 
responsive within the meaning of Sec.  1.509(a)-4(i)(3) and (2) engages 
in activities for or on behalf of the governmental supported 
organization that perform the functions of, or carry out the purposes 
of, the governmental supported organization and that, but for the 
involvement of the supporting organization, would normally be engaged 
in by the governmental supported organization itself. Notice 2014-4 
provides that such an organization will be treated as a functionally 
integrated Type III supporting organization until the earlier of the 
date final regulations are published under Sec.  1.509(a)-4(i)(4)(iv) 
in the Federal Register or the first day of the organization's third 
taxable year beginning after December 31, 2013.
    On December 23, 2015, the Treasury Department and the IRS published 
in the Federal Register (80 FR 79684) a Treasury Decision (TD 9746) 
containing final regulations (the 2015 TD) regarding the distribution 
requirement for NFI Type III supporting organizations. The preamble of 
those regulations provided that supporting organizations supporting a 
governmental supported organization could continue to rely on Notice 
2014-4 until the date of publication of the notice of proposed 
rulemaking prescribing the new proposed regulations under Sec.  
1.509(a)-(i)(4)(iv). The IRS received three comments in response to 
Notice 2014-4, which the Treasury Department and the IRS considered in 
developing these proposed regulations.

Explanation of Provisions and Summary of Comments

    This section describes the proposed provisions and addresses 
comments that the Treasury Department and the IRS received in response 
to the 2012 TD and Notice 2014-4.

1. Gifts From Controlling Donor--Meaning of Control

    Type I and Type III supporting organizations are prohibited 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. Section 509(f)(2) and Sec.  1.509(a)-4(f)(5). For this 
purpose, related persons include family members and 35-percent 
controlled entities within the meaning of section 4958(f). Although the 
2012 TD reserved Sec.  1.509(a)-4(f)(5)(ii), ``Meaning of control,'' 
the preamble to the 2012 TD indicated that the Treasury Department and 
the IRS intended to issue proposed regulations that would provide such 
a definition.
    These proposed regulations define ``control'' for this purpose 
consistently with Sec.  1.509(a)-4(j), which relates to control by 
disqualified persons for purposes of the disqualified person control 
test. In general, under the proposed regulations, the governing body of 
a supported organization is considered ``controlled'' by a person if 
that person, alone or by aggregating his or her votes or positions of 
authority with certain related persons, as described in section 
509(f)(2)(B)(ii) and (iii), may require the governing body of the 
supported organization to perform any act that significantly affects 
its operations or may prevent the governing body of the supported 
organization from performing any such act.

2. Type III Supporting Organization Relationship Test

    Section 1.509(a)-4(i)(1) provides that for each taxable year, a 
Type III supporting organization must satisfy (i) a notification 
requirement, (ii) a responsiveness test, and (iii) an integral part 
test provided in the regulations. These proposed regulations provide 
additional rules regarding each of these requirements.
A. Notification Requirement
    Section 509(f)(1)(A) provides that an organization shall not be 
considered a Type III supporting organization unless the organization 
provides to each supported organization, for each taxable year, such 
information as the Secretary may require to ensure that the 
organization is responsive to the needs or demands of the supported 
organizations.
    To satisfy this notification requirement, Sec.  1.509(a)-4(i)(2) 
requires a Type III supporting organization to provide to each of its 
supported organizations for each taxable year: (1) A written notice 
addressed to a principal officer of the supported organization 
describing the type and amount of all of the support it provided to the 
supported organization during the supporting organization's preceding 
taxable year; (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 (unless previously provided and not 
subsequently amended). For NFI Type III supporting organizations, the 
description of support in the written notice includes all of the 
distributions described in Sec.  1.509(a)-4(i)(6) to the supported 
organization.
    The proposed regulations amend Sec.  1.509(a)-4(i)(2) to clarify 
that a supporting organization must deliver the required documents to 
each of its supported organizations by the last day of the fifth month 
of the taxable year after the taxable year in which the supporting 
organization provided the support it is reporting. This proposed change 
is intended to reduce confusion, but does not substantively change the 
due date or the content of the required notification. Date of delivery 
is determined applying the general principles of section 7502.
B. Responsiveness Test
    Section 1.509(a)-4(i)(3)(i) provides that a supporting organization 
meets the responsiveness test if it is ``responsive to the needs or 
demands of a supported organization.'' To meet this responsiveness 
test, an organization must satisfy: (1) A relationship test described 
in Sec.  1.509(a)-4(i)(3)(ii) under which the officers, directors, or 
trustees of the organization have a specified relationship with the 
officers, directors, or trustees (and in some cases the members) of the 
supported organization; and (2) a significant voice test described in 
Sec.  1.509(a)-4(i)(3)(iii) under which the officers, directors, or 
trustees of the supported organization, by reason of this relationship, 
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 the supporting organization, and 
in otherwise directing the use of the income or assets of the 
supporting organization. The preamble to the 2012 TD stated that, in 
determining the appropriate distribution amount for NFI

[[Page 8449]]

Type III supporting organizations, the Treasury Department and the IRS 
considered the required relationship between a supporting organization 
and its supported organizations, and that the Treasury Department and 
the IRS intended to issue proposed regulations in the future that would 
amend the responsiveness test by requiring a Type III supporting 
organization to be responsive to all of its supported organizations.
    In response to this proposal in the preamble to the 2012 TD, one 
commenter stated that a supporting organization should not be required 
to be responsive to all of its supported organizations because the 
resulting administrative burden would effectively limit the total 
number of organizations a supporting organization could support. The 
commenter suggested alternatives under which a supporting organization 
would be responsive to only a subset of its supported organizations 
that would vary from year to year.
    The Treasury Department and the IRS note that the distinguishing 
characteristic of Type III supporting organizations, and the basis for 
their public charity classification, is that they are responsive to and 
significantly involved in the operations of their publicly supported 
organizations. See Sec.  1.509(a)-4(f)(4). The Treasury Department and 
the IRS believe that, unless a Type III supporting organization is 
responsive to each of its supported organizations, the supported 
organizations cannot exercise the requisite level of oversight of and 
engagement with the supporting organization. Limiting the 
responsiveness requirement to fewer than all of the supported 
organizations may result in the necessary oversight and accountability 
being present for less than all of a supporting organization's 
operations. Therefore, the proposed regulations revise Sec.  1.509(a)-
4(i)(3)(i) to require a supporting organization to be responsive to the 
needs and demands of each of its supported organizations in order to 
meet the responsiveness test.
    To illustrate how concerns about potential administrative burdens 
may be addressed consistent with the responsiveness test, the proposed 
regulations include a new example. The proposed example is intended to 
demonstrate one way in which a Type III supporting organization that 
supports multiple organizations may satisfy the responsiveness test in 
a manner that can be cost-effective. The example shows that a 
supporting organization can, with respect to each of its supported 
organizations, meet a different subset of the required relationships 
with the supporting organization's officers, directors, or trustees 
listed in Sec.  1.509(a)-4(i)(3)(ii). It also shows how a supporting 
organization can organize and hold regular meetings, provide 
information, and encourage communication to help ensure that the 
supported organizations have a significant voice in the operations of 
the supporting organization.
    Another commenter requested additional guidance regarding the 
ability of trusts to satisfy the significant voice requirement of the 
responsiveness test. The new Example 3 provides further illustration of 
how Type III supporting organizations, including charitable trusts, 
might satisfy the significant voice requirement of the responsiveness 
test. The Treasury Department and the IRS note that although the 
examples in the regulations relating to the responsiveness test may 
involve a Type III supporting organization that is organized as either 
a corporation or a trust, the applicable law and relevant regulatory 
provisions, as modified by the proposed regulations, are applicable to 
all Type III supporting organizations in the same manner, whether 
organized as a corporation or a trust. The Treasury Department and the 
IRS anticipate that Type III supporting organizations may be able to 
demonstrate they satisfy the responsiveness test in a variety of ways, 
and that the determination will be based on all the facts and 
circumstances.
    As a result of the proposed changes to the responsiveness test, the 
proposed regulations also include conforming changes to examples and 
other regulatory provisions.
C. Integral Part Test--Functionally Integrated Type III Supporting 
Organizations
    Section 1.509(a)-4(i)(1) provides that, for each taxable year, a 
Type III supporting organization must satisfy the integral part test. 
The integral part test is satisfied under Sec.  1.509(a)-4(i)(1)(iii) 
by maintaining significant involvement in the operations of one or more 
supported organizations and providing support on which the supported 
organizations are dependent. To satisfy this test, a Type III 
supporting organization must meet the requirements either for a 
functionally integrated Type III supporting organization or for an NFI 
Type III supporting organization, as set forth in Sec.  1.509(a)-
4(i)(4) or (5), respectively.
    A Type III organization is functionally integrated under Sec.  
1.509(a)-4(i)(4) if (1) it 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 that section, (2) it is the parent of each of 
its supported organizations as described in paragraph (i)(4)(iii) of 
that section, or (3) it supports a governmental supported organization 
and otherwise meets the requirements of paragraph (i)(4)(iv) of that 
section. The direct furtherance test is not addressed by these 
regulations.
i. Parent of Each Supported Organization
    Under the current regulations, 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 
capacities) of the supporting organization. See Sec.  1.509(a)-
4(i)(4)(iii). This definition was adopted by the 2012 TD; however, the 
preamble to the 2012 TD stated that the Treasury Department and the IRS 
had determined that the definition of parent was insufficiently 
specific. It further stated that the Treasury Department and the IRS 
intended to issue proposed regulations that would provide a new 
definition of parent.
    As noted in the preamble to the 2009 NPRM, the classification of a 
parent organization as functionally integrated was intended to ``apply 
to supporting organizations that oversee or facilitate the operation of 
an integrated system, such as hospital systems.'' To more fully 
accomplish this purpose, the proposed regulations amend Sec.  1.509(a)-
4(i)(4)(iii) to clarify that in order for a supporting organization to 
qualify as the parent of each of its supported organizations, the 
supporting organization and its supported organizations must be part of 
an integrated system (such as a hospital system), and the supporting 
organization must engage in activities typical of the parent of an 
integrated system. Examples of these activities include (but are not 
limited to) coordinating the activities of the supported organizations 
and engaging in overall planning, policy development, budgeting, and 
resource allocation for the supported organizations. The Treasury 
Department and the IRS request comments on what activities are typical 
of the parent of an integrated system, and whether additional

[[Page 8450]]

activities should be explicitly listed as examples.
    The proposed regulations retain the requirement that the governing 
body, members of the governing body, or officers of the supporting 
organization must appoint or elect a majority of the officers, 
directors, or trustees of the supported organization. The Treasury 
Department and the IRS intend, as stated in the 2009 NPRM, the use of 
the phrase ``appointed or elected, directly or indirectly'' to mean the 
supporting organization could qualify as a parent of a second-tier (or 
lower) subsidiary. Thus, for example, if the directors of supporting 
organization A appoint a majority of the directors of supported 
organization B, which in turn appoints a majority of the directors of 
supported organization C, the directors of supporting organization A 
will be treated as appointing the majority of the directors of both 
supported organization B and supported organization C.
    The preamble to the 2012 TD stated that the Treasury Department and 
the IRS intended that the new definition of parent would specifically 
address the power to remove and replace officers, directors, or 
trustees of the supported organization. The Treasury Department and the 
IRS interpret the existing requirement under Sec.  1.509(a)-
4(i)(4)(iii) that the parent organization have the power to appoint or 
elect a majority of the officers, directors, or trustees of each 
supported organization to include the requirement that the parent 
organization also have the power to remove and replace such officers, 
directors, or trustees, or otherwise have an ongoing power to appoint 
or elect with reasonable frequency. The Treasury Department and the IRS 
request comments on whether Sec.  1.509(a)-4(i)(4)(iii) should be 
amended to provide further clarification on this issue.
ii. Supporting a Governmental Supported Organization
    The 2009 NPRM proposed an exception to the general rules for 
qualifying as a functionally integrated Type III supporting 
organization if the supporting organization supported only one 
governmental entity, which was defined as an entity the assets of which 
are subject to the appropriations process of a federal, state, local, 
or Indian tribal government. The 2009 NPRM also provided that in order 
to be considered functionally integrated, a substantial part of the 
supporting organization's total activities had to directly further the 
exempt purpose(s) of its supported organization, and that exempt 
purposes are not directly furthered by fundraising, grantmaking, or 
investing and managing non-exempt-use assets. The Treasury Department 
and IRS received multiple comments regarding this proposal. The 2012 TD 
stated the Treasury Department and the IRS were continuing to consider 
the public comments on the 2009 NPRM regarding this governmental entity 
exception and reserved Sec.  1.509(a)-4(i)(4)(iv) for future guidance 
on how a Type III supporting organization can qualify as functionally 
integrated by supporting a governmental entity.
    These proposed regulations take the prior comments into 
consideration and provide rules to qualify as functionally integrated 
both for new and existing Type III supporting organizations that 
support governmental supported organizations. These proposed rules also 
define the term ``governmental supported organization.''
    One commenter stated that the definition of a governmental 
supported organization in the 2009 NPRM was too complicated and 
difficult to understand and administer. This commenter proposed using 
the existing definition of a governmental unit in section 
170(b)(1)(A)(v) and (c)(1).
    The Treasury Department and the IRS agree with the commenter that 
for simplicity and administrability the term ``governmental supported 
organization'' should be defined by using an existing Code definition 
of a governmental unit. The proposed regulations define a governmental 
supported organization as a governmental unit described in section 
170(c)(1), or an organization described in section 170(c)(2) and 
(b)(1)(A) (other than in clauses (vii) and (viii)) that is an 
instrumentality of one or more governmental units described in section 
170(c)(1). The Treasury Department and the IRS further note that a 
governmental unit described in section 170(c)(1) includes all of the 
agencies, departments, and divisions of the governmental unit, and all 
such agencies, departments, and divisions will be treated as one 
governmental supported organization for purposes of Sec.  1.509(a)-
4(i)(4)(iv). The Treasury Department and the IRS specifically request 
comments on the proposed definition of governmental supported 
organization.
    Two commenters said that the 2009 NPRM's limit of only one 
governmental supported organization was too strict and instead 
recommended allowing a supporting organization to qualify for this 
exception if it supports at least one governmental supported 
organization, as Notice 2014-4 provides. One commenter noted that the 
2009 NPRM's limit of only one governmental supported organization would 
adversely affect existing supporting organizations that support an 
additional supported organization that is not itself a governmental 
entity, but that has a substantial operational connection with the 
governmental supported organization. Another commenter said that the 
test in Notice 2014-4 was not sufficient because it did not cover 
activities, such as fundraising and grant making, that the governmental 
supported organization could not otherwise perform.
    In response to these comments, the Treasury Department and the IRS 
propose a new test for Type III supporting organizations that support 
only governmental supported organizations to qualify as functionally 
integrated. The Treasury Department and the IRS agree it would be 
appropriate to treat a Type III supporting organization that supports 
two or more governmental supported organizations as functionally 
integrated, provided that the governmental supported organizations are 
themselves connected geographically or operationally, which will help 
ensure that the supported organizations provide sufficient input to and 
oversight of the supporting organization. Thus, the proposed 
regulations provide that a supporting organization that supports more 
than one governmental supported organization may be considered 
functionally integrated if all of its governmental supported 
organizations either: (1) Operate within the same geographic region 
(defined as a city, county, or metropolitan area); or (2) work in close 
coordination or collaboration with one another to conduct a service, 
program, or activity that the supporting organization supports. To 
satisfy the close cooperation or coordination requirement, the proposed 
regulations require a supporting organization to maintain on file a 
letter from each of the governmental supported organizations (or a 
joint letter from all of them) describing their collaborative or 
cooperative efforts with respect to the particular service, program, or 
activity. In addition, the proposed regulations incorporate the 2009 
NPRM proposed requirement that a substantial part of the supporting 
organization's total activities must directly further the exempt 
purposes of its governmental supported organization(s). The Treasury 
Department and the IRS believe that using a substantial part 
requirement, instead of the substantially all requirement in Sec.  
1.509(a)-4(i)(4)(iv)(A), is appropriate when supporting

[[Page 8451]]

organizations support only governmental supported organizations 
operating in the same geographic region or working in close 
collaboration because the input from and oversight by the governmental 
supported organizations minimize the potential for abuse.
    Two commenters stated that activities such as fundraising, grant-
making, and managing non-exempt-use assets should be considered 
activities that directly further the exempt purposes of a governmental 
supported organization. The Treasury Department and the IRS note that 
the integral part test's definition of ``directly further'' in Sec.  
1.509(a)-4(i)(4)(ii)(C) generally excludes fundraising, making grants, 
and investing and managing non-exempt-use assets. The Treasury 
Department and the IRS excluded these items because they determined 
that a Type III supporting organization should qualify as functionally 
integrated only if the supporting organization itself conducts 
activities that perform the functions of or carry out the purposes of 
the supported organization (as distinguished from providing financial 
support for the activities carried out by the supported organization). 
The Treasury Department and the IRS do not believe a different 
definition of ``directly further'' should apply to supporting 
organizations that support governmental supported organizations. 
Accordingly, the proposed regulations do not adopt this comment. 
However, under the proposed rules, these types of organizations would 
be considered functionally integrated if a substantial part, but not 
substantially all, of their total activities directly further the 
exempt purposes of their governmental supported organization(s). 
Accordingly, these proposed regulations allow these organizations to 
conduct more fundraising and other financial activities, if certain 
requirements are met, than is permitted under the substantially all 
test of Sec.  1.509(a)-4(i)(4)(ii).
    In response to comments, the proposed regulations also provide a 
special rule for existing Type III supporting organizations, provided 
that they support no more than one additional supported organization 
that is not a governmental supported organization. A Type III 
supporting organization in existence on or before February 19, 2016 is 
treated as functionally integrated if: (1) It supports one or more 
governmental supported organizations and no more than one supported 
organization that is not a governmental supported organization; (2) it 
designated each of its supported organizations as provided in Sec.  
1.509(a)-4(d)(4) on or before February 19, 2016; and (3) a substantial 
part of its total activities directly furthers the exempt purposes of 
its governmental supported organization(s).
    The proposed regulations also further extend the transition relief 
provided in Notice 2014-4 and extended by the 2015 TD. Under the 
proposed regulations, a Type III supporting organization in existence 
on or before February 19, 2016 that continues to meet the requirements 
of Notice 2014-4 is treated as functionally integrated until the 
earlier of the first day of the organization's first taxable year 
beginning after the date final regulations under Sec.  1.509(a)-
4(i)(4)(iv) are published or the first day of the organization's second 
taxable year beginning after February 19, 2016.
D. Integral Part Test--Non-Functionally Integrated Type III Supporting 
Organizations
    Section 1.509(a)-4(i)(5) generally provides that an NFI Type III 
supporting organization meets the integral part test if it satisfies 
the distribution requirement of paragraph (i)(5)(ii) of that section 
and the attentiveness requirement of paragraph (i)(5)(iii) of that 
section. Section 1.509(a)-4(i)(5)(ii) provides that, 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 its ``distributable amount''. Section 1.509(a)-4(i)(6) 
provides the amount of a distribution made to a supported organization 
is the amount of cash or the fair market value of the property 
distributed.
    For clarity and consistency, the proposed regulations revise Sec.  
1.509(a)-4(i)(5)(ii) to state that a supporting organization must make 
distributions as described in Sec.  1.509(a)-4(i)(6) to satisfy the 
distribution requirement, and revise section 1.509(a)-4(i)(6) to 
describe in detail what distributions count towards the distribution 
requirement.
i. Reduction of Distributable Amount for Taxes Subtitle A Imposes
    Section 1.509(a)-4(i)(5)(ii)(B) provides that the distributable 
amount is equal to the greater of 85 percent of an organization's 
adjusted net income for the immediately preceding taxable year (as 
determined by applying the principles of section 4942(f) and Sec.  
53.4942(a)-2(d)) or its minimum asset amount for the immediately 
preceding taxable year, reduced by the amount of taxes imposed on the 
supporting organization under subtitle A of the Code during the 
immediately preceding taxable year. See Sec.  1.509(a)-4(i)(5)(ii)(B).
    The Treasury Department and the IRS believe that, because the taxes 
under subtitle A of the Code are imposed on a supporting organization's 
unrelated business taxable income (pursuant to section 511) and the 
activity that produces the unrelated business taxable income does not 
further the supported organization's exempt purposes, these taxes 
should not be treated as an amount distributed to a supported 
organization. Therefore, the proposed regulations remove the provision 
in Sec.  1.509(a)-4(i)(5)(ii)(B) that reduces the distributable amount 
by the amount of taxes subtitle A of the Code imposed on a supporting 
organization during the immediately preceding taxable year.
ii. Distributions That Count Toward Distribution Requirement
    As noted above, Sec.  1.509(a)-4(i)(6) provides details on the 
distributions by a supporting organization that count toward satisfying 
the distribution requirement imposed in Sec.  1.509(a)-4(i)(5)(ii). The 
current regulations provide that distributions include but are not 
limited to: (1) Any amount paid to a supported organization to 
accomplish the supported organization's exempt purposes; (2) any amount 
paid by the supporting organization to perform an activity that 
directly furthers the exempt purposes of the supported organization 
within the meaning of Sec.  1.509(a)-4(i)(4)(ii), but only to the 
extent such amount exceeds any income derived by the supporting 
organization from the activity; (3) 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; (4) any amount paid to acquire an 
exempt-use asset described in Sec.  1.509(a)-4(i)(8)(ii); and (5) any 
amount set aside for a specific project that accomplishes the exempt 
purposes of a supported organization to which the supporting 
organization is responsive.
    The preamble to the 2012 TD stated that the list in Sec.  1.509(a)-
4(i)(6) is not exhaustive and other distributions may count toward the 
distribution requirement. The preamble further stated the Treasury 
Department and the IRS intended to propose regulations that more fully 
describe the expenditures (including expenditures for administrative 
and additional charitable activities) that do and do not count toward 
the distribution requirement.
    The Treasury Department and the IRS believe that the non-exclusive 
list in the current regulations creates uncertainty

[[Page 8452]]

for supporting organizations and the IRS about what counts toward the 
distribution requirement. Therefore, the proposed regulations revise 
and clarify the list in Sec.  1.509(a)-4(i)(6) of what counts toward 
the distribution requirement and make it an exclusive list.
    The 2012 TD clarified that reasonable and necessary administrative 
expenses paid to accomplish the exempt purposes of supported 
organizations, and not expenses incurred in the production of 
investment income, count toward the distribution requirement. For 
example, if a supporting organization conducts exempt activities that 
are for the benefit of, perform the functions of, or carry out the 
purposes of its supported organization(s) and also conducts nonexempt 
activities (such as investment activities or unrelated business 
activities), then the supporting organization's administrative expenses 
(such as salaries, rent, utilities and other overhead expenses) must be 
allocated between the exempt and nonexempt activities on a reasonable 
and consistently-applied basis. The administrative expenses 
attributable to the exempt activities are treated as distributions to 
its supported organization(s) if such expenses are reasonable and 
necessary. The administrative expenses and operating costs attributable 
to the nonexempt activities are not treated as distributions to the 
supported organization(s). The proposed regulations retain this 
provision, but also provide additional guidance on fundraising 
expenses.
    The 2012 TD did not specifically address whether fundraising 
expenses count toward the distribution requirement. The proposed 
regulations specify that reasonable and necessary administrative 
expenses paid to accomplish the exempt purposes of a supported 
organization generally do not include fundraising expenses the 
supporting organization incurs. However, under the proposed 
regulations, reasonable and necessary expenses incurred by the 
supporting organization to solicit contributions that a supported 
organization receives directly from donors count toward the 
distribution requirement, but only to the extent that the amount of 
such expenses does not exceed the amount of contributions actually 
received by the supported organization as a result of the solicitation 
activities of the supporting organization. The Treasury Department and 
the IRS believe this rule would provide greater consistency with the 
treatment of contributions that supporting organizations receive 
directly and then distribute to their supported organizations (net of 
the supporting organizations' solicitation expenses). To ensure that a 
supporting organization has the information it needs to calculate the 
allowable expenses, the proposed regulations require the supporting 
organization to obtain written substantiation from the supported 
organization of the amount of contributions the supported organization 
actually received as a result of the supporting organization's 
solicitations.
    One commenter requested that program related investments (PRIs) 
count toward the distribution requirement. The preamble to the 2012 TD 
stated the 2012 final and temporary regulations did not specifically 
address whether or not PRIs may count toward the distribution 
requirement or are excluded in calculating a supporting organization's 
distributable amount for a taxable year. The Treasury Department and 
the IRS recognize that private foundations may use PRIs in a variety of 
ways to accomplish their exempt purposes and that PRIs thus are treated 
as qualifying distributions under section 4942. However, because 
supporting organizations must be operated exclusively for the benefit 
of, to perform the functions of, or to carry out the purposes of their 
supported organizations, they differ from private foundations. For 
purposes of meeting the integral part test, the Treasury Department and 
the IRS do not believe that PRIs should be treated as distributions to 
supported organizations. The Treasury Department and the IRS believe 
that other provisions relating to the distribution requirement, such as 
the availability of set asides and the potential for carry-forwards of 
excess distributions, provide significant flexibility for supporting 
organizations to meet the current and future needs of their supported 
organizations. For these reasons, the proposed regulations do not adopt 
this comment.

Effective Date and Reliance

    These regulations are proposed to be effective on the date the 
Treasury decision adopting these rules as final or temporary 
regulations is published in the Federal Register. However, taxpayers 
may rely on the provisions of the proposed regulations until final or 
temporary regulations are issued.

Statement of Availability of IRS Documents

    The IRS Notice 2014-4 cited in this preamble is published in the 
Internal Revenue Bulletin and is available from the Superintendent of 
Documents, U.S. Government Printing Office, Washington, DC 20402, or by 
visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact 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 
these regulations.
    In connection with the requirements of the Regulatory Flexibility 
Act (5 U.S.C. chapter 6), it is hereby certified that the collection of 
information contained in the proposed regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that the proposed regulations 
will not impact a substantial number of small entities.
    Based on IRS Statistics of Income data for 2013, there are 
1,052,495 active nonprofit charitable organizations recognized by the 
IRS under section 501(c)(3), of which only 7,872 organizations self-
identified as Type III supporting organizations. The universe of 
organizations that would be affected by the collection of information 
under proposed Sec.  1.509(a)-4(i)(4)(iii) and Sec.  1.509(a)-
4(i)(6)(iii) is a subset of all Type III supporting organizations. 
Thus, the number of organizations that would be affected by the 
collection of information under proposed Sec.  1.509(a)-4(i)(4)(iii) 
and (i)(6)(iii), which is expected to be significantly less than 7,872, 
would not be substantial. Moreover, the time to complete the 
recordkeeping requirements is expected to be no more than 2 hours for 
each organization, which would not have a significant economic impact. 
Therefore, the collection of information under proposed Sec.  1.509(a)-
4(i)(4)(iii) and (i)(6)(iii) would not have a significant economic 
impact.
    Pursuant to section 7805(f) of the Code, this regulation has been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic comments or written 
comments (a signed original and eight (8) copies) that are submitted 
timely to the IRS. The Treasury Department and

[[Page 8453]]

the IRS request comments on all aspects of the proposed rules. All 
comments that are submitted by the public will be available for public 
inspection and copying at www.regulations.gov or upon request. A public 
hearing may be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Jonathan Carter and 
Mike Repass, 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 in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

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:
0
1. Revising paragraphs (f)(5)(ii), (i)(2)(i) introductory text, 
(i)(2)(i)(A), (i)(2)(iii), and (i)(3)(i);
0
2. Adding Example 3 to paragraph (i)(3)(iv);
0
3. Revising paragraphs (i)(4)(ii)(A)(1), (i)(4)(ii)(B), (i)(4)(iii) and 
(iv), (i)(5)(ii)(A) and (B), (i)(5)(iii)(A), Example 4 of paragraph 
(i)(5)(iii)(D), the third sentence of paragraph (i)(6) introductory 
text, and paragraphs (i)(6)(iii) and (v) introductory text and (l).
    The revisions and additions read as follows:


Sec.  1.509(a)-4  Supporting organizations.

* * * * *
    (f) * * *
    (5) * * *
    (ii) Meaning of control. For purposes of paragraph (f)(5)(i) of 
this section, the governing body of a supported organization will be 
considered controlled by a person described in paragraph (f)(5)(i)(A) 
of this section if that person, alone or by aggregating the person's 
votes or positions of authority with persons described in paragraph 
(f)(5)(i)(B) or (C) of this section, may require the governing body of 
the supported organization to perform any act that significantly 
affects its operations or may prevent the governing body of the 
supported organization from performing any such act. The governing body 
of a supported organization will generally be considered to be 
controlled directly or indirectly by one or more persons described in 
paragraph (f)(5)(i)(A), (B), or (C) of this section if the voting power 
of such persons is 50 percent or more of the total voting power of such 
governing body or if one or more of such persons have the right to 
exercise veto power over the actions of the governing body of the 
supported organization. However, all pertinent facts and circumstances 
will be taken into consideration in determining whether one or more 
persons do in fact directly or indirectly control the governing body of 
a supported organization.
* * * * *
    (i) * * *
    (2) * * * (i) Annual notification. For each taxable year (the 
Reporting 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 (including all of the distributions described in paragraph 
(i)(6) of this section if applicable) the supporting organization 
provided to the supported organization during the supporting 
organization's taxable year immediately preceding the Reporting Year 
(and during any other taxable year of the supporting organization 
ending after December 28, 2012, for which such support information has 
not previously been provided);
* * * * *
    (iii) Due date. The notification documents required by this 
paragraph (i)(2) shall be delivered or electronically transmitted by 
the last day of the fifth calendar month of the Reporting Year.
* * * * *
    (3) * * * (i) General rule. A supporting organization meets the 
responsiveness test only if it is responsive to the needs or demands of 
each of its supported organizations. 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 
(iii) of this section with respect to each of its supported 
organizations.
* * * * *
    (iv) * * *
    Example 3.  Z is described in section 501(c)(3). Z's 
organizational documents provide that it supports ten different 
organizations, each of which is described in section 509(a)(1). One 
of the directors of S (one of the supported organizations) is a 
voting member of Z's board of directors and participates in Z's 
regular board meetings. Officers of Z hold regular face-to-face or 
telephonic meetings during the year to which officers of all the 
supported organizations are invited. Z's meetings with the supported 
organizations may be held jointly or separately. Prior to the 
meetings, Z makes available to the supported organizations 
(including by email) up-to-date information about its activities 
including its assets and liabilities, receipts and distributions, 
and investment policies and returns. In the meetings, officers of 
each of the supported organizations have an opportunity to ask 
questions and discuss with officers of Z the projected needs of 
their organizations, as well as Z's investment and grant making 
policies and practices. In addition to holding these meetings with 
the supported organizations, Z provides the contact information of 
one of its officers to each of the supported organizations and 
encourages them to contact that officer if they have questions, or 
if they wish to schedule additional meetings to discuss the 
projected needs of their organization and how Z should distribute 
its income and invest its assets. Z provides the information 
required under paragraph (i)(2) of this section and a copy of its 
annual audited financial statements to the principal officers of the 
supported organizations. Z meets the relationship test of paragraph 
(i)(3)(ii)(B) or (C) of this section with respect to each of its 
supported organizations. Based on these facts, Z also satisfies the 
significant voice requirement of paragraph (i)(3)(iii) of this 
section, and therefore meets the responsiveness test of this 
paragraph (i)(3) with respect to each of its ten supported 
organizations.
* * * * *
    (4) * * *
    (ii) * * *
    (A) * * *
    (1) Directly further the exempt purposes of one or more supported 
organizations by performing the functions of, or carrying out the 
purposes of, such supported organization(s); and
* * * * *
    (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), all pertinent facts 
and circumstances will be taken into consideration.
* * * * *
    (iii) Parent of supported organization(s). For purposes of 
paragraph (i)(4)(i)(B) of this section, in order for a supporting 
organization to qualify as the parent of each of its

[[Page 8454]]

supported organizations, the supporting organization and its supported 
organizations must be part of an integrated system (such as a hospital 
system), the supporting organization must engage in activities typical 
of the parent of an integrated system, and a majority of the officers, 
directors, or trustees of each supported organization must be appointed 
or elected, directly or indirectly, by the governing body, members of 
the governing body, or officers (acting in their official capacities) 
of the supporting organization. For purposes of this paragraph 
(i)(4)(iii), examples of activities typical of the parent of an 
integrated system of supported organizations include (but are not 
limited to) coordinating the activities of the supported organizations 
and engaging in overall planning, policy development, budgeting, and 
resource allocation for the supported organizations.
    (iv) Supporting a governmental supported organization--(A) In 
general. A supporting organization satisfies the requirements of this 
paragraph (i)(4)(iv) if--
    (1) The supporting organization supports only governmental 
supported organizations, and, if the supporting organization supports 
more than one governmental supported organization, all of the 
governmental supported organizations either--
    (i) Operate within the same geographic region; or
    (ii) Work in close coordination or collaboration with one another 
to conduct a service, program, or activity that the supporting 
organization supports; and
    (2) A substantial part of the supporting organization's total 
activities are activities that directly further, as defined by 
paragraph (i)(4)(ii)(C) of this section, the exempt purposes of its 
governmental supported organization(s).
    (B) Governmental supported organization defined. For purposes of 
paragraph (i)(4)(iv)(A) of this section, the term governmental 
supported organization means a supported organization that is--
    (1) A governmental unit described in section 170(c)(1); or
    (2) An organization described in section 170(c)(2) and (b)(1)(A) 
(other than in clauses (vii) and (viii)) that is an instrumentality of 
one or more governmental units described in section 170(c)(1).
    (C) Geographic region defined. For purposes of paragraph 
(i)(4)(iv)(A)(1) of this section, the term geographic region means a 
city, county, or metropolitan area.
    (D) Close cooperation or coordination. To satisfy the close 
cooperation or coordination requirement of paragraph (i)(4)(iv)(A)(1) 
of this section, the supporting organization shall maintain on file a 
letter from each of the governmental supported organizations (or a 
joint letter from all of them) describing their collaborative or 
cooperative efforts with respect to the particular service, program, or 
activity.
    (E) Exception for organizations supporting a governmental supported 
organization on or before February 19, 2016. A Type III supporting 
organization in existence on or before February 19, 2016 will be 
treated as meeting the requirements of this paragraph (i)(4)(iv) if it 
met and continues to meet the following requirements--
    (1) It supports one or more governmental supported organizations 
described in paragraph (i)(4)(iv)(B) of this section and does not 
support more than one supported organization that is not a governmental 
supported organization;
    (2) Each of the supported organizations is designated by the 
supporting organization as provided in paragraph (d)(4) of this section 
on or before February 19, 2016; and
    (3) A substantial part of the supporting organization's total 
activities are activities that directly further, as defined by 
paragraph (i)(4)(ii)(C) of this section, the exempt purposes of its 
governmental supported organization(s).
    (F) Transition rule for supporting organizations in existence on or 
before February 19, 2016. Until the earlier of the first day of the 
organization's first taxable year beginning after the date final 
regulations are published in the Federal Register under this paragraph 
(i)(4)(iv) or the first day of the organization's second taxable year 
beginning after February 19, 2016, a Type III supporting organization 
in existence on or before February 19, 2016 will be treated as meeting 
the requirements of this paragraph (i)(4)(iv) if it met and continues 
to meet the following requirements--
    (1) It supports at least one supported organization that is a 
governmental entity to which the supporting organization is responsive 
within the meaning of paragraph (i)(3) of this section; and
    (2) It engages in activities for or on behalf of the governmental 
supported organization described in paragraph (i)(4)(iv)(F)(1) of this 
section that perform the functions of, or carry out the purposes of, 
that governmental supported organization and that, but for the 
involvement of the supporting organization, would normally be engaged 
in by the governmental supported organization itself.
* * * * *
    (5) * * *
    (ii) * * * (A) Annual distribution. With respect to each taxable 
year, a supporting organization must make distributions described in 
paragraph (i)(6) of this section in a total amount equaling or 
exceeding the supporting organization's distributable amount for the 
taxable year, as defined in paragraph (i)(5)(ii)(B) of this section, on 
or before the last day of the taxable year.
    (B) Distributable amount. Except as provided in paragraphs 
(i)(5)(ii)(D) and (E) of this section, 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) 
or its minimum asset amount (as defined in paragraph (i)(5)(ii)(C) of 
this section) for the immediately preceding taxable year.
* * * * *
    (iii) * * * (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).
* * * * *
    (D) * * *
    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 described in paragraph (i)(3) of this section with 
respect to each of its supported organizations. Each year, O 
distributes an aggregate amount that equals its distributable amount 
described in paragraph (i)(5)(ii)(B) of this section and distributes an 
equal amount to each of the five universities. O distributes annually 
to each of V and W an amount that equals more than 10 percent of each 
university's total annual support received in its most recently 
completed taxable year. Based on these facts, O meets the requirements 
of paragraph (i)(5)(iii) of this section because it distributes two-
fifths (more than the required one-third) of its

[[Page 8455]]

distributable amount to supported organizations that are attentive to 
O.
    (6) Distributions that count toward distribution requirement. * * * 
Distributions by the supporting organization that count toward the 
distribution requirement imposed in paragraph (i)(5)(ii) of this 
section are limited to the following--
* * * * *
    (iii) Any reasonable and necessary--
    (A) Administrative expenses paid to accomplish the exempt purposes 
of the supported organization, which do not include expenses incurred 
in the production of investment income or the conduct of fundraising 
activities, except as provided in paragraph (i)(6)(iii)(B) of this 
section; and
    (B) Expenses incurred to solicit contributions that are received 
directly by a supported organization, but only to the extent the amount 
of such expenses does not exceed the amount of contributions actually 
received by the supported organization as a result of the solicitation, 
as substantiated in writing by the supported organization;
* * * * *
    (v) Any amount set aside for a specific project that accomplishes 
the exempt purposes of a supported organization, 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--
* * * * *
    (l) Effective/applicability dates. (1) Paragraphs (a)(6), (f)(5), 
and (i) of this section are effective on December 28, 2012, except--
    (i) Paragraphs (i)(4)(ii)(C), (i)(5)(ii)(C) and (D), (i)(6)(iv), 
(i)(7)(ii), and (i)(8) of this section are applicable on December 21, 
2015; and
    (ii) Paragraphs (f)(5)(ii), (i)(2)(i) and (iii), (i)(3)(i), 
(i)(4)(ii)(A)(1), (i)(4)(ii)(B), (i)(4)(iii) and (iv), (i)(5)(ii)(A) 
and (B), (i)(5)(iii)(A), (i)(6)(i), (iii) and (v) of this section, 
Example 3 of paragraph (i)(3)(iv) of this section, and Example 4 of 
paragraph (i)(5)(iii)(D) of this section are effective on the date the 
Treasury decision adopting these rules as final or temporary 
regulations is published in the Federal Register.
    (2) See paragraphs (i)(5)(ii)(B) and (C) and (i)(8) of Sec.  
1.509(a)-4T contained in 26 CFR part 1, revised as of April 1, 2015, 
for certain rules regarding non-functionally integrated Type III 
supporting organizations effective before December 21, 2015. See 
paragraphs (i)(5)(ii)(A) and (B) and (i)(5)(iii)(D) of Sec.  1.509(a)-4 
(as effective December 21, 2015), for certain rules regarding non-
functionally integrated Type III supporting organizations effective 
before the date the Treasury decision adopting these rules as final or 
temporary regulations is published in the Federal Register.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-02858 Filed 2-18-16; 8:45 am]
 BILLING CODE 4830-01-P