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ABA Comments on Proposed IRS Changes to Group Tax Exemptions: Solutions, Not More Problems

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Group tax exemptions have long provided valuable benefits for many nonprofit organizations, allowing them to receive tax-exempt status through a central organization instead of applying directly to the IRS. Through its Notice 2020-36 issued this year, however, the IRS has proposed a new “Revenue Procedure” that could significantly limit and change this traditional administrative benefit for many nonprofits.

Wagenmaker & Oberly attorney Ryan Oberly teamed up with a small group of attorneys in the American Bar Association Section of Taxation, to prepare an extensive report commenting on the proposed Revenue Procedure’s many problems and providing alternative solutions for the IRS to consider prior to finalizing the Revenue Procedure. The ABA joins a slew of religious denominations and other nonprofit groups critiquing these proposed group tax exemption changes.

The ABA’s feedback can be summarized as follows:

We believe that in its current form, the Proposed Revenue Procedure might create or exacerbate more difficulties than it ameliorates. It would oblige both central organizations and their subordinates to comply with a number of requirements without increasing the central organization's ability to exercise oversight over the subordinates. In some instances, it would make such oversight more difficult to exercise properly. In our view, it also would increase the Service's caseload, with thousands of organizations submitting applications for exemption that would not otherwise have needed to do so. 

Especially in light of the ongoing resource constraints faced by the Service, now does not seem the time to present cumbersome changes to a group exemption system that has worked relatively well for decades. Instead, we believe that the Service's concerns are best addressed through a framework that articulates the concepts of affiliation, general supervision, and control with greater clarity and flexibility. 

The ABA’s comments highlight the diversity of nonprofits benefiting from the group ruling process, each with a distinct governance and organizational structure. The ABA’s comments further emphasize the importance of group tax exemptions for America’s religious communities, with many denominational bodies relying on the administrative process to provide exemption for thousands of covered subordinates. Current group tax exemption requirements provide subordinates with appropriate flexibility to pursue a diversity of purposes and activities that further their exempt purposes while still participating in a group ruling. The proposed Revenue Procedure, in its current form, significantly limits the purposes, governance, and types of exempt activities a subordinate can pursue within a group exemption.[1]

The ABA’s comments also address one area of ambiguity that has existed in current group ruling guidance for many years. Specifically, what level of affiliation or control must exist between a central organization and its subordinate organization(s)? Acknowledging that these terms could benefit from further definition, the ABA advocates for relaxed control: “We recommend that the Proposed Revenue Procedure, when finalized, not only keep the definitions of affiliation, general supervision, and control flexible enough to accommodate a wide range of religious and nonreligious governance structures, but also avoid uniformity requirements that implicitly impose a degree of top-down control beyond what is necessary for proper oversight by central organizations.” For example, it should be legally sufficient for subordinates to retain their autonomy to appoint their own officers and directors. 

The ABA comments address numerous other considerations for group tax exemption, including information required to be annually obtained by central organizations from their subordinates, how many subordinates a central organization needs to obtain or maintain a group ruling, the differences of public charity subclassification among organizations within a group ruing, NTEE code uniformity aspects, and grandfathering and other transitional aspects.

What’s next? Public comments were due by August 16, 2020, and the IRS has reportedly suspended its processing of all group tax exemption applications until final guidance is issued. Yet there is no current date for the final guidance. In fact, we do not know whether the IRS will continue to proceed with the current Revenue Procedure as proposed, attempt to incorporate many of the comments offered by the ABA and others, or continue the process without new guidance. Many nonprofit groups advocate that the third option is the wisest. 

The IRS Notice 2020-36 can be found here. The proposed revenue procedure would modify and supersede Rev. Prov. 80-27 (as modified by Rev. Proc. 96-40). The ABA’s comments can be found here.

[1] For more background on group tax exemptions generally, see our blog on the subject here.

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