- Community
- Research
- Forms, Rates & Tables
- Government
- Executive
- Judicial
- Legislative
- Treasury
- Comments
- Continuing Professional Education
- Determination Letter
- Email Chief Counsel Advice
- Exempt Organizations Update
- Field Service Advice
- Forms and Instructions
- General Counsel Memoranda
- IRS Announcements
- IRS Fact Sheet
- IRS Forms
- IRS Legal Memoranda
- IRS Notices
- Information Release
- Internal Revenue Code
- Letter Rulings
- Publications
- Regulations
- Revenue Procedures
- Revenue Rulings
- Technical Advice Memoranda
- Treasury Decisions
- Management
- Marketing
- Planning
- News
- Articles
- Case Studies
- Technical Reports
Firm Thanks Treasury for Agreeing to Discuss Type III Supporting Organization Proposals
Summary
Writing on behalf of Caplan & Drysdale, Michael Durham has thanked the Treasury for agreeing to meet with the Wisconsin Alumni Research Foundation for the purpose of discussing the contours of the currently proposed "Government Entity Exception" allowing some type III supporting organizations of government entities to include investment and grantmaking activities among the activities qualifying them for functionally integrated status, and your willingness to consider our further proposals growing out of that discussion.
Full Text:
February 9, 2011
Alexandra Minkovich, Esq.
Attorney Advisor, Office of Tax Policy
Department of Treasury
1500 Pennsylvania Avenue
Room 1313-AMT
Washington, D.C. 20220
RE: "Government Entity" Exception for Functionally Integrated Type IIIs
Dear Ms. Minkovich:
Thank you again for your willingness to meet with WARF in December to discuss the contours of the currently proposed "Government Entity Exception" allowing some type III supporting organizations of government entities to include investment and grantmaking activities among the activities qualifying them for functionally integrated status, and your willingness to consider our further proposals growing out of that discussion. This letter aims to discuss alternative options for broadening that exception that may be acceptable to Treasury.
Please note that although it is not discussed in detail in
this letter, we continue to believe that the final regulations should
make clear that a supporting organization "may use any reasonable method
to determine the amount of its activities directly furthering the
exempt purposes of its supported organization(s), as long as such method
is consistently used," as we have previously proposed.
- I. WARF's Previous Proposal and Treasury's Concerns
- (iii) Governmental Entity Exception. A supporting
organization may treat the investment and management of non-exempt-use
assets and the making of grants directly to a supported organization as
activities that directly further the exempt purposes of a supported
organization if:
(A) Such activities are conducted on behalf of a supported organization
-
(1) whose assets are subject to the appropriation process of a federal,
state, local or Indian tribal government for purposes or programs
unrelated to the exempt purposes of the supported organization, or
(2) that is responsive to, and has a substantial operational connection with, a supported organization described in paragraph (i)(4)(iii)(A)(1);
(C) A substantial part of the supporting organization's total activities directly furthers the exempt purpose(s) of its supported organization(s) and are activities other than fundraising, grantmaking, and investing and managing non exempt-use assets.1
Our original proposal already provides some practical limits on how many unrelated organizations an entity could support.
We believe that our original proposal does provide some limits on the
ability for an organization to spread its support among many unrelated
institutions. Specifically, the proposal leaves in place the requirement
that "substantially all" of the supporting organization's activities
must directly further the purposes of those supported organizations to which it is responsive.
Thus, a supporting organization would have to be responsive to each
institution whose support it wished to count as functionally integrated,
which would create a natural limit on the number of such organizations
it could support. This responsiveness requirement is the same practical
limitation that prevents other functionally integrated type IIIs from
dividing their support among a large number of supported organizations,
and it seems like it could serve the same function for type IIIs
supporting governmental entities. (A type III would have to assure each
such institution a significant voice in its affairs, typically by having
a representative from each supported institution on its board.)
- II. Options for Further Restriction
- A. Reinstate the limit to a single government supported organization,
but allow support for close affiliates of that institution.
- (iii) Governmental Entity Exception. A supporting
organization may treat the investment and management of non-exempt-use
assets on behalf of a supported organization and the making of grants
directly to a supported organization as activities that directly further
the exempt purposes of that supported organization if:
(A) The supporting organization primarily supports an organization whose assets are subject to the appropriation process of a federal, state, local or Indian tribal government for purposes or programs unrelated to the exempt purposes of the supported organization;
(B) The supporting organization's other supported organizations (if any) are responsive to, and have a substantial operational connection with, the supported organization described in paragraph (i)(4)(iii)(A)(1); and
(C) A substantial part of the supporting organization's total activities directly furthers the exempt purpose(s) of its supported organization(s) and are activities other than fundraising, grantmaking, and investing and managing non exempt-use assets.
A supported organization described in paragraph (i)(4)(iii)(B) is responsive to the supported organization described in paragraph (i)(4)(iii)(A) if it would meet the requirements of paragraphs (i)(3)(ii) and (i)(3)(iii) with respect to that supported organization, read by substituting "supported organization described in paragraph (i)(4)(iii)(B)" for "supporting organization" and by substituting "supported organization described in paragraph (i)(4)(iii)(A)" for "supported organization" wherever such terms appear. Whether a supported organization described in paragraph (i)(4)(iii)(B) has a substantial operational connection with the supported organization described in paragraph (i)(4)(iii)(A) shall be determined based on all the facts and circumstances. The following factors shall ordinarily be considered evidence of a substantial operational connection between organizations: commonality of purpose as evidenced in the two organizations' governing documents and operations; common staff or facilities; the activities of the supported organization described in paragraph (i)(4)(iii)(B) serving as part of a larger complex of activities conducted by the supported organization described in paragraph (i)(4)(iii)(A), or complementing or enhancing those activities; and the supported organization described in paragraph (i)(4)(iii)(B) having a historic and continuing relationship with the supported organization described in paragraph (i)(4)(iii)(A).
Under the proposed language, a type III could only qualify for
the Government Entity exception if it provided support primarily to a
single entity subject to a government appropriation process. It could
support additional governmental or nongovernmental entities, but only if
they each were "responsive to" and had "a substantial operational
connection with" the primary supported organization (keeping those terms
materially the same as defined in our previous proposal). This proposal
thus leaves intact the currently proposed regulations' refusal to
extend the exception to organizations that support multiple unrelated
government institutions. Of course, there is no requirement that the
type III have any additional supported organizations besides a single
government entity. And the number of such secondary supported
organizations receiving any substantial support would be naturally
limited, because the type III would have to devote substantially all of
its activity to supported organizations to which it is responsive.
- B. Narrow option (A) by adding a numerical limit on the number of secondary supported organizations.
-
(B) the supporting organization has at most one other supported organization, which (if it exists) is
-
(B) the supporting organization's has at most [X] other supported organizations, each of which (if any)
- C. Broaden option (A) to allow additional supported organizations.
- Allow up to a fixed number unrelated government supported organizations, along with close affiliates of each such entity. This is perhaps the simplest alternative to draft and to administer, although it may be difficult to determine what the exact numerical limit should be.
- Allow multiple unrelated government supported organizations and their closely related affiliates, but count investment or grantmaking activities in support of each such entity as "directly furthering" its purposes only if the type III supporting organization also spends a substantial part of its activities on other functionally integrated activities on behalf of that entity. This approach would set a practical limit rather than (or potentially in addition to) a strict numerical limit on the number of government entities whose support would count toward functionally integrated status. Note that we would not recommend changing the Government Entity exception to require a substantial part of a type Ill's activities to be devoted separately to each closely related affiliate of a government entity. In many cases, such organizations are quite tiny relative to their associated public institutions, and we believe a type III supporting the government institution should be able to support these affiliates as an incidental part of supporting the overall program of the government institution. Thus, so long as the "substantial part" requirement is met with respect to a government supported organization and its closely related affiliates as a group, we do not believe it should have to be met separately with respect to each close affiliate in that group.
- Allow other supported organizations, but do not count investment management or grantmaking to them as "directly furthering" their purposes. Under the current Proposed Regulations and our suggested revisions, the existence of any supported organization beyond those allowed would disqualify the type III from taking advantage of the Government Entity exception -- even if substantially all support went to qualifying supported organizations. An alternative approach would be to allow such additional supported organizations so long as support for such organizations remained small enough that substantially all of the organization's activities would still be on behalf of organizations meeting the criteria of the Government Entity exception.
- III. Conclusion
Please do not hesitate to call me at 202-862-5031 if you have any questions about these comments on the scope of the Government Entity exception.
- Sincerely,
Michael W. Durham
Caplin & Drysdale
Washington, DC
cc:
Andew Cohn, Wisconsin Alumni Research Foundation
* * * * *
Wisconsin Alumni Research Foundation
February 9, 2011
Exhibit A
Previous WARF Suggestions
Regarding Proposed Treasury Regulations § 1.509(a)-4(i)(4)
Wisconsin Alumni Research Foundation
February 9, 2011
Exhibit A
Previous WARF Suggestions
Regarding Proposed Treasury Regulations § 1.509(a)-4(i)(4)
(4) Integral part test -- functionally integrated Type III supporting organization --
(i) General rule.
A supporting organization meets the integral part test as a functionally integrated Type III supporting organization if it satisfies either paragraph (i)(4)(i)(A) or paragraph (i)(4)(i)(B) of this section.
(A) The supporting organization engages in activities:
(1) Substantially all of which directly further the exempt purposes of the supported organization(s) to which the supporting organization is responsive, by performing the functions of, or carrying out the purposes of, such supported organization(s); and
(2) That, but for the involvement of the supporting organization, would normally be engaged in by the supported organization(s).
(B) The supporting organization is the parent of each of its supported organizations. For purposes of the integral part test, 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.
(C) For purposes of this paragraph, a supporting organization may use any reasonable method to determine the amount of its activities directly furthering the exempt purposes of its supported organization(s), as long as such method is consistently used.
(ii) "Directly further." Holding title to exempt-use property and managing exempt-use property are activities that directly further the exempt purposes of the supported organization within the meaning of paragraph (i)(4)(i)(A) of this section. Except as provided in paragraph (i)(4)(iii) of this section, fundraising, investing and managing non-exempt-use property, and making grants (whether to the supported organization or to third parties) are not activities that directly further the exempt purposes of the supported organization within the meaning of paragraph (i)(4)(i)(A) of this section.
(iii) Governmental Entity Exception. A supporting organization may treat the investment and management of non-exempt-use assets and the making of grants directly to a supported organization as activities that directly further the exempt purposes of a supported organization if:
(A) Such activities are conducted on behalf of a supported organization
- (1) whose assets are subject to the appropriation process
of a federal, state, local or Indian tribal government for purposes or
programs unrelated to the exempt purposes of the supported organization, or
(2) that is responsive to, and has a substantial operational connection with, a supported organization described in paragraph (i)(4)(iii)(A)(1);
(C) A substantial part of the supporting organization's total activities directly furthers the exempt purpose(s) of its supported organization(s) and are activities other than fundraising, grantmaking, and investing and managing non exempt-use assets.
A supported organization described in paragraph (i)(4)(iii)(A)(2) is responsive to a government supported organization described in paragraph (i)(4)(iii)(A)(1) if it would meet the requirements of paragraphs (i)(3)(ii) and (i)(3)(iii), read by substituting "organization described in paragraph (i)(4)(iii)(A)(2)" for "supporting, organization" and by substituting "organization described in paragraph (i)(4)(iii)(A)(1)" for "supported organization" wherever such terms appear. Whether a supported organization described in paragraph (i)(4)(iii)(A)(2) has a substantial operational connection with a government supported organization described in paragraph (i)(4)(iii)(A)(1) shall be determined based on all the facts and circumstances. The following factors shall ordinarily be considered evidence of a substantial operational connection between organizations: commonality of purpose as evidenced in the supported organization's governing documents and operations; common staff or facilities; whether the activities of a supported organization are part of a larger complex of activities conducted with a government supported organization; whether the activities of a supported organization support, complement or enhance the activities of a government supported organization; whether a supported organization has a historic and continuing relationship with a government supported organization.
(iv) Examples. The provisions of this paragraph (i)(4) may be illustrated by the following examples. In each example, the supporting organization meets the requirements of paragraphs (i)(2) and (i)(3) of this section.
. . . .
Example 6. W, an organization described in section
501(c)(3), is organized as a supporting organization to Z, a public
university in state D described in section 509(a)(1). Z is, and Y, a charitable medical research organization described in section 509(a)(1). Y was
created to engage in medical research in conjunction with Z's medical
school and the Z hospital and to promote, conduct and enhance scientific
research at and in conjunction with Z. Z designates one member of Y's
governing board and has a significant voice in Y's activities. Y
conducts its primary research activities in facilities on the Z campus
and several Z professors serve as researchers for Y. Y also conducts
additional research on scientific processes developed at Y and Z and
makes the results of this research available to the public. Y and Z are the sole named supported organization organizations
in W's articles of incorporation. Under the laws of state D, assets
under Z's control are subject to the appropriation process for any state
D purpose by an action of the state D legislature. Z transfers Y and Z transfer the intellectual property developed by Y and
by Z's science department to W for patenting and licensing, including
making the property available to the public. The royalties generated by
the licenses are shared among Z Y or Z, as the case may be, the original researcher, and W. W invests and manages its share, and at Z's request, Z's share,
of the royalties and other income generated by the patenting and
licensing of the intellectual property to build an endowment to support Z. Y and Z. W
also conducts further research on scientific processes developed at Z
and makes the results of this research available to the public. W's
research W's patent and licensing activities make up a substantial part of W's total activities. But for the activities of W, Y and Z would normally conduct the research patent and licensing activities engaged in by W and manage the royalties from the intellectual property generated at Z Y and Z, respectively. W's activities of investing and managing its share of royalties and other income are not considered activities that directly further the exempt purposes of Y or
Z under paragraph (i)(4)(ii) of this section. However, because Z's
assets are subject to the appropriation process of state D for purposes
unrelated to Z's exempt purposes, Z is W's sole supported organization, and
Y is responsive to, and has a substantial operational connection with,
Z; because Y and Z are W's only supported organizations; and because a substantial part of W's activities directly further Y and
Z's exempt purposes, W qualifies for the exception in paragraph
(i)(4)(iii) of this section. Accordingly, based on these facts, W
qualifies as a functionally integrated Type III supporting organization
under paragraph (4)(i)(A) of this section.
FOOTNOTE
1 A complete copy of our original proposal, showing its changes to the currently proposed regulations, is attached as Exhibit A.
END OF FOOTNOTE
Add comment
Comments