Treasury Assistant Secretary for Legislative Affairs Kevin I. Fromer has responded to Texas congressional members regarding their concerns over proposed rulemaking that would require
"non-functionally integrated" Type III supporting organizations to distribute at least 5% of their fair market value annually and other provisions that would make it "impossible" for historical supporting organizations to meet the functional integration test."
Full Text:
March 3, 2008
The Honorable Ron Paul
U.S. House of Representatives
Washington, DC 20515-4314
Dear Mr. Paul:
Thank you for your letter to Secretary Paulson regarding a recent advance notice of proposed rulemaking relating to certain Type III supporting organizations (the "Advance Notice"). After consulting with the Office of Tax Policy, I would like to provide the following response to your letter.
"Supporting organizations" that provide support to certain section 501(c)(3) exempt organizations are classified for Federal tax purposes as public charities, rather than as private foundations. Private foundations are subject to more stringent rules than public charities, including a payout requirement. In the Pension Protection Act of 2006 (the "Act"), Congress directed the Treasury Department to promulgate new regulations with a payout requirement for so-called "non-functionally integrated" Type III supporting organizations. The payout requirement described in the Advance Notice would require a non-functionally integrated Type III supporting organization to distribute annually to its supported organizations an amount equal to 5 percent of the fair market value of the organization's assets, similar to the payout requirement for private foundations. This payout requirement is consistent with the explanation of the Act published by the Joint Committee on Taxation on August 3, 2006, which references the 5 percent payout requirement for non-operating private foundations. The Advance Notice also includes a test for functional integration that would require a Type III supporting organization to make direct charitable expenditures equal to substantially all of the lesser of its adjusted net income or 5 percent of the fair market value of its non-charitable-use assets, and to devote at least 65 percent of its assets to the active conduct of its exempt activities.
The Advance Notice requests comments on the payout requirement and the test for functional integration, as well as the transition rules for existing organizations. The Treasury Department and the Internal Revenue Service ("IRS") are evaluating comments received in response to the Advance Notice and will take those comments into consideration as we develop proposed regulations. In particular, the Treasury Department and the IRS will work to ensure that the payout requirement for non-functionally integrated Type III supporting organizations appropriately reflects the objective of the Act to ensure that significant amounts are paid to beneficiary charities and also takes into account your concern about potential disruption of the charitable operations of affected supporting organizations. Our work on the proposed regulations will also consider your concern with the proposed asset test for functional integration.
Thank you for your interest in this important matter.
Thank you for your letter to Secretary Paulson regarding a recent advance notice of proposed rulemaking relating to certain Type III supporting organizations (the "Advance Notice"). After consulting with the Office of Tax Policy, I would like to provide the following response to your letter.
"Supporting organizations" that provide support to certain section 501(c)(3) exempt organizations are classified for Federal tax purposes as public charities, rather than as private foundations. Private foundations are subject to more stringent rules than public charities, including a payout requirement. In the Pension Protection Act of 2006 (the "Act"), Congress directed the Treasury Department to promulgate new regulations with a payout requirement for so-called "non-functionally integrated" Type III supporting organizations. The payout requirement described in the Advance Notice would require a non-functionally integrated Type III supporting organization to distribute annually to its supported organizations an amount equal to 5 percent of the fair market value of the organization's assets, similar to the payout requirement for private foundations. This payout requirement is consistent with the explanation of the Act published by the Joint Committee on Taxation on August 3, 2006, which references the 5 percent payout requirement for non-operating private foundations. The Advance Notice also includes a test for functional integration that would require a Type III supporting organization to make direct charitable expenditures equal to substantially all of the lesser of its adjusted net income or 5 percent of the fair market value of its non-charitable-use assets, and to devote at least 65 percent of its assets to the active conduct of its exempt activities.
The Advance Notice requests comments on the payout requirement and the test for functional integration, as well as the transition rules for existing organizations. The Treasury Department and the Internal Revenue Service ("IRS") are evaluating comments received in response to the Advance Notice and will take those comments into consideration as we develop proposed regulations. In particular, the Treasury Department and the IRS will work to ensure that the payout requirement for non-functionally integrated Type III supporting organizations appropriately reflects the objective of the Act to ensure that significant amounts are paid to beneficiary charities and also takes into account your concern about potential disruption of the charitable operations of affected supporting organizations. Our work on the proposed regulations will also consider your concern with the proposed asset test for functional integration.
Thank you for your interest in this important matter.
Thank you for your letter to Secretary Paulson regarding a recent advance notice of proposed rulemaking relating to certain Type III supporting organizations (the "Advance Notice"). After consulting with the Office of Tax Policy, I would like to provide the following response to your letter.
"Supporting organizations" that provide support to certain section 501(c)(3) exempt organizations are classified for Federal tax purposes as public charities, rather than as private foundations. Private foundations are subject to more stringent rules than public charities, including a payout requirement. In the Pension Protection Act of 2006 (the "Act"), Congress directed the Treasury Department to promulgate new regulations with a payout requirement for so-called "non-functionally integrated" Type III supporting organizations. The payout requirement described in the Advance Notice would require a non-functionally integrated Type III supporting organization to distribute annually to its supported organizations an amount equal to 5 percent of the fair market value of the organization's assets, similar to the payout requirement for private foundations. This payout requirement is consistent with the explanation of the Act published by the Joint Committee on Taxation on August 3, 2006, which references the 5 percent payout requirement for non-operating private foundations. The Advance Notice also includes a test for functional integration that would require a Type III supporting organization to make direct charitable expenditures equal to substantially all of the lesser of its adjusted net income or 5 percent of the fair market value of its non-charitable-use assets, and to devote at least 65 percent of its assets to the active conduct of its exempt activities.
The Advance Notice requests comments on the payout requirement and the test for functional integration, as well as the transition rules for existing organizations. The Treasury Department and the Internal Revenue Service ("IRS") are evaluating comments received in response to the Advance Notice and will take those comments into consideration as we develop proposed regulations. In particular, the Treasury Department and the IRS will work to ensure that the payout requirement for non-functionally integrated Type III supporting organizations appropriately reflects the objective of the Act to ensure that significant amounts are paid to beneficiary charities and also takes into account your concern about potential disruption of the charitable operations of affected supporting organizations. Our work on the proposed regulations will also consider your concern with the proposed asset test for functional integration.
Thank you for your interest in this important matter.