Notice 2020-36

The proposed revenue procedure is intended to be a comprehensive resource regarding group exemption letters. Accordingly, information located in other guidance, such as in the Treasury Regulations or other revenue procedures, has been incorporated into the proposed revenue procedure, including, but not limited to, information with respect to the filing of group returns (as described in section 7 of the proposed revenue procedure) and donor or contributor reliance on group exemption letters (as described in section 12 of the proposed revenue procedure).

The proposed revenue procedure uses formatting similar to Rev. Proc. 2020-5, 2020-1 I.R.B. 241 (updated annually) and includes much of the same information but specifically tailored to apply to group exemption letters. For example, the proposed revenue procedure states when the IRS will issue a group exemption letter (see section 4 of the proposed revenue procedure) and under what circumstances the IRS may terminate a group exemption letter (see section 8 of the proposed revenue procedure). The proposed revenue procedure describes how a subordinate organization may obtain recognition of exemption or declare its exempt status (without obtaining recognition from the IRS), as applicable, if the IRS does not accept a request for a group exemption letter or declines to issue a group exemption letter or if the IRS or the central organization terminates the group exemption letter (in its entirety or only with respect to a particular subordinate organization) (see section 9.04 of the proposed revenue procedure). The proposed revenue procedure explains how the effective date of exemption is determined in each of these circumstances (see section 10 of the proposed revenue procedure). In particular, the proposed revenue procedure explains that, if a group exemption letter is terminated with respect to all subordinate organizations, a subordinate organization required to file an application for recognition of exemption has 27 months from the date of termination to obtain recognition of its exemption to avoid interruption of its exempt status (see section 10.03(1) of the proposed revenue procedure).

The proposed revenue procedure updates the procedures currently described in Rev. Proc. 80-27 by incorporating changes to the Code enacted since its publication in January of 1980.

(1) Automatic revocation.

The proposed revenue procedure clarifies the application of § 6033(j) to subordinate organizations. Section 6033(j) automatically revokes an organization’s exemption if the organization fails to file a required annual return or notice (as defined in section 2.05 of the proposed revenue procedure with reference to § 6033) for three consecutive years. See Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780 (2006)). The proposed revenue procedure explains that a subordinate organization that has had its exemption automatically revoked (within the meaning of section 2.06 of the proposed revenue procedure) and has not yet had its exemption reinstated after filing an application for reinstatement (within the meaning of section 2.07 of the proposed revenue procedure) is not eligible for initial inclusion in or subsequent addition to a group exemption letter (see section 3.04(5) of the proposed revenue procedure). A subordinate organization will be removed from a group exemption letter if its exemption is automatically revoked (see section 8.02(1)(c) of the proposed revenue procedure). When submitting the information required annually to maintain a group exemption letter (supplemental group ruling information, or SGRI, discussed in section 6 of the proposed revenue procedure), the central organization must notify the IRS of any subordinate organizations that are no longer included in the group exemption letter because such subordinate organizations have had their exemption automatically revoked (see section 6.02(2)(a)(ii) of the proposed revenue procedure). Under the proposed revenue procedure, the IRS may terminate a group exemption letter with respect to all subordinate organizations if more than half of the subordinate organizations have had their exemption automatically revoked (see section 8.01(1)(g) of the proposed revenue procedure).

(2) Notification of intent to operate as an organization described in § 501(c)(4).

Section 5.03(3)(c) of the proposed revenue procedure explains the application of § 506 to subordinate organizations. Section 506 requires an organization described in § 501(c)(4) to notify the Secretary that it is operating as an organization described in § 501(c)(4) no later than 60 days after the organization is established. See Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113, Div. Q (129 Stat. 2242 (2015)) (PATH Act). Section 5.03(3)(c) of the proposed revenue procedure explains that a subordinate organization described in § 501(c)(4) that is included in (or subsequently added to) a group exemption letter must follow the procedures described in Rev. Proc. 2016-41, 2016-30 I.R.B. 165, and submit a completed electronic Form 8976, “Notice of Intent to Operate Under Section 501(c)(4).” This section explains that a subordinate organization may authorize an individual representing the central organization to submit Form 8976 on the subordinate organization’s behalf and to receive any communications relating to the subordinate organization’s submission.

The proposed revenue procedure would make additional modifications to the procedures currently described in Rev. Proc. 80-27. In general, the changes are intended: to increase efficiency, transparency, and compliance with the group exemption letter program; to improve the central organization’s ability to exercise general supervision or control over its subordinate organizations; and to reduce the administrative burden on the IRS. A transition rule and a grandfather rule (both discussed in the “Applicability” section of this notice and in section 14 of the proposed revenue procedure) address how these changes would apply to preexisting group exemption letters.

(1) Central organization requirements to obtain and maintain a group exemption letter.

The proposed revenue procedure includes two requirements a central organization must satisfy to obtain and maintain a group exemption letter in addition to the requirement set forth in Rev. Proc. 80-27 that a central organization must be described in § 501(c) or must be an instrumentality or an agency of a political subdivision. First, Rev. Proc. 80-27 does not require a central organization to have a specific number of subordinate organizations to obtain or to maintain a group exemption letter. Both Rev. Proc. 80-27 and section 2.02 of the proposed revenue procedure define the term “central organization” as an organization that has one or more subordinate organizations under its general supervision or control. However, the administrative burden of processing one group exemption letter request is comparable to the administrative burden of processing four applications (as defined in section 2.04 of the proposed revenue procedure). Furthermore, more than 300 group exemption letters in existence when the project was conducted included no subordinate organizations but considerable resources are required to administer the program for these group exemption letters. Accordingly, section 3.01(2) of the proposed revenue procedure requires a central organization to have at least five subordinate organizations to obtain a group exemption letter and at least one subordinate organization to maintain the group exemption letter thereafter.

Second, Rev. Proc. 80-27 does not limit the number of group exemption letters a central organization may maintain. However, maintaining more than one group exemption letter may adversely affect the central organization’s ability to exercise general supervision or control over its subordinate organizations. Traditionally, IRS electronic databases have not systemically tracked more than one group exemption letter for each central organization. Accordingly, section 3.01(3) of the proposed revenue procedure provides that a central organization may maintain only one group exemption letter.

(2) The central organization’s relationship with its subordinate organizations.

Consistent with Rev. Proc. 80-27, section 3.02(1) of the proposed revenue procedure requires a central organization to establish that each subordinate organization to be included in the group exemption letter be affiliated with the central organization and subject to its general supervision or control. Rev. Proc. 80-27, however, does not define the terms “affiliation,” “general supervision,” or “control.” This lack of definition has caused confusion and created a lack of consistency for both the IRS and central organizations. Accordingly, these terms are described in greater detail in sections 3.02(2), 3.02(3), and 3.02(4) of the proposed revenue procedure. Further, section 3.02(5) of the proposed revenue procedure provides that the descriptions of “general supervision” and “control” apply only for purposes of the proposed revenue procedure and § 1.6033-2(d) of the Treasury Regulations (relating to group returns).

(3) Organizations eligible for initial inclusion in or subsequent addition to a group exemption letter as subordinate organizations.

The proposed revenue procedure describes four new requirements that a subordinate organization must meet for initial inclusion in or subsequent addition to a group exemption letter.

(a) Matching requirements.

Rev. Proc. 80-27 provides that the central organization must establish that all subordinate organizations included in a group exemption letter request are described in the same paragraph of § 501(c), though not necessarily the paragraph in which the central organization is described. Thus, under Rev. Proc. 80-27, a central organization described in § 501(c)(3) may have a group exemption letter for subordinate organizations described in § 501(c)(4). Section 3.03(2)(a)(i) of the proposed revenue procedure retains the requirement that all subordinate organizations be described in the same paragraph of § 501(c). However, permitting a central organization to have subordinate organizations described in a paragraph of § 501(c) that is different from the paragraph describing the central organization limits the central organization’s ability to exercise general supervision or control over its subordinate organizations. Accordingly, section 3.03(2)(a)(ii) of the proposed revenue procedure requires all subordinate organizations initially included in or subsequently added to a group exemption letter to be described in the same paragraph of § 501(c) as the central organization. For example, if a central organization is described in § 501(c)(3), all the subordinate organizations initially included in or subsequently added to the group exemption letter must be described in § 501(c)(3). Nonetheless, section 3.03(2)(a)(iii) of the proposed revenue procedure explains that, if the central organization is either an instrumentality or an agency of a political subdivision and is not described in § 501(c), the matching requirement in section 3.03(2)(a)(ii) of the proposed revenue procedure does not apply. Accordingly, such a central organization may obtain and maintain a group exemption letter for subordinate organizations described in any paragraph of § 501(c) (provided that the eligibility requirements of section 3.03 of the proposed revenue procedure are met), as long as all the subordinate organizations are described in the same paragraph of § 501(c) (see section 3.03(2)(a)(i) of the proposed revenue procedure). For example, a state college or university may obtain and maintain a group exemption letter for organizations described in § 501(c)(3), provided that the state college or university can establish that it is a qualified governmental agency.

(b) Foundation classification requirement.

The second new requirement for initial inclusion in or subsequent addition to a group exemption letter introduced by the proposed revenue procedure involves the foundation classification of subordinate organizations described in § 501(c)(3). Rev. Proc. 80-27 does not require subordinate organizations described in § 501(c)(3) to have any particular foundation classification under § 509(a) (other than the prohibition of subordinate organizations that are private foundations). Traditionally, IRS electronic databases have not systemically tracked multiple foundation classifications in connection with a particular group exemption letter. This limitation reduces transparency, complicates compliance, and increases the administrative burden because different foundation classifications have different requirements. Accordingly, section 3.03(2)(b)(i) of the proposed revenue procedure provides that, if the subordinate organizations initially included in or subsequently added to a group exemption letter are described in § 501(c)(3), all such subordinate organizations must be classified as public charities under the same paragraph of § 509(a).

Subordinate organizations described in § 501(c)(3) and classified under § 509(a)(1) are not required to be classified under the same paragraph of § 170(b)(1)(A). For example, subordinate organizations described in § 501(c)(3) that are classified under § 509(a)(1) as churches described in § 170(b)(1)(A)(i), educational organizations described in § 170(b)(1)(A)(ii), or hospitals described in § 170(b)(1)(A)(iii) may all be initially included in or subsequently added to the same group exemption letter, provided that the other requirements of the proposed revenue procedure are satisfied. Nonetheless, the IRS is considering how, and the extent to which, this requirement may affect a central organization’s ability to exercise general supervision or control over its subordinate organizations and, after an appropriate transition period, eventually may require all subordinate organizations classified under § 509(a)(1) to be classified under the same paragraph of § 170(b)(1)(A).

Public support is calculated annually and may change from year to year. See §§ 170(b)(1)(A)(vi) & 509(a)(1) & (2). Thus, for purposes of the foundation classification requirement described in the proposed revenue procedure, a subordinate organization classified under § 509(a)(1) and described in § 170(b)(1)(A)(vi) will be considered as having the same foundation classification as a subordinate organization classified under § 509(a)(2), and vice versa.

Additionally, subordinate organizations described in § 501(c)(3) are not required to be classified under the same paragraph of § 509(a) as the central organization. For example, subordinate organizations classified as hospitals under §§ 509(a)(1) and 170(b)(1)(A)(iii) may be included in a group exemption letter maintained by a central organization that is a Type III supporting organization described in § 509(a)(3).

(c) Similar purpose requirement.

The third new requirement for initial inclusion in or subsequent addition to a group exemption letter adheres to the original intent of the group exemption letter program by requiring certain subordinate organizations included in a group exemption letter to have the same or similar purposes. This requirement will facilitate the central organization’s exercise of general supervision or control and reduce the administrative burden of the group exemption letter program. Therefore, section 3.03(2)(c) of the proposed revenue procedure requires all subordinate organizations described in § 501(c) (other than § 501(c)(3)) initially included in or subsequently added to a group exemption letter to be described by the same National Taxonomy of Exempt Entities (NTEE) Code (as defined in section 2.08 of the proposed revenue procedure). In this case, the proposed revenue procedure directs a central organization requesting a group exemption letter to visit the Urban Institute, National Center for Charitable Statistics, website at nccs.urban.org for a complete list of NTEE codes.

The IRS has chosen to use NTEE codes, rather than a different coding system, such as the North American Industry Classification System, because the NTEE codes were created specifically to describe the activities engaged in by exempt organizations that further one or more exempt purposes. Indeed, the IRS already requires organizations applying for recognition under § 501(c)(3) to enter the NTEE code that best describes the organization’s activities on Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.”

Subordinate organizations described in § 501(c)(3) initially included in or subsequently added to a group exemption letter are not required to have the same primary purpose (and therefore are not required to provide an NTEE code), because, although such subordinate organizations must be classified in the same paragraph of § 509(a), such subordinate organizations may have different religious, charitable, educational, or other exempt purposes.

(d) Uniform governing instrument requirement.

The fourth new requirement for initial inclusion in or subsequent addition to a group exemption letter introduced by the proposed revenue procedure is a modification to the requirement in Rev. Proc. 80-27 directing a central organization to include a sample copy the governing instrument adopted by the subordinate organizations with its request for a group exemption letter. If a uniform governing instrument is not used, Rev. Proc. 80-27 requires the central organization to submit copies of representative instruments. However, governing instruments that are not uniform are not consistent with the similar purpose requirement. Accordingly, section 3.03(2)(d) of the proposed revenue procedure eliminates the option of submitting copies of representative instruments in the absence of a uniform governing instrument and requires all subordinate organizations to adopt a uniform governing instrument. Section 5.03(2)(a) of the proposed revenue procedure requires the central organization to submit a copy of the uniform governing instrument with its request for a group exemption letter. Representative instruments are no longer acceptable for this purpose.

Section 3.03(2)(d) of the proposed revenue procedure includes an exception for subordinate organizations described in § 501(c)(3) because, under the foundation classification requirement, such subordinate organizations may have different religious, charitable, educational, or other exempt purposes and because the similar purpose requirement does not apply to subordinate organizations described in § 501(c)(3). Accordingly, the proposed revenue procedure allows the governing instruments of subordinate organizations described in § 501(c)(3) to describe different purposes. The proposed revenue procedure further explains that, if a group exemption letter includes subordinate organizations described in § 501(c)(3) with different purposes, the governing instrument describing each purpose should be a uniform governing instrument. For example, if a group exemption letter includes subordinate organizations that are schools and hospitals, all the subordinate organizations that are schools should adopt a uniform governing instrument describing their educational purpose and all the subordinate organizations that are hospitals should adopt a uniform governing instrument describing their charitable purpose.

(4) Organizations not eligible for inclusion in or subsequent addition to a group exemption letter as subordinate organizations.

Rev. Proc. 80-27 states that a group exemption letter may not include any subordinate organization that is organized and operated in a foreign country or that is described in § 501(c)(3) and classified as a private foundation under § 509(a). The proposed revenue procedure generally retains these requirements, except it permits a subordinate organization to operate in a foreign country, provided that it is organized in the United States. More specifically, section 3.04(1) of the proposed revenue procedure provides that a subordinate organization that is organized in a foreign country may not be initially included in or subsequently added to a group exemption letter. A subordinate organization that is organized in the United States is subject to federal tax law even if it operates in a foreign country, and a central organization therefore should be able to exercise general supervision or control over such a subordinate organization. In addition, section 3.04(2) of the proposed revenue procedure states that an organization described in § 501(c)(3) that is classified as a private foundation under § 509(a) is not eligible for initial inclusion in or subsequent addition to a group exemption letter as a subordinate organization.

The proposed revenue procedure also provides that other types of organizations may not be initially included in or subsequently added to a group exemption letter as subordinate organizations. Sections 3.04(3) and 3.04(4) of the proposed revenue procedure state that neither an organization described in § 501(c)(3) that is classified as a Type III supporting organization under § 509(a)(3) nor a qualified nonprofit health insurance issuer (QNHII) described in § 501(c)(29) is eligible for initial inclusion in or subsequent addition to a group exemption letter as a subordinate organization. Both Type III supporting organizations and QNHIIs are subject to complex requirements. Permitting these types of organizations to be subordinate organizations would not be in the sound interest of tax administration because of the complexity of the rules governing such organizations and, in the case of Type III supporting organizations, the history of abuse associated with such organizations.

Additionally, section 3.04(5) of the proposed revenue procedure states that an organization that has had its exemption automatically revoked and that has not yet had its exemption reinstated after filing an application for reinstatement may not be initially included in or subsequently added to a group exemption letter as a subordinate organization. An organization that has had its exemption automatically revoked is required to apply for reinstatement under § 6033(j)(2). However, unlike the other types of organizations that may not be initially included in or subsequently added to a group exemption letter as subordinate organizations, such as private foundations, an organization that has had its exemption automatically revoked is eligible to become a subordinate organization after it has filed an application for reinstatement and has had its exemption reinstated, provided that it meets the other requirements of the proposed revenue procedure.

(5) Authorization for initial inclusion in or subsequent addition to a group exemption letter.

Rev. Proc. 80-27 requires a subordinate organization to authorize the central organization to include it in the request for a group exemption letter. Section 3.05(1) of the proposed revenue procedure retains this requirement, but section 3.05(2) of the proposed revenue procedure adds the requirement that the authorization permit the central organization to remove the subordinate organization from the group exemption letter if the subordinate organization fails to comply with the requirements of the proposed revenue procedure. Consistent with Rev. Proc. 80-27, section 3.05(3) of the proposed revenue procedure requires the central organization to retain the authorization but clarifies that the central organization must retain the authorization only while the group exemption letter includes the particular subordinate organization, rather than for the entire duration the group exemption letter is in effect.

(6) Information required to maintain a group exemption letter.

Both Rev. Proc. 80-27 and the proposed revenue procedure require a central organization to submit certain information (supplemental group ruling information, or SGRI) annually to maintain a group exemption letter. Under section 6.01 of the proposed revenue procedure, a central organization must submit the SGRI at least 30 days, rather than 90 days as required by Rev. Proc. 80-27, before the close of its annual accounting period. This change is intended to increase the accuracy of the SGRI submitted by the central organization. Nonetheless, the proposed revenue procedure explains that a central organization may provide additional updates at any time. Section 6.05 of the proposed revenue procedure includes the exception to the SGRI filing requirement originally included in Pub. 4573 for central organizations described in § 501(c)(3) that are churches or conventions or associations of churches. More specifically, section 6.05 of the proposed revenue procedure provides that a central organization that is a church or a convention or association of churches may, but is not required to, submit the SGRI.

(7) Declaratory judgment provisions of § 7428.

In 1976, Congress enacted § 7428 to permit organizations described in § 501(c)(3) to file a declaratory judgment action in the case of an actual controversy involving determinations made by the IRS. See Tax Reform Act of 1976, Public Law 94-455 (90 Stat. 1520 (1976)). The PATH Act extended application of § 7428 to all organizations described in § 501(c).

Rev. Proc. 80-27 does not address the application of § 7428 to either central organizations or subordinate organizations. Nevertheless, questions exist regarding how the statute applies in the context of group exemption letters. Accordingly, section 11 of the proposed revenue procedure explains when § 7428 applies in the group exemption letter context. With respect to a central organization, section 11.02 of the proposed revenue procedure clarifies that section 10.02 of Rev. Proc. 2020-5 (or its successor) describes when § 7428 applies. With respect to subordinate organizations, section 11.03 of the proposed revenue procedure describes the limited circumstances in which § 7428 applies.

Section 11.03(1) of the proposed revenue procedure explains that § 7428 applies to a final determination by the IRS that a subordinate organization is no longer described in § 501(c) and therefore is not exempt under § 501(a). Such a determination occurs when the IRS terminates a group exemption letter with respect to a particular subordinate organization under section 8.02(1)(b)(i) of the proposed revenue procedure. Section 11.03(2) of the proposed revenue procedure explains that § 7428 also applies to a final determination by the IRS that a subordinate organization was not eligible for initial inclusion in or subsequent addition to a group exemption letter under section 3.04 of the proposed revenue procedure (other than under section 3.04(5) of the proposed revenue procedure regarding automatic revocation). Such a determination occurs when the IRS terminates a group exemption letter with respect to a particular subordinate organization under section 8.02(1)(b)(ii) of the proposed revenue procedure. Section 11.04 of the proposed revenue procedure explains that § 7428 does not apply to certain other actions the IRS may take, such as not accepting a group exemption letter request for a reason described in section 4.02 of the proposed revenue procedure or declining to issue a group exemption letter for a reason described in section 4.03 of the proposed revenue procedure.

Section 11.05 of the proposed revenue procedure explains that a subordinate organization must file the declaratory judgment action under § 7428 with respect to a determination affecting its own initial or continuing qualification or classification; the central organization may not file the declaratory judgment action under § 7428 on behalf of the subordinate organization. Similarly, a subordinate organization may not file a declaratory judgment action under § 7428 on behalf of its central organization.

The proposed revenue procedure will apply to group exemption letters requested and issued after the date the final revenue procedure is published in the Internal Revenue Bulletin and to preexisting group exemption letters (see sections 14.01 and 14.02 of the proposed revenue procedure). However, section 14.02(2)(a) of the proposed revenue procedure provides that the requirements that a central organization have at least one subordinate organization to maintain a group exemption letter (see section 3.01(2) of the proposed revenue procedure) and that the central organization maintain only one group exemption letter (see section 3.01(3) of the proposed revenue procedure) will apply after a one year transition period. Section 14.02(2)(b) of the proposed revenue procedure directs a central organization with a preexisting group exemption letter, but no preexisting subordinate organizations, to add at least one subordinate organization to the preexisting group exemption letter or to notify the IRS of its intent to terminate the group exemption letter. Section 14.02(2)(c) of the proposed revenue procedure directs a central organization with more than one preexisting group exemption letter to determine, during the transition period, which, if any, preexisting group exemption letter it intends to maintain and to notify the IRS of its intent to terminate any additional preexisting group exemption letters.

The proposed revenue procedure will apply to all new subordinate organizations added to a preexisting group exemption letter (see sections 2.11 and 14.02(3) of the proposed revenue procedure). Section 14.02(3)(b) of the proposed revenue procedure describes the information a central organization must submit the first time it adds one or more subordinate organizations to a preexisting group exemption letter.

The proposed revenue procedure generally will apply to preexisting subordinate organizations (as defined in section 2.10 of the proposed revenue procedure). However, section 14.02(4)(b)(i) through (iii) of the proposed revenue procedure provide a grandfather rule with respect to certain requirements in the proposed revenue procedure. In particular, the following definitions and rules will not apply to preexisting subordinate organizations:

Instead, definitions and rules similar to those contained in Rev. Proc. 80-27 will apply. Section 14.02(4)(c) of the proposed revenue procedure clarifies that preexisting subordinate organizations must all be described in the same paragraph of § 501(c), though not necessarily the same paragraph as the central organization; preexisting subordinate organizations described in § 501(c)(3) may be classified in any paragraph of § 509(a) (including § 509(a)(3)); and all preexisting subordinate organizations may have different primary purposes and unique, as opposed to “uniform,” governing instruments.

Additionally, section 14.02(4)(b)(iv) of the proposed revenue procedure provides that the requirement that the authorization for initial inclusion in or subsequent addition to a group exemption letter described in section 3.05(1) of the proposed revenue procedure permit the central organization to remove a subordinate organization in certain circumstances does not apply to preexisting subordinate organizations. The IRS recognizes that imposing this requirement on preexisting group exemption letters could require the central organization to obtain new authorizations from all of its preexisting subordinate organizations, which would likely impose a considerable administrative burden on many central organizations.

Although the definitions of “general supervision” or “control” in sections 3.02(3) and 3.02(4) of the proposed revenue procedure do not apply to preexisting group exemption letters, section 14.02(4)(e) of the proposed revenue procedure explains that a central organization that meets the requirements of section 3.02(3) or section 3.02(4) of the proposed revenue procedure with respect to a particular preexisting subordinate organization will be deemed to exercise “general supervision” or “control,” as applicable, over that preexisting subordinate organization.

Finally, section 14.03 of the proposed revenue procedure provides examples of how the grandfather and transition rules function.