In REG 155929-06; 74 F.R. 48672-48687 (24 Sep 2009), the IRS published proposed regulations for Type III supporting organizations.

In the Pension Protection Act of 2006 (PPA 2006), there were significant reforms for all Type I, Type II and Type III supporting organizations. In response to perceived abuses of the Type III supporting organizations, significant new requirements were created for its qualification and operation.

Under PPA 2006, there could be no control of an SO by a prohibited party. The SO is required annually to give notice to the supported organizations. A minimum payout requirement was to be created by Treasury for the non-functionally-integrated Type III SOs. There were also limits on gifts by SOs to some foreign charities.

A Type III supporting organization must meet both a responsiveness test and an integral part test. Generally, under the responsiveness test, the SO supported organization elects an officer, director or trustee of the SO. With a "close, continuous working relationship" between the supported organization and the SO, the supported organization needs to have a "significant voice" in the policies of the SO.

The integral part test is intended to ensure a "significant involvement" by the SO in the operations of the supported organizations. Under the "but-for" test, the SO carries out functions that normally would be engaged in by the supported organization. Under the "attentiveness test", most SOs distribute 85 percent or more of adjusted net income to supported organizations.

The proposed regulations outline several requirements for functionally integrated and non-functionally integrated type III supporting organizations.

A requirement exists for a Type III SO to notify each supported organization. The notice must describe the amount and type of support for the past year, include the most recent form 990 of the SO and in the initial year include the SO governing documents. While the IRS considered limiting the number of supported organizations, the proposed regulations do not include a numerical limit.

A key definition is whether the Type III SO is "functionally integrated." Treasury determines that functional integration exists if "substantially all" of the SO activities are directly involved in supported organization functions, it is directly responsive to the supported organization, and the supported organization would normally engage in those functions. There is an exception for a Type III SO that is created to support a single government entity.

If an organization does not meet that standard, it is classified as a non-functionally-integrated Type III SO and must comply with extensive restrictions. A non-functionally-integrated Type III SO is required to distribute five percent of the fair market value of non-exempt-use assets each year and to pass an attentiveness test. The five percent payout does not permit any set asides. There is an exception for the first year and any carry forward may be counted first in future distributions. A reasonable cause distribution exception is permitted.

Under the attentiveness requirement, a non-functionally-integrated type III SO must provide 10 percent or more of the total support, or provide support necessary to carry on a key function of the supported organization, or provide sufficient support under a "facts and circumstances" test.

In REG-119097-05 published on June 7, 2007, the IRS set forth rules for the inclusion of grantor retained annuity trusts (GRATs) and similar trusts in estates. Sec. 2036 estate inclusion applies if the GRAT or other trust pays for a lifetime, or for a term of years and the recipient passes away prior to the expiration of that term.

In REG-119532-08; 74 F.R. 19913-19917 (30 Apr 2009), the IRS published supplemental regulations that explain the inclusion of a graduated GRAT or similar trust. The other types of agreements could include grantor retained income trusts (GRITs), charitable remainder trusts (CRTs) and grantor retained interest trusts (GRTs).

Under the prior ruling, the portion of the corpus of a GRAT or similar trust is the amount of corpus necessary to pay the desired annuity or income. For a GRAT, the included amount equals the adjusted annuity divided by the applicable federal rate under Section 7520. The included amount is further limited to a maximum of the value of the trust.

With a graduated annuity, the calculation is completed sequentially for the base amount and then the value of each enhanced payment. The total estate inclusion is a sum of the various calculated amounts.

The regulations include two examples. In the first example, trust income is paid to parent D and child C. The income is paid equally to both for life and all to survivor. When parent D passes away, half of the income is includable under Sec. 2036(a)(1). The other half of the trust is includable because the parent holds a contingent income interest, with a reduction for the value of the child's income interest.

A second example describes a $3.2 million GRAT with a $100,000 initial payment and 20% increasing payments for a term of five years. Donor passes away after two years. The includable value is the sum of the corpus required for sustaining the payment for the remaining three years, and the value of the additional corpus necessary to make the increased payments in years four and five. The required corpus in years four and five is discounted to year three by calculating two discount factors using the deferral periods and the applicable federal rate. The sum of the three values is $2,973,866 and equals the estate inclusion.

If the annuity is paid other than annually, there is an adjusted factor. Once again, the total inclusion amount may not be greater than the trust value at date of death.

In T.D. 9423; 73 F.R. 52528-52555 (9 Sep 2008), Treasury published final and temporary regulations for implementing Form 990. The regulations are effective immediately and specifically apply to organizations with advance ruling periods expiring on or after June 9, 2008.

Effective immediately, the advanced ruling procedure is eliminated. Organizations will now be exempt as a public charity for five years if it can be demonstrated that the nonprofit will "reasonably be expected to receive the essential public support needed during the period."

At the same time, Treasury published frequently asked questions (FAQs) on the new regulations. The FAQs note that any organization with an advanced ruling period expiring on or after June 9, 2008 will be treated as a public charity for a period of five years.

These charitable organizations will be required to include additional information on the new Form 990 to show public support received. After five years, if the organization is not able to demonstrate a sufficient level of public support (normally 33% or more of revenue from donors who make gifts of 2% or less of total support), then in the sixth and succeeding years the organization will be treated as a private foundation and will file Form 990-PF.

IRS Commissioner Doug Shulman noted, "The revised Form 990 enhances transparency for exempt organizations and makes it easier for them to show that they are "publicly supported" charities, rather than private foundations."

Editor's Note: The IRS believes that eliminating the advance ruling procedure will "streamline processing" of exempt organization requests. It will use the enhanced Form 990 information to monitor the status of publicly-supported charities.