The group exemption permits a central or parent organization to certify that each subordinate qualifies for exemption and to include it under its umbrella for tax-exemption purposes. The process is designed to reduce paperwork for both taxpayers and the IRS where affiliated entities are similar in their purpose, structure and operations.
The obvious benefit is that is each entity that will be included in the group exemption is spared the nuisance and expense of applying for tax exempt status on its own. On the other hand, many parent organizations have been reluctant to apply for a group ruling out of an unwillingness to take on the recordkeeping and oversight responsibilities imposed on a central organization of a group ruling.
Who May Obtain a Group Exemption Letter?
An organization seeking a group exemption letter must first obtain recognition of its own tax-exempt status. Once an organization establishes its own qualification for exemption and that is not classified as a private foundation, it may obtain a group exemption letter if it has one or more subordinate organizations under its general supervision or control.
The parent and subordinate organizations do not have to be classified under the same tax section. For example, an IRC 501(c)(3) parent may have a subordinates that are engaged in IRC 501(c)(4) social welfare activities.
It is important to note that the IRS has determined some fundraising techniques and activities are not appropriate for group exemptions. Such groups include those using professional fundraisers, telemarketers, charitable gaming, and tax-exempt bonds or those pursuing housing programs or operating schools.
Who May Be Included in a Group Exemption Letter?
Once a parent organization has established its own tax-exempt status, a group exemption letter may be issued for the parent organization’s subordinates. To include a subordinate in its group exemption, the parent organization must certify that the subordinate will be organized and/or operated according to sample documents the parent organization submits to support its subordinates’ tax exemption.
In order for a subordinate to be included in a group exemption letter the parent must establish that the subordinate is:
- affiliated with it and subject to its general supervision or control;
- exempt under the same paragraph of IRC 501(c) as all other subordinates IRC 501(c) (but not necessarily the same paragraph of IRC 501(c) under which the parent is exempt);
- other than a private foundation or a foreign organization; and
- on the same accounting period as the parent.
There is little guidance on what constitutes “affiliated with” and “subject to its general supervision and control.” Typically, the parent has some governance rights or contractual rights, or both, that permit it to exercise a significant degree of supervision and control over the subordinates.
Providing the subordinate meets the four-prong test above, it must then provide the parent with written authorization that it wishes to be included in the parent’s group exemption.
Information Required for a Group Exemption Letter
To obtain a group exemption letter, a parent must provide certain information on behalf of the subordinates including a letter signed by the parent’s authorized representative stating that the subordinate has met the above four-prong test in addition to the following:
- a detailed description of the subordinates’ principal purposes and activities, including financial information;
- a sample copy of the subordinates’ uniform governing instrument which has been adopted by the subordinates (alternatively, a representative instrument may be submitted);
- an affirmation that the subordinates’ purposes and activities are as set forth in the representations furnished in (a) and (b) above;
- a statement that each subordinate has furnished a written authorization to be included in the group exemption letter; and
- \a list of the subordinates who have been previously recognized as exempt from federal income tax.
In addition to the information required above, if the application involves a group exemption letter under IRC 501(c)(3), the parent must provide a statement to the effect that no subordinate to be included in the group exemption letter is a private foundation.
The parent must submit a complete list of the names, complete mailing addresses, and the employer identification numbers of all subordinates to be included in the group exemption letter. Finally, the parent must submit a filing fee, currently $3,000, along with the request.
Providing the tax-exempt status of the subordinates has been established under a group exemption letter, the parent, although required to file a separate annual return for itself, may elect to file a group return covering at least two or more of its subordinates. However, subordinates that are subject to the tax on unrelated business income must file their own Form 990-T.
A group return must include only those subordinates that have authorized the parent in writing to include them in the return. An authorized officer of each subordinate must also provide to the parent a statement under the penalties of perjury specifying its gross income, receipts, and disbursements, and such other information relating to them that must be included on the return.
The group return must be filed based on the parent’s annual accounting period. The subordinates’ information may be provided in one of two ways. Either the information may be provided on the parent’s Form 990 with separate schedules for each subordinate attached, or on a consolidated basis for all the subordinates and the parent on one group return. The return must indicate which method is being used and that method must be used for all subsequent filings unless the parent obtains the consent of the IRS to change its reporting method.
Termination/Revocation of Group Exemption Letter
A group exemption will be automatically terminated if a parent:
- dissolves or ceases to exist;
- fails to submit the annual information required by Rev. Proc. 80-27; or
- fails to file the required annual information return.
- If a termination occurs or if the parent loses its own exemption, the IRS will revoke the tax-exemption of the subordinates. Each subordinate that wishes to continue to be recognized as tax-exempt must file an application for recognition of exemption on its own.
A parent may also revoke the tax status of a suboredinate that no longer meets the requirements for inclusion in the group exemption letter. Generally, the parent notifies the Service of such terminations on Form 990.
If the Service examines a subordinate and concludes that it no longer qualifies for exemption, the subordinate will receive a letter of revocation. The Service will then notify the parent that the group exemption letter does not apply to the revoked subordinate.
Obtaining a group exemption can be a huge convenience for subordinate organizations; however, prospective parents need to carefully consider whether they have the capacity to manage the responsibilities of a central organization. Parents that are acting as the central organization on a group ruling should periodically review their procedures to ensure they are fulfilling their responsibilities to monitor and certify subordinates’ continued qualification for inclusion in the group ruling. Failure to do so puts both the parent and the subordinates at risk.
Ellis Carter is a nonprofit attorney licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide. Ellis can be reached through her firm at firstname.lastname@example.org or at 602-456-0071.