SECTION 2. BACKGROUND

.01 Qualifying as a Functionally Integrated Type III Supporting Organization

An organization described in § 501(c)(3) of the Code is classified as either a private foundation or a public charity. To be classified as a public charity, an organization must be described in § 509(a)(1), (2), (3), or (4). Organizations described in § 509(a)(3) are known as “supporting organizations” because their non-private foundation status is based on their provision of support to one or more organizations described in § 509(a)(1) or (2), which in this context are referred to as “supported organizations.” Supporting organizations that are “operated in connection with” their supported organization(s) are called “Type III supporting organizations.” The Pension Protection Act of 2006, Public Law 109–280 (120 Stat. 780) (PPA), divided Type III supporting organizations into two categories - those that are “functionally integrated” and those that are not.

On December 28, 2012, the Department of the Treasury (the Treasury Department) and the Internal Revenue Service (IRS) published a Treasury Decision in the Federal Register (TD 9605,

2013–11 I.R.B. 587 [77 FR 76382]) containing final and temporary regulations (the “2012 regulations”) that, among other things, set forth the requirements to qualify as a functionally integrated Type III supporting organization. To qualify as functionally integrated, the 2012 regulations provide that a Type III supporting organization must meet one of three tests. It must:

(1) Engage in activities substantially all of which directly further the exempt purposes of one or more of the supported organizations to which the supporting organization is responsive ⁶ by performing the functions of, or carrying out the purposes of, such supported organization(s) and that, but for the involvement of the supporting organization, would normally be engaged in by the supported organization(s);

(2) Be the parent of each of its supported organizations; or

(3) Support a governmental supported organization and otherwise meet the requirements described in § 1.509(a)– 4(i)(4)(iv). The 2012 regulations reserved § 1.509(a)–4(i)(4)(iv) to provide future guidance on the specific requirements relating to qualifying as functionally integrated by supporting a governmental supported organization.

The 2012 regulations also contained transition relief under which a Type III supporting organization in existence on December 28, 2012, that met and continued to meet the requirements of the “but for” test under former § 1.509(a)– 4(i)(3)(ii), as in effect prior to December 28, 2012, would be treated as functionally integrated until the first day of its second taxable year beginning after December 28, 2012. See § 1.509(a)–4(i)(11)(ii)(A). A Type III supporting organization met the “but for” test under former § 1.509(a)– 4(i)(3)(ii) if the activities it engaged in for or on behalf of its supported organization(s) performed the functions of, or carried out the purposes of, such supported organization(s), and, but for the involvement of the supporting organization, would normally be engaged in by the supported organization(s).

6 Treas. Reg. § 1.509(a)–4(i)(3) requires a Type III supported organization to demonstrate “responsiveness” to a supported organization by having one of three specified relationships with its supported organization(s) that results in the officers, directors, or trustees of the supported organization(s) having a “significant voice” in the operations of the supporting organization.

January 6, 2014 274 Bulletin No. 2014–2

.02 Reliance for Grantors

On December 18, 2006, the Treasury Department and the IRS issued Notice 2006–109 to provide interim guidance on the PPA rules regarding grants to supporting organizations by private foundations and sponsoring organizations that maintain donor advised funds. Section 3.01 of Notice 2006–109 provides procedures under which these grantors, acting in good faith, may rely on written representations and/or reasoned written opinions of counsel in determining whether a grantee is a Type I, Type II, or functionally integrated Type III supporting organization for purposes of §§ 4942, 4945 and 4966. Section 3.02 of Notice 2006–109 states that, solely for purposes of a representation or opinion of counsel on which a grantor may rely, an organization will be considered a functionally integrated Type III supporting organization if it would meet the “but for” test set forth in former 1.509(a)–4(i)(3)(ii), as in effect at the time that notice was published. Notice 2006–109 states that the reliance criteria in section 3.01 are in effect “until further guidance is issued” and that the “functionally integrated” definition in section 3.02 is in effect until the issuance of regulations defining the term.

In 2011, the Treasury Department and the IRS issued Rev. Proc. 2011–33, 2011–1 C.B. 887, which provides general rules for reliance by grantors and contributors to organizations described in §§ 509(a)(1), (2), and (3) for purposes of §§ 4942, 4945, and 4966. Rev. Proc. 2011–33 modified Notice 2006–109 by specifying that grantors may rely on any Type I, Type II, Type III, or Type III functionally integrated supporting organization classifications that are listed in the IRS Business Master File (“BMF”) extract and former Publication 78, Cumula- tive List of Organizations Described in § 170(c) of the Internal Revenue Code (now part of Exempt Organizations Select Check ) and providing that a grantor or contributor may rely on information about an organization from the BMF extract that is obtained from a third party, so long as certain specified requirements are met.