Included among the drafts released to-date are a revised Schedule A [PDF 352 KB] Public Charity Status and Public Support, and accompanying instructions [PDF 977 KB].
The drafts of Schedule A and the accompanying instructions are subject to OMB approval; may change before being officially released; and are not to be relied upon for filing.
Nonetheless, the proposed changes to Schedule A for tax years beginning in 2014—as previewed in the draft schedule—may be quite significant for supporting organizations. In addition to modifying Part I, Reason for Public Charity Status, Line 11, the draft Schedule A also adds a new Part IV, Supporting Organizations, and Part V, Type III Non-Functionally Integrated 509(a)(3) Supporting Organizations.
As a result of these proposed changes, the draft 2014 Schedule A is twice as long as its 2013 predecessor.
Part I, Line 11 of Schedule A (draft)
An organization that claims public charity status because it is a supporting organization under section 509(a)(3) must check the box for Line 11 and then indicate, on Line 11a, b, c, or d, whether it is a Type I, Type II, Type III functionally integrated, or Type III non-functionally integrated supporting organization.
The draft Schedule A adds a brief description to each of these fields and cross-references each field against another part of Schedule A that must be completed.
The instructions clarify that a supporting organization is not to check off the box for renumbered Line 11e if it has a determination letter stating that it is a Type III supporting organization without specifying whether it is functionally integrated or non-functionally integrated.
New Line 11f asks the supporting organization to enter the number of supported organizations it was organized to support, whether or not they actually received support during the tax year.
New Line 11g(vi) provides a column for supporting organizations to optionally provide an estimate of the fair market value of goods, other property, services, and use of facilities that it provided to or for the benefit of each supported organization during the tax year.
The questions pertaining to whether the supporting organization was controlled by disqualified persons (previously, Line 11e) or whether the supporting organization accepted gifts from certain disqualified persons (previously, Line 11g) have been moved to Part IV.
Similarly, columns for reporting whether a Type III supporting organization provided its supported organization notice of its support (previously, Line 11h, Column (v)) and whether its supported organizations were organized inside or outside the United States (previously, Line 11h, Column (vi)) have moved to Part V.
Parts IV and V of Schedule A (draft)
All supporting organizations, regardless of type, are instructed to complete Part IV, Section A, All Supporting Organizations.
The 11 questions (and their sub-questions) appear to provide a checklist for supporting organizations to determine whether they meet the organizational and operational tests of section 509(a)(3). For example, supporting organizations that support an entity that does not have a determination letter recognizing the organization as a public charity under section 509(a)(1) or (2) will need to explain how they determined that such organization is described under one of those sections (Lines 2 and 3). Organizations that support foreign supported organizations will need to demonstrate that they retain ultimate control and discretion in deciding whether to make grants to the foreign organization (Line 4).
In addition to completing Part IV, Section A, Type I organizations must complete Part IV, Section B, Type I Supporting Organizations; and Type II organizations must complete Part IV, Section C, Type II Supporting Organizations. Here, Type I and Type II supporting organizations must explain how they satisfy the relationship test, recognizing that there may be more than one way to structure the relationship between the supporting and supported organizations to satisfy the requirements.
All Type III supporting organizations must complete Part IV, Section D to demonstrate that they met the notification requirement, responsiveness test, and significant voice test. The draft instructions clarify that a Type III supporting organization that fails to meet any of these requirements during the tax year will fail to qualify as a Type III supporting organization during that year. In addition, functionally integrated supporting organizations must complete Part IV, Section E, and non-functionally integrated supporting organizations must complete Part V.
A Type III functionally integrated supporting organization must demonstrate that it either satisfied the “activities test” and complete Part IV, Section E, Line 2 or is the parent of its supported organizations and complete Part IV, Section E, Line 3. If it supported a governmental entity, it must describe in Part VI, Supplemental Information, how it satisfied this test—as currently set forth in Notice 2014-4.
A Type III non-functionally integrated supporting organization completes Part V to compute its adjusted net income and minimum asset amounts (Sections A and B), to calculate its distributable amount (Section C), and demonstrate that it satisfied its attentiveness test (Section D) and met its payout requirement (Section E).
In addition to the changes specifically applicable to section 509(a)(3) supporting organizations, the draft instructions to Schedule A also contain new general provisions.
In particular, the instructions provide that an organization can complete Part II (Support Schedule for Organizations Described in Section 170(b)(1)(A)(iv) and 170(b)(1)(A)(vi)) even if it checks another type of public charity classification in Part I (e.g., schools described in section 170(b)(1)(A)(ii)). An organization may want to do this for purposes such as qualifying for the first “Special Rule” in Schedule B, Schedule of Contributors, by meeting the 331⁄3 % support test.
Although these changes may increase the reporting burden for supporting organizations, they may offer relatively straight-forward guidance and clarity in a very complex and muddled area. Older supporting organizations that do not have determination letters designating them as “Type I, II, or III” can follow the series of questions through Parts IV and V to obtain a greater level of confidence as to their appropriate classification. Furthermore, because these organizations will now be required to analyze their organizational and operational structure for reporting purposes, more may decide to obtain updated determination letters by filing Form 8940, Request for Miscellaneous Determination.
The draft instructions also provide some useful insight to Type III supporting organizations with respect to their notification requirement (i.e., the requirement to annually provide written notice to each of their supported organizations regarding the type and amount of support, among other things). Although the requirement is statutory in nature, Treasury and the IRS set the deadline for meeting this requirement (generally by the last day of the fifth month following the close of the organization’s tax year). Therefore, if a Type III supporting organization fails to timely provide this notice to each of its supported organizations, and would not otherwise qualify as a public charity, all is not lost. The instructions suggest that administrative relief may be available if the organization qualifies for “9100 relief” under Reg. section 301.9100-3.
For more information, contact:
Rick Speizman, Partner-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group
+1 (202) 533-3084