Taxation & Estate Planning

IRS CHANGES PUBLIC SUPPORT ADVANCE RULING PROCEDURES FOR SECTION 501(c)(3) ORANIZATIONS

By Charles Rubin

Under the Internal Revenue Code, there are advantages for a Section 501(c)(3) organization to be classified as a "publicly supported" organization. To be "publicly supported," that organization must meet certain mathematical tests demonstrating a broad base of donor support (as compared to a small non-public pool of donors, such as a single family).

Previously, organizations that expect to meet the public support test would file a Form 1023 exemption application and seek a five year advance ruling. With such a ruling, the organization would generally be treated as publicly supported for its first five years. Then, it would need to submit a Form 8734 to show that its fundraising meets the publicly supported requirements, and if it did, the IRS would issue a final ruling establishing publicly supported status (or if it did not meet that status, it would be reclassified as a private foundation).

The IRS has now withdrawn the need to file a Form 8734 after 5 years. Instead, the taxpayer makes its own determination after 5 years, and if it meets the publicly supported requirements (and for so long as it does), it will report as a public charity without the need for a final determination by the IRS. The IRS will police the fulfillment of the public support requirement by new disclosures required on the Form 990 filings of the entity (assuming such a filing is required).

Note that if a public charity does not meet the public charity support requirements for two continuous years, it will lose its public charity status.

The IRS has issued a FAQ in question and answer format that address various transitional rules and other issues relating to the new reporting method.

09082008faq

Full post as published by Rubin on Tax on September 13, 2008 (boomark / email).