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New Regulations to Implement Changes to Redesigned Form 990
The Treasury Department and IRS today released for publication in the Federal Register final and temporary regulations (T.D. 9423) and, by cross-reference, proposed regulations (REG-142333-07) that are necessary to accommodate changes incorporated in the redesigned 2008 Form 990. Today’s regulations provide guidance under sections 170, 507, and 509 and:
- Eliminate the advance ruling process for new organizations
- Change the public support computation period for organizations described in sections 170(b)(1)(A)(vi) and 509(a)(1) and in section 509(a)(2) to five years
- Change the method of computing public support by providing that support must be reported using the organization's overall method of accounting
- Eliminate the exception for material changes in sources of support
For an electronic version of the regulations (115 pages):
T.D. 9423 and
REG-142333-07
Background
Under existing regulations, a tax-exempt organization described in section 501(c)(3) that seeks non-private foundation status under sections 509(a)(1) and 170(b)(1)(A)(vi) or section 509(a)(2) generally must meet a public support test on the basis of its cumulative support received during the four tax years preceding the current tax year.
Organizations that have "substantial and material" changes in their sources of support for the current year are required to compute their public support test on the basis of the preceding four tax years and the current tax year. If the public support test is met for the computation period, the organization meets the public support test for the tax year being tested and the immediately succeeding tax year (i.e., the organization would need to fail the public support test for two years in a row to become a private foundation).
A new organization applying for recognition of exemption under section 501(c)(3) may request an advance ruling permitting it to compute its public support on the basis of the cumulative support received during its first five tax years, at the end of which the organization is required to file Form 8734 to establish that it met the applicable public support test for the five-year advance ruling period.
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Overview
Today’s amended regulations—consistent with the redesigned Form 990—provide that the public support computation period will be the five-year period that includes the current tax year. An organization that meets the public support test for the current tax year will be treated as publicly supported for the current year and also the immediately succeeding tax year. If a new organization applying for recognition of exemption under section 501(c)(3) has been in existence for less than five years, the IRS will classify the organization as a publicly supported charity if the organization can establish to the satisfaction of the IRS that it can reasonably be expected to meet one of the public support tests during its first five years. In such case, the organization will be treated as a public charity for all purposes (including by grantors and contributors) during its first five years, regardless of the level of public support it actually receives during this period, and it will not be required to file Form 8734 at the end of the five-year period.
Under existing rules, an organization is required to compute its public support on Form 990 Schedule A on the cash method of accounting, even if it uses the accrual method of accounting in keeping its books. The amended regulations provide that an organization must compute its public support using the same accounting method it uses in keeping its books.
In addition, the temporary regulations contain amendments to the regulations under section 6033 and 6043 that govern the reporting of compensation and substantial contractions. The temporary regulations:
- Provide new threshold amounts for reporting compensation
- Require that compensation be reported on a calendar year basis or a basis that is prescribed by publication, form or instruction when reporting listed officer, director, trustee, key employee and independent contractor compensation
- Expand the scope of organizations subject to information reporting requirements upon a substantial contraction
Effective Date, Transition Rule
The temporary regulations apply to tax years beginning on or after January 1, 2008.
Under a transition rule, an organization that cannot meet the public support test for its first tax year beginning on or after January 1, 2008, using the five-year computation period will continue to qualify as a public charity for its 2008 tax year if it satisfied the public support test for its 2007 tax year based on public support received in its four preceding years (i.e., 2003 - 2006).
In addition, an organization that received an advance ruling that expires on or after the date that is 90 days prior to the date the regulations are published in the Federal Register (which is scheduled for Tuesday, September 9, 2008), are treated as new public charities without regard to their actual public support during the five-year advance ruling period, and without filing Form 8734.
The related proposed regulations include a request for public comment on the temporary regulations. Written or electronic comments and requests for a public hearing must be received within 60 days after publication of the regulations in the Federal Register (i.e., September 9, 2008).
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For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or
rspeizma@kpmg.com
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