September 2008
IRS Eliminates Advance
Ruling Process
On September 9, 2008, the IRS
issued temporary Income Tax Regulations which eliminate the
advance ruling process for section 501(c)(3) organizations.
Under the new regulations, a new 501(c)(3) organization will
be classified as a publicly supported charity, and not a
private foundation, if it can show that it reasonably can be
expected to be publicly supported when it applies for
tax-exempt status.
Under the old regulations, an
organization that wanted to be recognized by the IRS as a
publicly supported charity instead of a private foundation
had to go through an extended two-step process. First, the
organization had to declare that it expected to be publicly
supported on an ongoing basis. Then, after five years, it
had to file Form 8734, Support Schedule for Advance
Ruling Period, showing the IRS that it actually met the
public support test. If it didn't meet the test, it was
designated a tax-exempt private foundation and would be
subject to stricter rules.
The new rules no longer
require the organization to file Form 8734 after completing
its first five tax years. Moreover, the organization
retains its public charity status for its first five years
regardless of the public support actually received during
that time. Instead, beginning with the organization's sixth
taxable year, it must establish that it meets the public
support test by showing that it is publicly supported on its
Schedule A to Form 990, Return of Organization Exempt
from Income Tax.
Transition rules apply to
organizations that have previously received advance
rulings.
Under the new regulations,
section 501(c)(3) organizations that have received advance
rulings that will expire on or after June 9, 2008 will be
classified as publicly supported charities. These
organizations and their donors may rely on the
organizations' advance ruling determination, and the
organizations no longer need to file Form 8734 with the IRS.
Organizations whose advance
rulings had expired before June 9, 2008 and that did not
submit Form 8734 to the IRS will be reclassified as private
foundations unless they submit documentation to the IRS
establishing that they met the public support test during
the advance ruling period.
The IRS will process
exemption applications submitted before the effective date
of the new regulations under the new rules.
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