December 8, 2006
The Pension Protection Act of 2006 - Impact Upon Private Foundation Grants
As you may be aware, President Bush signed the Pension Protection Act of 2006 (the “Act”) into law on August 17, 2006. In addition to sweeping changes to the pension plan rules, the Act also contains provisions potentially limiting private foundation grants to supporting organizations.
For a little background information, a private foundation is not a public charity under Internal Revenue Code (“IRC”) Section 501(c)(3) and is generally required to make annual qualifying distributions equal to at least five percent (5%) of the fair market value of the private foundation’s assets. Failure to make the qualifying distributions can result in harsh taxes and penalties. In addition, a private foundation is also subject to an excise tax for taxable expenditures. On the other hand, a supporting organization is considered a public charity under IRC Section 501(c)(3) and is classified by its structural relationship with a public charity as a Type I, II or III.
Effective August 17, 2006, the Act amends the IRC to provide that a grant by a private foundation is not a qualifying distribution if made to (1) a Type III supporting organization that is not “functionally integrated” or (2) any type of supporting organization if a disqualified person with respect to the private foundation directly or indirectly controls the supporting organization or one of its supported organizations. Similarly, a grant is a taxable expenditure if made to the above mentioned supporting organizations unless “expenditure responsibility” is exercised. Without Treasury Regulations for guidance, uncertainty has surrounded the terms “Type III supporting organization that is not functionally integrated” and “directly or indirectly controls.” In fact, this uncertainty has caused some private foundations to delay or suspend grants due to supporting organizations in 2006.
Fortunately, the Internal Revenue Service (“IRS”) released temporary guidance in the form of IRS Notice 2006-109 on December 4, 2006, which describes the information a private foundation may rely upon for grant distributions. First, a private foundation may rely upon the supporting organization’s current IRS determination letter to establish whether the supporting organization is a Type I, II or III. Second, a private foundation, acting in good faith, may rely on a written representation by the supporting organization and specified documents regarding the supporting organization’s status as “functionally integrated.” Alternatively, a private foundation may rely on a reasoned opinion of counsel from either the private foundation or the supporting organization regarding status as “functionally integrated.” Finally, temporary definitions of “functionally integrated Type III supporting organization” and “control” are provided. IRS Notice 2006-109 will remain in effect for grants made prior to the date any future Treasury Regulations are proposed.
Please contact any of the attorneys below if you have any questions or would like assistance with compliance efforts for the Pension Protection Act of 2006 and IRS Notice 2006-109.
Triage Process Addresses Backlogged Exemption Applications
Many organizations may have noticed an increased timeframe for the processing of tax exemption applications, commonly referred to as Internal Revenue Service (“IRS”) Form 1023. The delay is due to a backlog of applications at the IRS. Fortunately, the IRS recently released a streamlined “triage” process for dealing with the increased backlog.
The process separates applications into three categories: (1) those that can be processed immediately based on information submitted, (2) those that need minor additional information to be resolved, and (3) those that require additional development. If an application falls within the first or second category, the applicant will receive a determination letter or request for additional information within approximately 60 days from the date of application submission. If an application falls within the third group, the applicant will be contacted once the application has been assigned to an exempt organization specialist, likely to be substantially longer than 60 days from the date the application was submitted.
The recently released IRS process highlights the importance of engaging a professional to guide an organization through a tax exemption application. In particular, the classification as a first or second category application can significantly decrease the timeframe for processing by the IRS. Attorneys from Krieg DeVault’s Nonprofit Practice Group have guided numerous organizations through the tax exemption application and can help to ensure your organization’s application will be processed promptly by the IRS.
If you have further questions or if we can be of assistance, please contact any of the attorneys below.
If you have questions on these or any other nonprofit issues, please contact any of the professionals below:
Thomas N. Hutchinson, Chair - (317) 238-6254 - thutchinson@kdlegal.com
Robert A. Anderson - (317) 238-6255 - randerson@kdlegal.com
Julie C. Bolling - (317) 238-6241 - jbolling@kdlegal.com
Matthew S. Carr - (317) 238-6272 - mcarr@kdlegal.com
Charles S. Coleman - (317) 238-6258 - ccoleman@kdlegal.com
Randall R. Fearnow - (317) 238-6279 - rfearnow@kdlegal.com
Amy L. Flack, Lobbyist - (317) 238-6250 - aflack@kdlegal.com
Lisa M. Glenn - (317) 238-6264 - lglenn@kdlegal.com
Robert A. Greising - (317) 238-6215 - rgreising@kdlegal.com
Marc A. Hetzner - (317) 238-6217 - mhetzner@kdlegal.com
Frank A. Hoffman - (317) 238-6240 - fhoffman@kdlegal.com
David E. Jose - (317) 238-6211 - djose@kdlegal.com
Paul F. Lindemann - (317) 238-6210 - plindemann@kdlegal.com
Thomas R. Neal - (317) 238-6221 - tneal@kdlegal.com
William R. Neale - (317) 238-6209 - wneale@kdlegal.com
Edward R. Schmidt - (317) 238-6260 - eschmidt@kdlegal.com
Adam C. Shields - (317) 238-6312 - ashields@kdlegal.com
Glenn T. Troyer - (317) 238-6223 - gtroyer@kdlegal.com
Nonprofit Practice Group Newsletter is published by the law firm of Krieg DeVault LLP for general information purposes only. Material contained herein is not to be considered legal advice to any particular person. Each person's circumstances are unique and must be evaluated individually. Competent legal counsel should be sought before taking any action in reliance upon the information contained in this newsletter. The contents of this newsletter may not be reproduced, transmitted or distributed without the express written consent of Krieg DeVault LLP. © 2006, Krieg DeVault LLP
