As a tax professional who has worked a lot with nonprofits, you’d think that I would understand group exemptions better – but, frankly, they have always been a bit mysterious to me.
There are evidently over 4,300 group exemptions that cover more than 50,000 subordinate organizations. These groups include churches (ex., the Catholic Church, Presbyterian Church USA), youth organizations (ex., 4-H), national nonprofits (ex., American Cancer Society, Habitat for Humanity), labor unions (ex, Teamsters), and many others.
I know that a group of organizations with enough common affiliation and purpose can file one form requesting exempt status for all the organizations in the group. This filing prevents each organization from having to file for exemption separately. Makes sense.
There are procedures to file annual tax returns either as a group or individually. Makes sense.
The central organization is required to annually submit a list of their affiliates to the IRS. Makes sense.
However, the lists of subordinate organizations are not distributed by the IRS and each affiliate is not individually included in Pub 78 (an IRS publication that lists all nonprofits eligible for tax deductible charitable contributions). That has always bothered me. How does a donor know that the affiliate is actually covered by the group exemption? Who’s in the group?
Turns out, it has bothered other folks too. So, the IRS Advisory Committee on Tax Exempt and Government Entities (ACT) studied the problem and submitted their recommendations to the IRS.
Very reasonable (in my mind) solutions have been recommended. The theme, not surprisingly, is transparency. Each recommendation is offered to improve transparency within the tax-exempt sector. The recommendations are:
1. Retain the group exemption mechanism – A central organization can still file for tax exempt status for the entire group. Bravo! No need to make this process more painful.
2. Eliminate group returns – Each organization will independently file a tax return. Again, this makes sense because most subordinate organizations have their own board of directors and are financially independent from the central organization. Having worked with large corporate organizations with multiple subsidiaries, the ability for a stakeholder to figure out the financial results of any particular subsidiary from the tax return is difficult at best. Since transparency is the goal, each organization should stand alone in their tax filings.
3. Better define “general supervision and control” – This suggestion is made for purposes of determine whether the subordinate organization is covered by the group exemption. Some of these very large central organizations may not get enough information from their affiliates to hold them accountable for maintaining the tax-exempt status given to the group. I’ve served on nonprofit boards where the group has gotten away from the mission of the organization as it was described to the IRS. In a group exemption setting, it is important for the central organization to maintain supervision of the affiliates to make sure they haven’t strayed from the path.
4. Enhance Form 990 for central organizations – Each central organization would be required to file a full-blown Form 990 (not just a 990EZ or 990N) and attach a list of their affiliates covered by the group exemption. Since all of these filings are public (available on several websites but I most often use The National Center for Charitable Statistics), this would certainly improve transparency.
5. List the subordinate organizations in Pub 78 – YEA! The answer to my question that sparked me to read the recommendations in the first place.
So, if these recommendations are implemented, we’ll be able to figure out who’s in the group! Stay tuned…