48672 Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 

Operations Support Group, 1601 Lind 

Avenue, SW., Renton, WA 98057. 

Persons interested in being placed on 

a mailing list for future NPRM’s should 

contact the FAA’s Office of Rulemaking, 

(202) 267–9677, for a copy of Advisory 

Circular No. 11–2A, Notice of Proposed 

Rulemaking Distribution System, which 

describes the application procedure. 

The Proposal 

The FAA is proposing an amendment 

to Title 14 Code of Federal Regulations 

(14 CFR) part 71 by establishing Class E 

airspace designated as surface areas and 

modifying existing Class E airspace 

extending upward from 700 feet above 

the surface at Eastern Sierra Regional 

Airport, Bishop, CA. Controlled airspace 

is necessary to accommodate aircraft 

using the new RNAV (GPS) SIAP at 

Eastern Sierra Regional Airport, Bishop, 

CA. This action would enhance the 

safety and management of aircraft 

operations at Eastern Sierra Regional 

Airport, Bishop, CA. 

Class E airspace designations are 

published in paragraph 6002 and 6005, 

respectively, of FAA Order 7400.9T, 

signed August 27, 2009, and effective 

September 15, 2009, which is 

incorporated by reference in 14 CFR 

71.1. The Class E airspace designation 

listed in this document will be 

published subsequently in this Order. 

The FAA has determined that this 

proposed regulation only involves an 

established body of technical 

regulations for which frequent and 

routine amendments are necessary to 

keep them operationally current. 

Therefore, this proposed regulation; (1) 

is not a ‘‘significant regulatory action’’ 

under Executive Order 12866; (2) is not 

a ‘‘significant rule’’ under DOT 

Regulatory Policies and Procedures (44 

FR 11034; February 26, 1979); and (3) 

does not warrant preparation of a 

regulatory evaluation as the anticipated 

impact is so minimal. Since this is a 

routine matter that will only affect air 

traffic procedures and air navigation, it 

is certified that this proposed rule, 

when promulgated, would not have a 

significant economic impact on a 

substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. 

The FAA’s authority to issue rules 

regarding aviation safety is found in 

Title 49 of the U.S. Code. Subtitle 1, 

Section 106, describes the authority for 

the FAA Administrator. Subtitle VII, 

Aviation Programs, describes in more 

detail the scope of the agency’s 

authority. This rulemaking is 

promulgated under the authority 

described in Subtitle VII, Part A, 

Subpart I, Section 40103. Under that 

section, the FAA is charged with 

prescribing regulations to assign the use 

of the airspace necessary to ensure the 

safety of aircraft and the efficient use of 

airspace. This regulation is within the 

scope of that authority as it establishes 

additional controlled airspace at Eastern 

Sierra Regional Airport, Bishop, CA. 

List of Subjects in 14 CFR Part 71 

Airspace, Incorporation by reference, 

Navigation (air). 

The Proposed Amendment 

Accordingly, pursuant to the 

authority delegated to me, the Federal 

Aviation Administration proposes to 

amend 14 CFR part 71 as follows: 

PART 71—DESIGNATION OF CLASS A, 

B, C, D, AND E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

1. The authority citation for 14 CFR 

part 71 continues to read as follows: 

Authority: 49 U.S.C. 106(g), 40103, 40113, 

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959– 

1963 Comp., p. 389. 

§ 71.1 [Amended] 

2. The incorporation by reference in 

14 CFR 71.1 of the FAA Order 7400.9T, 

Airspace Designations and Reporting 

Points, signed August 27, 2009, and 

effective September 15, 2009, is 

amended as follows: 

Paragraph 6002 Class E airspace designated 

as surface areas. 

* * * * * 

AWP CA, E2 Bishop, CA [New] 

Eastern Sierra Regional, CA 

(Lat. 37°22′23′′ N., long. 118°21′49′′ W.) 

Within a 4.2-mile radius of Eastern Sierra 

Regional Airport. This Class E airspace area 

is effective during the specific dates and 

times established in advance by a Notice to 

Airmen. The effective date and time will 

thereafter be continuously published in the 

Airport/Facility Directory. 

* * * * * 

Paragraph 6005 Class E airspace areas 

extending upward from 700 feet or more 

above the surface of the earth. 

* * * * * 

AWP CA, E5 Bishop, CA [Modified] 

Eastern Sierra Regional, CA 

(Lat. 37°22′23′′ N., long. 118°21′49′′ W.) 

Beatty VORTAC 

(Lat. 36°48′02′′ N., long. 116°44′52′′ W.) 

LIDAT Intersection 

(Lat. 37°25′49′′ N., long. 117°16′41′′ W.) 

That airspace extending upward from 700 

feet above the surface within a 6.7-mile 

radius of Eastern Sierra Regional Airport and 

that airspace within 2.2 miles each side of 

the Eastern Sierra Regional Airport 337° 

bearing extending from the 6.7-mile radius to 

27.8 miles northwest of the Eastern Sierra 

Regional Airport; and that airspace extending 

upward from 1,200 feet above the surface of 

the earth bounded by a line beginning at lat. 

38°11′08′′ N., long. 118°46′30′′ W.; to lat. 

38°13′14′′ N., long. 118°41′00′′ W.; to lat. 

38°14′25′′ N., long. 118°17′04′′ W.; to lat. 

38°03′17′′ N., long. 118°02′30′′ W.; to lat. 

37°41′20′′ N., long. 118°16′42′′ W.; to lat. 

37°09′50′′ N., long. 118°00′13′′ W.; to lat. 

37°02′00′′ N., long. 118°21′30′′ W.; to lat. 

38°11′08′′ N., long. 118°57′00′′ W.; thence to 

the point of origin. That airspace extending 

upward from 12,500 feet MSL within 4.3 

miles each side of a direct course between 

the Eastern Sierra Regional Airport and 

LIDAT Intersection, 36.5 miles 12,500 feet 

MSL, 10,500 feet MSL LIDAT Intersection; 

and within 4.3 miles each side of a direct 

course between Eastern Sierra Regional 

Airport and the Beatty VORTAC 69.5 miles 

12,500 feet MSL, 10,500 feet MSL Beatty 

VORTAC. 

* * * * * 

Issued in Seattle, Washington, on 

September 18, 2009. 

William Buck, 

Acting Manager, Operations Support Group, 

Western Service Center. 

[FR Doc. E9–23105 Filed 9–23–09; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 53 

[REG–155929–06] 

RIN 1545–BG31 

Payout Requirements for Type III 

Supporting Organizations That Are Not 

Functionally Integrated 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations regarding the 

requirements to qualify as a Type III 

supporting organization that is operated 

in connection with one or more 

supported organizations. The 

regulations reflect changes to the law 

made by the Pension Protection Act of 

2006. The regulations will affect Type 

III supporting organizations and their 

supported organizations. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by December 23, 2009. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–155929–06), room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 


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Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 48673 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–155929– 

06), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov/ (IRS REG– 

155929–06). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Philip T. Hackney or Don R. Spellmann 

at (202) 622–6070; concerning 

submissions of comments and requests 

for a public hearing, Richard A. Hurst at 

(202) 622–7180 (not toll-free numbers) 

or 

Richard.A.Hurst@irscounsel.treas.gov. 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in this notice of proposed 

rulemaking has been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). Comments on the 

collection of information should be sent 

to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

November 23, 2009. Comments are 

specifically requested concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Internal Revenue Service, including 

whether the information will have 

practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information; 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

forms of information technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of services to provide 

information. 

The collection of information in this 

proposed regulation is in Prop. Reg. 

§ 1.509(a)–4(i)(2). The collection of 

information flows from section 

509(f)(1)(A), which requires a Type III 

supporting organization to provide to 

each of its supported organizations such 

information as the Secretary may 

require to ensure that the Type III 

supporting organization is responsive to 

the needs or demands of its supported 

organization(s). The likely 

recordkeepers are Type III supporting 

organizations. 

Estimated total annual reporting 

burden: 8,400 hours. 

Estimated average annual burden 

hours per recordkeeper: Two hours. 

Estimated number of recordkeepers: 

4,200. 

Estimated frequency of collection of 

such information: Annual. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. Books or 

records relating to a collection of 

information must be retained as long as 

their contents may become material in 

the administration of any internal 

revenue law. Generally, tax returns and 

return information are confidential, as 

required by 26 U.S.C. 6103. 

Background 

An organization described in section 

501(c)(3) of the Internal Revenue Code 

(Code) is classified as either a private 

foundation or a public charity. To be 

classified as a public charity, an 

organization must meet the 

requirements of section 509(a)(1), (2), 

(3), or (4). Organizations described in 

section 509(a)(3) are known as 

supporting organizations. Such 

organizations achieve their status by 

providing support to one or more 

organizations described in section 

509(a)(1) or (2), which in this context 

are referred to as supported 

organizations. 

To meet the requirements of section 

509(a)(3), an organization must satisfy 

an organizational test, an operational 

test, a relationship test, and a 

disqualified person control test. The 

organizational and operational tests 

require that the supporting organization 

be organized and at all times thereafter 

operated exclusively for the benefit of, 

to perform the functions of, or to 

conduct the purposes of one or more 

supported organizations. The 

relationship test requires the supporting 

organization to establish one of three 

types of relationships with one or more 

supported organizations. Finally, the 

disqualified person control test requires 

that the supporting organization not be 

controlled directly or indirectly by 

certain disqualified persons. Although 

each of these tests is a necessary 

requirement for an organization to 

establish that it qualifies as a supporting 

organization, this notice of proposed 

rulemaking (NPRM) focuses primarily 

on the relationship test. 

Three Types of Supporting 

Organizations 

Treas. Reg. § 1.509(a)–4(f)(2) provides 

that a supporting organization must 

maintain one of three types of structural 

or operational relationships with its 

supported organization(s). A supporting 

organization that is operated, supervised 

or controlled by one or more supported 

organizations is commonly known as a 

Type I supporting organization. The 

relationship of a Type I supporting 

organization with its supported 

organization(s) is comparable to that of 

a corporate parent-subsidiary 

relationship. A supporting organization 

that is supervised or controlled in 

connection with one or more supported 

organizations is commonly known as a 

Type II supporting organization. The 

relationship of a Type II supporting 

organization with its supported 

organization(s) is comparable to a 

corporate brother-sister relationship. A 

supporting organization that is operated 

in connection with one or more 

supported organizations is commonly 

known as a Type III supporting 

organization. This NPRM focuses 

primarily on Type III supporting 

organizations. 

Qualification Requirements for Type III 

Supporting Organizations Prior to 

Enactment of the Pension Protection Act 

of 2006, Public Law 109–280 (120 Stat. 

780 (2006)) (PPA) 

Prior to the enactment of the PPA, the 

regulations under section 509(a)(3) 

generally provided that an organization 

is ‘‘operated in connection with’’ one or 

more supported organizations if it meets 

a ‘‘responsiveness test’’ and an ‘‘integral 

part test.’’ 

Responsiveness Test 

Treas. Reg. § 1.509(a)–4(i)(2)(i) 

provides that an organization meets the 

responsiveness test if the organization is 

responsive to the needs or demands of 

its supported organizations. Treas. Reg. 

§ 1.509(a)–4(i)(2)(ii) provides three ways 

that a supporting organization may 

demonstrate responsiveness to a 

supported organization: (1) The 

supported organization appoints or 

elects one or more of the officers, 

directors, or trustees of the supporting 

organization; (2) one or more members 

of the governing body of the supported 

organization serve as officers, directors, 

or trustees of, or hold other important 

offices in, the supporting organization; 

or (3) the officers, directors, or trustees 

of the supporting organization maintain 


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48674 Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 

a close continuous working relationship 

with the officers, directors, or trustees of 

the supported organization. In all three 

cases, the relationship must result in the 

supported organization having a 

significant voice in the investment 

policies of the supporting organization, 

the timing and the manner of making 

grants, the selection of the grant 

recipients of the supporting 

organization, and direction over the use 

of the income or assets of the supporting 

organization. 

The existing regulations also provide 

an alternative means for charitable 

trusts to satisfy the responsiveness test. 

Under Treas. Reg. § 1.509(a)–4(i)(2)(iii), 

a supporting organization is responsive 

if: (1) it is a charitable trust under State 

law, (2) each specified supported 

organization is a named beneficiary 

under the charitable trust’s governing 

instrument, and (3) each beneficiary 

organization has the power to enforce 

the trust and compel an accounting 

under State law. 

In the case of an organization that was 

supporting one or more supported 

organizations before November 20, 

1970, Treas. Reg. § 1.509(a)–4(i)(1)(ii) 

provides that additional facts and 

circumstances, such as a historic and 

continuing relationship between the 

supporting organization and its 

supported organization(s), also may be 

taken into account to establish 

compliance with the responsiveness 

test. 

Integral Part Test 

Treas. Reg. § 1.509(a)–4(i)(3)(i) 

provides that a supporting organization 

meets the integral part test by 

maintaining a significant involvement 

in the operations of one or more 

supported organizations that are 

dependent upon the supporting 

organization for the type of support 

which it provides. Under the existing 

regulations, there are two alternative 

ways to meet the integral part test: (1) 

The ‘‘but for’’ test under Treas. Reg. 

§ 1.509(a)–4(i)(3)(ii); or (2) the 

‘‘attentiveness’’ test under Treas. Reg. 

§ 1.509(a)–4(i)(3)(iii). 

Treas. Reg. § 1.509(a)–4(i)(3)(ii) states 

that the ‘‘but for’’ test is satisfied if ‘‘the 

activities engaged in [by the supporting 

organization] for or on behalf of the 

supported organizations are activities to 

perform the functions of, or to carry out 

the purposes of, such organizations, 

and, but for the involvement of the 

supporting organization, would 

normally be engaged in by the 

supported organizations themselves.’’ 

The ‘‘attentiveness’’ test under Treas. 

Reg. § 1.509(a)–4(i)(3)(iii) requires a 

supporting organization to: (1) Make 

payments of substantially all of its 

income to or for the use of one or more 

supported organizations, (2) provide 

enough support to one or more 

supported organizations to ensure the 

attentiveness of such organization(s) to 

the operations of the supporting 

organization; and (3) pay a substantial 

amount of the total support of the 

supporting organization to those 

supported organizations that meet the 

attentiveness requirement. Rev. Rul. 76– 

208, 1976–1 CB 161 (see 

§ 601.601(d)(2)(ii)(b)), provides that the 

phrase ‘‘substantially all of its income’’ 

in Treas. Reg. § 1.509(a)–4(i)(3)(iii) 

means at least 85 percent of adjusted net 

income. 

PPA Changes to Qualification 

Requirements for Type III Supporting 

Organizations 

The PPA made five changes to the 

requirements an organization must meet 

to qualify as a Type III supporting 

organization: 

(1) It removed the alternative test for 

charitable trusts as a means of meeting 

the responsiveness test; 

(2) It required the Secretary of the 

Treasury to set a new payout 

requirement for organizations that are 

not functionally integrated (generally, 

those organizations that met the integral 

part test by satisfying the attentiveness 

test under the existing regulations) to 

ensure that such organizations pay a 

‘‘significant amount’’ to their supported 

organizations; 

(3) It provided that a Type III 

supporting organization must annually 

provide to each of its supported 

organizations such information as the 

Secretary may require to ensure that the 

supporting organization is responsive to 

the needs or demands of its supported 

organization(s); 

(4) It prohibited a Type III supporting 

organization from supporting any 

supported organization not organized in 

the United States; and 

(5) It prohibited a Type I or Type III 

supporting organization from accepting 

a gift or contribution from a person who, 

together with certain related persons, 

directly or indirectly controls the 

governing body of a supported 

organization of the Type I or Type III 

supporting organization. 

Notice 2006–109 

On December 18, 2006, the Treasury 

Department and the IRS released Notice 

2006–109 (2006–51 IRB 1121) (see 

§ 601.601(d)(2)(ii)(b)), which alerted 

taxpayers to the new supporting 

organization rules enacted by the PPA; 

provided interim guidance, including 

reliance standards for private 

foundations making grants to supporting 

organizations; and solicited comments 

regarding the new supporting 

organization requirements. Fifteen 

comments and numerous phone calls 

were received in response to the request 

for comments contained in Notice 2006– 

109. 

Advanced Notice of Proposed 

Rulemaking (ANPRM) 

On August 2, 2007, the Treasury 

Department and the IRS issued an 

ANPRM titled ‘‘Payout Requirements for 

Type III Supporting Organizations that 

Are Not Functionally Integrated’’ (Reg155929–06, 72 FR 148). The ANPRM 

described proposed rules to implement 

the PPA changes to the Type III 

supporting organization requirements, 

and solicited comments regarding those 

proposed rules. 

In the ANPRM, the Treasury 

Department and the IRS proposed that 

all Type III supporting organizations 

would be required to meet the 

responsiveness test under Treas. Reg. 

§ 1.509(a)–4(i)(2)(ii). In addition, the 

Treasury Department and the IRS 

proposed that Type III supporting 

organizations that are functionally 

integrated would be required to meet: 

(A) The ‘‘but for’’ test in existing Treas. 

Reg. § 1.509(a)–4(i)(3)(ii); (B) an 

expenditure test resembling the section 

4942(j)(3)(A) qualifying distributions 

test for private operating foundations; 

and (C) an assets test resembling the 

section 4942(j)(3)(B) alternative assets 

test for private operating foundations. 

However, the Treasury Department and 

the IRS indicated that an exception 

would be provided for certain Type III 

supporting organizations that oversee or 

facilitate the operation of an integrated 

system, such as certain hospital 

systems. The ANPRM stated that such 

organizations would be classified as 

functionally integrated as long as they 

satisfied the responsiveness and ‘‘but 

for’’ tests under the existing regulations. 

The ANPRM proposal provided that a 

non-functionally integrated Type III 

supporting organization would be 

required to make an annual payout 

equal to the annual payout required 

from a private non-operating foundation 

(generally, five percent of the fair 

market value of non-exempt-use assets). 

The Treasury Department and the IRS 

also proposed a limitation on the 

number of supported organizations a 

non-functionally integrated Type III 

supporting organization could support. 

The IRS received over 40 comments 

and numerous phone calls in response 

to the ANPRM. After consideration of 

all comments received, the Treasury 

Department and the IRS are issuing this 


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Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 48675 

NPRM regarding the new qualification 

requirements for Type III supporting 

organizations. The major areas of 

comment in response to the ANPRM are 

discussed in the preamble under 

Explanation of Provisions. 

Explanation of Provisions 

Summary of Proposed Criteria To 

Qualify as a Type III Supporting 

Organization 

The proposed regulations provide that 

every Type III supporting organization 

must: (1) Satisfy the notification 

requirement set forth under Prop. Reg. 

§ 1.509(a)–4(i)(2); (2) meet the 

responsiveness test set forth under Prop. 

Reg. § 1.509(a)–4(i)(3); and (3) 

demonstrate that it is an integral part of 

one or more supported organizations. A 

Type III supporting organization 

demonstrates that it is an integral part 

of a supported organization by satisfying 

either the requirements for functionally 

integrated Type III supporting 

organizations set forth in Prop. Reg. 

§ 1.509(a)–4(i)(4), or the requirements 

for non-functionally integrated Type III 

supporting organizations set forth in 

Prop. Reg. § 1.509(a)–4(i)(5). Further, as 

set forth in Prop. Reg. § 1.509(a)– 

4(i)(10), a Type III supporting 

organization may not support a 

supported organization that is organized 

outside of the United States. Finally, as 

set forth in Prop. Reg. § 1.509(a)–4(f)(5), 

Type I and Type III supporting 

organizations are prohibited from 

accepting a gift or contribution from a 

person who, together with certain 

related persons, directly or indirectly 

controls the governing body of a 

supported organization of the Type I or 

Type III supporting organization. 

Requirement To Notify Supported 

Organizations 

Prop. Reg. § 1.509(a)–4(i)(2) 

implements section 509(f)(1)(A) of the 

Code, which provides that a Type III 

supporting organization must provide to 

each of its supported organizations such 

information as the Secretary may 

require to ensure that the supporting 

organization is responsive to the needs 

or demands of the supported 

organization. 

The Treasury Department and the IRS 

requested comments in the ANPRM on 

the type of information a Type III 

supporting organization should be 

required to provide to its supported 

organizations. One commentator 

recommended that the proposed 

regulations adopt a recommendation of 

the Panel on the Nonprofit Sector, 

which suggested requiring Type III 

supporting organizations to provide 

annually to their supported 

organizations: (1) A copy of governing 

documents, including those filed with 

Form 1023, ‘‘Application for 

Recognition of Exemption Under 

Section 501(c)(3) of the Internal 

Revenue Code,’’ and any updates; (2) a 

copy of Form 990, ‘‘Return of 

Organization Exempt from Income Tax;’’ 

and (3) an annual report of activities, 

including a narrative, financial detail, 

and a description of the support 

provided (including how it was 

calculated or determined) and a 

projection of support to be provided in 

the subsequent year. Panel on the 

Nonprofit Sector, Strengthening 

Transparency, Governance, 

Accountability of Charitable 

Organizations (June 2005), at 45. 

Another commentator recommended 

that the proposed regulations require 

only that the Form 990 be distributed to 

the ‘‘lead’’ supported organization. This 

commentator argued that any additional 

requirement would impose too much 

additional administrative burden and 

cost on the charitable sector. The 

comment also suggested allowing the 

notification to be provided 

electronically. 

The proposed regulations require that 

each taxable year, a Type III supporting 

organization must provide to each of its 

supported organizations: (A) A written 

notice addressed to a principal officer of 

the supported organization identifying 

the supporting organization and 

describing the amount and type of 

support it provided to the supported 

organization in the past year; (B) a copy 

of the supporting organization’s most 

recently filed Form 990; and (C) a copy 

of the supporting organization’s 

governing documents, including any 

amendments. Copies of governing 

documents need only be provided once. 

The proposed regulations provide that 

the required notice and documents may 

be delivered by electronic media. 

Organizations must satisfy the 

notification requirement to qualify as a 

Type III supporting organization and 

should retain proof of delivery in their 

records. 

Responsiveness Test 

The proposed regulations provide that 

all Type III supporting organizations, 

including those organized as charitable 

trusts, must meet the responsiveness 

test under existing Treas. Reg. 

§ 1.509(a)–4(i)(2)(ii). 

The ANPRM proposed to apply the 

responsiveness test to all Type III 

supporting organizations and to remove 

the special rule for charitable trusts. In 

response to the ANPRM, commentators 

argued that the PPA did not require 

imposition of the general 

responsiveness test on charitable trusts, 

and that the test could be difficult to 

satisfy because of State-law fiduciary 

requirements on trusts. Thus, a 

commentator recommended the 

development of an alternate charitable 

trust test based on facts and 

circumstances. 

One commentator recommended 

exempting trusts managed by 

institutional trustees from the 

responsiveness test. The commentator 

stated that institutional trustees employ 

strict rules to manage trusts, thereby 

making abuse of these trusts highly 

unlikely. Another commentator 

recommended transition relief for trusts 

in existence on the date the PPA was 

enacted similar to that provided in 

Treas. Reg. § 1.509(a)–4(i)(4) for trusts 

established before November 20, 1970, 

which would apply to a trust with a 

lengthy and continuous history of 

distributions, and no discretion to vary 

the beneficiaries or the amount of 

distributions. 

The proposed regulations require that 

all Type III supporting organizations 

demonstrate the necessary relationship 

between its officers, directors or trustees 

and those of the supported organization, 

and show that this relationship results 

in the officers, directors or trustees of 

the supported organization having a 

significant voice in the operations of the 

supporting organization. The proposed 

regulations do not adopt a special rule 

for trusts. 

The Treasury Department and the IRS 

believe that requiring charitable trusts to 

meet the responsiveness test set forth in 

these proposed regulations is consistent 

with Congress’ intent in the PPA. The 

Treasury Department and the IRS expect 

that some charitable trusts will be able 

to demonstrate that they meet the 

requirements of the responsiveness test. 

The proposed regulations provide 

examples that illustrate factors that 

could lead to a conclusion that a 

supporting organization organized as a 

trust is responsive to the needs of a 

supported organization. Additionally, 

the Treasury Department and the IRS 

request comments regarding a specific 

responsiveness rule for trusts that 

would be consistent with the existing 

responsiveness test and the 

Congressional intent behind section 

1241 of the PPA, which removed the 

alternative trust test in the regulations. 

Integral Part Test—Functionally 

Integrated Type III Supporting 

Organizations 

The proposed regulations provide that 

a Type III supporting organization is 

functionally integrated if it either: (1) 


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48676 Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 

Engages in activities substantially all of 

which directly further the exempt 

purposes of the supported 

organization(s) to which it is responsive 

by performing the functions of, or 

carrying out the purposes of, such 

supported organization(s) and that, but 

for the involvement of the supporting 

organization, would normally be 

engaged in by the supported 

organization(s); or (2) is the parent of 

each of its supported organizations. 

The ANPRM proposed requiring an 

organization to meet not only the ‘‘but 

for’’ test under existing Treas. Reg. 

§ 1.509(a)–4(i)(3)(ii), but also two 

additional tests—an expenditure test 

and an assets test—in order to qualify as 

a functionally integrated Type III 

supporting organization. In general, 

commentators said that the additional 

tests were unduly restrictive and more 

burdensome than those proposed for 

non-functionally integrated Type III 

supporting organizations. These 

commentators argued that the ANPRM’s 

expenditure test was arbitrary and that 

Congress did not authorize the Secretary 

to impose a payout requirement on 

functionally integrated organizations. 

Many commentators highlighted 

differences between a Type III 

supporting organization and a private 

operating foundation that warrant 

treating these types of organizations 

differently, including the fact that a 

supporting organization is dedicated to 

specific organizations and that those 

specified organizations rely on the 

supporting organization for consistent 

support. 

Many commentators recommended 

exempting certain types of organizations 

from the proposed requirements for 

functionally integrated Type III 

supporting organizations, such as longstanding supporting organizations and 

supporting organizations that support 

governmental agencies, religious 

organizations, and grant-making 

organizations. Several commentators 

recommended that the proposed 

regulations take into account the 

historic and continuing relationship of 

‘‘long-standing’’ organizations with their 

supported organizations. Additionally, 

many commentators requested an 

exemption for supporting organizations 

of governmental entities, contending 

that these organizations are not subject 

to abuse because of their connection to 

a governmental entity. These 

commentators argued that supporting 

organizations choose a Type III structure 

to ensure that funds are dedicated longterm to a specific purpose, and removed 

from the appropriation process of the 

government. 

In formulating the criteria in the 

proposed regulations, the Treasury 

Department and the IRS also noted the 

suggestion in the Joint Committee on 

Taxation’s Technical Explanation of the 

PPA that ‘‘substantially all of the 

activities of [a functionally integrated 

Type III supporting organization] should 

be activities in direct furtherance of the 

functions or purposes of supported 

organizations.’’ Staff of the Joint 

Committee on Taxation, Technical 

Explanation of H.R. 4, The ‘‘Pension 

Protection Act of 2006’’ (Aug. 3, 2006), 

at 360 n.571 (Technical Explanation). In 

the Technical Explanation, the Joint 

Committee on Taxation also expressed 

concern that ‘‘the current regulatory 

standards for satisfying the integral part 

test not by reason of a payout are not 

sufficiently stringent to ensure that 

there is a sufficient nexus between the 

supporting and supported 

organizations.’’ Technical Explanation 

at 360 n.571. 

The Treasury Department and the IRS 

believe that a sufficient nexus exists 

between a supporting organization and 

its supported organization(s) where the 

supporting organization engages in 

activities that directly further the 

exempt purposes of the supported 

organization(s) and that would 

otherwise be conducted by the 

supported organization itself. 

Accordingly, the proposed regulations 

provide that a Type III supporting 

organization is functionally integrated if 

it either: (1) Engages in activities (a) 

substantially all of which directly 

further the exempt purposes of the 

supported organization(s) to which it is 

responsive by performing the functions 

of, or carrying out the purposes of, such 

supported organization(s) and (b) that, 

but for the involvement of the 

supporting organization, would 

normally be engaged in by the 

supported organization(s); or (2) is the 

parent of each of its supported 

organizations. The Treasury Department 

and the IRS request comments on how 

guidance might clarify the application 

of the ‘‘substantially all’’ test in this 

context. The proposed regulations do 

not adopt the expenditure test and the 

assets test described in the ANPRM. 

The proposed regulations provide that 

a supporting organization directly 

furthers the exempt purposes of its 

supported organization by holding or 

managing exempt-use assets but does 

not directly further such exempt 

purposes by fundraising, grantmaking, 

or investing and managing non-exemptuse assets. The Treasury Department 

and the IRS believe that fundraising, 

grantmaking, and investing and 

managing non-exempt-use assets do not 

alone establish a sufficient nexus 

between a supporting organization and 

its supported organization. Further, the 

Treasury Department and the IRS 

believe that an organization that does 

not engage in activities that directly 

further a exempt purpose will achieve a 

sufficient nexus with its supported 

organization(s) only if it distributes a 

significant amount to its supported 

organizations, as Congress directed in 

the PPA. 

The Treasury Department and the IRS 

recognize the unique circumstances of a 

governmental entity whose assets are 

subject to the appropriations process of 

a Federal, State, local or Indian Tribal 

government and that therefore organizes 

a Type III supporting organization to 

remove assets from the appropriations 

process of the government. The 

proposed regulations therefore provide 

an exception under which a supporting 

organization that supports a single 

governmental entity may treat investing 

and managing non-exempt-use assets as 

activities that directly further an exempt 

purpose, so long as a substantial part of 

the supporting organization’s total 

activities directly furthers the exempt 

purposes of such governmental entity. 

The proposed regulations specifically 

require that a functionally integrated 

Type III supporting organization’s 

activities directly further the exempt 

purposes of those supported 

organizations with respect to which the 

supporting organization meets the 

responsiveness test under Prop. Reg. 

§ 1.509(a)–4(i)(3). The Treasury 

Department and the IRS request 

comments on this requirement. 

The proposed regulations provide that 

a supporting organization will be treated 

as the parent of a supported 

organization if the supporting 

organization exercises a substantial 

degree of direction over the policies, 

programs, and activities of the 

supported organization, and the 

majority of the officers, directors, or 

trustees of the supported organization is 

appointed or elected, directly or 

indirectly, by the governing body, 

members of the governing body, or 

officers of the supporting organization 

acting in their official capacity. Thus, 

the supporting organization could 

qualify as a parent of a second-tier (or 

lower) subsidiary. The classification of 

a parent supporting organization as 

functionally integrated is intended to 

apply to supporting organizations that 

oversee or facilitate the operation of an 

integrated system, such as hospital 

systems. 

The proposed regulations provide 

examples that illustrate the 


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Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 48677 

requirements for functionally integrated 

Type III supporting organizations. 

Integral Part Test—Non-Functionally 

Integrated Type III Supporting 

Organizations 

The proposed regulations provide that 

a Type III supporting organization is 

non-functionally integrated if it satisfies 

a distribution requirement equal to five 

percent of the fair market value of nonexempt-use assets and an attentiveness 

requirement. 

Section 1241(d)(1) of the PPA directed 

the Secretary of the Treasury to 

promulgate new regulations on a payout 

requirement for non-functionally 

integrated Type III supporting 

organizations, based on income or 

assets, in order to ensure that these 

supporting organizations pay a 

significant amount to their supported 

organizations. The ANPRM proposal 

required an annual payout of five 

percent of the fair market value of nonexempt-use assets. Many commentators 

said that this payout rate was too high 

and would erode an organization’s 

assets over time. The commentators said 

that a Type III supporting organization 

provides long-term consistent support to 

specific organizations, while private 

foundations may pay out to whomever 

they choose. Further, a supporting 

organization maintains a governance 

relationship with its supported 

organization(s) in a way that a private 

foundation does not. Commentators 

argued that because of these differences, 

the private foundation payout 

requirement should not be imposed on 

a supporting organization. Imposing a 

five percent payout, these commentators 

contend, would jeopardize the ability of 

supporting organizations to provide the 

kind of consistent, reliable, long-term 

support supported organizations have 

come to expect. 

Commentators suggested a number of 

alternative payout rates. Many of them 

also recommended allowing an 

averaging of assets over a period of years 

for purposes of calculating the payout 

amount. 

The ANPRM proposed to limit the 

number of organizations a nonfunctionally integrated Type III 

supporting organization can support to 

no more than five. The ANPRM further 

provided that Type III supporting 

organizations in existence before the 

date regulations are proposed may 

support more than five organizations, as 

long as the supporting organization pays 

85 percent of its support to 

organizations to which the supporting 

organization is responsive. 

Many commentators asked that the 

proposed regulations not include the 

limitation on the number of supported 

organizations a non-functionally 

integrated Type III supporting 

organization can support, arguing that 

such a rule is arbitrary. In particular, 

commentators pointed out that the 

original Senate bill associated with 

supporting organizations, contained in 

the Tax Increase Prevention and 

Reconciliation Act of 2005, Public Law 

109–222 (120 Stat. 345 (2005)), limited 

the number of organizations a 

supporting organization could support 

to five, but that Congress ultimately did 

not enact such a limitation. 

One commentator suggested that the 

proposed regulations adopt a rule that 

one-third of a non-functionally 

integrated Type III supporting 

organization’s required distribution 

must go to a supported organization that 

is attentive to the supporting 

organization and to which the 

supporting organization is responsive. 

Commentators recommended 

providing a transition period for the 

payout requirement to allow 

organizations sufficient time either to 

modify governing instruments or to sell 

assets. 

A number of commentators suggested 

that the proposed regulations exempt 

Type III supporting organizations that 

(1) have no continuing involvement of 

donors or their family in the governance 

of the organization; and (2) before the 

date of enactment of PPA, had 

distributed to or for the benefit of its 

supported organizations an amount 

equal to or greater than the amounts 

transferred to the organization for which 

charitable deductions were allowed. 

Under the proposed regulations, to 

qualify as a non-functionally integrated 

Type III supporting organization, an 

organization must meet a distribution 

requirement and an attentiveness 

requirement. The proposed regulations 

set the distribution requirement for nonfunctionally integrated Type III 

supporting organizations at five percent 

of non-exempt-use assets, and retain the 

concept of attentiveness that is in the 

current regulations. The proposed 

regulations do not adopt the five 

organization limit described in the 

ANPRM. 

Distribution Requirement 

To satisfy the distribution 

requirement of Prop. Reg. § 1.509(a)– 

4(i)(5)(ii), a Type III supporting 

organization that is not functionally 

integrated must distribute, with respect 

to each taxable year, to or for the use of 

its supported organizations, amounts 

equaling or exceeding five percent of the 

aggregate fair market value of its nonexempt-use assets (the annual 

distributable amount), on or before the 

last day of such taxable year. The 

annual distributable amount is 

determined based on asset values 

measured over the preceding taxable 

year. Thus, for example, a Type III 

supporting organization that is not 

functionally integrated would determine 

its annual distributable amount for its 

2012 taxable year, which must be 

distributed on or before the last day of 

the organization’s 2012 taxable year, 

based on asset values measured over its 

2011 taxable year. A Type III supporting 

organization that is not functionally 

integrated is not required to distribute 

any amount in its first year of existence. 

The proposed regulations generally 

draw from the regulations under section 

4942 for principles on valuation, timing, 

and carryovers. However, the proposed 

regulations do not permit set-asides, 

which count towards a private 

foundation’s distribution requirement 

under section 4942(g)(2). While 

Congress statutorily provided that setasides constitute qualifying 

distributions for private foundations, 

Congress made no such statutory 

provision for supporting organizations. 

Rather, in the PPA, it directed that a 

payout requirement be implemented for 

non-functionally integrated Type III 

supporting organizations that would 

result in a prompt, robust flow of 

support to supported organizations. The 

Treasury Department and the IRS 

request comments on whether set-asides 

are necessary and consistent with 

Congressional intent in determining 

whether Type III supporting 

organizations that are not functionally 

integrated have distributed their annual 

distributable amount. 

The proposed regulations also provide 

a slightly different rule regarding the 

carryover of excess distributions than is 

applicable to private foundations. Under 

section 4942(i), a private foundation 

that distributes more than its 

distributable amount may carry forward 

that excess amount for five years. 

However, when calculating qualifying 

distributions in a future year under 

section 4942, amounts paid out in the 

future year count first towards the 

required distributable amount, and any 

amount carried forward is not ‘‘used’’ in 

the future year to the extent that the 

organization made qualifying 

distributions in that future year. These 

proposed regulations reverse the 

ordering rule and first count any excess 

amount carried forward toward the nonfunctionally integrated Type III 

supporting organization’s annual 

distributable amount, followed by 

amounts paid out in the later year. 


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48678 Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 

The proposed regulations provide a 

reasonable cause exception for failure to 

meet the distribution requirement 

applicable to non-functionally 

integrated Type III supporting 

organizations. Under the exception, an 

organization that fails to meet the 

distribution requirement will not be 

classified as a private foundation in the 

taxable year for which it fails to meet 

such distribution requirement, if the 

organization establishes to the 

satisfaction of the Secretary that: (1) The 

failure was due solely to an incorrect 

valuation of assets, a ministerial error, 

or unforeseen events or circumstances 

that are beyond the organization’s 

control; (2) the failure was due to 

reasonable cause and not to willful 

neglect; and (3) the distribution 

requirement is met within 180 days after 

the date the incorrect valuation or 

ministerial error was or should have 

been discovered, or 180 days after the 

organization is first able to make its 

required payout notwithstanding the 

unforeseen event or circumstances. The 

reasonable cause exception applies only 

to the distribution requirement of Prop. 

Reg. § 1.509(a)–4(i)(5)(ii), and not to the 

attentiveness requirement of Prop. Reg. 

§ 1.509(a)–4(i)(5)(iii). The Treasury 

Department and the IRS request 

comments regarding the reasonable 

cause exception for the distribution 

requirement. 

The proposed regulations also provide 

for an emergency temporary reduction 

in the annual distributable amount. 

Under Prop. Reg. § 1.509(a)– 

4(i)(5)(ii)(D), the Secretary may provide 

by publication in the Internal Revenue 

Bulletin for a temporary reduction in 

the annual distributable amount in the 

case of a disaster or emergency. 

The Treasury Department and the IRS 

are aware that some supporting 

organizations impacted by the 

distribution requirement contained in 

these proposed regulations may be 

heavily invested in assets that are not 

readily marketable. The Treasury 

Department and the IRS request 

comments regarding the need for a 

transition rule for non-functionally 

integrated Type III supporting 

organizations whose assets, as of the 

effective date of these regulations, 

consist predominantly (in any event 

more than one-half) of assets that are not 

readily marketable. 

Attentiveness Requirement 

These proposed regulations modify 

the attentiveness requirement in 

existing Treas. Reg. § 1.509(a)–4(i)(3)(iii) 

to provide that an organization must 

distribute one-third or more of its 

annual distributable amount to one or 

more supported organizations that are 

attentive to the supporting organization 

and with respect to which the 

supporting organization meets the 

responsiveness test under Prop. Reg. 

§ 1.509(a)–4(i)(3). 

The proposed regulations provide that 

to demonstrate that a supported 

organization is attentive, a supporting 

organization must either: (1) Provide 10 

percent or more of the supported 

organization’s total support; (2) provide 

support that is necessary to avoid the 

interruption of the carrying on of a 

particular function or activity of the 

supported organization; or (3) provide 

an amount of support that based on all 

the facts and circumstances is a 

sufficient part of a supported 

organization’s total support. 

Consequences of Failure to Meet 

Requirements 

A Type III supporting organization 

that fails to meet the requirements of 

these proposed regulations, once they 

are published as final or temporary 

regulations, will be classified as a 

private foundation. Once classified as a 

private foundation, the section 507 rules 

regarding termination of private 

foundation status apply. The Treasury 

Department and the IRS request 

comments on whether exceptions or 

special rules under section 507 are 

needed for Type III supporting 

organizations that are reclassified as 

private foundations as a result of the 

changes in the PPA. 

Transition and Other Relief Provisions 

Responsiveness Test 

The proposed regulations continue to 

provide that additional facts and 

circumstances, such as a historic and 

continuing relationship with a 

supported organization, may be taken 

into account in establishing compliance 

with the responsiveness test for 

organizations that were operating prior 

to November 20, 1970. 

Integral Part Test 

The proposed regulations provide a 

transition rule for Type III supporting 

organizations in existence on the date 

these regulations are published in the 

Federal Register as final or temporary 

regulations. Under the transition rule, 

such organizations that met and 

continue to meet the requirements of 

existing Treas. Reg. § 1.509(a)–4(i)(3)(ii) 

(i.e., an organization that meets the 

integral part test by satisfying the ‘‘but 

for’’ test) will be treated as meeting the 

requirements of a functionally 

integrated Type III supporting 

organization set forth in Prop. Reg. 

§ 1.509(a)–4(i)(4) until the first day of 

the organization’s first taxable year 

beginning after the date these proposed 

regulations are published as final or 

temporary regulations. 

The proposed regulations also provide 

that Type III supporting organizations in 

existence on the date these regulations 

are published in the Federal Register as 

final or temporary regulations that met 

and continue to meet the requirements 

of existing Treas. Reg. § 1.509(a)– 

4(i)(3)(iii) will be treated as meeting the 

requirements of a non-functionally 

integrated Type III supporting 

organization set forth in Prop. Reg. 

§ 1.509(a)–4(i)(5) until the first day of 

the organization’s second taxable year 

beginning after the date these proposed 

regulations are published as final or 

temporary regulations. Such 

organizations will be required to value 

their assets in accordance with Prop. 

Reg. § 1.509(a)–4(i)(8) in the first taxable 

year beginning after final or temporary 

regulations are published, and to meet 

all of the requirements of Prop. Reg. 

§ 1.509(a)–4(i)(5)(i) in the second 

taxable year beginning after the 

publication of these regulations as final 

or temporary regulations and for all 

succeeding taxable years. 

For example, if the Treasury 

Department and the IRS publish these 

regulations as final or temporary 

regulations any time in 2010, a 

calendar-year non-functionally 

integrated Type III supporting 

organization must: (1) in 2010, meet all 

of the requirements of existing Treas. 

Reg. § 1.509(a)–4(i)(3)(iii) (i.e., distribute 

to its supported organizations 

substantially all of its income in accord 

with the existing regulations); (2) in 

2011, meet all of the requirements of 

current Treas. Reg. § 1.509(a)–4(i)(3)(iii) 

and value its assets according to Prop. 

Reg. § 1.509(a)–4(i)(8); and (3) in 2012, 

meet all of the requirements of Prop. 

Reg. § 1.509(a)–4(i)(5)(i), including the 

distribution requirement. 

The proposed regulations also retain 

the exception from the integral part test 

for pre-November 20, 1970 trusts that 

meet certain other requirements found 

in current Treas. Reg. § 1.509(a)–4(i)(4). 

The Treasury Department and the IRS 

request comments on whether 

additional transition relief is needed. 

The proposed regulations eliminate 

current Treas. Reg. § 1.509(a)–4(i)(1)(iii), 

which provides an exception from the 

integral part test if an organization can 

establish that: (1) It met the payout 

requirement under current Treas. Reg. 

§ 1.509(a)–4(i)(3)(iii)(a) for any five-year 

period; (2) it cannot meet such payout 

requirement for its current taxable year 

solely because the amount received by 


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Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 48679 

one or more of the supported 

organizations is no longer sufficient to 

satisfy the attentiveness requirement; 

and (3) there has been a historic and 

continuing relationship of support 

between such organizations between the 

end of the five-year period and the 

taxable year in question. The Treasury 

Department and the IRS believe that the 

breadth of this exception is inconsistent 

with Congress’ intent in mandating a 

payout requirement in the PPA. 

Regulations Under Section 4943 

This NPRM also includes proposed 

regulations under section 4943 that 

provide two transition rules to address 

excess business holdings for Type III 

supporting organizations affected by the 

PPA. The PPA applied the section 4943 

excess business holdings excise tax to 

non-functionally integrated Type III 

supporting organizations. However, it 

provided that in calculating the 

‘‘present holdings’’ of Type III 

supporting organizations in existence on 

August 17, 2006 (the date of enactment 

of the PPA), the transition rules that 

applied to private foundations in 1969, 

when section 4943 was first enacted, 

would apply. These transition rules 

effectively allow affected organizations 

additional time to dispose of certain 

business holdings. 

The proposed regulations provide 

transition relief to a private foundation 

that qualified as a Type III supporting 

organization under section 509(a)(3) 

immediately before August 17, 2006, 

and that was reclassified as a private 

foundation under section 509(a) on or 

after August 17, 2006, solely as a result 

of the rules enacted by Section 1241 of 

the PPA. Thus, under the proposed 

regulations, the present holdings of such 

private foundations will be determined 

using the same rules that apply to Type 

III supporting organizations under 

section 4943(f)(7). 

In addition, the Treasury Department 

and the IRS believe that pre-November 

20, 1970 trusts that are exempted from 

the integral part test under current 

regulations and these proposed 

regulations should not be subject to the 

excess business holdings excise tax that 

applies to non-functionally integrated 

Type III supporting organizations. 

Therefore, the proposed regulations 

under section 4943 provide that a Type 

III supporting organization created as a 

trust before November 20, 1970, that 

meets the requirements of current Treas. 

Reg. § 1.509(a)–4(i)(4) and Prop. Reg. 

§ 1.509(a)–4(i)(9), will be treated as a 

‘‘functionally integrated Type III 

supporting organization’’ for purposes 

of section 4943(f)(3)(A). 

Reliance on Prior Guidance 

In Notice 2006–109, the Treasury 

Department and the IRS provided 

guidance to private foundations 

regarding determinations of the public 

charity status of a section 501(c)(3) 

organization when making grants. In 

particular, because a grant to a nonfunctionally integrated Type III 

supporting organization is not 

considered a qualifying distribution 

under section 4942, and is considered a 

taxable expenditure unless expenditure 

responsibility is exercised under section 

4945, the notice provided criteria for 

determining whether a Type III 

supporting organization is functionally 

integrated and allowed private 

foundations to rely on those criteria for 

purposes of sections 4942 and 4945. 

Commentators to the ANPRM requested 

that the Treasury Department and the 

IRS permit private foundations to 

continue to rely on the guidance in 

Notice 2006–109 on private foundation 

grantmaking until the IRS issues 

determination letters addressing 

functionally integrated status. 

Private foundations can continue to 

rely on the grantor reliance standards of 

section 3.0 of Notice 2006–109 until 

these proposed regulations are 

published as final or temporary 

regulations. 

In addition, the IRS stated in a 

September 24, 2007 memorandum from 

the Director of Exempt Organizations 

Rulings and Agreements that it would 

issue functionally integrated Type III 

supporting organization determinations 

to organizations that meet the 

requirements for functionally integrated 

organizations set forth in the ANPRM. 

As of the date of the publication in the 

Federal Register of this notice of 

proposed rulemaking, the IRS will issue 

a functionally integrated Type III 

supporting organization determination 

only to organizations that meet the 

requirements of Prop. Reg. § 1.509(a)– 

4(i)(4). An organization that received a 

determination that it qualified as a 

functionally integrated Type III 

supporting organization under the 

ANPRM can continue to rely on such 

determination letter until final or 

temporary regulations are published in 

the Federal Register, so long as the 

organization continues to meet the 

requirements of either the ANPRM or 

Prop. Reg. § 1.509(a)–4(i)(4). An 

organization that receives a 

determination that it is a functionally 

integrated Type III supporting 

organization under either the ANPRM or 

these proposed regulations will be 

required to meet the requirements 

established in final or temporary 

regulations as of the first taxable year 

beginning after final or temporary 

regulations are published in the Federal 

Register. 

Effective Date 

The proposed regulations will apply 

to taxable years beginning after the date 

these rules are published in the Federal 

Register as final or temporary 

regulations. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

is hereby certified that this regulation 

will not have a significant economic 

impact on a substantial number of small 

entities. This certification is based on 

the fact that this regulation will not 

impact a substantial number of small 

entities. Based on IRS Statistics of 

Income data for 2005, there are over 1.4 

million organizations that qualify as 

exempt from Federal income tax under 

section 501(c)(3). Approximately 13,000 

of the 1.4 million exempt organizations 

reported as supporting organizations; 

approximately 4,200 supporting 

organizations reported as Type III 

supporting organizations; and it is 

expected that some fraction of the 4,200 

Type III supporting organizations may 

be classified as non-functionally 

integrated Type III supporting 

organizations. Thus, the number of 

organizations affected by this regulation 

will not be substantial. The collection of 

information in this regulation that is 

subject to the Regulatory Flexibility Act 

will impose a minimal burden upon the 

affected organizations. All of the 

information required to be delivered is 

information that the organization is 

already required to maintain. Further, 

the distribution requirement in Prop. 

Reg. § 1.509(a)–4(i)(5)(ii) for nonfunctionally integrated Type III 

supporting organizations does not have 

a significant economic impact. A nonfunctionally integrated Type III 

supporting organization that fails to 

satisfy the distribution requirement of 

Prop. Reg. § 1.509(a)–4(i)(5)(ii) would be 

reclassified as a private non-operating 

foundation and as such, would be 

required under section 4942 to 

distribute amounts equal to five percent 

of the aggregate fair market value of 

non-exempt-use assets. In addition, as a 

private non-operating foundation, the 

organization would be subject to 

additional regulatory requirements and 

excise taxes that do not apply to nonfunctionally integrated Type III 

supporting organizations. Accordingly, 


cprice-sewell on DSK2BSOYB1PROD with PROPOSALS
48680 Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 

a Regulatory Flexibility Analysis under 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. Pursuant to 

section 7805(f) of the Code, this 

regulation has been submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Request for Comments 

Before these proposed regulations are 

adopted as final or temporary 

regulations, consideration will be given 

to any written (a signed original and 

eight (8) copies) or electronic comments 

that are submitted timely to the IRS. The 

Treasury Department and the IRS 

request comments on the clarity of the 

proposed rules and how they can be 

made easier to understand. All 

comments will be available for public 

inspection and copying. A public 

hearing will be scheduled if requested 

in writing by any person that timely 

submits written comments. If a public 

hearing is scheduled, notice of the date, 

time, and place for the public hearing 

will be published in the Federal 

Register. 

Drafting Information 

The principal authors of these 

proposed regulations are Philip T. 

Hackney and Don R. Spellmann, Office 

of the Chief Counsel (Tax-Exempt and 

Government Entities). However, other 

personnel from the Treasury 

Department and the IRS participated in 

their development. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 53 

Excise taxes, Foundations, 

Investments, Lobbying, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR parts 1 and 53 

are proposed to be amended as follows: 

PART 1—INCOME TAXES 

Par. 1. The authority citation for part 

1 continues to read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

Par. 2. Section 1.509(a)–4 is amended 

by: 

1. The term ‘‘publicly supported 

organization’’ is removed and the term 

‘‘supported organization’’ is added in its 

place wherever it appears. 

2. Paragraphs (a)(5) and (i) are revised. 

3. New paragraphs (a)(6) and (f)(5) are 

added. 

The revisions and additions read as 

follows: 

§ 1.509(a)–4 Supporting organizations. 

(a) * * * 

(5) For purposes of this section, the 

term ‘‘supporting organization’’ means 

either an organization described in 

section 509(a)(3) or an organization 

seeking section 509(a)(3) status, 

depending upon its context. 

(6) For purposes of this section, the 

term ‘‘supported organization’’ means 

an organization described in section 

509(a)(1) or (2)— 

(i) For whose benefit the supporting 

organization is organized and operated, 

or 

(ii) With respect to which the 

supporting organization performs the 

functions, or carries out the purposes. 

* * * * * 

(f) * * * 

(5) Organizations controlled by 

donors. An organization shall not be 

considered to be operated, supervised, 

or controlled by, or operated in 

connection with, one or more supported 

organizations, if such organization 

accepts any gift or contribution from 

any person (other than an organization 

described in section 509(a)(1), (2) or (4)) 

who— 

(i) Directly or indirectly controls, 

either alone or together with persons 

described in paragraph (f)(5)(ii) or (iii) 

of this section, a supported organization 

supported by such supporting 

organization; 

(ii) Is a member of the family 

(determined under section 4958(f)(4)) of 

an individual described in paragraph 

(f)(5)(i) of this section; or 

(iii) Is a 35-percent controlled entity 

(as defined in section 4958(f)(3) by 

substituting ‘‘persons described in 

paragraph (f)(5)(i) or (ii) of this section’’ 

for ‘‘persons described in subparagraph 

(A) or (B) of paragraph (1)’’ in paragraph 

(A)(i) thereof). 

* * * * * 

(i) Meaning of ‘‘operated in 

connection with’’—(1) General Rule. 

Except as otherwise provided in 

paragraphs (f)(5) and (i)(10) of this 

section, a supporting organization is 

operated in connection with one or 

more supported organizations only if it 

satisfies— 

(i) The notification requirement in 

paragraph (i)(2) of this section; 

(ii) The responsiveness test, which is 

set forth in paragraph (i)(3) of this 

section; and 

(iii) The integral part test, which is set 

forth in paragraphs (i)(4) and (i)(5) of 

this section. An organization is an 

integral part of a supported organization 

if it is significantly involved in the 

operations of the supported organization 

and the supported organization is 

dependent upon the supporting 

organization for the type of support the 

supporting organization provides. An 

organization can demonstrate that it is 

an integral part of a supported 

organization only if it satisfies either the 

requirements for functionally integrated 

Type III supporting organizations set 

forth in paragraph (i)(4) of this section 

or the requirements for non-functionally 

integrated Type III supporting 

organizations set forth in paragraph 

(i)(5) of this section. 

(2) Notification requirement. Each 

taxable year, the supporting 

organization must provide to each of its 

supported organizations— 

(i) A written notice addressed to a 

principal officer of the supported 

organization indicating the type and 

amount of support provided by the 

supporting organization to the 

supported organization in the past year; 

(ii) A copy of the supporting 

organization’s most recently filed Form 

990, ‘‘Return of Organization Exempt 

from Income Tax,’’ or other return 

required to be filed under section 6033; 

and 

(iii) A copy of the supporting 

organization’s governing documents, 

including its charter or trust instrument 

and bylaws, and any amendments to 

such documents. Copies of governing 

documents need not be provided in a 

given year if such documents have 

previously been provided and have not 

subsequently been amended. 

(iv) Electronic media. Notification 

may be provided by electronic media. 

(v) Due date. The required 

notifications shall be postmarked or 

electronically transmitted by the last 

day of the 5th month after the close of 

the supporting organization’s tax year. 

(3) Responsiveness test. (i) A 

supporting organization meets the 

responsiveness test if it is responsive to 

the needs or demands of a supported 

organization. Except as provided in 

paragraph (i)(3)(v) of this section, a 

supporting organization is responsive to 

the needs or demands of a supported 

organization if it satisfies the 

requirements of paragraphs (i)(3)(ii) and 

(i)(3)(iii) of this section. 

(ii) A supporting organization satisfies 

the requirements of this paragraph 

(i)(3)(ii) if: 

(A) One or more officers, directors, or 

trustees of the supporting organization 

are elected or appointed by the officers, 

directors, trustees, or membership of the 

supported organization; 

(B) One or more members of the 

governing bodies of the supported 


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organization are also officers, directors, 

or trustees of, or hold other important 

offices in, the supporting organization; 

or 

(C) The officers, directors, or trustees 

of the supporting organization maintain 

a close and continuous working 

relationship with the officers, directors, 

or trustees of the supported 

organization. 

(iii) By reason of paragraphs 

(i)(3)(ii)(A), (i)(3)(ii)(B), or (i)(3)(ii)(C) of 

this section, the officers, directors or 

trustees of the supported organization 

have a significant voice in the 

investment policies of the supporting 

organization, the timing of grants, the 

manner of making them, and the 

selection of recipients by such 

supporting organization, and in 

otherwise directing the use of the 

income or assets of such supporting 

organization. 

(iv) Examples. The provisions of this 

paragraph (i)(3) may be illustrated by 

the following examples: 

Example (1). X, an organization described 

in section 501(c)(3), is a trust created under 

the last will and testament of Decedent. The 

trustee of X is a bank (Trustee). Under the 

trust instrument, X supports M, a private 

university described in section 509(a)(1). The 

trust instrument provides that Trustee has 

discretion regarding the timing and amount 

of distributions consistent with the Trustee’s 

fiduciary duties. Representatives of Trustee 

and an officer of M have quarterly face to face 

meetings, at which they discuss M’s 

projected needs for the university and ways 

in which M would like X to use its income 

and invest its assets. Additionally, Trustee 

communicates regularly with the officer of M 

regarding X’s investments and plans for 

distributions from X. Trustee provides the 

officer of M with quarterly investment 

statements, the information required under 

paragraph (i)(2) of this section, and an annual 

accounting statement. Based on these facts, X 

meets the responsiveness test of this 

paragraph (i)(3). 

Example (2). Y is an organization described 

in section 501(c)(3) and is organized as a 

trust under State law. The trustee of Y is a 

bank, Trustee. Y supports charities P, Q and 

R, each an organization described in section 

509(a)(1). Y makes annual cash payments to 

P, Q and R. Once a year, Trustee sends to P, 

Q, and R the cash payment, the information 

required under paragraph (i)(2) of this 

section, and an accounting statement. Trustee 

has no other communication with P, Q or R. 

Y does not meet the responsiveness test of 

this paragraph (i)(3). 

(v) Exception for Pre-November 20, 

1970 Organizations. In the case of a 

supporting organization that was 

supporting or benefiting a supported 

organization before November 20, 1970, 

additional facts and circumstances, such 

as a historic and continuing relationship 

between the organizations, may be taken 

into account, in addition to the factors 

described in paragraph (i)(3)(ii) of this 

section, to establish compliance with 

the responsiveness test. 

(4) Integral part test—functionally 

integrated Type III supporting 

organization—(i) General rule. A 

supporting organization meets the 

integral part test as a functionally 

integrated Type III supporting 

organization if it satisfies either 

paragraph (i)(4)(i)(A) or paragraph 

(i)(4)(i)(B) of this section. 

(A) The supporting organization 

engages in activities: 

(1) Substantially all of which directly 

further the exempt purposes of the 

supported organization(s) to which the 

supporting organization is responsive, 

by performing the functions of, or 

carrying out the purposes of, such 

supported organization(s); and 

(2) That, but for the involvement of 

the supporting organization, would 

normally be engaged in by the 

supported organization(s). 

(B) The supporting organization is the 

parent of each of its supported 

organizations. For purposes of the 

integral part test, a supporting 

organization is the parent of a supported 

organization if the supporting 

organization exercises a substantial 

degree of direction over the policies, 

programs, and activities of the 

supported organization and a majority 

of the officers, directors, or trustees of 

the supported organization is appointed 

or elected, directly or indirectly, by the 

governing body, members of the 

governing body, or officers (acting in 

their official capacity) of the supporting 

organization. 

(ii) ‘‘Directly further.’’ Holding title to 

exempt-use property and managing 

exempt-use property are activities that 

directly further the exempt purposes of 

the supported organization within the 

meaning of paragraph (i)(4)(i)(A) of this 

section. Except as provided in 

paragraph (i)(4)(iii) of this section, 

fundraising, investing and managing 

non-exempt-use property, and making 

grants (whether to the supported 

organization or to third parties) are not 

activities that directly further the 

exempt purposes of the supported 

organization within the meaning of 

paragraph (i)(4)(i)(A) of this section. 

(iii) Governmental Entity Exception. A 

supporting organization may treat the 

investment and management of nonexempt-use assets and the making of 

grants directly to a supported 

organization as activities that directly 

further the exempt purposes of a 

supported organization if: 

(A) Such activities are conducted on 

behalf of a supported organization 

whose assets are subject to the 

appropriation process of a Federal, 

State, local or Indian Tribal government 

for purposes or programs unrelated to 

the exempt purposes of the supported 

organization; 

(B) The supporting organization 

supports only one supported 

organization; and 

(C) A substantial part of the 

supporting organization’s total activities 

directly furthers the exempt purpose(s) 

of its supported organization and are 

activities other than fundraising, 

grantmaking, and investing and 

managing non-exempt-use assets. 

(iv) Examples. The provisions of this 

paragraph (i)(4) may be illustrated by 

the following examples. In each 

example, the supporting organization 

meets the requirements of paragraphs 

(i)(2) and (i)(3) of this section. 

Example 1. N, an organization described in 

section 501(c)(3), is the parent organization 

of a healthcare system consisting of two 

hospitals (Q and R) and an outpatient clinic 

(S), each of which is described in section 

509(a)(1), and a taxable subsidiary (T). N is 

the sole member of each of Q, R, and S. 

Under the charter and bylaws of each of Q, 

R, and S, N appoints all members of the 

board of directors of each corporation. N 

engages in the overall coordination and 

supervision of the healthcare system’s 

exempt subsidiary corporations Q, R, and S 

in approval of their budgets, strategic 

planning, marketing, resource allocation, 

securing tax-exempt bond financing, and 

community education. N also manages and 

invests assets that serve as endowments of Q, 

R and S. Based on these facts, N qualifies as 

a functionally integrated Type III supporting 

organization under paragraph (4)(i)(B) of this 

section. 

Example 2. V, an organization described in 

section 501(c)(3), is organized as a supporting 

organization to L, a church described in 

section 509(a)(1). L transferred to V title to 

the buildings in which L conducts religious 

services, Bible study and community 

enrichment programs. Substantially all of V’s 

activities consist of holding and managing 

these buildings. But for the activities of V, L 

would normally engage in these same 

activities. Based on these facts, V satisfies the 

activities and but for requirements of 

paragraph (4)(i)(A) of this section and 

therefore qualifies as a functionally 

integrated Type III supporting organization. 

Example 3. O is a nonprofit publishing 

organization described in section 501(c)(3). It 

does all of the publishing and printing for the 

eight churches of a particular denomination 

located in a particular geographic region, 

each of which is described in section 

509(a)(1). Control of O is vested in a five-man 

Board of Directors, which includes an official 

from one of the churches and four lay 

members of the congregations of that 

denomination. The officers of O maintain a 

close and continuing working relationship 

with each of the eight churches for whom it 

publishes and prints materials and as a result 

of such relationship, each of the eight 


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churches has a significant voice in the 

operations of O. O does no other printing or 

publishing. O publishes all of the churches’ 

religious as well as secular tracts and 

materials. All of O’s activities directly further 

the exempt purposes of supported 

organizations to which it is responsive. 

Additionally, but for the activities of O, the 

churches would normally publish these 

materials themselves. Based on these facts, O 

qualifies as a functionally integrated Type III 

supporting organization under paragraph 

(4)(i)(A) of this section. 

Example 4. M, an organization described in 

section 501(c)(3), was created by B, an 

individual, to provide scholarships for 

students of a private secondary school, U, an 

organization described in section 509(a)(1). U 

establishes the scholarship criteria, 

publicizes the scholarship program, solicits 

and reviews applications, and selects the 

scholarship recipients. M invests its assets 

and disburses the funds for scholarships to 

the recipients selected by U. Based on these 

facts, M is not a functionally integrated Type 

III supporting organization. 

Example 5. J, an organization described in 

section 501(c)(3), is a supporting organization 

to community foundation G, an organization 

described in section 509(a)(1). In addition to 

maintaining field-of-interest funds, 

sponsoring donor advised funds, and general 

grant-making activities, G also engages in 

activities to beautify and maintain local 

parks. J’s activities consist of maintaining all 

of the local parks in the area of community 

foundation G by activities such as 

establishing and maintaining trails, planting 

trees and removing trash. But for the 

activities of J, G would normally engage in 

these efforts to beautify and maintain the 

local parks. Based on these facts, J qualifies 

as a functionally integrated Type III 

supporting organization under paragraph 

(4)(i)(A) of this section. 

Example 6. W, an organization described 

in section 501(c)(3), is organized as a 

supporting organization to Z, a public 

university in State D described in section 

509(a)(1). Z is the sole named supported 

organization in W’s articles of incorporation. 

Under the laws of State D, assets under Z’s 

control are subject to the appropriation 

process for any State D purpose by an action 

of the State D legislature. Z transfers the 

intellectual property developed by Z’s 

science department to W for patenting and 

licensing, including making the property 

available to the public. The royalties 

generated by the licenses are shared among 

Z, the original researcher, and W. W invests 

and manages its share of the royalties and 

other income generated by the patenting and 

licensing of the intellectual property to build 

an endowment to support Z. W also conducts 

further research on scientific processes 

developed at Z and makes the results of this 

research available to the public. W’s research 

activities make up a substantial part of W’s 

total activities. But for the activities of W, Z 

would normally conduct the research 

engaged in by W and manage the royalties 

from the intellectual property generated at Z. 

W’s activities of investing and managing its 

share of royalties and other income are not 

considered activities that directly further the 

exempt purposes of Z under paragraph 

(i)(4)(ii) of this section. However, because Z’s 

assets are subject to the appropriation 

process of State D for purposes unrelated to 

Z’s exempt purposes, Z is W’s sole supported 

organization, and a substantial part of W’s 

activities directly further Z’s exempt 

purposes, W qualifies for the exception in 

paragraph (i)(4)(iii) of this section. 

Accordingly, based on these facts, W 

qualifies as a functionally integrated Type III 

supporting organization under paragraph 

(4)(i)(A) of this section. 

Example 7. P, an alumni association 

described in section 501(c)(3), was formed to 

promote a spirit of loyalty among graduates 

of Y University, a public university in State 

E described in section 509(a)(1), and to effect 

united action in promoting the general 

welfare of Y. Y is the sole named supported 

organization in P’s articles of incorporation. 

Under the laws of State E, Y’s assets are 

subject to the appropriation process for any 

State E purpose. P manages an endowment 

created by gifts from the alumni. A special 

committee of Y’s governing board meets with 

P and makes recommendations as to the 

allocation of P’s program of gifts and 

scholarships to the university and its 

students. More than a substantial part of P’s 

activities, however, consist of maintaining 

records of alumni and publishing a bulletin 

to keep alumni aware of the activities of the 

university. But for the activities of P, Y 

would normally engage in these same 

activities. P’s endowment management 

activities are not considered activities that 

directly further the exempt purposes of Y 

under paragraph (i)(4)(ii) of this section. 

However, because Y’s assets are subject to the 

appropriation process of State E for purposes 

unrelated to Y’s exempt purposes, Y is P’s 

sole supported organization, and a 

substantial part of P’s activities directly 

further Y’s exempt purposes, P qualifies for 

the exception in paragraph (i)(4)(iii) of this 

section. Accordingly, based on these facts, P 

qualifies as a functionally integrated Type III 

supporting organization under paragraph 

(4)(i)(A) of this section. 

(5) Integral part test—nonfunctionally integrated Type III 

supporting organization—(i) A 

supporting organization meets the 

integral part test as a non-functionally 

integrated Type III supporting 

organization if it satisfies either: 

(A) The distribution requirement of 

paragraph (i)(5)(ii) of this section and 

the attentiveness requirement of 

paragraph (i)(5)(iii) of this section; or 

(B) The pre-1970 trust requirements of 

paragraph (i)(9) of this section. 

(ii) Distribution requirement. (A) The 

supporting organization must distribute, 

with respect to each taxable year, to or 

for the use of one or more supported 

organizations, amounts equaling or 

exceeding the supporting organization’s 

annual distributable amount for such 

year, as defined in paragraph (i)(5)(ii)(B) 

of this section, on or before the last day 

of such taxable year. 

(B) Annual distributable amount. 

Except as provided in paragraphs 

(i)(5)(ii)(C) and (i)(5)(ii)(D) of this 

section, the annual distributable amount 

for a taxable year is: 

(1) Five percent of the excess of the 

aggregate fair market value of all nonexempt-use assets (determined under 

paragraph (i)(8) of this section) over the 

acquisition indebtedness with respect to 

such non-exempt-use assets, determined 

under section 514(c)(1) without regard 

to the taxable year in which the 

indebtedness was incurred; increased by 

(2) Amounts received or accrued as 

repayments of amounts which were 

taken into account by the organization 

to meet the distribution requirement 

imposed in paragraph (i)(5)(ii)(A) of this 

section for any taxable year; increased 

by 

(3) Amounts received or accrued from 

the sale or other disposition of property 

to the extent that the acquisition of such 

property was taken into account by the 

organization to meet the distribution 

requirement imposed in paragraph 

(i)(5)(ii)(A) of this section for any 

taxable year; and reduced by 

(4) The amount of taxes imposed on 

the supporting organization for such 

taxable year under subtitle A of the 

Code. 

(C) First taxable year of existence. The 

annual distributable amount for the first 

taxable year an organization is treated as 

a non-functionally integrated Type III 

supporting organization is zero. 

(D) Emergency temporary reduction. 

The Secretary may provide by 

publication in the Internal Revenue 

Bulletin (see § 601.601(d)(2)(ii)(b) of this 

chapter) for a temporary reduction in 

the annual distributable amount in the 

case of a disaster or emergency. 

(E) Reasonable cause exception. An 

organization that fails to meet the 

distribution requirement of paragraph 

(i)(5)(ii) of this section will not be 

classified as a private foundation in the 

taxable year for which it fails to meet 

such distribution requirement, if the 

organization establishes to the 

satisfaction of the Secretary that: 

(1) The failure was due solely to an 

incorrect valuation of assets, a 

ministerial error, or unforeseen events 

or circumstances that are beyond the 

organization’s control, 

(2) The failure was due to reasonable 

cause and not to willful neglect, 

and 

(3) The distribution requirement is 

met within 180 days after the date the 

incorrect valuation or ministerial error 

was or should have been discovered, or 

180 days after the organization is first 

able to make its required payout 


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notwithstanding the unforeseen event or 

circumstances. 

(iii) Attentiveness requirement. (A) 

General rule. A non-functionally 

integrated Type III supporting 

organization must distribute one-third 

or more of its annual distributable 

amount to one or more supported 

organizations that are attentive to the 

operations of the supporting 

organization and to which the 

supporting organization is responsive 

under paragraph (i)(3) of this section. 

(B) Except as provided in paragraph 

(i)(5)(iii)(C) of this section, a supported 

organization is attentive to the 

operations of the supporting 

organization if the supporting 

organization distributes annually to 

such supported organization an amount 

of support that represents a sufficient 

part of the supported organization’s 

total support. A supporting organization 

must meet the requirements of 

paragraphs (i)(5)(iii)(B)(1), 

(i)(5)(iii)(B)(2), or (i)(5)(iii)(B)(3) of this 

section to demonstrate that it is 

attentive. If a supporting organization 

makes payments to, or for the use of, a 

particular department or school of a 

university, hospital or church, the total 

support of the department or school 

shall be substituted for the total support 

of the beneficiary organization. 

(1) The supporting organization 

distributes annually to the supported 

organization an amount that is 10 

percent or more of the supported 

organization’s total support. 

(2) The amount of support received 

from the supporting organization is 

necessary to avoid the interruption of 

the carrying on of a particular function 

or activity. The support is necessary if 

the supporting organization or the 

supported organization earmarks the 

support for a particular program or 

activity, even if such program or activity 

is not the supported organization’s 

primary program or activity so long as 

such program or activity is a substantial 

one. 

(3) Based on the consideration of all 

pertinent factors, including the number 

of supported organizations, the length 

and nature of the relationship between 

the supported organization and 

supporting organization and the 

purpose to which the funds are put, the 

amount of support is a sufficient part of 

a supported organization’s total support. 

Normally the attentiveness of a 

supported organization is motivated by 

reason of the amounts received from the 

supporting organization. Thus, the more 

substantial the amount involved, in 

terms of a percentage of the supported 

organization’s total support, the greater 

the likelihood that the required degree 

of attentiveness will be present. 

However, in determining whether the 

amount received from the supporting 

organization is sufficient to ensure the 

attentiveness of the supported 

organization to the operations of the 

supporting organization (including 

attentiveness to the nature and yield of 

such supporting organization’s 

investments), evidence of actual 

attentiveness by the supported 

organization is of almost equal 

importance. A supported organization is 

not considered to be attentive solely 

because it has enforceable rights against 

the supporting organization under State 

law. 

(C) Distribution to donor-advised fund 

does not establish attentiveness. 

Notwithstanding paragraphs (i)(5)(iii)(A) 

and (i)(5)(iii)(B) of this section, a 

supported organization will not be 

considered attentive to the operations of 

a supporting organization with respect 

to any amount received from the 

supporting organization that is held by 

the supported organization in a donor 

advised fund described in section 

4966(d)(2). 

(iv) Paragraph (5)(iii)(B)(2) of this 

section is illustrated by examples 1 and 

2 and paragraph(5)(iii)(B) of this section 

is illustrated by examples 3 and 4: 

Example 1. K, an organization described in 

section 501(c)(3), annually pays over an 

amount equal to five percent of its assets to 

L, a museum described in section 509(a)(2). 

K meets the responsiveness test described in 

paragraph (i)(3) of this section with respect 

to L. In recent years, L has earmarked the 

income received from K to underwrite the 

cost of carrying on a chamber music series 

consisting of 12 performances a year that are 

performed for the general public free of 

charge at its premises. The chamber music 

series is not L’s primary activity. L could not 

continue the performances without K’s 

support. Based on these facts, K meets the 

requirements of paragraph (i)(5)(iii)(B)(2) of 

this section. 

Example 2. M, an organization described in 

section 501(c)(3), pays annually an amount 

equal to five percent of its assets to the Law 

School of N University, an organization 

described in section 509(a)(1). M meets the 

responsiveness test described in paragraph 

(i)(3) of this section with respect to N. M has 

earmarked the income paid over to N’s Law 

School to endow a chair in International 

Law. Without M’s continued support, N 

could not continue to maintain this chair. 

Based on these facts, M meets the 

requirements of paragraph (i)(5)(iii)(B)(2) of 

this section. 

Example 3. R is a charitable trust created 

under the will of B, who died in 1969. R’s 

purpose is to hold assets as an endowment 

for S, a hospital, T, a university, and U, a 

national medical research organization (all 

organizations described in section 509(a)(1) 

and specifically named in the trust 

instrument), and to distribute all of the 

income each year in equal shares among the 

three named beneficiaries. Each year, R pays 

an amount equal to five percent of its assets 

to each of S, T, and U. Such payments are 

less than one percent of each organization’s 

total support. Based on these facts, R does 

not meet the attentiveness requirement of 

paragraph (i)(5)(iii)(B). However, because B 

died prior to November 20, 1970, R could, 

upon meeting all of the requirements of 

paragraph (i)(9) of this section, be considered 

as meeting the requirements of paragraph 

(i)(5)(i)(B) of this section. 

Example 4. O is an organization described 

in section 501(c)(3). O is organized to support 

five private universities, V, W, X, Y and Z, 

each of which is described in section 

509(a)(1). O meets the responsiveness test 

under paragraph (i)(3) of this section only as 

to V. Each year, O distributes five percent of 

the fair market value of its non-exempt-use 

assets in equal amounts to the five 

universities. O distributes annually more 

than 10 percent of the total annual support 

of V and W. Based on these facts O does not 

meet the requirements of paragraph (i)(5)(iii) 

of this section. Although both V and W are 

attentive to the operations of O under 

paragraph (i)(5)(iii)(B)(1) of this section, O is 

only responsive to V. Accordingly, O 

distributes only one-fifth (i.e., less than the 

required one-third) of its annual distributable 

amount to supported organization(s) that are 

both attentive to O and to which O is also 

responsive under paragraph (i)(3) of this 

section. 

(6) Distributions. For purposes of this 

paragraph (i)(6), the amount of a 

distribution made to a supported 

organization is the fair market value of 

such property as of the date such 

distribution is made. The amount of a 

distribution will be determined solely 

on the cash receipts and disbursements 

method of accounting described in 

section 446(c)(1). Distributions that 

count toward the distribution 

requirement imposed in paragraph 

(i)(5)(ii)(A) of this section shall include: 

(i) Any amount paid to a supported 

organization to accomplish its exempt 

purposes, 

(ii) Any amount paid to acquire an 

asset used (or held for use) to carry out 

the exempt purposes of the supported 

organization(s), and 

(iii) Any amount expended by the 

supporting organization for reasonable 

and necessary administrative expenses. 

(7) Carryover of excess amounts—(i) 

In general. If with respect to any taxable 

year, an excess amount, as defined in 

paragraph (i)(7)(ii) of this section, is 

created, such excess amount may be 

used to reduce the annual distributable 

amount in any of the five taxable years 

immediately following the taxable year 

in which the excess amount is created 

(the ‘‘carryover period’’). An excess 

amount created in a taxable year cannot 

be carried over beyond the succeeding 

five taxable years. With respect to any 


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taxable year to which an excess amount 

is carried over, in determining whether 

an excess amount is created in that 

taxable year, the annual distributable 

amount is reduced first to the extent of 

any excess amounts carried over and 

then to the extent of distributions made 

in that taxable year. 

(ii) Excess amount. An excess amount 

is created for any taxable year beginning 

after the effective date of these 

regulations if the total distributions 

made by a supporting organization to its 

supported organization(s) for such 

taxable year exceeds the supporting 

organization’s annual distributable 

amount for such taxable year, as defined 

in paragraph (i)(5)(ii)(B) of this section, 

determined without regard to this 

paragraph. 

(8) Valuation of assets—(i) General 

rules. (A) For purposes of determining 

the organization’s annual distributable 

amount, as defined in paragraph 

(i)(5)(ii)(B) of this section, the 

determination of the fair market value of 

the non-exempt-use assets shall be made 

in the year preceding the year of the 

required distribution under paragraph 

(i)(5)(ii)(A) of this section. The aggregate 

fair market value of all non-exempt-use 

assets of a supporting organization is the 

sum of: 

(1) The average of the fair market 

values on a monthly basis of securities 

for which market quotations are readily 

available (within the meaning of 

paragraph (i)(8)(iii)(A)(1) of this 

section); 

(2) The average of the supporting 

organization’s cash balances on a 

monthly basis (less the same amount of 

cash balances excluded under paragraph 

(i)(8)(i)(C)(2)(iv) of this section) from the 

computation of the annual distributable 

amount); and 

(3) The fair market value of all other 

assets (except those assets described in 

paragraph (i)(8)(i)(B) or paragraph 

(i)(8)(i)(C) of this section) for the period 

of time during the taxable year for 

which such assets are held by the 

supporting organization. 

(B) Certain assets excluded. For 

purposes of this paragraph, the nonexempt-use assets taken into account in 

determining the annual distributable 

amount described in paragraph 

(i)(5)(ii)(B) of this section shall not 

include the following: 

(1) Any future interest (such as a 

vested or contingent remainder, whether 

legal or equitable) of a supporting 

organization in the income or corpus of 

any real or personal property, other than 

a future interest created by the 

supporting organization after August 17, 

2006, until all intervening interests in, 

and rights to the actual possession or 

enjoyment of, such property have 

expired, or, although not actually 

reduced to the supporting organization’s 

possession, until such future interest 

has been constructively received by the 

supporting organization, as where it has 

been credited to the supporting 

organization’s account, set apart for the 

supporting organization, or otherwise 

made available so that the supporting 

organization may acquire it at any time 

or could have acquired it if notice of 

intention to acquire had been given; 

(2) The assets of an estate until such 

time as such assets are distributed to the 

supporting organization or, due to a 

prolonged period of administration, 

such estate is considered terminated for 

Federal income tax purposes by 

operation of Treas. Reg. § 1.641(b)–3(a); 

(3) Any present interest of a 

supporting organization in any trust 

created and funded by another person; 

(4) Any pledge to the supporting 

organization of money or property 

(whether or not the pledge may be 

legally enforced); and 

(5) Any assets used (or held for use) 

to carry out the exempt purposes of the 

supported organization(s). 

(C) Assets used (or held for use) to 

carry out the exempt purposes of the 

supported organization(s)—(1) In 

general. For purposes of paragraph 

(i)(8)(i)(B)(5) of this section, an asset is 

‘‘used (or held for use) to carry out the 

exempt purposes of the supported 

organization(s)’’ only if the asset is 

actually used by the supporting 

organization in activities that carry out 

the exempt purposes of its supported 

organization(s), or if the supporting 

organization owns the asset and 

establishes to the satisfaction of the 

Commissioner that its immediate use for 

such exempt purpose is not practical 

(based on the facts and circumstances of 

the particular case) and that definite 

plans exist to commence such use on 

behalf of its supported organization(s) 

within a reasonable period of time. 

Consequently, assets that are held for 

the production of income or for 

investment (for example, stocks, bonds, 

interest-bearing notes, endowment 

funds, or, generally, leased real estate) 

are not being used (or held for use) to 

carry out the exempt purposes of the 

supported organization(s), even though 

the income from such assets is used to 

carry out such exempt purposes. 

Whether an asset is held for the 

production of income or for investment 

rather than used (or held for use) by the 

supporting organization to carry out the 

exempt purposes of the supported 

organization(s) is a question of fact. For 

example, an office building used for the 

purpose of providing offices for 

employees engaged in the management 

of endowment funds is not being used 

(or held for use) by the supporting 

organization to carry out the exempt 

purposes of the supported 

organization(s). However, where 

property is used both to carry out the 

exempt purposes of the supported 

organization(s) and for other purposes, 

if the former use represents 95 percent 

or more of the total use, such property 

shall be considered to be used 

exclusively to carry out an exempt 

purpose of the supported 

organization(s). If the use of such 

property to carry out the exempt 

purposes of the supported 

organization(s) represents less than 95 

percent of the total use, reasonable 

allocation between such use and other 

use must be made for purposes of this 

paragraph. Property acquired by the 

supporting organization to be used to 

carry out the exempt purposes of the 

supported organization(s) may be 

considered as used (or held for use) to 

carry out such exempt purposes even 

though the property, in whole or in part, 

is leased for a limited period of time 

during which arrangements are made for 

its conversion to the use for which it 

was acquired, provided such incomeproducing use of the property does not 

exceed a reasonable period of time. 

Generally, one year shall be deemed to 

be a reasonable period of time for 

purposes of the immediately preceding 

sentence. Where the income-producing 

use continues beyond a reasonable 

period of time, the property shall not be 

deemed to be used by the supporting 

organization to carry out the exempt 

purposes of the supported 

organization(s), but, instead, as of the 

time the income-producing use becomes 

unreasonable, such property shall be 

treated as disposed of within the 

meaning of paragraph (i)(5)(ii)(B)(3) of 

this section to the extent that the 

acquisition of the property was taken 

into account by the organization to meet 

the distribution requirement imposed in 

paragraph (i)(5)(ii)(A) of this section for 

any taxable year. If, subsequently, the 

property is used by the supporting 

organization to carry out the exempt 

purposes of the supported 

organization(s), a distribution to its 

supported organization(s) in the amount 

of its then fair market value, determined 

in accordance with the rules contained 

in this paragraph (i)(8), shall be deemed 

to have been made as of the time such 

exempt purpose use begins. 

(2) Illustrations. Examples of assets 

that are ‘‘used (or held for use) to carry 

out the exempt purposes of the 


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supported organization(s)’’ include, but 

are not limited to, the following: 

(i) Administrative assets, such as 

office equipment and supplies that are 

used by employees or consultants of the 

supporting organization, to the extent 

such assets are devoted to and used 

directly in the administration of the 

supporting organization’s activities that 

carry out the exempt purposes of the 

supported organization(s). 

(ii) Real estate or the portion of a 

building used by the supporting 

organization directly in its activities to 

carry out the exempt purposes of the 

supported organization(s). 

(iii) Physical facilities used in the 

supporting organization’s activities to 

carry out the exempt purposes of the 

supported organization(s), such as 

paintings or other works of art owned by 

the supporting organization that are on 

public display, fixtures and equipment 

in classrooms, and research facilities 

and related equipment, which under the 

facts and circumstances serve a useful 

purpose in the conduct of such exempt 

purpose activities. 

(iv) The reasonable cash balances 

necessary to cover current 

administrative expenses and other 

normal and current disbursements 

directly connected to the supporting 

organization’s activities to carry out the 

exempt purposes of the supported 

organization(s). The reasonable 

necessary cash balances will generally 

be deemed to be an amount, computed 

on an annual basis, equal to one and 

one-half percent of the fair market value 

of all of the supporting organization’s 

assets, other than assets used or held for 

use to carry out the exempt purposes of 

the supported organization(s), without 

regard to this paragraph 

(i)(8)(i)(C)(2)(iv). However, if the 

Commissioner is satisfied that under the 

facts and circumstances an amount in 

addition to such one and one-half 

percent is necessary for payment of such 

expenses and disbursements, then such 

additional amount may also be excluded 

from the amount of assets described in 

paragraph (i)(5)(ii)(B) of this section. All 

remaining cash balances, including 

amounts necessary to pay any tax 

imposed by section 511 or section 4943, 

are to be included in the assets 

described in paragraph (i)(5)(ii)(B) of 

this section. 

(v) Any property leased by the 

supporting organization in carrying out 

the exempt purposes of its supported 

organization(s) at no cost (or at a 

nominal rent) to the lessee, such as the 

leasing of renovated apartments to lowincome tenants at a low rental as part of 

the lessor-supporting organization’s 

program for rehabilitating a blighted 

portion of the community. 

(ii) Valuation of assets—timing. For 

purposes of determining the annual 

distributable amount for a taxable year, 

the supporting organization’s assets are 

to be valued over the preceding taxable 

year. 

(iii) Valuation of assets—(A) Certain 

securities. (1) For purposes of this 

paragraph, a supporting organization 

may use any reasonable method to 

determine the fair market value on a 

monthly basis of securities for which 

market quotations are readily available, 

as long as such method is consistently 

used. 

(2) For purposes of this paragraph, 

market quotations are readily available 

if a security is: 

(i) Listed on the New York Stock 

Exchange, the American Stock 

Exchange, or any city or regional 

exchange in which quotations appear on 

a daily basis, including foreign 

securities listed on a recognized foreign 

national or regional exchange; 

(ii) Regularly traded in the national or 

regional over-the-counter market, for 

which published quotations are 

available; or 

(iii) Locally traded, for which 

quotations can readily be obtained from 

established brokerage firms. 

(3) For purposes of this paragraph, if 

the supporting organization can show 

that the value of securities determined 

on the basis of market quotations as 

provided by paragraph (i)(8)(iii)(A)(2) of 

this section, does not reflect the fair 

market value thereof because: 

(i) The securities constitute a block of 

securities so large in relation to the 

volume of actual sales on the existing 

market that it could not be liquidated in 

a reasonable time without depressing 

the market; 

(ii) The securities are securities in a 

closely held corporation and sales are 

few or of a sporadic nature; and/or 

(iii) The sale of the securities would 

result in a forced or distress sale 

because the securities could not be 

offered to the public for sale without 

first being registered under the 

Securities Act of 1933 or because of 

other factors, then the price at which the 

securities could be sold as such outside 

the usual market, as through an 

underwriter, may be a more accurate 

indication of value than market 

quotations. On the other hand, if the 

securities to be valued represent a 

controlling interest, either actual or 

effective, in a going business, the price 

at which other lots change hands may 

have little relation to the true value of 

the securities. No decrease in the fair 

market value of any given class of 

securities determined on the basis of 

market quotations as provided by 

paragraph (i)(8)(iii)(A)(2) of this section 

shall be allowed except as authorized by 

this paragraph, and no such decrease 

shall in the aggregate exceed 10 percent 

of the fair market value of such class of 

securities so determined on the basis of 

market quotations and without regard to 

this paragraph. 

(4) In the case of securities described 

in paragraph (i)(8)(iii)(A)(2) of this 

section, that are held in trust for, or on 

behalf of, a supporting organization by 

a bank or other financial institution that 

values such securities periodically by 

use of a computer, a supporting 

organization may determine the correct 

value of such securities by use of such 

computer pricing system, provided the 

Commissioner has accepted such 

computer pricing system as a valid 

method for valuing securities for 

Federal estate tax purposes. 

(B) Cash. In order to determine the 

amount of a supporting organization’s 

cash balances, the supporting 

organization shall value its cash on a 

monthly basis by averaging the amount 

of cash on hand as of the first day of 

each month and as of the last day of 

each month. 

(C) Common trust funds. If a 

supporting organization owns a 

participating interest in a common trust 

fund (as defined in section 584) 

established and administered under a 

plan providing for the periodic 

valuation of participating interests 

during the fund’s taxable year and the 

reporting of such valuations to 

participants, the value of the supporting 

organization’s interest in the common 

trust fund based upon the average of the 

valuations reported to the supporting 

organization during its taxable year will 

ordinarily constitute an acceptable 

method of valuation. 

(D) Other assets. (1) Except as 

otherwise provided in paragraph 

(i)(8)(iii)(D)(2) of this section, the fair 

market value of assets other than those 

described in paragraphs (i)(8)(iii)(A) 

through (i)(8)(iii)(C) of this section, shall 

be determined annually. Thus, the fair 

market value of securities other than 

those described in paragraph 

(i)(8)(iii)(A) of this section shall be 

determined in accordance with this 

paragraph (i)(8)(iii)(D)(1). If, however, a 

supporting organization owns voting 

stock of an issuer of unlisted securities 

and has, or together with disqualified 

persons or another supporting 

organization has, effective control of the 

issuer (within the meaning of § 53.4943– 

3(b)(3)(ii)), then to the extent that the 

issuer’s assets consist of shares of listed 

securities issues, such assets shall be 


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48686 Federal Register / Vol. 74, No. 184 / Thursday, September 24, 2009 / Proposed Rules 

valued monthly on the basis of market 

quotations or in accordance with section 

4942(e)(2)(B), if applicable. Thus, for 

example, if a supporting organization 

and a disqualified person together own 

all of the unlisted voting stock of a 

holding company that in turn holds a 

portfolio of securities of issues that are 

listed on the New York Stock Exchange, 

in determining the net worth of the 

holding company, the underlying 

portfolio securities are to be valued 

monthly by reference to market 

quotations for their issues unless a 

decrease in such value is authorized in 

accordance with section 4942(e)(2)(B). 

Such determination may be made by 

employees of the supporting 

organization or by any other person 

without regard to whether such person 

is a disqualified person with respect to 

the supporting organization. A valuation 

made pursuant to the provisions of this 

paragraph, if accepted by the 

Commissioner, shall be valid only for 

the taxable year for which it is made. A 

new valuation made in accordance with 

these provisions is required for the 

succeeding taxable year. 

(2) If the requirements of this 

paragraph are met, the fair market value 

of any interest in real property, 

including any improvements thereon, 

may be determined on a five-year basis. 

Such value must be determined by 

means of a certified, independent 

appraisal made in writing by a qualified 

person who is neither a disqualified 

person with respect to, nor an employee 

of, the supporting organization. The 

appraisal is certified only if it contains 

a statement at the end thereof to the 

effect that, in the opinion of the 

appraiser, the values placed on the 

assets appraised were determined in 

accordance with valuation principles 

regularly employed in making 

appraisals of such property using all 

reasonable valuation methods. The 

supporting organization shall retain a 

copy of the independent appraisal for its 

records. If a valuation made pursuant to 

the provisions of this paragraph in fact 

falls within the range of reasonable 

values for the appraised property, such 

valuation may be used by the 

supporting organization for the taxable 

year for which the valuation is made 

and for each of the succeeding four 

taxable years. Any valuation made 

pursuant to the provisions of this 

paragraph may be replaced during the 

five-year period by a subsequent fiveyear valuation made in accordance with 

the rules set forth in this paragraph 

(i)(8)(iii)(D)(2), or with an annual 

valuation made in accordance with 

paragraph (i)(8)(iii)(D)(1) of this section, 

and the most recent such valuation of 

such assets shall be used in computing 

the supporting organization’s annual 

distributable amount. A valuation made 

in accordance with this paragraph must 

be made no later than the last day of the 

first taxable year for which such 

valuation is applicable. A valuation, if 

properly made in accordance with the 

rules set forth in this paragraph, will not 

be disturbed by the Commissioner 

during the five-year period for which it 

applies even if the actual fair market 

value of such property changes during 

such period. 

(3) For purposes of this paragraph 

(i)(8)(iii)(D)(3), commonly accepted 

methods of valuation must be used in 

making an appraisal. Valuations made 

in accordance with the principles stated 

in the regulations under section 2031 

constitute acceptable methods of 

valuation. The term ‘‘appraisal,’’ as used 

in this paragraph (i)(8)(iii)(D)(3), means 

a determination of fair market value and 

is not to be construed in a technical 

sense peculiar to particular property or 

interests therein, such as, for example, 

mineral interests in real property. 

(E) Definition of ‘‘securities’’. For 

purposes of this paragraph (i)(8)(iii)(E), 

the term ‘‘securities’’ includes, but is 

not limited to, common and preferred 

stocks, bonds, and mutual fund shares. 

(F) Valuation date. (1) In the case of 

an asset that is required to be valued on 

an annual basis as provided in 

paragraph (i)(8)(iii)(D)(1) of this section, 

such asset may be valued as of any day 

in the supporting organization’s taxable 

year to which such valuation applies, 

provided the supporting organization 

follows a consistent practice of valuing 

such asset as of such date in all taxable 

years. 

(2) A valuation described in 

paragraph (i)(8)(iii)(D)(2) of this section 

may be made as of any day in the first 

taxable year of the supporting 

organization to which such valuation is 

to be applied. 

(G) Assets held for less than a taxable 

year. For purposes of this paragraph 

(i)(8)(iii)(G), any asset described in 

paragraph (i)(8)(i)(A) of this section that 

is held by a supporting organization for 

only part of a taxable year shall be taken 

into account for purposes of 

determining the supporting 

organization’s annual distributable 

amount for such taxable year by 

multiplying the fair market value of 

such asset (as determined pursuant to 

paragraph (i)(8) of this section) by a 

fraction, the numerator of which is the 

number of days in such taxable year that 

the supporting organization held such 

asset and the denominator of which is 

the number of days in such taxable year. 

(9) Exception to integral part test for 

certain trusts. A trust (whether or not 

exempt from taxation under section 

501(a)) that on November 20, 1970, met 

and continues to meet the requirements 

of paragraphs (i)(9)(i) through (i)(9)(v) of 

this section, shall be treated as meeting 

the requirements of the integral part test 

(whether or not it meets the 

requirements of paragraph (i)(4) or 

paragraph (i)(5) of this section) if for 

taxable years beginning after October 16, 

1972, the trustee of such trust makes 

annual written reports to all of the 

beneficiary supported organizations 

with respect to such trust setting forth 

a description of the assets of the trust, 

including a detailed list of the assets 

and the income produced by such 

assets. A trust organization that meets 

the requirements of this paragraph may 

request a ruling that it is described in 

section 509(a)(3) in such manner as the 

Commissioner may prescribe. 

(i) All the unexpired interests in the 

trust are devoted to one or more 

purposes described in section 170(c)(1) 

or (2)(B) and a deduction was allowed 

with respect to such interests under 

sections 170, 545(b)(2), 556(b)(2), 642(c), 

2055, 2106(a)(2), 2522, or corresponding 

provisions of prior law (or would have 

been allowed such a deduction if the 

trust had not been created before 1913); 

(ii) The trust was created prior to 

November 20, 1970, and did not receive 

any grant, contribution, bequest or other 

transfer on or after such date. For 

purpose of this paragraph (i)(9)(ii), a 

split-interest trust described in section 

4947(a)(2) that was created prior to 

November 20, 1970, was irrevocable on 

such date, and that becomes a charitable 

trust described in section 4947(a)(1) 

after such date shall be treated as having 

been created prior to such date; 

(iii) The trust is required by its 

governing instrument to distribute all of 

its net income currently to a designated 

beneficiary supported organization. 

Where more than one beneficiary 

supported organization is designated in 

the governing instrument of a trust, all 

of the net income must be distributable 

and must be distributed currently to 

each of such beneficiary organizations 

in fixed shares pursuant to such 

governing instrument. For purposes of 

this paragraph (i)(9)(iii), the governing 

instrument of a charitable trust shall be 

treated as requiring distribution to a 

designated beneficiary organization 

where the trust instrument describes the 

charitable purpose of the trust so 

completely that such description can 

apply to only one existing beneficiary 

organization and is of sufficient 

particularity as to vest in such 

organization rights against the trust 


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enforceable in a court possessing 

equitable powers; 

(iv) The trustee of the trust does not 

have discretion to vary either the 

beneficiaries or the amounts payable to 

the beneficiaries. For purposes of this 

paragraph (i)(9)(iv), a trustee shall not 

be treated as having such discretion 

where the trustee has discretion to make 

payments of principal to the single 

section 509(a)(1) or (2) organization that 

is currently entitled to receive all of the 

trust’s income or where the trust 

instrument provides that the trustee 

may cease making income payments to 

a particular charitable beneficiary in the 

event of certain specific occurrences, 

such as the loss of exemption under 

section 501(c)(3) or classification under 

section 509(a)(1) or (2) by the 

beneficiary or the failure of the 

beneficiary to carry out its charitable 

purpose properly; and 

(v) None of the trustees would be 

disqualified persons within the meaning 

of section 4946(a) (other than 

foundation managers under section 

4946(a)(1)(B)) with respect to the trust if 

such trust were treated as a private 

foundation. 

(10) Foreign supported organizations. 

A supporting organization is not 

operated in connection with one or 

more supported organizations if it 

supports any supported organization 

organized outside of the United States. 

(11) Transition rules—(i) A Type III 

supporting organization in existence on 

the effective date of these regulations 

that met and continues to meet the 

requirements of Treas. Reg. § 1.509(a)– 

4(i)(3)(ii), as in effect prior to the date 

these regulations are published as final 

or temporary regulations, will be treated 

as meeting the requirements of 

paragraph (i)(4)(i) of this section until 

the first day of the organization’s first 

taxable year beginning after the date 

these regulations are published as final 

or temporary regulations. 

(ii) A Type III supporting organization 

in existence on the effective date of 

these regulations that met and continues 

to meet the requirements of Treas. Reg. 

§ 1.509(a)–4(i)(3)(iii), as in effect prior to 

the date these regulations are published 

as final or temporary regulations, will be 

treated as meeting the requirements of 

paragraph (i)(5)(i) of this section until 

the first day of its second taxable year 

beginning after the effective date of 

these regulations. Beginning in the first 

taxable year beginning after the effective 

date of these regulations, such 

organizations must value their assets 

according to paragraph (i)(8) of this 

section. Beginning in the second taxable 

year beginning after the effective date of 

these regulations (and in all succeeding 

taxable years), these organizations must 

meet all of the requirements of 

paragraph (i)(5)(i) of this section. 

(iii) For the first taxable year after the 

effective date of these regulations, the 

annual distributable amount for Type III 

supporting organizations that are not 

functionally integrated is zero. 

(12) Effective/applicability date. 

These regulations are effective on the 

date of publication of the Treasury 

decision adopting these rules as final or 

temporary regulations. 

* * * * * 

PART 53—FOUNDATION AND SIMILAR 

EXCISE TAXES 

Par. 3. The authority citation for part 

53 continues to read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

Par. 4. In § 53.4943–11, section 

heading is revised and paragraphs (f) 

and (g) are added to read as follows: 

§ 53.4943–11 Effective/Applicability date. 

* * * * * 

(f) Special transitional rule for private 

foundations that qualified as Type III 

supporting organizations before August 

17, 2006. The present holdings of a 

private foundation that qualified as a 

Type III supporting organization under 

section 509(a)(3) immediately before 

August 17, 2006, and that was 

reclassified as a private foundation 

under section 509(a) on or after August 

17, 2006, solely as a result of the rules 

enacted by section 1241 of the Pension 

Protection Act of 2006, Public Law 109– 

280 (120 Stat. 780), will be determined 

using the same rules that apply to Type 

III supporting organizations under 

section 4943(f)(7). 

(g) Special transitional rule for Type 

III supporting organizations created as 

trusts before November 20, 1970. A trust 

that qualifies as a Type III supporting 

organization under section 509(a)(3) and 

meets the requirements of Treas. Reg. 

§ 1.509(a)–4(i)(9) will be treated as a 

‘‘functionally integrated Type III 

supporting organization’’ for purposes 

of section 4943(f)(3)(A). 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E9–22866 Filed 9–23–09; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Alcohol and Tobacco Tax and Trade 

Bureau 

27 CFR Parts 40, 41, and 45 

[Docket No. TTB–2009–0002; Notice No. 99; 

Re: T.D. TTB–81, T.D. TTB–78, Notice No. 

95] 

RIN 1513–AB75 

Extension of Package Use-Up Rule for 

Roll-Your-Own Tobacco and Pipe 

Tobacco (2009R–368P) 

AGENCY: Alcohol and Tobacco Tax and 

Trade Bureau, Treasury. 

ACTION: Notice of proposed rulemaking; 

cross-reference to temporary rule. 

SUMMARY: Elsewhere in this issue of the 

Federal Register, the Alcohol and 

Tobacco Tax and Trade Bureau is 

issuing a temporary rule to extend the 

use-up period and delay the application 

of the new pipe tobacco and roll-yourown tobacco classification rule adopted 

on June 22, 2009, in response to certain 

changes made to the Internal Revenue 

Code of 1986 by the Children’s Health 

Insurance Program Reauthorization Act 

of 2009. That temporary rule also 

corrects two minor errors in the 

previously published regulatory texts. 

The text of the regulations in the 

temporary rule published in the Rules 

and Regulations section of this issue of 

the Federal Register serves as the text 

of the proposed regulations. 

DATES: Comments must be received on 

or before November 23, 2009. 

ADDRESSES: You may send comments on 

this notice to one of the following 

addresses: 

• http://www.regulations.gov: Use the 

comment form for this notice on the 

Federal e-rulemaking portal, 

Regulations.gov, to submit comments 

via the Internet; 

• Mail: Director, Regulations and 

Rulings Division, Alcohol and Tobacco 

Tax and Trade Bureau, P.O. Box 14412, 

Washington, DC 20044–4412. 

• Hand Delivery/Courier in Lieu of 

Mail: Alcohol and Tobacco Tax and 

Trade Bureau, 1310 G Street, NW., Suite 

200–E, Washington, DC 20005. 

See the Public Participation section of 

this notice for specific instructions and 

requirements for submitting comments, 

and for information on how to request 

a public hearing. 

You may view copies of this notice, 

selected supporting materials, and any 

comments we receive about this 

proposal within Docket No. TTB–2009– 

0002 at http://www.regulations.gov. A 

direct link to this docket is posted on 


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