What is Group Exemption?
A group exemption is a way that the IRS recognizes many related, affiliated nonprofit organization as tax-exempt under a 501(c) exemption held by a “parent” entity. This allows the organizations to share the same tax-exempt status. These organizations are sometimes called “umbrella organizations” because the parent organization may provide tax-exempt status, resources, and oversight to the smaller organizations under its responsibility and control.
In short, the IRS will allow organizations that are affiliated with a central organization to apply for tax-exempt status as a group. This not only saves time for the organizations applying, but it also relieves the IRS of reviewing each subordinate organization’s application for tax-exempt status. In this way, the central (parent) organization takes responsibility for the subordinate organizations.
IRS Status Update
In 2020, the IRS stopped accepting new applications for group exemptions.
The IRS currently is not examining any group exemption applications.
Instead, the IRS is reviewing its procedures on how to grant group exemptions in the future. Current group exemptions are secure, but the procedure may change for future group exemptions. See IRS Notice 2020-36 for more details.
Because of this pause, organizations considering a group exemption may like to work with a tax-exempt attorney to develop a different governance and tax plan for its subordinate organizations.
What types of organizations can use a group exemption?
A variety of organizations might qualify:
- public charities
- churches and religious organizaitons
- educational insittuation
- business leagues
- social clubs
The IRS spells out specific requirements for subordinate organizations. Each subordinate group must be:
- Affiliated with the central organization. For example, the subordinate organizations can be chapters, posts, or units of a central organization.The IRS does not require subordinates to become incorporated, but each one should have an organizing document.
- Subject to the central organization’s general supervision or control;
- Exempt under the same paragraph of IRC 501(c), though not necessarily the paragraph under which the central organization is exempt;
- Not private foundations, if the application for a group exemption letter involves section 501(c)(3); and
- All on the same accounting period as the central organization if they are to be included in group returns.
A central organization can also be a subordinate of a larger organization. For example, a state organization may be a subordinate of a national organization, but it can be the central organization for the chapters located within the state.
Must the central organization obtain tax-exempt status before applying for a group exemption?
- Most nonprofit organizations: the central organization can submit the request for group exemption at the same time as it submits Form 1023 or Form 1024 to receive tax-exempt status.
- Churches: the central organization applying for tax-exempt status as a church must obtain recognition of its tax-exempt status before it can apply for group exemption as the central organization.
Does each subordinate need an Employer Identification Number (EIN)?Â
Yes, each subordinate must obtain an EIN — even if they have no employees.
What is the process for obtaining a group exemption letter? (Currently paused by the IRS)
The process for obtaining group exemption varies depending on the type of central organization and whether the central organization has already obtained tax-exempt status.
Central Organizations Applying for Tax-Exempt Status for the First Time
Central organizations applying for tax-exempt status submit the appropriate application form (either Form 1023, 1024, other)Â and a letter requesting group exemption (see below).
Central Organizations with Tax-Exempt Status who now want Group Exemption
If the central organization has already obtained tax-exempt status, then the central organization must submit a letter requesting group exemption (see below), and include the central organization’s EIN, the date of the letter recognizing its own exemption, and a copy of any amendments to its governing instruments or internal regulations. If the central organization has made any changes to its character, purposes or method of operation, then these changes must be sent to the IRS as well.
Letter Requesting a Group Exemption
The central organization submits a letter to the IRS on behalf of itself and its subordinates. The letter must include the following information:
- Information verifying the existence of the required relationship;
- A sample copy of a uniform governing instrument adopted by the subordinates;
- A detailed description of the purposes and activities of the subordinates including the sources of receipts and the nature of expenditures;
- A statement that each subordinate to be included in the group exemption letter has furnished written authorization to the central organization;
- A list of subordinates to be included in the group exemption letter to which the IRS has issued an outstanding ruling or determination letter relating to exemption;
- If the application for a group exemption letter involves IRC 501(c)(3), an affirmation that no subordinate to be included in the group exemption letter is a private foundation;
- For each subordinate that is a school claiming exemption under IRC 501(c)(3), the information required by Rev. Proc. 75-50, 1975-2 C.B. 834 and Rev. Rul. 71-447, 1971-2 C.B. 230; and
- A list of the names, mailing and actual addresses, and employer identification numbers of subordinates to be included in the group exemption letter.
What is required to ensure that the group exemption letter remains valid?
To ensure that the group exemption remains valid, the central organization must:
- Continue to be in existence
- Continue to qualify as tax-exempt under section 501(c)
- Submit all IRS-required information annually
- File the annual information return (Form 990, for example), if required.
What are the reporting requirements for organizations with a group exemption?
The central organization must submit at least 90 days before the close of its annual accounting period all of the following information each year:
- Information about all changes in the purposes, character, or method of operation of the subordinates included in the group exemption letter.
- A separate list (that includes the names, mailing addresses, actual addresses if different, and EINs of the affected subordinates) for each of the three following categories.
- Subordinates that have changed their names or addresses during the year.
- Subordinates no longer to be included in the group exemption letter because they no longer exist or have disaffiliated from or withdrawn their authorization to the central organization.
- Subordinates to be added to the group exemption letter because they are newly organized or affiliated or because they have recently authorized the central organization to include them.
- If subordinates are added, then the central organization must also submit items from the original letter requesting the group exemption for the subordinates added. If items 1 through 4 are similar for the new subordinates, then a statement to that effect can be submitted instead.
Does the central organization submit an annual return on behalf of all the subordinates?
The central organization must file its own separate return. It may also file a group return on behalf of some or all of its subordinates. If a central organization only files on behalf of some its subordinates, it must attach a list of the subordinates included in the return.
*SPECIAL NOTICE – IRS Group Exemptions are Paused*
As of June 2020, the IRS paused requests for group exemption letters. The IRS is reviewing how it reviews, accepts, and administers group exemptions and the IRS has not published a new timeline.
Current group exemptions are secure so long as the group continues to follow IRS requirements, but the procedure may change for future group exemptions. See IRS Notice 2020-36 for more details.
New applicants must wait until the IRS resumes the application process – or consider alternative structures in the meantime.
Resources on IRS Group Exemptions
IRS web pages providing information on group exemptions and group returns:
IRS: Publication 4573 – Group Exemptions
Need Legal Help?
The Cullinane Law Group works exclusively with tax-exempt organizations, including dozens of group exemptions across the United States.
Whether you’re navigating IRS rules, governance, or rethinking your group’s tax strategy in light of the current pause, we can help. Contact us for help with your group exemption.
