August 03, 2007
The Pension Protection Act of 2006 (the “Act”) contains special provisions for individuals who receive Individual Retirement Account (“IRA”) distributions in tax years 2006 and/or 2007 and who have attained age 70½ on the date of the distribution. Those individuals are able to make contributions from their IRAs directly to certain qualified public charities without including the distributed amounts in their reportable income. In addition, the Act restricts private foundations from making distributions to certain public charities. In both cases, application of these new provisions of the Act depend on the recipient organization’s particular classification as a public charity under Section 509(a) of the Internal Revenue Code (the “Code”).
Under the Act, supporting organizations classified under Section 509(a)(3) are specifically excluded from the category of organizations that can receive “qualified charitable distributions.” Therefore, distributions made directly from IRAs to supporting organizations described in Section 509(a)(3) of the Code are not excludable from the IRA holder’s income. In addition, distributions from private foundations to certain supporting organizations described in Section 509(a)(3) are not qualifying distributions and may be taxable expenditures by the private foundation. A violation of the new guidelines could result in an individual donor’s loss of a charitable deduction or, in the case of a private foundation, loss of its tax-exempt status. To alleviate this hardship, organizations currently classified as Section 509(a)(3) supporting organizations may seek to be reclassified under Section 509(a)(1) or (2) as publicly supported charities.
Public charities, as described in Section 509(a)(1), are organizations that receive a substantial part of their financial support in the form of contributions from publicly supported organizations, from the government or from the general public. Public charities described in Section 509(a)(2) are organizations that normally receive not more than one-third of their financial support from gross investment income and more than one-third of their financial support from contributions and certain permissible fees.
A Section 509(a)(3) supporting organization seeking to change its charitable status owing to the provisions of the Act must submit a written request for reclassification to the Internal Revenue Service pursuant to Revenue Procedure 2006-4, 2006-1 I.R.B. 135. The request must include (i) a short letter requesting reclassification and (ii) financial information from the supporting organization’s most recently filed Form 990 (“Return of Organization Exempt from Income Tax”). If, for some reason, the financial support schedule from the Form 990 is not available, the IRS has provided Form 8734 (“Support Schedule for Advance Ruling Period”) to complete as an alternative, which is available on the IRS’s website. There is no fee charged by the IRS to the organization when filing this expedited request for reclassification.
After IRS review of the change request, the supporting organization will receive a determination letter indicating whether the change in public charity classification has been made. In light of these provisions of the Act, clients involved with the operation of a Section 509(a)(3) supporting organization might want to review whether reclassification of its charitable status would be feasible and worthwhile.
For more information please contact Tracy McSweeney at [email protected]