TD 9873; Reg §1.506-1
The IRS has finalized regs under Code Sec. 506, that discuss the requirement that social welfare organizations notify the IRS of their intent to operate under Code Sec. 501(c)(4) no later than 60 days after their establishment. The final regs adopt, without substantive changes, proposed regs issued in 2016.
Background—Code. Code Sec. 501(c)(4) describes certain civic leagues, organizations operated exclusively for the promotion of social welfare and certain local associations of employees that are exempt from Federal income tax under Code Sec. 501(a).
Code Sec. 506, was added to the Code by the Protecting Americans from Tax Hikes (PATH) Act of 2015. Code Sec. 506(a) requires an organization to notify the IRS that it is operating as a Code Sec. 501(c)(4) organization within 60 days after the organization is established (notification). The 60-day notification period may be extended for reasonable cause. (Code Sec. 506(d))
Code Sec. 506(b) provides that the notification must include: (1) The name, address, and taxpayer identification number of the organization; (2) the date on which, and the state under the laws of which, the organization was organized; and (3) a statement of the purpose of the organization. The notification must be accompanied by a reasonable user fee. (Code Sec. 506(e))
The IRS must acknowledge receipt of an organization’s notification within 60 days of receiving it. (Code Sec. 506(c))
An organization wanting certainty about its tax-exempt status under Code Sec. 501(c)(4) may request a determination letter from the IRS. Such a determination letter request is treated as an application for exemption under Code Sec. 501(a) and is subject to public inspection under Code Sec. 6104. (Code Sec. 506(f))
In addition, the PATH Act amended Code Sec. 6033(f) to require a Code Sec. 501(c)(4) organization submitting a notification to include, with its first annual information return filed after the notification, any additional information required by regs that supports the organization’s treatment as a Code Sec. 501(c)(4)organization.
The PATH Act also amended Code Sec. 6652(c) to impose penalties for failure to file the notification by the date and in the manner prescribed in Code Sec. 506and its implementing regs. Code Sec. 6652(c)(5) provides that no penalty is imposed with respect to any failure to file a notification under Code Sec. 506 if it is shown that such failure is due to reasonable cause.
Background—Notice, etc. The IRS provided interim guidance on the notification requirement under Code Sec. 506 in Notice 2016-9, 2016-6 IRB 306. In Notice 2016-9, the IRS extended the due date for submitting the notification until at least 60 days from the date that implementing regs were issued.
Notice 2016-9 also stated that organizations seeking IRS recognition of their Code Sec. 501(c)(4) status should continue to use Form 1024, Application for Recognition of Exemption Under Section 501(a), until further guidance was issued. Notice 2016-9 also stated that filing a Form 1024 did not relieve an organization of the requirement to submit the notification under Code Sec. 506.
In 2018, the IRS created Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code, for organizations to use to apply for recognition of their exempt status under Code Sec. 501(c)(4).
Background—Revenue procedure. Rev Proc 2016-41, 2016-30 IRB 165, provided that the notification under Code Sec. 506 must be submitted on Form 8976, Notice of Intent to Operate Under Section 501(c)(4) (or its successor). Rev Proc 2016-41 also provided information on the procedure for submitting Form 8976 and on requesting relief from a failure to file penalty under Code Sec. 6652(c)(4).
Background—Temporary regs. On July 8, 2016, the IRS issued temporary regs (that served as the text for the proposed regs) under Code Sec. 506 (TD 9775; Prop Reg §1.506-1). Generally, the temporary regs required organizations to notify the IRS of their intent to operate under Code Sec. 501(c)(4) using Form 8976 no later than 60 days after the date the organization is organized. (Reg §1.506-1T(a)(1))
The temporary regs required payment of the user fee authorized by Code Sec. 506(e) (set by Rev Proc 2016-41 at $50) with the notification. (Reg §1.506-1T(a)(3)) The temporary regs also provided that the 60-day period for submitting the notification could be extended for reasonable cause. (Reg §1.506-1T(a)(4))
Within 60 days after receipt of the notification, the IRS will send the organization an acknowledgment of such receipt. This acknowledgment is not a determination by the IRS that the organization qualifies as an organization described in Code Sec. 501(c)(4). (Reg. §1.506-1T(d))
The temporary regs specified that the process by which an organization may request an IRS determination that it qualifies for Code Sec. 501(c)(4) status is separate from the procedure for submitting the notification. (Reg. §1.506-1T(e)) Thus, an organization seeking IRS recognition of its Code Sec. 501(c)(4) status must use the regular determination letter procedures. (Reg. §1.506-1T(e))
The temporary regs provided relief from the notification requirement for any Code Sec. 501(c)(4) organization that, on or before July 8, 2016, either: (1) had applied for a written determination of recognition as a Code Sec. 501(c)(4) organization using Form 1024; or (2) had filed at least one Form 990 series return or notice. (Reg §1.506-1T(b))
Final regs. The IRS has adopted the proposed regulations, which cross-referenced the text of the temporary regulations, without substantive change. However, in the preamble to the final regs, the IRS clarifies several issues, including:
…The exemption from the notification requirement in Reg §1.506-1(b) for organizations that applied for recognition as a Code Sec. 501(c)(4) organization, or filed a Form 990 series return or notice on or before July 8, 2016, applies to an organization that was included as a subordinate organization on a group Form 990 filed on or before July 8, 2016.
…The exemption in Reg §1.506-1(b)(2) only applies to a completed Form 990 series return or notice, not to a request for an extension of time to file such a return or notice, because a filing extension request does not provide the IRS with the information required under Code Sec. 506.
…Organizations that were terminated or dissolved before September 6, 2016, were required to file Form 8976 because such organizations may still be included in the IRS’s Exempt Organization Business Master File, and a filed Form 8976 would notify the IRS that the terminated or dissolved organization operated as a Code Sec. 501(c)(4) organization.
…Filing a Form 1024-A within the 60-day notification period is not a substitute for filing Form 8976 because, among other reasons, the notification requirement under Code Sec. 506(a) is separate and apart from the application process under Code Sec. 506(f), and the IRS does not have a process for using Form 1024-A as both a notification under Code Sec. 506 and an optional application for exempt status.
…Subordinate organizations included in a group exemption letter are not exempt from the notification requirement unless they were included in a group Form 990 return or notice or filed their own return or notice as required by Reg §1.506-1(b).
…The date an organization is organized for Code Sec. 506 purposes is the date on which it is formed as a legal entity. (Reg §1.506-1(a)(2)(ii))
…An organization (other than a Code Sec. 501(c)(3) organization) that did not originally intend to operate under Code Sec. 501(c)(4) must submit Form 8976 once it begins to operate as a Code Sec. 501(c)(4) organization. Such an organization that files a Form 8976 within 60 days of amending its organizing document to qualify as a Code Sec. 501(c)(4) organization would have reasonable cause for not filing a Form 8976 within 60 days of formation. The organization may obtain relief from the penalty under Code Sec. 6652(c)(4) by submitting a request in response to correspondence from the IRS regarding the penalty. Code Sec. 6652(c)(4) imposes a penalty for failure to submit the notice required by Code Sec. 506(a).
…There is no obligation to submit a new Form 8976 if an organization’s information changes, or if the Form 8976 was accepted for processing. Rather, any updated information should be reported on the organization’s annual information return or notice.
The final regs apply to organizations described in Code Sec. 501(c)(4) on and after July 8, 2016. (Reg. §1.506-1(f))