[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Rules and Regulations]
[Pages 65550-65553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30839]
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DEPARTMENT OF THE TREASURY
26 CFR Part 1
[TD 8640]
RIN 1545-AI52
Exempt Organizations Not Required To File Annual Returns:
Integrated Auxiliaries of Churches
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that exempt certain
integrated auxiliaries of churches from filing information returns.
These regulations incorporate the rules of Rev. Proc. 86-23 (1986-1
C.B. 564), into the regulations defining integrated auxiliary for
purposes of determining what entities must file information returns.
The new definition focuses on the sources of an organization's
financial support in addition to the nature of the organization's
activities.
DATES: These regulations are effective December 20, 1995.
For dates of applicability of these regulations, see Sec. 1.6033-
2(h)(6).
FOR FURTHER INFORMATION CONTACT: Terri Harris or Paul Accettura, of the
Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS, at 202-622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 15, 1994 proposed regulations Secs. 1.6033-2 and 1.508-
1 [EE-41-86 (1995-2 I.R.B. 20)] under sections 6033(a)(2) and 508 of
the Internal Revenue Code of 1986, respectively, were published in the
Federal Register (59 FR 64633). The proposed regulations adopted the
rules of Rev. Proc. 86-23 (1986-1, C.B. 564) as the definition of
integrated auxiliary of a church replacing the current definition set
forth in Sec. 1.6033-2(g)(5). Additionally, section 508(c) excepts
integrated auxiliaries of a church from the requirement that new
organizations notify the Secretary of the Treasury that they are
applying for recognition of section 501(c)(3) status (Form 1023). For
consistency, Sec. 1.508-1(a)(3)(i)(a), which gives several examples of
integrated auxiliaries, was proposed to be amended by deleting the
examples and by adding a cross-reference to Sec. 1.6033-2(h) for the
definition of integrated auxiliary of a church. After IRS and Treasury
consideration of the public comments received regarding the proposed
regulations, the regulations are adopted as revised by this Treasury
decision.
Explanation of Provisions
Section 6033(a)(1) requires organizations that are exempt from
income tax under section 501(a) to file annual returns. Section
6033(a)(2)(A) provides exceptions to this requirement for certain
specified types of organizations, including, among others, churches,
their integrated auxiliaries, and conventions or associations of
churches. Section 6033(a)(2)(B) provides that the Secretary may relieve
any organization from the filing requirement where the Secretary
determines that filing is not necessary to the efficient administration
of the internal revenue laws.
Prior to this Treasury decision, Sec. 1.6033-2(g)(5)(i) defined the
term integrated auxiliary of a church as an organization that is: (1)
exempt from taxation as an organization described in section 501(c)(3);
(2) affiliated with a church (within the meaning of Sec. 1.6033-
2(g)(5)(iii)); and (3) engaged in a principal activity that is
``exclusively religious.'' Section 1.6033-2(g)(5)(ii) provides that an
organization's principal activity is not ``exclusively religious'' if
that activity is educational, literary, charitable, or of another
nature (other than religious) that would serve as a basis for exemption
under section 501(c)(3).
The ``exclusively religious'' element of the definition was
litigated in Lutheran Social Service of Minnesota v. United States, 583
F. Supp. 1298 (D. Minn. 1984), rev'd 758 F.2d 1283 (8th Cir. 1985), and
Tennessee Baptist Children's Homes, Inc. v. United States, 604 F. Supp.
210 (M.D. Tenn. 1984) aff'd, 790 F.2d 534 (6th Cir. 1986). While the
litigation over the ``exclusively religious'' standard was proceeding,
Congress enacted section 3121(w) of the Internal Revenue Code, Tax
Reform Act of 1984, Pub. L. 98-369, section 2603(b), 98 Stat. 494, 1128
(1984), which permits certain church-related organizations to elect out
of social security coverage if they meet a standard based on the degree
of financial support they receive from a church. In light of this
litigation and the enactment of section 3121(w), IRS personnel met with
representatives of various church organizations to encourage voluntary
compliance with the filing requirements and to develop a less
controversial and more objective standard for identifying an integrated
auxiliary of a church.
Subsequent to these meetings the IRS published Rev. Proc. 86-23,
which provides that, for tax years beginning after December 31, 1975,
an organization is not required to file Form 990 if it is: (1)
described in sections 501(c)(3) and 509(a) (1), (2), or (3); (2)
affiliated with a church or a convention or association of churches;
and (3) internally supported. With respect to this last criterion, Rev.
Proc. 86-23 sets forth an internal support standard that is similar to
the financial support standard in section 3121(w).
The proposed regulations adopted the rules of Rev. Proc. 86-23 as
the definition of the term integrated auxiliary of a church replacing
the current definition set forth in Sec. 1.6033-2(g)(5). The final
regulations retain the definition of an integrated auxiliary of a
church that is contained in the proposed regulations.
Under this Treasury decision, to be an integrated auxiliary of a
church an organization must first be described in section 501(c)(3) and
section 509(a) (1), (2), or (3), and be affiliated with a church in
accordance with standards set forth in the regulations. An organization
meeting those tests is an integrated auxiliary if it either: (1) does
not offer admissions, goods, services, or facilities for sale, other
than on an incidental basis, to the general public; or (2) offers
admissions, goods, services, or facilities for sale, other than on an
incidental basis, to the general public and not more than 50 percent of
its support comes from a combination of government sources, public
solicitation of contributions, and receipts other than those from an
unrelated trade or business.
Some commentators have noted that certain church-related
organizations that finance, fund and manage pension programs were
originally excused from filing by Notice 84-2 (1984-1 C.B. 331), which
was issued pursuant to the Commissioner's discretionary authority
[[Page 65551]]
under section 6033(a)(2)(B). Rev. Proc. 86-23 states that Notice 84-2
is superseded by Rev. Proc. 86-23 because the organizations excused
from filing under the notice are excused from filing by the revenue
procedure. The commentators have expressed concern that the proposed
regulations did not relieve church pension plans described in Notice
84-2 from the filing requirement. The organizations excused from filing
under Notice 84-2 do not necessarily meet the definition of an
integrated auxiliary of a church under these final regulations.
Nevertheless, the proposed regulations were not intended to alter the
exemption from filing provided in Notice 84-2 and reaffirmed in Rev.
Proc. 86-23. To make this intent clear, the IRS is issuing Revenue
Procedure 96-10 at the same time that it issues these final
regulations. Rev. Proc. 96-10 carries over the exemption from filing
for church pension plan organizations that was set forth in Notice 84-
2. Having reaffirmed those parts of Rev. Proc. 86-23 that were not
incorporated into these final regulations, Rev. Proc. 96-10 also
obsoletes Rev. Proc. 86-23.
The IRS developed the internal support test contained in the
proposed regulations based on its conclusion that Congress intended
that organizations receiving a majority of their support from public
and government sources, as opposed to those receiving a majority of
their support from church sources, should file annual information
returns in order that the public have a means of inspecting the returns
of these organizations. The annual information return also was intended
to serve as a means by which the IRS could examine, if necessary, those
organizations receiving substantial non-church support.
One commentator has suggested that the definition of an integrated
auxiliary of a church should consist of a church-related structural
test rather than an internal support test. The IRS and the Treasury
Department believe that the use of a structural test could lead to
problems similar to those caused by the ``exclusively religious'' test.
Additionally, the suggested definition would frustrate Congress'
intended objective of allowing ongoing public scrutiny of organizations
receiving the majority of their support from public and government
sources.
A commentator has also suggested that by using the internal support
test as part of the new definition of an integrated auxiliary of a
church, the IRS is attempting to ``overrule'' the holdings in the
previously mentioned court cases (i.e. Tennessee Baptist Children's
Home and Lutheran Social Service of Minnesota).
The IRS and the Treasury Department believe that the courts'
rulings questioned the validity of the ``exclusively religious''
activity requirement contained in the former regulation on the basis
that it is not within the Service's discretion to assess the religious
nature of a church's activities. Having eliminated the ``exclusively
religious'' activity test from the definition of integrated auxiliary
of a church, the IRS and the Treasury Department believe that the
definition in the final regulation is consistent with the courts'
holdings as well as the statute and the legislative history.
Some commentators have suggested that the first sentence of
Sec. 1.6033-2(g)(5)(iv) of the regulations in effect prior to this
Treasury decision should be included in the final regulations. That
sentence identified specific types of organizations as integrated
auxiliaries of churches in accordance with legislative history.
Although Sec. 1.6033-2(h) of the proposed regulations was intended to
provide a general definition that could apply in all instances, the IRS
and the Treasury Department agree that, in order to be consistent with
the legislative history, parts of Sec. 1.6033-2(g)(5)(iv) of the
regulations should be included in these final regulations. Therefore,
these final regulations include Sec. 1.6033-2(h)(5) that states that
``a men's or women's organization, a seminary, a mission society, or a
youth group'' is an integrated auxiliary of a church regardless of
whether it meets the internal support test in to Sec. 1.6033-
2(h)(1)(iii). (The tests under Sec. 1.6033-2(h)(1) (i) and (ii) must
still be met.)
Comments were received objecting that Example 4 relating to
seminaries did not describe a realistic set of facts and, therefore,
could lead to confusion. Accordingly, Example 4 has been eliminated.
Also, the treatment of seminaries has been clarified by Sec. 1.6033-
2(h)(5). We also note that, in addition to the exception for
seminaries, Sec. 1.6033-2(g)(1)(vii) of the regulations excepts certain
schools below college level that are affiliated with a church or
operated by a religious order from the filing requirements of section
6033. Except for a paragraph numbering change contained in a cross-
reference, Sec. 1.6033-2(g)(1)(vii) is unchanged by these final
regulations.
Several commentators have suggested that expanded definitions of
certain terms used in the internal support test be included in this
Treasury decision. The final regulations do not incorporate this
suggestion. The IRS and the Treasury Department intend for these final
regulations to reissue the test published in Rev. Proc. 86-23 as the
new definition for an integrated auxiliary of a church. If guidance is
necessary on the application of the definition to specific cases, that
guidance is more appropriately provided in non-regulatory form, such as
through private letter rulings or revenue rulings.
The amendment to Sec. 1.6033-2(g)(5) is effective with respect to
returns filed for taxable years beginning after December 31, 1969.
However, for returns filed for taxable years beginning after December
31, 1969, but before December 20, 1995, the exclusively religious test
contained in Sec. 1.6033-2(g)(5) prior to its amendment by these final
regulations may, at the entity's option, be used as an alternative to
the financial support test in determining whether an entity is an
integrated auxiliary of a church. The remainder of the amendments are
effective with respect to returns for taxable years beginning after
December 31, 1969. Therefore, for returns filed for taxable years
beginning after December 20, 1995, the definition of integrated
auxiliary of a church contained in Sec. 1.6033-2(h) will be used in
determining whether an entity is an integrated auxiliary of a church.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore,a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of this Treasury decision is Terri Harris,
Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, personnel from other offices of the IRS
and the Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
[[Page 65552]]
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.508-1 is amended by revising paragraphs(a)(3)(i)
introductory text and (a)(3)(i)(a) to read as follows:
Sec. 1.508-1 Notices.
(a) * * *
(3) * * * (i) Paragraphs (a) (1) and (2) of this section are
inapplicable to the following organizations:
(a) Churches, interchurch organizations of local units of a church,
conventions or associations of churches, or integrated auxiliaries of a
church. See Sec. 1.6033-2(h) regarding the definition of integrated
auxiliary of a church;
* * * * *
Par. 3. Section 1.6033-2 is amended as follows:
1. Paragraphs (g)(1)(i) and (g)(vii) are revised.
2. Paragraph (g)(5) is removed and reserved.
3. Paragraphs (h) through (j) are redesignated as paragraphs (i)
through (k).
4. New paragraph (h) is added.
The added and revised provisions read as follows:
Sec. 1.6033-2 Returns by exempt organizations (taxable years beginning
after December 31, 1969) and returns by certain nonexempt organizations
(taxable years beginning after December 31, 1980).
* * * * *
(g) * * *
(1) * * *
(i) A church, an interchurch organization of local units of a
church, a convention or association of churches, or an integrated
auxiliary of a church (as defined in paragraph (h) of this section);
* * * * *
(vii) An educational organization (below college level) that is
described in section 170(b)(1)(A)(ii), that has a program of a general
academic nature, and that is affiliated (within the meaning of
paragraph (h)(2) of this section) with a church or operated by a
religious order.
* * * * *
(h) Integrated auxiliary--(1) In general. For purposes of this
title, the term integrated auxiliary of a church means an organization
that is--
(i) Described both in sections 501(c)(3) and 509(a) (1), (2), or
(3);
(ii) Affiliated with a church or a convention or association of
churches; and
(iii) Internally supported.
(2) Affiliation. An organization is affiliated with a church or a
convention or association of churches, for purposes of paragraph
(h)(1)(ii) of this section, if--
(i) The organization is covered by a group exemption letter issued
under applicable administrative procedures, (such as Rev. Proc. 80-27
(1980-1 C.B. 677); See Sec. 601.601(a)(2)(ii)(b)), to a church or a
convention or association of churches;
(ii) The organization is operated, supervised, or controlled by or
in connection with (as defined in Sec. 1.509(a)-4) a church or a
convention or association of churches; or
(iii) Relevant facts and circumstances show that it is so
affiliated.
(3) Facts and circumstances. For purposes of paragraph (h)(2)(iii)
of this section, relevant facts and circumstances that indicate an
organization is affiliated with a church or a convention or association
of churches include the following factors. However, the absence of one
or more of the following factors does not necessarily preclude
classification of an organization as being affiliated with a church or
a convention or association of churches--
(i) The organization's enabling instrument (corporate charter,
trust instrument, articles of association, constitution or similar
document) or by-laws affirm that the organization shares common
religious doctrines, principles, disciplines, or practices with a
church or a convention or association of churches;
(ii) A church or a convention or association of churches has the
authority to appoint or remove, or to control the appointment or
removal of, at least one of the organization's officers or directors;
(iii) The corporate name of the organization indicates an
institutional relationship with a church or a convention or association
of churches;
(iv) The organization reports at least annually on its financial
and general operations to a church or a convention or association of
churches;
(v) An institutional relationship between the organization and a
church or a convention or association of churches is affirmed by the
church, or convention or association of churches, or a designee
thereof; and
(vi) In the event of dissolution, the organization's assets are
required to be distributed to a church or a convention or association
of churches, or to an affiliate thereof within the meaning of this
paragraph (h).
(4) Internal support. An organization is internally supported, for
purposes of paragraph (h)(1)(iii) of this section, unless it both--
(i) Offers admissions, goods, services or facilities for sale,
other than on an incidental basis, to the general public (except goods,
services, or facilities sold at a nominal charge or for an
insubstantial portion of the cost); and
(ii) Normally receives more than 50 percent of its support from a
combination of governmental sources, public solicitation of
contributions, and receipts from the sale of admissions, goods,
performance of services, or furnishing of facilities in activities that
are not unrelated trades or businesses.
(5) Special rule. Men's and women's organizations, seminaries,
mission societies, and youth groups that satisfy paragraphs (h)(1) (i)
and (ii) of this section are integrated auxiliaries of a church
regardless of whether such an organization meets the internal support
requirement under paragraph (h)(1)(iii) of this section.
(6) Effective date. This paragraph (h) applies for returns filed
for taxable years beginning after December 31, 1969. For returns filed
for taxable years beginning after December 31, 1969 but beginning
before December 20, 1995, the definition for the term integrated
auxiliary of a church set forth in Sec. 1.6033-2(g)(5) (as contained in
the 26 CFR edition revised as of April 1, 1995) may be used as an
alternative definition to such term set forth in this paragraph (h).
(7) Examples of internal support. The internal support test of this
paragraph (h) is illustrated by the following examples, in each of
which it is assumed that the organization's provision of goods and
services does not constitute an unrelated trade or business:
Example 1. Organization A is described in sections 501(c)(3) and
509(a)(2) and is affiliated (within the meaning of this paragraph
(h)) with a church. Organization A publishes a weekly newspaper as
its only activity. On an incidental basis, some copies of
Organization A's publication are sold to nonmembers of the church
with which it is affiliated. Organization A advertises for
subscriptions at places of worship of the church. Organization A is
internally supported, regardless of its sources of financial
support, because it does not offer admissions, goods, services, or
facilities for sale, other than on an incidental basis, to the
general public. Organization A is an integrated auxiliary.
Example 2. Organization B is a retirement home described in
sections 501(c)(3) and 509(a)(2). Organization B is affiliated
(within the meaning of this paragraph (h)) with a
[[Page 65553]]
church. Admission to Organization B is open to all members of the
community for a fee. Organization B advertises in publications of
general distribution appealing to the elderly and maintains its name
on non-denominational listings of available retirement homes.
Therefore, Organization B offers its services for sale to the
general public on more than an incidental basis. Organization B
receives a cash contribution of $50,000 annually from the church.
Fees received by Organization B from its residents total $100,000
annually. Organization B does not receive any government support or
contributions from the general public. Total support is $150,000
($100,000 + $50,000), and $100,000 of that total is from receipts
from the performance of services (66\2/3\% of total support).
Therefore, Organization B receives more than 50 percent of its
support from receipts from the performance of services. Organization
B is not internally supported and is not an integrated auxiliary.
Example 3. Organization C is a hospital that is described in
sections 501(c)(3) and 509(a)(1). Organization C is affiliated
(within the meaning of this paragraph (h)) with a church.
Organization C is open to all persons in need of hospital care in
the community, although most of Organization C's patients are
members of the same denomination as the church with which
Organization C is affiliated. Organization C maintains its name on
hospital listings used by the general public, and participating
doctors are allowed to admit all patients. Therefore, Organization C
offers its services for sale to the general public on more than an
incidental basis. Organization C annually receives $250,000 in
support from the church, $1,000,000 in payments from patients and
third party payors (including Medicare, Medicaid and other insurers)
for patient care, $100,000 in contributions from the public,
$100,000 in grants from the federal government (other than Medicare
and Medicaid payments) and $50,000 in investment income. Total
support is $1,500,000 ($250,000 + $1,000,000 + $100,000 + $100,000 +
$50,000), and $1,200,000 ($1,000,000 + $100,000 + $100,000) of that
total is support from receipts from the performance of services,
government sources, and public contributions (80% of total support).
Therefore, Organization C receives more than 50 percent of its
support from receipts from the performance of services, government
sources, and public contributions. Organization C is not internally
supported and is not an integrated auxiliary.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: November 27, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30839 Filed 12-19-95; 8:45 am]
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