IRS, stakeholders wrangle on group exemptions for 501(c)s

The Internal Revenue Service has released Rev. Proc. 2026-08, which updates procedures to obtain recognition of exemption from federal income tax on a group basis for 501(c) organizations that are affiliated with and under the general supervision or control of a central organization.

Processing Content

It also discusses the comments received in response to the proposed procedure and modifications made — and not made — in response to comments.

Clarity

The Treasury and the IRS received 29 written comments. Among them:

• The proposed revenue procedure requires a central organization to have at least five subordinate organizations to obtain a group exemption letter and at least one subordinate organization to maintain a group exemption letter afterward. One commenter recommended eliminating the first requirement, stating that it would discourage the use of group exemptions by making it more difficult for a central organization to recruit enough subordinate organizations. The Treasury Department and the IRS disagreed, saying the requirement for a central organization to have a minimum number of subordinate organizations is due to “the administrative burden that processing group applications imposes on the IRS.”
• The rev. proc. prohibits a central organization from maintaining more than one group exemption letter.  Several commenters objected to this provision, claiming it would decrease transparency and place significant administrative burdens on a central organization, particularly if coupled with the proposed revenue procedure’s requirements involving matching, foundation classification and uniform governing instruments. The response: Restricting the number of group exemption letters that a central organization can maintain is necessary because traditionally, the IRS’s electronic databases have not systematically tracked more than one group exemption letter per central organization. Maintaining more than one group exemption letter may also adversely affect a central organization’s ability to exercise general supervision over subordinate organizations.
• The proposed rev. proc. required a central organization to establish that each subordinate organization to be included in the group exemption letter is affiliated with the central organization and stated that a subordinate organization’s affiliation with the central organization is demonstrated by the entirety of the information. One commenter requested more clarity regarding the standard for determining whether a subordinate organization is affiliated with a central organization. In response, Sect 4.02(2) of Rev. Proc. 2026-8 adds several examples illustrating how a central organization may demonstrate affiliation with its subordinate organizations.

One or three years?

A central organization must have one or more subordinate organizations under its general supervision or control, according to the rev. proc. Several commenters claimed the general supervision standard was ambiguous concerning the amount and type of information a central organization must obtain, review and retain regarding its subordinate organizations’ finances, activities and compliance with filing requirements. 

One commenter requested more specificity regarding the way a central organization exercises general supervision over subordinate organizations that file a Form 990-N.

The rev. proc. provides that a central organization satisfies the requirement by acquiring a copy.

Commenters also asked about the information a central organization must transmit to subordinate organizations on tax-exempt status. Section 4.02(3)(a)(ii) of Rev. Proc. 2026-8, like Section 3.02(3)(b) of the proposed revenue procedure, is intentionally broad so as to “afford a central organization flexibility in meeting the general supervision standard,” the IRS replied.

Some commenters suggested a subordinate organization should only be required to inform the central organization that it complied with filing obligations once every three years. This suggestion is not adopted because “the Treasury Department and the IRS believe that the requirement that a central organization annually obtain, review and retain information on its subordinate organizations helps ensure the subordinate organizations are complying with their filing.”

A subordinate organization is subject to a central organization’s control if the central organization appoints a majority of the subordinate organization’s officers, directors or trustees; or a majority of the subordinate organization’s officers, directors or trustees are officers, directors or trustees of the central organization.

Some commenters claimed this control standard was overly rigid and that compliance would be burdensome, particularly for a central organization with numerous subordinate organizations.  One commenter asked that the final revenue procedure consider alternative governance structures that also demonstrate control by the central organization, such as cases in which the central organization must approve the election of the subordinate organization’s directors.

Another commenter stated the proposed control standard was at odds with principles of union democracy and that it directly contradicts provisions of the Labor-Management Reporting and Disclosure Act. The Treasury Department and IRS agreed, and added that the central organization can establish control over the subordinate organization using a written agreement evidencing its control over the subordinate organization’s activities and operations. 

A commenter suggested that any reference in the control standard to “a majority of officers, directors or trustees” must be limited to those have voting power because, in the commenter’s view, voting power evinces control. The Treasury Department and the IRS generally agreed with this comment, too, and added four structural conditions under which a subordinate organization is subject to a central organization’s control.

Several commenters suggested that the final procedure allow a central organization to exercise general supervision or control over subordinate organizations through intermediate subordinate organizations. The Treasury Department and the IRS did not agree, maintaining that a central organization is directly responsible for ensuring its subordinate organizations are entitled to federal tax-exempt status, and allowing a central organization to establish general supervision or control through intermediate subordinate organizations would run the risk of undermining this.

Religious questions

Several religious organizations objected to the general supervision or control standards in Section 3.02(3) and (4) of the proposed revenue procedure, claiming the standards would interfere with their religious practices because their beliefs require self-governance and autonomy at the local level. These commenters argued that the proposed rev. proc. would prevent them from participating in the group exemption letter program, in violation of the First Amendment and the Religious Freedom Restoration Act.

The response: Sec. 4.02(3)(c) of Rev. Proc. 2026-8 provides that a central organization does not have to annually obtain, review and retain information on a subordinate organization’s finances, activities and compliance with annual filing requirements if that subordinate organization is not required to file an annual information return or notice.

Some religious organizations also objected to the use of “subordinate organization,” stating that the term does not accurately reflect their organizational structure. Rev. Proc. 2026-8 continues to use the term “subordinate organization” because the group exemption letter program has referred to organizations as subordinate organizations for many decades and changing the term now would likely cause confusion, among other concerns.

Rev. Proc. 2026-08 and Notice 2026-08 will be in the Internal Revenue Bulletin for Jan. 20.