IRS Proposes Changes to Group Exemption Letter Program

The IRS is proposing several substantial changes to the procedures required for exempt organizations to receive and maintain group exemption letters. These proposed procedures, when finalized, will apply to both new and pre-existing group rulings. There are some exceptions and transitional relief to pre-existing group rulings.

With a group exemption letter, a set of subordinate organizations affiliated with and under the general supervision or control of a central organization may receive tax-exempt status as a group from the IRS under Section 501(c). The group exemption letter is issued to the central organization.

Notice 2020-36, issued on May 1, 2020, contains a proposed revenue procedure on group exemptions that will update and supersede Revenue Procedure (Rev. Proc.) 80-27. The guidance is being issued as a proposed revenue procedure to allow comments from the public on its provisions. Pending the issuance of the final revenue procedure, the IRS stopped accepting requests for group exemption letters, beginning June 17, 2020.

“In general, the changes are intended: to increase efficiency, transparency, and compliance with the group exemption letter program; to improve the central organization’s ability to exercise general supervision or control over its subordinate organizations; and to reduce the administrative burden on the IRS,” Notice 2020-36 states.
Here are the key takeaways that not-for-profit organizations should know.

Obtaining and Maintaining a Group Exemption Letter

As set forth in the proposed revenue procedure, a central organization must be described in Section 501(c), which lists types of exempt organizations, or it must be an instrumentality or an agency of a political subdivision. Here are some of the other main changes.

Requirement to Have Subordinate Organizations

Under the proposed revenue procedure, a central organization must have at least five subordinate organizations to receive a group exemption letter, and it must have at least one subordinate organization to maintain the group exemption letter going forward. The previous rules didn’t have a minimum requirement on the number of subordinate organizations. In fact, hundreds of central organizations with group exemption letters currently have no subordinate organizations.

Limit on Group Exemptions

In addition, a central organization would only be allowed to maintain one group exemption letter under the new guidance. Previously, there hadn’t been a limit.

General Supervision and Control Requirements

A central organization must demonstrate that each subordinate organization covered by the group exemption letter is affiliated with the central organization and subject to its general supervision and control. The previous rules hadn’t defined general supervision or control.

A subordinate organization is under a central organization’s general supervision, according to the proposed revenue procedure, if the central organization does both of the following:

  • Annually reviews and retains information on the subordinate’s finances, activities, and compliance with annual filing requirements
  • Sends written notice to the subordinate about the requirements to maintain its tax-exempt status

Control occurs, according to the proposed revenue procedure, if the central organization appoints a majority of the subordinate’s officers, directors, or trustees; or a majority of the subordinate’s officers, directors, or trustees serve the central organization in the same capacity.

Supplemental Group Ruling Information

Both Rev. Proc. 80-27 and the proposed revenue procedure require a central organization to annually submit information, known as supplemental group ruling information (SGRI), to maintain the group exemption letter. Under the proposed rules, the SGRI must now be submitted at least 30 days before the end of the central organization’s accounting period; previously, the requirement had been 90 days before. Also under the proposed rules, a central organization that is a church or a convention of churches may submit SGRI but is not required to.

Included in the SGRI to be submitted are the following items:

  • Changes in purpose of any subordinates described in Section 501(c)(3), or changes in activities for any subordinates described in any paragraph of Section 501(c)
  • List of subordinates that have changed their names or mailing addresses during the year
  • List of subordinates no longer to be included in the group exemption letter
  • List of subordinates to be added to the group exemption letter

If there are no changes to report, the central organization must submit a statement saying so.

Requirements for Subordinate Organizations

The proposed revenue procedure outlines four new requirements for subordinate organizations. The new conditions are:

  • Matching requirement: If the central organization is described in Section 501(c), then all subordinates must also be described in the same paragraph of Section 501(c) as the central organization. For instance, if the central organization is a 501(c)(3) organization, then all the subordinates must also be 501(c)(3) organizations.

If the central organization is a government agency or instrumentality not described in Section 501(c), then all subordinates must be described in the same paragraph of Section 501(c).

  • Foundation classification requirement: All subordinates described in Section 501(c)(3) must be classified as public charities under the same paragraph of Section 509(a). Subordinates classified under Section 509(a)(1) need not be classified under the same paragraph of Section 170(b)(1)(A). In addition, subordinates classified as publicly supported organizations under either Sections 509(a)(1) and 170(b)(1)(A)(vi) or under Section 509(a)(2) will be considered to have the same foundation classification. The foundation classification of the central organization may differ from the subordinates.
  • Similar purpose requirement: The primary purpose of all subordinates described in Section 501(c)—except for 501(c)(3) organizations—must be described by the same National Taxonomy of Exempt Entities (NTEE) code. NTEE codes can be found here.
  • Uniform governing instrument requirement: All subordinates must adopt a uniform governing instrument. If the group contains 501(c)(3) organizations with different purposes, then the governing instrument describing each purpose should be uniform.

The following organizations aren’t eligible to be subordinate organizations:

  • Entities organized in a foreign country. A subordinate organization may operate in a foreign country as long as it is organized in the United States.
  • Private foundations
  • Type III supporting organizations. This is new with the proposed revenue procedure.
  • Qualified not-for-profit health insurance issuers described in Section 501(c)(29). This is new with the proposed revenue procedure.
  • Organizations that have had their exemption automatically revoked and have not yet had their exemptions reinstated. This is new with the proposed revenue procedure.

As before, a subordinate must give the central organization written authorization to include it in the request for a group exemption letter. Under the proposed revenue procedure, the authorization must now also state that the central organization can remove the subordinate from the group exemption letter for not complying with the revenue procedure.

Additional Information

Section 7428 allows 501(c)(3) organizations to file a declaratory judgment action in case of an actual controversy involving IRS determinations. Rev. Proc. 80-27 didn’t address how Section 7428 would apply to group exemptions. The proposed revenue procedures outline when Section 7428 would apply.

The proposed revenue procedure also includes information on the issuance of group exemption letters; instructions to request a group exemption letter; annual filing requirements; termination of the group exemption letter; the effective date of exemption; reliance on the group exemption letter by central and subordinate organizations, and by grantors and donors; and disclosure of group exemption letter requests and group exemption letters. Some of these provisions have carried over from Rev. Proc. 80-27.


The proposed revenue procedure would apply to all group exemption letters requested after the date the final revenue procedure is published in the Internal Revenue Bulletin. It would also apply to pre-existing group exemption letters, with a transition period for certain provisions.

Central organizations with a pre-existing group exemption letter that do not have any subordinate organizations have a year to add at least one subordinate. Central organizations with more than one group exemption letter have a year to determine which pre-existing group exemption letter, if any, it will maintain.

The revenue procedure would apply to all new subordinate organizations. For pre-existing subordinate organizations, the following rules will not apply:

  • The definition of general supervision and control
  • The matching, foundation classification, similar purpose, and uniform governing instrument requirements
  • Limit on Type III supporting organizations as subordinates

If a pre-existing group exemption letter includes pre-existing subordinates that are described in different paragraphs of Section 501(c), the central organization must remove those subordinates that are described in a paragraph different from the one in the group exemption letter request. For example, if a central organization had a pre-existing group exemption letter for Section 501(c)(3) subordinates, but it also had some subordinates described in Section 501(c)(4), it would have to remove the 501(c)(4) subordinates.

What’s Next

Rev. Proc. 80-27 will continue to apply until the publication of the final revenue procedure.

The IRS is seeking comments on the proposed revenue procedure in Notice 2020-36, particularly related to the following items:

  • The administrative burden created by the gathering of information required to show that a central organization has general supervision over a subordinate; the gathering of information from a subordinate for inclusion in a group exemption letter; and the gathering of information to submit SGRI
  • The factors that indicate a subordinate is affiliated with a central organization
  • Whether central organizations with more than one pre-existing group exemption letter would benefit from rules allowing the consolidation or transfer of one or more of the pre-existing group exemption letters

The submission of comments is due by August 16, 2020. Comments may be sent electronically to: Use “Notice 2020-36” in the subject line.

Written comments (include “Notice 2020-36” on the cover page) may be sent to:

              Internal Revenue Service
              CC:PA:LPD:PR (Notice 2020-36), Room 5203
              P.O. Box 7604
              Ben Franklin Station
              Washington, D.C. 20044

We’re Here to Help

If you have questions on any of the proposed changes or their potential implications for your organizations, please contact your Moss Adams professional.

Contact Us with Questions

Enter security code:
 Security code