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Due date extended for social welfare orgs to provide notification required under Path Act

Notice 2016-9, 2016-6 IRB

In a Notice, IRS has provided interim guidance on Code Sec. 506, newly added by the Protecting Americans from Tax Hikes (PATH) Act of 2015, which requires new and certain existing social welfare organizations to notify IRS of their intent to operate under Code Sec. 501(c)(4). The Notice states that the due date for organizations subject to the requirement will be at least 60 days from the date that forthcoming temporary regs on Code Sec. 506 are issued.

Background. Code Sec. 501(a) generally provides that an organization described in Code Sec. 501(c) is exempt from federal income tax. In particular, Code Sec. 501(c)(4) describes organizations “operated exclusively for the promotion of social welfare.”

Under pre-PATH Act law, organizations seeking tax-exempt status under Code Sec. 501(c)(4) were not required to submit a formal exemption application to IRS but instead were exempt under that section if they satisfied the requirements applicable to that status. However, to get certain benefits, such as public recognition of their tax-exempt status, exemption from certain state taxes, and nonprofit mailing privileges, Code Sec. 501(c)(4) organizations voluntarily could request formal IRS recognition of their tax-exempt status by filing a Form 1024, Application for Recognition of Exemption Under Section 501(a).

New law. Code Sec. 506, added by the PATH Act, requires a Code Sec. 501(c)(4) organization established after Dec. 18, 2015 to, within 60 days after the organization is established, provide IRS with notification in the manner prescribed by regs that it is operating as a Code Sec. 501(c)(4) organization. The 60-day notification period may be extended for reasonable cause. (Code Sec. 506(d)) The notification requirement also applies to certain existing Code Sec. 501(c)(4) organizations—in general, any other Code Sec. 501(c)(4) organization that had not, on or before the date of enactment, applied for a written determination of recognition under Code Sec. 501(c)(4) or filed at least one annual information return or notice required under Code Sec. 6033(a)(1) or Code Sec. 6033(i) —and the notification is due no later than June 15, 2016, 180 days after the date of enactment of the PATH Act.

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. (Code Sec. 506(b)) IRS must send the organization an acknowledgement of the receipt of its notification within 60 days. (Code Sec. 506(c))

An organization that wants additional certainty regarding its qualification as tax-exempt under Code Sec. 501(c)(4) may file a request for a determination letter, along with the required user fee, with IRS. The request is treated as an application for exemption under Code Sec. 501(a) subject to public inspection under Code Sec. 6104. (Code Sec. 506(f))

The PATH Act also:

  • Amended Code Sec. 6033(f) to require a Code Sec. 501(c)(4) organization submitting the notification to include with its first annual information return filed thereafter any additional information prescribed by regs that supports the organization’s treatment as an organization described in Code Sec. 501(c)(4); and
  • 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. 506 (and implementing regs)—specifically, under Code Sec. 6652(c)(4)(A), a penalty on an organization that fails to submit the notification equal to $20 per day for each day the failure continues, up to a maximum of $5,000, and a similar penalty under Code Sec. 6652(c)(4)(B) on persons who fail to timely submit the notification in response to a written request from IRS.

Deadline pushed back. IRS intends to issue temporary regs implementing the notification requirement under Code Sec. 506. In order to provide adequate transition time for organizations to comply with the new procedures, IRS is extending the due date for submitting the notification until at least 60 days from the date that the regs are issued. Organizations were instructed in Notice 2016-9 that they “should wait to submit the information” until the regs are issued. No penalties under Code Sec. 6652(c)(4) will apply to a Code Sec. 501(c)(4) organization that submits the notification by the due date provided in the regs. (Notice 2016-9, Sec. 3)

Clarification. Notice 2016-9 clarifies that IRS’s statutorily mandated acknowledgment that it received a notification under Code Sec. 506(c) is not a determination that the organization qualifies for Code Sec. 501(c)(4) exempt status. Such a determination is separately requested and will be treated as an application for exemption from tax under Code Sec. 501(a). (Code Sec. 506(f))

Until further guidance is issued, organizations requesting IRS recognition of exempt status under Code Sec. 501(c)(4) should continue to use Form 1024. The filing of Form 1024 is optional and will not relieve an organization of the requirement to file the notification required under Code Sec. 506. (Notice 2016-9, Sec. 4)

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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