81 FR 45008 - Requirement To Notify the IRS of Intent To Operate as a Section 501(c)(4) Organization; Final and Temporary Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 81, Issue 133 (July 12, 2016)

This document contains final and temporary regulations relating to the requirement, added by the Protecting Americans from Tax Hikes Act of 2015, that organizations must notify the IRS of their intent to operate under section 501(c)(4) of the Internal Revenue Code (Code). The regulations affect organizations described in section 501(c)(4) (section 501(c)(4) organizations) that are organized after December 18, 2015, and certain section 501(c)(4) organizations existing on that date. The text of the temporary regulations serves as the text of the proposed regulations set forth in the related notice of proposed rulemaking (REG-101689-16) published in the Proposed Rules section in this issue of the Federal Register.

[Federal Register Volume 81, Number 133 (Tuesday, July 12, 2016)]
[Rules and Regulations]
[Pages 45008-45012]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-16338]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9775]
RIN 1545-BN26


Requirement To Notify the IRS of Intent To Operate as a Section 
501(c)(4) Organization; Final and Temporary Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the requirement, added by the Protecting Americans from Tax 
Hikes Act of 2015, that organizations must notify the IRS of their 
intent to operate under section 501(c)(4) of the Internal Revenue Code 
(Code). The regulations affect organizations described in section 
501(c)(4) (section 501(c)(4) organizations) that are organized after 
December 18, 2015, and certain section 501(c)(4) organizations existing 
on that date. The text of the temporary regulations serves as the text 
of the proposed regulations set forth in the related notice of proposed 
rulemaking (REG-101689-16) published in the Proposed Rules section in 
this issue of the Federal Register.

DATES: 
    Effective Date: These regulations are effective on July 8, 2016.
    Applicability Date: For date of applicability, see Sec.  1.506-
1T(f).

FOR FURTHER INFORMATION CONTACT: Chelsea Rubin at (202) 317-5800 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final and 
temporary regulations will be reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-2268.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books and records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This Treasury decision contains temporary regulations under section 
506 of the Code. Section 405 of the Protecting Americans from Tax Hikes 
Act of 2015 (Pub. L. 114-113, div. Q) (the PATH Act), enacted on 
December 18, 2015, added section 506 to the Code and amended sections 
6033 and 6652. Because the statutory provisions were effective upon 
enactment and certain section 501(c)(4) organizations must notify the 
IRS within 60 days of formation, these temporary regulations are 
necessary to provide prompt guidance to enable section 501(c)(4) 
organizations to satisfy the new statutory notification requirement and 
provide appropriate transition relief.

1. Section 501(c)(4) Organizations

    Section 501(a) of the Code generally provides that an organization 
described in section 501(c) is exempt from federal income tax. Section 
501(c)(4) describes certain civic leagues or organizations operated 
exclusively for the promotion of social welfare and certain local 
associations of employees. An organization is described in section 
501(c)(4) and exempt from tax under section 501(a) if it satisfies the 
requirements applicable to such status. Subject to certain exceptions, 
section 6033, in part, requires organizations exempt from taxation 
under section 501(a) to file annual information returns or notices, as 
applicable.
    Although an organization may apply to the IRS for recognition that 
the organization qualifies for tax-exempt status under section 
501(c)(4), there is no requirement to do so (except as provided in 
section 6033(j)(2), which requires organizations that lose tax-exempt 
status for failure to file required annual information returns or 
notices and want to regain tax-exempt status to apply to obtain 
reinstatement of such status). Accordingly, a section 501(c)(4) 
organization that files annual information returns or notices, as 
required under section 6033, need not seek an IRS determination of its 
qualification for tax-exempt status in order to be described in and 
operate as a section 501(c)(4) organization.

[[Page 45009]]

2. The PATH Act

    Section 405(a) of the PATH Act added section 506 to the Code, 
requiring an organization to notify the IRS of its intent to operate as 
a section 501(c)(4) organization. In addition, section 405(b) and (c) 
of the PATH Act amended sections 6033(f) and 6652(c), relating to 
information that section 501(c)(4) organizations may be required to 
include on their annual information returns and penalties for certain 
failures by tax-exempt organizations to comply with filing or 
disclosure requirements, respectively.
    Section 506(a) requires a section 501(c)(4) organization, no later 
than 60 days after the organization is established, to notify the 
Secretary of the Department of the Treasury (Secretary) that it is 
operating as a section 501(c)(4) organization (the notification). 
Section 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. Section 506(c) requires the Secretary to send the 
organization an acknowledgment of the receipt of its notification 
within 60 days. Section 506(d) permits the Secretary to extend the 60-
day notification period for reasonable cause. Section 506(e) provides 
that the Secretary shall impose a reasonable user fee for submission of 
the notification. Section 506(f) provides that, upon request by an 
organization, the Secretary may issue a determination with respect to 
the organization's treatment as a section 501(c)(4) organization and 
that the organization's request will be treated as an application for 
exemption from taxation under section 501(a) subject to public 
inspection under section 6104.\1\
---------------------------------------------------------------------------

    \1\ The separate procedure by which an organization may request 
a determination of tax-exempt status is prescribed in Rev. Proc. 
2016-5, 2016-1 IRB 188, or its successor.
---------------------------------------------------------------------------

    In addition, the PATH Act amended section 6033(f) to require a 
section 501(c)(4) organization submitting the notification to include 
with its first annual information return after submitting the 
notification any additional information prescribed by regulation that 
supports the organization's treatment as a section 501(c)(4) 
organization.
    The PATH Act also amended section 6652(c) to impose penalties for 
failure to submit the notification by the date and in the manner 
prescribed in regulations. In particular, section 6652(c)(4)(A) imposes 
a penalty on an organization that fails to submit the notification 
equal to $20 per day for each day such failure continues, up to a 
maximum of $5,000. Additionally, section 6652(c)(4)(B) imposes a 
similar penalty on persons who fail to timely submit the notification 
in response to a written request by the Secretary.
    Section 405(f) of the PATH Act provides that, in general, the 
requirement to submit the notification and the related amendments to 
sections 6033 and 6652 apply to section 501(c)(4) organizations that 
are established after December 18, 2015, the date of enactment of the 
PATH Act. Section 405(f)(2) of the PATH Act provides that these 
provisions also apply to any other section 501(c)(4) organizations that 
had not, on or before the date of enactment of the PATH Act: (1) 
Applied for a written determination of recognition as a section 
501(c)(4) organization (using Form 1024, ``Application for Recognition 
of Exemption Under Section 501(a)''); or (2) filed at least one annual 
information return or notice required under section 6033(a)(1) or (i) 
(that is, a Form 990, ``Return of Organization Exempt From Income 
Tax,'' or, if eligible, Form 990-EZ, ``Short Form Return of 
Organization Exempt From Income Tax,'' or Form 990-N (e-Postcard)). 
Organizations described in section 405(f)(2) of the PATH Act must 
submit the notification within 180 days after the date of enactment of 
the PATH Act.

3. Notice 2016-09

    The Treasury Department and the IRS issued Notice 2016-09 (2016-6 
IRB 306 (February 8, 2016)) to provide interim guidance regarding 
section 405 of the PATH Act. Specifically, Notice 2016-09 extended the 
due date for submitting the notification until at least 60 days from 
the date that implementing regulations are issued in order to provide 
adequate transition time for organizations to comply with the new 
requirement to submit the notification. Notice 2016-09 further stated 
that no penalties under section 6652(c)(4) would apply to a section 
501(c)(4) organization that submits the notification by the due date 
provided in the regulations.
    With respect to the separate procedure by which an organization may 
request a determination from the IRS that it qualifies for tax-exempt 
status under section 501(c)(4), Notice 2016-09 stated that 
organizations seeking IRS recognition of section 501(c)(4) status 
should continue using Form 1024 until further guidance is issued. 
Notice 2016-09 also clarified that the filing of Form 1024 does not 
relieve an organization of the requirement to submit the notification. 
The Treasury Department and the IRS received a public comment in 
response to Notice 2016-09, which was considered in drafting these 
temporary regulations.

Explanation of Provisions

1. Overview of Temporary Regulations

    The temporary regulations prescribe the manner in which an 
organization must notify the IRS, consistent with section 506, that it 
is operating as a section 501(c)(4) organization. In addition, the 
temporary regulations clarify that the submission of the notification 
does not constitute a request by an organization for a determination 
from the IRS that it qualifies for tax-exempt status.

2. The Notification

    The IRS has developed a new electronic form, Form 8976, ``Notice of 
Intent to Operate Under Section 501(c)(4),'' for use by organizations 
submitting the notification. In accordance with section 506(a), the 
temporary regulations generally require a section 501(c)(4) 
organization to submit the notification to the IRS on Form 8976 (or its 
successor) no later than 60 days after the date the organization is 
organized. The Form 8976 must be submitted in accordance with the form 
and its instructions.
    Consistent with section 506(b), the temporary regulations specify 
that the notification must include: (1) The name, address, and taxpayer 
identification number of the organization; (2) the date on which, and 
the state or other jurisdiction under the laws of which, the 
organization was organized; and (3) a statement of the purpose of the 
organization. In addition, the temporary regulations provide that the 
notification must include such additional information as may be 
specified in published guidance in the Internal Revenue Bulletin or in 
other guidance, such as forms or instructions, issued with respect to 
the notification. To ensure that the statutorily required items of 
information in the notification are correlated accurately within 
existing IRS systems, Form 8976 requires organizations to provide their 
annual accounting period.
    The temporary regulations also provide that the notification must 
be accompanied by payment of the reasonable user fee authorized by 
section 506(e), which will be set forth by published guidance in the 
Internal Revenue Bulletin or in other guidance, such as forms or 
instructions, issued

[[Page 45010]]

with respect to the notification. Consistent with section 506(d), the 
temporary regulations state that the 60-day period for submitting the 
notification may be extended for reasonable cause.
    Further, the temporary regulations provide that, within 60 days 
after receipt of the notification, the IRS will send the organization 
an acknowledgment of such receipt. The temporary regulations clarify 
that this acknowledgment is not a determination with respect to tax-
exempt status. Thus, it is not a determination on which an organization 
may rely or a determination or a failure to make a determination with 
respect to which the organization may seek declaratory judgment under 
section 7428. For further information regarding the interaction of the 
section 506 notification requirement with the separate procedure by 
which an organization may request an IRS determination that it 
qualifies for tax-exempt status under section 501(c)(4), see section 5 
of this Explanation of Provisions.
    Finally, the temporary regulations provide that additional guidance 
on the procedures for submitting the notification may be provided in 
published guidance in the Internal Revenue Bulletin or in other 
guidance, such as forms or instructions, issued with respect to the 
notification. On July 8, 2016, the IRS released Rev. Proc. 2016-41, 
2016-30 IRB xxxx, which provides additional information on the 
procedure for submitting the Form 8976.
    A public comment submitted in response to Notice 2016-09 suggested 
that section 506(a) should not apply to foreign organizations that do 
not conduct significant activities (other than investment activities) 
in the United States, even if the organizations may be required to 
submit a Form 990 to the IRS. As the commenter notes, foreign section 
501(c)(4) organizations generally are required to file an annual 
information return or notice with the IRS under section 6033. See Rev. 
Proc. 2011-15, Sec.  3 (2011-3 IRB 322). Section 506(a) does not 
include an exception from the requirement to submit the notification 
for foreign section 501(c)(4) organizations. The Treasury Department 
and the IRS have determined that the regulations should not create such 
an exception because the requirement to submit the notification is 
intended to replace the former practice under which section 501(c)(4) 
organizations (both domestic and foreign) might not notify the IRS that 
they claim section 501(c)(4) status until they file a Form 990 return 
or notice. Accordingly, the temporary regulations clarify that a 
section 501(c)(4) organization must submit the notification whether it 
is organized in the United States or outside the United States. 
However, a foreign organization may be eligible for relief from 
penalties under section 6652 if it submits the notification promptly 
after first commencing activities or receiving income that would cause 
it to have a filing requirement under section 6033. Rev. Proc. 2016-41 
includes an example to illustrate the availability of this relief.

3. Special Rules for Organizations Organized on or Before July 8, 2016

    Under section 405(f)(2) of the PATH Act, the requirement to submit 
the notification does not apply to certain organizations that notified 
the IRS of their existence on or before December 18, 2015. The Treasury 
Department and the IRS recognize that, since the enactment of the PATH 
Act but before the availability of the new electronic Form 8976 for 
submitting the notification, additional section 501(c)(4) organizations 
may have notified the IRS of their existence by applying for a written 
determination of tax-exempt status or filing a required annual 
information return or notice. Accordingly, to reduce the burden on 
these organizations and the IRS, the temporary regulations provide 
relief from the requirement to submit the notification for any section 
501(c)(4) organization that, on or before July 8, 2016, either: (1) 
Applied for a written determination of recognition as a section 
501(c)(4) organization (using Form 1024); or (2) filed at least one 
annual return or notice required under section 6033(a)(1) or (i) (that 
is, a Form 990 or, if eligible, Form 990-EZ or Form 990-N).
    In order to allow adequate transition time for organizations that 
do not qualify for this transition relief to submit the notification in 
the manner prescribed by these regulations, the temporary regulations 
provide that an organization that was organized on or before July 8, 
2016, will have until September 6, 2016, which is 60 days from the date 
that the regulations are filed with the Federal Register, to submit the 
notification.

4. Failure To Submit the Notification

    For information on the applicable penalties for failure to submit 
the notification, the temporary regulations refer to section 
6652(c)(4), which imposes penalties on the organization and on persons 
who fail to timely submit the notification in response to a written 
request by the Secretary, as well as section 6652(c)(5), which provides 
a reasonable cause exception, and section 6652(c)(6), which provides 
other special rules that generally apply for purposes of section 
6652(c) penalties.
    Under section 6652(c)(5), no penalty will be imposed with respect 
to a failure to submit the notification if it is shown that such 
failure is due to reasonable cause. Rev. Proc. 2016-41 addresses 
reasonable cause for abating a section 6652(c)(4) penalty.
    Under section 6652(c)(6), the section 6652(c)(4)(B) penalty imposed 
on ``persons'' who fail to timely submit the notification in response 
to a written request by the Secretary applies to any officer, director, 
trustee, employee, or other individual who is under a duty to submit 
the notification. In addition, under section 6652(c)(6), if more than 
one person is liable for the section 6652(c)(4)(B) penalty, all such 
persons will be jointly and severally liable with respect to the 
failure to submit the notification.

5. Separate Procedure by Which an Organization May Request an IRS 
Determination That It Qualifies for Section 501(c)(4) Exempt Status

    Section 506(f) provides that an organization subject to the section 
506 notification requirement may request a determination to be treated 
as an organization described in section 501(c)(4). This indicates that 
the procedure by which an organization may request a determination that 
it is described in section 501(c)(4) is separate from the procedure for 
submitting the notification. Accordingly, the temporary regulations 
provide that submission of the notification does not constitute a 
request for an IRS determination that the organization qualifies for 
tax-exempt status under section 501(c)(4). Rather, an organization that 
seeks IRS recognition of tax-exempt status under section 501(c)(4) must 
separately request a determination in the manner prescribed in Revenue 
Procedure 2016-5, or its successor.
    If an organization receives a determination from the IRS 
recognizing tax-exempt status, the organization's application, 
supporting papers, and final determination letter are open to public 
inspection under section 6104(a)(1) and (d). The notification, by 
contrast, is not open for public inspection because it is not an 
application within the meaning of section 6104.

6. No Additional Information Required on Form 990 or 990-EZ at This 
Time

    Section 6033(f)(2), as amended by the PATH Act, provides that the 
IRS may require an organization that submits the

[[Page 45011]]

notification to include additional information in support of the 
organization's treatment as an organization described in section 
501(c)(4) on the first Form 990 or 990-EZ, as applicable, filed by the 
organization after submitting the notification. The temporary 
regulations do not prescribe any additional information to be reported 
on Form 990 or 990-EZ at this time. The IRS will monitor the 
notification process to determine whether additional information is 
needed.

Statement of Availability of IRS Documents

    For copies of recently issued revenue procedures, revenue rulings, 
notices, and other guidance published in the Internal Revenue Bulletin, 
please visit the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory assessment is not 
required. It has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations. For applicability of the Regulatory Flexibility Act, 
please refer to the cross-referencing notice of proposed rulemaking 
published in the Proposed Rules section of this issue of the Federal 
Register. Pursuant to section 7805(f) of the Code, these regulations 
have been 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 these regulations is Chelsea R. Rubin, 
Office of Associate Chief Counsel (Tax Exempt and Government Entities). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:


    Authority:  26 U.S.C. 7805 * * *


0
Par 2. Section 1.506-1T is added to read as follows:


Sec.  1.506-1T  Organizations required to notify Commissioner of intent 
to operate under section 501(c)(4) (temporary).

    (a) Notification requirement--(1) In general. Except as provided in 
paragraph (b) of this section, an organization (whether domestic or 
foreign) described in section 501(c)(4) must, no later than 60 days 
after the date the organization is organized, notify the Commissioner 
that it is operating as an organization described in section 501(c)(4) 
by submitting a completed Form 8976, ``Notice of Intent to Operate 
Under Section 501(c)(4),'' or its successor (the notification). The 
notification must be submitted in accordance with the form and its 
instructions. The notification must include the information specified 
in paragraph (a)(2) of this section and be accompanied by payment of 
the user fee described in paragraph (a)(3) of this section. Additional 
guidance on the procedure for submitting the notification may be 
provided in published guidance in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2) of this chapter) or in other guidance, such as 
forms or instructions, issued with respect to the notification.
    (2) Contents of the notification. The notification must include the 
following information:
    (i) The name, address, and taxpayer identification number of the 
organization.
    (ii) The date on which, and the state or other jurisdiction under 
the laws of which, the organization was organized (that is, formed as a 
legal entity). For an organization formed outside the United States, 
the jurisdiction is the foreign country under the laws of which it is 
organized.
    (iii) A statement of the purpose of the organization.
    (iv) Such additional information as may be specified in published 
guidance in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of 
this chapter) or in other guidance, such as forms or instructions, 
issued with respect to the notification.
    (3) User fee. The notification must be accompanied by payment of 
the user fee set forth by published guidance in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2) of this chapter) or in other 
guidance, such as forms or instructions, issued with respect to the 
notification.
    (4) Extension for reasonable cause. The Commissioner may, for 
reasonable cause, extend the 60-day period for submitting the 
notification.
    (b) Special rules for organizations that were organized on or 
before July 8, 2016--(1) Notification requirement does not apply to 
organizations that filed with the IRS on or before December 18, 2015. 
The requirement to submit the notification does not apply to any 
organization described in section 501(c)(4) that, on or before December 
18, 2015, either--
    (i) Applied for a written determination of recognition as an 
organization described in section 501(c)(4) in accordance with Sec.  
1.501(a)-1 and all applicable guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter), forms, and 
instructions; or
    (ii) Filed at least one annual information return or annual 
electronic notification required under section 6033(a)(1) or (i).
    (2) Transition relief available for organizations that filed with 
the IRS on or before July 8, 2016. An organization described in section 
501(c)(4) is not required to submit the notification if, on or before 
July 8, 2016, the organization either--
    (i) Applied for a written determination of recognition as an 
organization described in section 501(c)(4) in accordance with Sec.  
1.501(a)-1 and all applicable guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter), forms, and 
instructions; or
    (ii) Filed at least one annual information return or annual 
electronic notification required under section 6033(a)(1) or (i).
    (3) Extended due date. An organization that was organized on or 
before July 8, 2016, and is not described in paragraph (b)(1) or (2) of 
this section, will satisfy the requirement to submit the notification 
if the notification is submitted on or before September 6, 2016.
    (c) Failure to submit the notification. For information on the 
penalties for failure to submit the notification, the applicable 
reasonable cause exception, and applicable special rules, see section 
6652(c)(4) through (6).
    (d) Acknowledgment of receipt. Within 60 days after receipt of the 
notification, the Commissioner will send the organization an 
acknowledgment of such receipt. This acknowledgment is not a 
determination by the Commissioner that the

[[Page 45012]]

organization qualifies for exemption under section 501(a) as an 
organization described in section 501(c)(4). See paragraph (e) of this 
section.
    (e) Separate procedure by which an organization may request an IRS 
determination that it qualifies for section 501(c)(4) tax-exempt 
status. Submission of the notification does not constitute a request by 
an organization for a determination by the Commissioner that the 
organization qualifies for exemption under section 501(a) as an 
organization described in section 501(c)(4). An organization seeking 
IRS recognition of its tax-exempt status must separately request such a 
determination in accordance with Sec.  1.501(a)-1 and all applicable 
guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2) of this chapter), forms, and instructions.
    (f) Effective/applicability date. This section applies on and after 
July 8, 2016.
    (g) Expiration date. The applicability of this section expires on 
or before July 8, 2019.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 3. The authority for part 602 continues to read as follows:


    Authority:  26 U.S.C. 7805 * * *


0
Par. 4. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where Identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.506-1T................................................       1545-2268
 
                                * * * * *
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John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: June 24, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-16338 Filed 7-8-16; 11:15 am]
 BILLING CODE 4830-01-P