What is a Group Exemption Letter?
The IRS sometimes recognizes a group of organizations as tax-exempt if they are affiliated with a central organization. This avoids the need for each of the organizations to apply for exemption individually. A Group Exemption Letter has the same effect as an individual exemption letter except that it applies to more than one organization.
What is the reason for group exemptions?
Group exemptions are an administrative convenience for both the IRS and organizations with many affiliated organizations. Subordinates in a group exemption do not have to file, and the IRS does not have to process, separate applications for exemption. Think of tens of thousands of Boy Scout troops applying for 501c3 status. Consequently, subordinates do not receive individual exemption letters.
What types of organizations can qualify for group exemptions?
Exempt organizations that have or plan to have related organizations that are very similar to each other may apply for a group exemption. Think Boy Scouts, or a denomination with many churches underneath the central denomination.
What are central and subordinate organizations?
Groups of organizations with Group Exemption Letters have a “head” or main organization, referred to as a central organization. The central organization generally supervises or controls many chapters, called subordinate organizations. The subordinate organizations have the same “mirrored” structures, purposes, and activities (and legal documents).
What criteria must organizations meet to be included in a group exemption?
- To qualify for a group exemption, the central organization and its subordinates must have a defined relationship. Subordinates must be:
- Affiliated with the central organization;
- Subject to the central organization’s general supervision or control;
- Exempt under the same paragraph of 501(c), though not necessarily the paragraph under which the central organization is exempt;
- Not private foundations;
- All on the same accounting period as the central organization if they are to be included in group returns; and
- Organizations that have been formed within the 27-month period prior to the date of submission of the group exemption letter application, if they are claiming section 501(c)(3) status and wish to be recognized as exempt from their dates of creation. A group exemption letter may be issued covering subordinates, one or more of which have not been organized within the 27-month period prior to the date of submission, if all subordinates are willing to be recognized as exempt only from the date of application.
What factors and documents need to be “mirrored” in all the subordinates?
The purpose of the subordinates must be “mirrored” in all the subordinate organizations. The purpose statement and the required IRS provisions in the Articles of Incorporation must be “mirrored” in all the subordinate organizations’ documents. The type of organization (e.g., charitable, religious, educational, scientific) must be “mirrored” in all the subordinate organizations’ Articles of Incorporation and Bylaws. The Bylaws must be “mirrored” in all the subordinate organizations’ documents. The Adoption of the Bylaws by the Directors/Trustees must be “mirrored” in all the subordinate organizations’ documents. The Certification of the Secretary certifying that the bylaws have been adopted by the directors/trustees must be “mirrored” in all the subordinate organizations’ documents. The Conflict of Interest Policy must be “mirrored” in all the subordinate organizations’ documents.
Hopefully this gives you enough information to know whether this is what you’re looking for. If it is, read on.
The IRS User Fee for group exemptions is more than three times what it is for a regular 501c3 ($2,000 vs. $600). This should give you an idea of how elaborate and complex the process is. There is a lot of work (more than three times) for you, for us, and for the IRS.
Our current reduced fee is $4,995 ($3,995 if central organization already has its 501c3 status). Plus $1,095 for each subordinate you have (or bring in later) under your central organization (which is our normal fee for preparing corporate documents).
The IRS filing fee is $2000.
Please keep in mind that, compared with the regular 501c3, not only is there three times as much work for you to do to obtain the group exemption letter, but also after you receive your group exemption letter, there is ongoing work to supervise or control your subordinates and ongoing paperwork to manage them once you receive the exemption letter. But if you want a growing number of subordinates under your organization, this is the way to go.
Not for the faint-hearted or those on a low budget. But if you are sincerely interested, we can do this for you.
Short-list of types of organizations that can benefit from a group exemption letter: nonprofit school “franchise,” church denominations, nonprofit sports network for low-income youth, nonprofit soup kitchen or thrift store “franchise,” nonprofit veterans aid organization with many chapters.