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Part 4. Examining Process

Chapter 75. Exempt Organizations Examination Procedures

Section 24. Organizations Covered by a Group Ruling

4.75.24  Organizations Covered by a Group Ruling

4.75.24.1  (08-01-2003)
Overview

  1. This IRM section contains guidance for examining central organizations covered by their own ruling and examining intermediate or subordinate organizations covered under a group ruling.

  2. Examination of group rulings will provide the opportunity of solving compliance problems up front through outreach programs coordinated with the central organizations. See Exhibit 4.75.24-1.

4.75.24.2  (08-01-2003)
Types of Examinations

  1. Examination of organizations covered by a group ruling include:

    1. A "central" or " parent" organization which is an organization recognized as exempt and requests exemption under the Internal Revenue Code for a group of subordinate organizations. A central or parent organization may file an annual group return on behalf of all or some of its subordinate organizations.

    2. An "intermediate" organization may be a state, area or regional organization that is a subordinate of a National with its own local subordinate units.

    3. A "subordinate" is a chapter, local post, or unit of a central or intermediate organization.

  2. The examination may be a general program examination or a part of a Coordinated Examination Program (CEP) examination.

    If the examination is... Then...
    A part of a CEP examination Refer to IRM 4.45.10, Exempt Organization's Coordinated Examination Program, specifically, IRM 4.45.10.11
    A general program examination Continue with this section.

4.75.24.3  (08-01-2003)
Examination Planning and Oversight

  1. The examination planning and oversight of organizations covered under group rulings are the responsibility of the area of jurisdiction. The area that governs the central organization is based on the principal place of business where the central organization is located. Examiners may refer to prior sections of Part 4, Chapter 75 for guidance on examinations of central and intermediate or subordinate organizations that are not part of the Coordinated Examination Program.

  2. The area of jurisdiction may request collateral examinations of intermediate and subordinate organizations by other areas. Refer to IRM 4.75.23.

  3. Centralized exam planning and oversight is appropriate where a common activity or policy of a group as a whole, or a number of intermediate or subordinate organizations covered under a group ruling are proper matters for examination. Clear instructions on the issues involved and suggested guidelines for development should accompany collateral requests by an area of jurisdiction for an examination by another area.

  4. A report or no-change letter will be issued to each subordinate organization whose books and records are examined. After the area of jurisdiction of the central organization is notified of the examination results, the area that conducted the examination of the subordinate organization will issue the report or no-change letter.

  5. Organizations that are the subject of examination may indicate in writing a desire for consideration by Appeals as a group. The area of jurisdiction will assemble all unagreed cases to be included in the group and transfer them to the Appeals Office serving the area of jurisdiction. Appropriate powers of attorney should be obtained before the area of jurisdiction consolidates the cases. Any area, which believes its case is distinguishable from the common issue, should prepare a memorandum for the case file detailing the facts before forwarding the case for consolidation.

  6. Intermediate or subordinate organizations that do not desire consolidation of their appeal with the appeal of other subordinates or the central organization will be transferred individually to the Appeals Office serving the area that conducted the examination. With the transfer, that area should inform the Appeals Office of the existence of the related group appeal so that the different Appeals Offices can coordinate resolution of any common issues.

4.75.24.3.1  (08-01-2003)
Examinations within the Domicile of the Central Organization

  1. Whenever possible, centralized exam planning and oversight will be limited to the area where the central organization is located (area of jurisdiction). This should not be interpreted as restricting individual intermediate or subordinate examinations of affiliated organizations outside the area of jurisdiction.

  2. Where the centralized exam planning and oversight concept is utilized, the EO specialist examining the central organization will be responsible for coordinating the examinations of intermediate and subordinate organizations. The scope of examination responsibility may vary at local option, but the examiner of the central organization must insure technical uniformity between the various examinations.

  3. The area of jurisdiction will only be changed in the interest of efficient tax administration.

4.75.24.3.2  (08-01-2003)
Examination of Intermediate and Subordinate Organizations outside the Area of Jurisdiction

  1. The appropriate TEGE area may examine an intermediate or subordinate organization.

  2. Where it appears, during the course of examination, that the issue(s) involved is not peculiar to the organization being examined, but is common to other subordinates or is based upon a policy of the central organization, a request for a combined examination should be directed to the area of jurisdiction. The receiving area should acknowledge the request and inform the requesting area if a combined examination will be conducted.

4.75.24.4  (08-01-2003)
Group Returns

  1. A group return is filed by the central organization on behalf its subordinates who are covered by a group exemption letter. The filing of a group return shall be in lieu of the filing of separate information returns for each subordinate included in the return. When examining the 990, you should focus on the regular audit objectives along with the information below:

    1. The central organization must obtain its own exempt status, but not necessarily under the same code section as the subordinates.

    2. The subordinates must be affiliated with the central organization.

    3. Subordinate must be under the general supervision or control of the central organization.

    4. All subordinates included in the ruling must be exempt under the same code section.

    5. The central organization must get permission to include its subordinate in the group return.

    6. If the parent is required to file a return it cannot be included in the group return.

    7. All subordinates must have the same accounting period

  2. The examiner should check to see if a schedule is attached listing each subordinate, showing Its name, address, and employer identification number. The return should also have a schedule of those subordinates that are not covered in the return.

  3. The examiner should ensure that the central organization include only those subordinates that provide proper information and have authorized the central organization to include them.

  4. Subordinates that are not included in a group return must file individual returns.

  5. If it is determined that the subordinate's filing requirements were not satisfied by being included in a group return, a delinquent Form 990 should be secured and penalties for late filing assessed, if applicable.

  6. Unrelated Business Income for the subordinate cannot be filed on the parent return. Subordinates must file their own form 990T.

  7. Subordinates in a foreign country and private foundations cannot be included in a group exemption.

    Note:

    As an examiner you may employ the same procedures and techniques in reviewing the returns and or activities of parents and subordinates. For additional information please refer to Revenue Procedure 80-27, and Revenue Procedure 84-46, along with the instructions for the return.

4.75.24.4.1  (08-01-2003)
Statute of Limitations

  1. In order to determine the statute date;

    1. The statute of limitations for assessing taxes on a subordinate organization that satisfies its Form 990 filing requirements by being included in a group return is controlled by the filing date of the group return. The statute is 3 years.

    2. To determine whether a subordinate organization has satisfied its Form 990 filing requirements by being included in a group return, a BMFOLT must be secured.

      Note:

      Each subordinate must have its own EIN. per Rev. Rul. 80–27.

    3. The Form 990 filing requirement of a subordinate organization that files as a part of a group return is 01. (Filing requirement 03 applies only to the group return, not the subordinates included in a group return.) If the subordinate organization has satisfied its Form 990 filing requirements by being included in a group return, the BMFOLT will show a 590 transaction. Variable data will show CC14, which means, "Subsidiary Corporation filed under parent EIN." Also under variable data PAR EIN 00-0000000shows that a group return was filed by the parent organization and provides the dummy EIN assigned to the group return.

    4. The statute date is determined by securing an IDRS printout for the EINassigned to the group return. The return received date shown on the IDRS printout for the EIN of the group return will be the computation date for determining the statute dates for all of the subsidiary organizations included in the group return.

    5. If an organization states that it filed as a part of a group return but the BMFOLT does not show a closing code, " CC 14" and the EIN FOR THE GROUP RETURN, "PAR EIN" , this is not conclusive evidence that the subordinate was not included in a group return. Due to a problem encountered in the Ogden Campus most of the group returns filed during 1995, 1996 and 1997 were not posted to the subordinate organizations' accounts correctly. If this situation is encountered,THE STATUTE FOR THE SUBORDINATE ORGANIZATION SHOULD BE PROTECTED AS IF IT EXPIRES ON THE DUE DATE FOR FILING FORM 990 FOR THE PERIOD UNDER EXAMINATION.

    6. The original group return should be secured to verify that the subordinate organization was in fact included in the group return. If it was included in the group return, its name, EIN and address should be listed in a schedule attached to the original group return, or in an annual information submission by the central organization.

    7. If it is determined that being included in a group return did not satisfy the subordinate's filing requirements, a delinquent form 990 should be secured and penalties for late filing assessed, if applicable.

      Note:

      An examination was conducted of a subordinate organization covered by a group ruling. The subordinate organization submitted its financial data to the parent organization to be included in the group return filed under the parent's GEN. The Form 5773 and Form 895 stated that there was no statue of limitations for the assessment of tax on the subordinate organization because it did not file a Form 990. The subordinate organization had substantially more than $25,000 in receipts and it did not meet any other criteria to exempt it from filing a Form 990. The Form 5773 further stated that the organization was not required to file a delinquent return because its financial information was included in the group return filed by the parent organization. The Form 895 showed the statue date as 12/EE/99. Examiner should secure and verify that the subordinate organization was included in the original return or annual information submission. If requirements for a subordinate were not met, a delinquent Form 990 should be secured and penalties assessed, if applicable.

  2. Responsibility for protecting the statute is as follows;

    1. Generally, the area of jurisdiction is responsible for protecting the statute of limitations.

    2. For situations where a specialist converts a Form 990 to a taxable return; TEGE will be responsible for protecting the statute until such time as a return is secured and the case is closed by TEGE or referred, using form 5666.

4.75.24.4.1.1  (08-01-2003)
Consents to Extend the Statute

  1. Obtaining authorized signatures:

    1. In a case where there is less than 180 days remaining and the organization or trustee(s) refuse to extend the statue of limitations by executing a consent Form 872, TEGE will work with the appropriate Division to ensure the statutory period does not expire.

    2. The examiner will ensure the file contains all appropriate statements on the revocation or modification, which can be used for the statement portion of the statutory notice.

    3. Subsidiaries will sign their own extensions unless they authorize the parent to act in this capacity on their behalf.

4.75.24.5  (08-01-2003)
Establishment on AIMS

  1. The establishment of returns for both the central and subordinate organizations follow the normal AIMS procedures covered in IRM 4.4.23.3. Should the examiner discover that a newly independent subsidiary has mistakenly retained its parent's employer ID number , it may then be necessary to establish the master files on Non - Master File (NMF.) for temporary control. Refer to IRM 4.4.23.3.2.1.

4.75.24.6  (08-01-2003)
Revocation

  1. Revenue Procedures 80-25 and 80-27 hold that when a central organization no longer exists or qualifies for exemption under IRC 501(c), the group exemption letter will be revoked. The revocation will result in non-recognition of the exempt status of all included subordinates. Each subordinate will be advised that it must file an individual exemption application or a new group exemption must be filed under the procedures of Revenue Procedure 80-27.

  2. If one or more subordinates included in a group exemption letter no longer qualify under IRC 501(c), both the central organization and the subordinate(s) will be notified accordingly and the group exemption letter will no longer apply to the affected organization(s) but will otherwise remain in effect, so long as there remains at least one qualified subordinate.

  3. A Certified letter will serve as notification of revocation once the revocation becomes final. The parent is also notified when we examine a subsidiary.

  4. When a subordinate organization has been disqualified under the procedures set forth in (2) above, and wishes to establish its qualification for inclusion in the group, the central organization should submit detailed information relating to the subordinate's qualification for re-inclusion in the group exemption letter.

  5. Revocation involving IRC 501(c)(3) and 170(c)(2) status are subject to the declaratory judgement provisions of IRC 7428.

4.75.24.7  (08-01-2003)
Contact with Parent Organization

  1. For purposes of disclosure, all persons authorized to act for the central organization are entitled to the audit results of its subsidiary.

  2. Subordinate or intermediate organizations must authorize the central organization to represent it in an exam if the organization wants to be represented.

4.75.24.8  (08-01-2003)
Oversight of Exams and Referrals

  1. Most subsidiaries should be examined within the context of a thoroughly planned examination of the parent and a selected sampling of its subs with pre and post exam discussions with the parent.

    1. Planned examinations resulting in significant employment tax, unrelated business income and/or exemption issues on high percentages of subsidiaries could lead to negotiations with the parent and the establishment of a closing agreement to make corrections, secure sanctions, and preserve the exempt status of the entire group. Follow up exams should be conducted to verify corrections. Isolated subs should be examined as a result of referrals. All referrals must be adequately documented on form 5666 and forwarded to EO. Classification (formally RPM), in Dallas.

    2. A planned examination of group rulings should be conducted upon referral since referrals may point out common issues which may be found in other subsidiaries.

Exhibit 4.75.24-1  (08-01-2003)
Customer Service Outreach Programs

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Pre-Filing Strategy
Focusing on the Right Target
1. Educate, explain and provide assistance to subordinates.
2. Promote outreach activities to increase activities to increase voluntary compliance for the Federal information return requirements.
3. Conducting field examination.
4. Planning and participation of educational seminars.
5. Distribute Publication 3386 and 3079.
6. Develop more up front programs to better serve the needs of our customer.
Post-Filing Strategy
Focusing on the Right Target
1. The goal is to redeploy resources from the compliant to the obviously noncompliant.
Non-filer Initiative
Identify the Non-filer Population
1. Identify and segment the non-filer population into various pools and use different wholesale techniques such as education and outreach to achieve filing compliance.
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