The IRS and Treasury have released proposed regulations regarding Type III supporting organizations that reflect changes to the law made by the Pension Protection Act of 2006. The proposed regulations institute a payout requirement for non-functionally integrated Type III supporting organizations and define functionally integrated Type III supporting organizations, which are not subject to the payout requirement.

Under the proposed regulations, non-functionally integrated Type III supporting organizations must annually make payments of five percent of the fair market value of their non-exempt-use assets to or for the use of one or more supported organizations. The proposed regulations generally provide that a Type III supporting organization is functionally integrated if either (1) substantially all its activities directly further the exempt purposes of its supported organization and but for the involvement of the supporting organization the activities supported organization would engage in the activities; or (2) it is the parent of each of its supported organizations. Fundraising, investing and managing non-exempt-use property, and making grants (to the supported organization or third parties) are generally not treated as activities that directly further the exempt purposes of the supported organization. 

The period for providing comments on the proposed regulations ends December 23, 2009.