IRS Finalizes Group Tax Exemption Procedures

Revenue Procedure 2026-8, released on January 15, adds new requirements for central and subordinate organizations to obtain and maintain group exemption letters, including new definitions for certain pre-existing requirements that continue to apply under the new procedures. With certain limited exceptions, the new requirements apply not only to prospective but also to existing central and subordinate organizations. Central organizations should take stock of their subordinate organizations, evaluate their compliance with the new rules, and make any changes needed prior to January 22, 2027 (the end of the transition period). 

Core Concepts at a Glance 

Central Organizations

A central organization generally may apply for a group exemption letter if the central organization (1) is recognized as tax-exempt under section 501(c) or has a pending application (including a pending reinstatement if automatically revoked), (2) has at least five subordinate organizations, (3) is “affiliated” with the subordinate organizations in the group, and (4) exercises “general supervision” or “control” over the subordinate organizations in the group. 

The central organization must always have at least one subordinate organization to maintain its group ruling. Generally, a central organization may also maintain only one group exemption letter, subject to certain transition rules for preexisting group exemption letters. 

Subordinate Organizations 

A subordinate organization generally can be included and retained in the group if it (1) is described in the same paragraph of section 501(c) as the other subordinate organizations (though not necessarily the central organization), (2) includes in its governing instrument a uniform purpose statement consistent with other subordinate organizations that share the same purpose, (3) shares the same annual accounting period as the central organization, and (4) authorizes the central organization in writing to add it to the group exemption and to remove it with or without cause. 

Type III supporting organizations, private foundations, Section 501(c)(29) nonprofit health insurance issuers, foreign organizations, and organizations whose tax-exempt status has been automatically revoked and not yet reinstated after filing an application for reinstatement may not be included under a group exemption letter. 

Key Definitions 

• “Affiliation” is based on facts and circumstances. Examples include if the central organization includes the organization in its group return or lists the organization in a directory of subordinate organizations that it regularly updates. 

• “General Supervision” means the central organization (1) annually obtains, reviews, and retains information on the subordinate organization’s finances, activities, and compliance with annual filing requirements, and (2) annually transmits written information to, or otherwise educates the subordinate organization about the requirements to maintain tax-exempt status, including, but not limited to, annual filing requirements, if applicable. 

• “Control” generally includes any of the following: (1) the central organization appoints the majority of the board of the subordinate; (2) the central organization appoints a majority of the subordinate organization’s officers; (3) a majority of the board of the subordinate organization is made up of directors or trustees of the central organization; (4) a majority of officers of the subordinate organization are officers of the central organization; or (5) there is a written agreement evidencing the central organization’s control over the subordinate organization’s activities and operations. For example, a written agreement giving the central organization approval or removal rights over the election of the subordinate organization’s directors, or a management agreement with the subordinate organization giving the central organization direct control over the subordinate organization’s activities and operations.

Transition & Grandfather Rules

Rev. Proc. 2026-8 provides a one‑year transition period through January 22, 2027, for current central organizations with preexisting group exemption letters to comply with the new requirements. During the transition period, the requirement to have at least one subordinate to maintain the group exemption, the prohibition on having more than one group exemption letter, the affiliation and general supervision or control requirements, and the requirement that all subordinates be described in the same section 501(c) paragraph do not apply. Central organizations should inventory their subordinates and confirm any required changes prior to the end of the transition period. 

For organizations that already have a group exemption letter, preexisting subordinate organizations that are already within their group ruling are not required to have a uniform purpose statement or authorize the central organization to remove them from the group exemption with or without cause. Type III supporting organizations already under the group ruling are also permitted to remain within the group. These exceptions are limited to preexisting subordinate organizations. New subordinate organizations added by existing central organizations must comply with the new requirements.

Annual Filings and Revocation

A central organization must file its annual group information update at least 30 days but no more than 90 days before the end of its fiscal year. Under the prior rules, a central organization was required to file its annual group information update at least 90 days before the end of its fiscal year. The update must identify (1) subordinate organizations that have changed their names or mailing addresses during the year, (2) subordinate organizations no longer to be included in the group exemption letter, (3) subordinate organizations to be added to the group exemption letter, and (4) subordinate organizations whose tax‑exempt status has been automatically revoked. Item (4) is a new requirement. A subordinate organization that has had its exemption automatically revoked and not reinstated is no longer eligible for inclusion in, or addition to, a group exemption letter. 

Importantly, the IRS may terminate the group exemption letter if more than half of the subordinates have had their tax‑exempt status revoked. This puts pressure on central organizations to ensure their subordinate organizations are complying with their IRS filing obligations. 

The IRS may also terminate the group exemption letter if the central organization (1) goes out of existence, (2) no longer qualifies under section 501(c), (3) has its own exemption automatically revoked, (4) fails to submit its annual group information update, (5) has no subordinate organizations, (6) fails to exercise general supervision or control over one or more subordinate organizations, or (7) more than half of its subordinate organizations do not have a uniform purpose statement.

Effective Date of Exemption

The effective date for a subordinate organization’s exempt status will be the date of the subordinate organization’s formation, provided the subordinate organization is added to a group exemption letter within 27 months of its date of formation. If a subordinate organization is added to a group exemption letter more than 27 months after its formation, its effective date of exemption will be the submission date of the filing adding it to the group exemption letter. 

In light of the new group tax exemption guidance, central organizations should review their subordinate organizations and evaluate their compliance with the new rules to ensure they will be compliant after the one-year transition period. Please contact your AFS attorney or the authors of this alert for additional information.