Firm Seeks Changes to Group Rulings Proposal

August 14, 2020

Internal Revenue Service
CC:PA:LPD:PR (Notice 2020-36)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Proposed Revenue Procedure Updating Group Exemption Letter Program (Notice 2020-36)

Ladies and Gentleman:

On behalf of Rotary International (“RI”), Kiwanis International (“Kiwanis”), and Lions Clubs International (“LCI”) (collectively, the “Service Organizations”), we appreciate the opportunity to comment on the Internal Revenue Service (the “Service”) consideration of updates to Revenue Procedure 80-27, 1980-1 C.B. 677 to provide clearer guidance to organizations holding group rulings, Service representatives, and the public.

The group exemption process provides a valuable convenience for both organizations covered by group rulings and to the Service in avoiding the need for issuance of duplicative exemption rulings. Holders of group rulings also provide oversight and guidance for subordinates covered by the group exemption — offering more guidance and oversight to what are normally small organizations than could generally be expected from the Service due to its limited resources.

We welcome the opportunity to submit comments with regard to the Notice 2020-36, 2020-21 I.R.B. 840, and the proposed Revenue Procedure (the “Proposed Revenue Procedure”) to update the group exemption letter program. 2020-21 I.R.B. at 847. The Proposed Revenue Procedure sets forth updated procedures under which recognition of exemption from federal income tax for organizations described in section 501(c) of the Internal Revenue Code (the “Code”) may be obtained on a group basis for subordinate organizations affiliated with and under the general supervision or control of a central organization. The Proposed Revenue Procedure would modify and supersede Rev. Proc. 80-27. The Service has requested public comments and suggestions on all aspects of the Proposed Revenue Procedure.

In the Notice, the Service specifically asked for comments on the administrative burdens imposed by the Proposed Revenue Procedure on central organizations to: (1) annually collect, review, and retain information on the finances, activities, and tax compliance of its subordinates and to educate subordinates on their tax filing obligations; (2) obtain and retain subordinate organization written authorizations for inclusion in the group ruling (including the subordinate's acknowledgement that the central organization may remove the subordinate from the group ruling if the subordinate fails to abide by the Proposed Revenue Procedure); and (3) annually submit information to the Service to maintain a group exemption letter. As requested, these comments discuss the referenced provisions.

We believe that the first requirement implies a formal system of written reports that would require a fundamental change in the relationship of the Service Organizations and their individual local clubs. This requirement is unduly burdensome and should be modified to allow less formal methods of oversight.

The second and third requirements will also potentially impose some additional burdens on service organizations. We suggest some modifications in these comments, but we believe that the majority of the proposed requirements are appropriate.

The Notice also specifically requested comments on whether central organizations with multiple preexisting group exemption letters would benefit from procedures for the consolidation or transfer of such letters. As detailed in our comments below, we do not see any reason why one central organization should not have more than one group exemption letter.

These comments also address the uniform governing instrument requirement, and the notice requirement for subordinate organizations described in Code section 501(c)(4).

I. The Service Organizations

A. Rotary International

RI is a membership organization formed in 1911 as an Illinois not for profit corporation. It is currently recognized by the Service as an organization described in section 501(c)(4) of the Code. RI has over 36,000 member clubs (“Rotary Clubs”) located throughout the world and in all fifty states in the United States. Members of the Rotary Clubs (“Rotarians”) number approximately 1.2 million. RI's member clubs are grouped into 537 districts and 34 zones for administrative purposes.

The over 5,600 Rotary Clubs organized in the United States have tax-exempt status as Code section 501(c)(4) organizations under a group ruling held by RI; RI's Group Exemption Number is 0573, and the group exemption ruling was issued by the Service on May 13, 1958. Various other RI subordinates (including RI districts) are included in the group exemption as well.

RI and its member clubs work closely to make lasting change in their communities and the world. Individual Rotary Clubs foster the building of relationships among dedicated individual volunteers within a community (predominantly, although not exclusively, Rotarians) to exchange ideas and take action by engaging in projects in their communities and throughout the world to improve public health and human living conditions. Rotarians volunteer their time to engage in service projects, and also support the Rotary Foundation of Rotary International, a section 501(c)(3) organization that in recent years has expended over $300 million per year to support domestic and international humanitarian and educational programs.

RI supports its member Rotary Clubs by providing the organizational framework to facilitate the global service programs and initiatives that the Rotary Clubs carry out in their local communities. RI provides extensive resources on its website to assist clubs and their officers in carrying out their organizational responsibilities, planning successful service projects, and supporting the Rotary Foundation.

Each Rotary Club is part of a District, which is led by a District Governor elected by the member clubs in that District. The District Governor facilitate oversight of the Rotary Clubs by visiting individual clubs within their district and meeting with individual club leadership in order to ensure the Rotary Clubs are meeting regularly, implementing service projects, paying RI and district dues, and generally operating in a manner consistent with RI governing documents and policies. Districts all have various committees to facilitate various Rotary Club and District activities, such as youth programs, grants, membership recruitment, and leadership training.

Each year, District Governors convene a district conference with Rotary Club district members and representatives from RI; the local Rotarians give a report on district activities and the RI representatives present an update on RI matters. The district members also use these conferences to discuss and vote on important district matters. Furthermore, District Governors are responsible for compiling and submitting to RI an annual financial statement of district finances reporting, among other things, the funds received from fundraising and grants and district fund expenditures. Prior to taking office, incoming District Governors attend a multi-day training program where they receive training on their responsibilities, including facilitating the activities of member Rotary Clubs. Incoming Rotary Club presidents also participate in a similar training program — President-Elect Training Seminars (“PETS”)

On the regional level, RI directors convene annual meetings called Rotary “institutes,” which gather past, current, and incoming RI leaders — i.e. District Governors, presidents, directors, trustees, and regional leaders — in one or more regions or “zones.” These institutes serve to inform local leaders of updates to RI policies and programs; they also function as a forum for these leaders to provide feedback about those policies and programs.

Approximately 50 new Rotary Clubs are formed each year. Rotary Clubs can be formed by either Rotarians or nonmembers in a given community that does not already have a local Rotary Club. Individuals that want to start a Rotary Club must contact their respective District Governor and formally apply to start the Rotary Club.

Some Rotary Clubs choose to formally incorporate with their local government, but many do not. However, upon formation, all Rotary Clubs must adopt the Standard Rotary Club Constitution and agree to operate consistent with the Standard Rotary Club Constitution and RI's constitution and bylaws in all respects. The Rotary Clubs must also agree that any additional bylaws that they adopt will be in harmony with RI's constitution and bylaws and with the Standard Rotary Club Constitution.

B. Kiwanis International

Kiwanis was founded in 1915 in Detroit, Michigan. Kiwanis was incorporated as a not for profit corporation in 1918 in Illinois. In 1997 Kiwanis was incorporated in Indiana. There are clubs (“Kiwanis Clubs”) in approximately 80 countries and geographic territories. Kiwanis has over 550,000 members of all ages.

Kiwanis is recognized by the Service as an organization described in section 501(c)(4) of the Code pursuant to a determination letter issued in 1940. There are over 3,200 Kiwanis Clubs in the United States covered by a group exemption ruling issued to Kiwanis in 1977 (GEN 0026). The group exemption letter recognizes the subordinates of Kiwanis as exempt organizations described in section 501(c)(4) of the Code.

Kiwanis International also has three other legal entities: Kiwanis Youth Programs (KYP), Circle K International (CKI), and the Kiwanis International Foundation, also known as the Kiwanis Children's Fund (KCF). Two of these entities also have group exemption rulings for their subordinates.

KYP is recognized by the Service as an organization described in section 501(c)(3) of the Code (determination letter issued in 1948) with a group exemption for Key Clubs issued in 1976 (GEN-1021). CKI is recognized by the Service as an 501(c)(4) organization with a group exemption for Circle-K clubs issued in 2004 (GEN-4264). KCF was founded in 1939 and is currently recognized by the Service as an organization described in section 501(c)(3) of the Code.

In order to maximize leadership, Kiwanis is organized into clubs, divisions, districts, and international. Kiwanis Clubs may sponsor any of the following Kiwanis family clubs: K-Kids (primary school children), Builders Clubs (adolescents), Key Clubs (teens), Circle K clubs (university students), or Aktion Clubs (adults living with disabilities). Kiwanis Clubs in a similar area are clustered together to form various divisions. The various divisions are grouped into 49 districts based on the divisions' geographical regions. All 49 Kiwanis districts and Kiwanis nations that do not fit into any district make up Kiwanis International.

Kiwanis members' mission is to improve the world one child and community at a time through service. Each year Kiwanis members stage more than 150,000 service projects, devote more than six million hours of service, and raise nearly $100 million. Kiwanis members have helped build all-access playgrounds, restock libraries, create food pantries, purchase medical equipment, host diversity fairs, provide school supplies, and with other projects based on the needs of the community. Kiwanis generally adds over 50 new Kiwanis clubs per year.

C. Lions Club International

LCI was founded in 1917 in Chicago, Illinois as an Illinois not for profit corporation. LCI is currently recognized by the Service as an organization described in section 501(c)(4) of the Code. LCI has approximately 46,000 chartered clubs (“Lions Clubs”) in over 200 countries and geographic areas. There are approximately 1.4 million members that carry out LCI's mission of serving others in order to improve communities and the world. LCI's members include Lions (adult) and Leos (Alpha Leos Ages 12-18; Omega Leos Ages 18-30).

There are over 130,000 Leos, LCI's youngest members. Leos stands for Leadership, Experience, and Opportunity. The first Leos club was formed in 1957 in Pennsylvania. Leos completed 20,395 projects last year. There are over 7,200 Leos clubs worldwide. Leos are considered a project of a chartered Lions Club and thus benefit from the inclusion of their related Lions Club in LCI's group exemption.

There are approximately 11,000 Lions Clubs in the United States. LCI holds a group exemption letter for its subordinates recognizing them as organizations described in section 501(c)(4) of the Code. The initial group exemption ruling, covering local Lions Clubs, was issued on December 6, 1940 (GEN 0239). This letter was supplemented by an additional letter issued by the Service on August 24, 1972. This letter expanded the group exemption ruling to cover all subordinate clubs, districts and multiple districts of Lions Clubs International.

Lions Club International Foundation (“LCIF”) was founded in 1968 and is currently recognized by the Service as an organization described in section 501(c)(3) of the Code. LCIF's mission is to support the efforts of Lions Clubs and partners in serving communities locally and globally, giving hope and impacting lives through humanitarian service projects and grants

LCI focuses on humanitarian needs, including but not limited to the following five global causes: diabetes, vision, hunger, environment, and childhood cancer. LCI's members work to encourage peace and promote international understanding. Between 100 and 200 new Lions Clubs are formed each year.

II. Comments on Specific Provisions of Proposed Revenue Procedure

A. Collection of Information on Subordinate Activities, Finances, and Tax Compliance

In order for a central organization to obtain and maintain a group exemption letter, it must establish that its subordinates are “affiliated” with the central organization and are subject either to its “general supervision” or “control.” Proposed Rev. Proc. § 3.02(1). The Service Organizations do not “control” their subordinates as described in the Proposed Revenue Procedure Proposed Rev. Proc. § 3.02(4). Therefore, they must satisfy the “general supervision” requirement. Proposed Rev. Proc. § 3.02(3).

In general, the Service Organizations seek to motivate the volunteer participants in their local clubs or other affiliates, but do not seek to tightly dictate the volunteer activities of the local entities. Rather, local clubs and similar affiliates are encouraged to be attuned to the needs of their communities and to plan programs and service projects which meet community needs and the interests of participants in Service Organization activities.

Exercising “general supervision” requires the central organization to annually obtain, review, and retain “information on the subordinate organization's finances, activities, and compliance with annual filing requirements.” Proposed Rev. Proc. § 3.02(3)(a). In addition, the central organization must provide information to its subordinates on tax filing requirements. Proposed Rev. Proc. § 3.02(3)(b). We address each of these in turn below.

1. Financial Information.

It is not generally the practice of the Service Organizations to collect detailed financial information from their local clubs or other subordinates. Service Organizations receive information from their local clubs as to their membership, since this information is necessary for local club participants to be entitled to participate in various programs of the Service Organizations, such as regional and international meetings. Membership information also is necessary for the calculation of dues payments.

In addition, Service Organizations' and their affiliated charitable foundations often have significant information about fundraising by local clubs and other affiliates. Local club and other affiliates (including regional organizations and local organization directed at younger individuals) often contribute and raise significant funds for the charitable foundations associated with the Service Organizations.

For example, Rotary Clubs and individual Rotarians are recognized for contributions to the Rotary Foundation originating from donations or activities of the Rotary Clubs. Both Lions Clubs and individual members are likewise recognized for contributions to LCIF from personal donations or funds raised through the activities of a Lions Club. Like Rotary and LCI, Kiwanis Clubs and members are also recognized for contributions to the Kiwanis Children's Fund. Such donor recognition activity encourages local initiatives by individual member, local clubs, and regional entities to support the charitable organizations affiliated with the Service Organizations.

Similarly, Service Organizations and their related charitable organizations often provide financial support for local club and regional entity service projects. For example, the Rotary Foundation provides grants to support international service projects sponsored by local Rotary Clubs. The grant application process involves the submission of information about sources of project funding and anticipated costs for the project. However, outside of the context of project-based funding requests, detailed financial reports of receipts and expenditures are not commonly required by the Service Organizations, absent special circumstances.

Obtaining and reviewing detailed financial reports would impose significant administrative burdens on the Service Organizations. Most local clubs are small, and activities are conducted by volunteers. They thus do not have significant income or expenditures and generally file Form 990-N, or, at best, Form 990-EZ. In addition, the Service Organizations would have to hire additional staff to review financial reports; the Service Organizations are under significant pressure to keep dues as low as possible, and it would be challenging to hire additional staff without a dues increase.

In addition, mandating financial reporting from local clubs to the Service Organizations would be a major shift in organization culture. The Service Organizations succeed when their volunteers are motivated to give their time to accomplishing useful public service projects in their communities and in other parts of the world. Volunteer time is a precious commodity, particularly when many volunteers are faced with demanding family and work obligations that limit their ability to participate in local club projects. Although local club leaders are trained to fulfill their basic organizational responsibilities, a mandate to spend time preparing financial reports that the Service Organizations have not customarily viewed as necessary would not be welcomed by volunteers with limited time.

For the foregoing reasons, we submit that the financial reporting obligation is unnecessary. The Service Organizations already require basic information to confirm the existence of the local clubs and other subordinates, exceeding the information required by the Service for Form 990-N filers. This information, coupled with the oversight provided by intermediate subordinates as described below, should provide appropriate oversight over local clubs and other subordinates of the Service Organizations.

2. Activities.

The Service Organizations generally provide for intermediate subordinates to provide oversight of local club activities. However, they do not generally require specific reporting to the Service Organization central office. Reporting of successful service projects or fundraising programs is, however, encouraged and publicized. Stories of local club successes help to inspire and motivate members of other local clubs to adapt good ideas to their own communities.

The Service Organizations have various intermediate organizational entities. RI has zones and districts; Kiwanis has divisions and districts; and LCI has districts and multiple districts (often, in the United States, corresponding to state boundaries). One of the functions of the leaders of these various intermediate bodies is to visit or otherwise monitor local clubs and to promote their success.

The leaders of these districts, divisions, or other bodies are motivated to avoid local club failures and to take action to deal with problems arising at local clubs or similar bodies in order to avoid damaging the reputation of the Service Organization. Local club members also are aware that the leaders of the intermediate bodies are available to address problems with local clubs. Thus, problems tend to be dealt with more swiftly than if reporting had to go to the headquarters of the Service Organizations.

We accordingly recommend that, rather than requiring annual reports, the general supervision requirement should recognize that oversight may be provided by other means, such as through activities of intermediate subordinates.

3. Tax Compliance

The Service Organizations have generally taken steps to inform U.S. subordinates of their tax filing obligations. For example, LCI provides an annual reminder to all chartered Lions Clubs in the U.S. to file their 990, 990-N or other required tax forms. Training is provided to international officers who oversee the districts and multiple districts in the U.S., and information is provided to all newly chartered clubs advising of the obligation to file their taxes on an annual basis.

RI similarly sends out an annual reminder by email to all Rotary Club presidents, secretaries, treasurers, and various other officers, as well as District Governors, reminding them of the due dates for the annual Form 990 filings and the possibility of automatic revocation if the forms are not filed. RI also maintains a listing of frequently asked questions about tax filing obligations and other tax compliance requirements on its website for Rotarians and Rotary Clubs.

Despite the diligent educational efforts of the Service Organizations, and the Service, there nonetheless are some affiliates that have appeared on the Service's automatic revocation list. It has not been common practice of the Service Organizations to confirm that local clubs or other subordinates have filed.

Because there is no existing reporting mechanism for local clubs and other subordinates to report their tax filings to the Service Organizations, we recommend elimination of the requirement for such reporting. However, we believe it would be reasonable for the Service Organizations to confirm, at least once every three years, that subordinates included in the group exemption have complied with their filing obligations. This could presumably be accomplished by an automated process in connection with the submission to the Service of the annual list of new organizations to be added to the group exemption, and organizations leaving the group.

In addition, as noted above, an additional specific requirement for satisfying the “general supervision” requirements is that the central organization “transmits written information to (or otherwise educates) the subordinate organization about the requirements to maintain tax-exempt status . . . including annual filing requirements.” Proposed Rev. Proc. § 3.02(3)(b).

“Otherwise educating” local clubs and other subordinates as to their filing obligations might include (1) providing educational materials to local club and other subordinate leadership as part of their training prior to assuming office, (2) including such information as part of the new club chartering process, and (3) providing information on the Service Organizations' web site. An example elaborating the meaning of “otherwise educates” in the Proposed Revenue Procedure would be welcome.

B. Subordinate Consent Letters and Annual Filings with the Service

1. Consent Letters

Section 3.05 of the Proposed Revenue Procedure describes the procedures for documenting the consent of subordinate organizations for initial inclusion or subsequent addition to a group exemption letter. The central organization must obtain the written consent of the subordinate, and such consent must be retained for as long as the group exemption letter remains in effect. In addition, the consent must contain the acknowledgement of the subordinate that the central organization can remove the subordinate from the group exemption letter if the subordinate fails to comply with the requirements of the Proposed Revenue Procedure.

Adding the required language to consent forms for inclusion in the group ruling should not be an insurmountable burden. We suggest, however, that, to accommodate local clubs or other subordinates of the Service Organizations in formation at whatever date the Proposed Revenue Procedure may become effective, the requirement of the additional language be effective one-year after the date of the finalization of the Proposed Revenue Procedure.

In addition, given that many group exemption letters have been in place for many years, we suggest that the Service consider relief from the requirement for maintaining a copy of older consents. A reasonable approach might be a presumption that organizations have provided written consents if they have been included in an existing group exemption letter for more than five years as of the date of issuance of the Proposed Revenue Procedure. Organizations that diligently filed away consents since the time Rev. Proc. 80-27 was promulgated 40 years ago may nonetheless find that the paper copies have disintegrated and that electronic versions are no longer readable on any existing computer equipment!

2. Annual Filings

Under the Proposed Revenue Procedure, central organizations must annually update the contact information as to organizations included in the group exemption letter and provide the Service with information regarding organizations joining or leaving the group. Proposed Rev. Proc. § 6.01

For the most part, the Proposed Revenue Procedure does not substantially increase the burdens on group ruling holders. However, two requirements are indeed burdensome and also seem not to serve any clear purpose.

The Proposed Revenue Procedure requires a central organization holding a group ruling on behalf of subordinates not described in section 501(c)(3) to “submit a detailed description of any change in the purposes of all of its subordinate organizations.” The central organization must also “submit a detailed description of any change in the activities of its subordinate organizations.” Proposed Rev. Proc. § 6.02(1).

We believe the foregoing two requirements are overly broad and unnecessary. The Service Organizations all have a formal chartering process for the creation of new clubs or other affiliates. This process requires that the new clubs or other affiliates agree to abide by the rules and governing documents of the respective Service Organizations. All of the Service Organizations require their subordinates to operate for certain specified purposes, and to adopt certain standard provisions as part of their governing documents (irrespective of the form of entity chosen, whether a corporation or an unincorporated association). Thus, Service Organizations have a considerable degree of clarity as to the overall purposes and scope of activities of their subordinates when they are formed.

The Service Organizations do not, however, require ongoing reporting of any additional organizational document changes necessary under state law. Thus, if a local club previously formed as an unincorporated association incorporates and has to add certain required purpose language to its certificate of incorporation, the Service Organizations will neither prohibit this change nor require that it be reported to the Service Organizations.

Similarly, and perhaps most importantly, the Service Organizations do not dictate the methods by which their local clubs carry out their charitable activities. If a local club decides to devote the proceeds from its virtual July 4th festivities to support health care of COVID victims at a local hospital, rather than supporting public building projects in parks and other community recreation facilities, it would be excessively burdensome for the Service Organizations to collect this information from their subordinates (which number in the thousands) and report it to the Service.

The purpose of volunteer run community service organizations is to meet community needs; the Service Organizations encourage their local clubs and other subordinates to meet community needs. These activities are clearly consistent with section 501(c)(4) civic and social welfare purposes (and probably charitable purposes as well). There is no reason to burden either the Service Organizations or their local clubs or other subordinates with this unnecessary reporting, particularly for subordinates that are likely to be Form 990-N filers.

C. Additional Specific Requirements

1. No more than one group exemption letter

The Proposed Revenue Procedure mandates that a central organization may maintain no more than one group exemption letter. Proposed Rev. Proc. § 3.01(3). We see no legitimate purpose for this requirement.

Service Organizations are generally organized to provide for multiple layers of affiliates, such as, in the case of RI, zones, districts, and Rotary Clubs. Kiwanis likewise has local Kiwanis Clubs, divisions, and districts. LCI has local Lions Clubs and intermediate supervisory entities, including districts and multiple districts.

In addition, the Service Organizations have different types of local organizations targeted at different age groups. LCI has local groups targeted at individuals aged 18-30 (“LEOS”), and Rotary has local Rotaract groups targeted at individuals aged 18-30 and Interact groups targeted at individuals aged 12-18. Kiwanis has Key Clubs for teens and Circle K clubs for university students.

LCI's existing group exemption ruling specifically allows for the inclusion of both local clubs and intermediate supervisory bodies under the same group exemption number; local chapters for younger age groups are not separately organized, but rather are part of their sponsoring local Lions Club, and thus are not separately included in the LCI group exemption.

Kiwanis follows the same approach as LCI with respect to its districts and divisions, including them all as part of its group exemption list. However, KYP (a section 501(c)(3) organization) and CKI are separately incorporated, and therefore have a separate group rulings covering their respective Key Clubs and Circle K Clubs.

RI has historically included its Rotary Clubs and districts, and similar organizational bodies that do not have their own exemption ruling, in its group exemption listing. Separately organized entities directed at younger individuals, such as Rotaract Clubs, are also included.

The diversity of practices with respect to the group exemption letters issued for Kiwanis, LCI, and RI suggests that flexibility — rather than uniformity — is the best practice for dealing with the diverse structures of organizations in the exempt sector, such as Service Organizations. We do not believe that separate group rulings should necessarily be required for subordinates of the same Service Organization simply because they fulfill a different role organizational role (based on type of membership or role in organizational governance), and have different governing documents as a result. However, if subordinates fulfill different purposes in accomplishing the overall purposes of the Service Organization, we do not see why they should not be permitted to have their own group exemption letters.

If the Service thinks that it is a good idea to require the inclusion of only relatively homogenous organizations in a group exemption letter, then Service Organizations are going to need the ability to maintain multiple letters to cover their various types of subordinates. Likewise, if the Service intends to require that organizations participating in a group ruling all have similar governing documents, then the only way to accommodate such a requirement in organizations with multiple layers of affiliates and affiliates with different types of participants would be to allow the central organization to have multiple group exemption letters.

2. Uniform Governing Instrument

The Proposed Revenue Procedure provides that all subordinates included in a group exemption letter “must adopt a uniform governing instrument (charter, trust indenture, articles of association, etc.).” Proposed Rev. Proc. § 3.03(2)(d). We do not believe that this requirement is practical or necessary.

The Service Organizations all have local clubs in all 50 states. The Service Organizations all permit their subordinates to choose and change their form of legal entity, provided that certain provisions are contained in the governing instruments. RI provides that each Rotary Club must adopt the standard RI Club Constitution, irrespective of the form of entity. RI does not have standard documents for Districts and Zones. However, the purposes and activities of these entities are prescribed in the RI bylaws, so the individual governing documents of the entities are of limited force.

LCI provides an International Constitution and By-Laws which all subordinates must comply with. LCI also provides Standard Club, District and Multiple District Constitutions and By-Laws, which subordinates are permitted to amend, provided such amendments do not conflict with the International Constitution and By-Laws. Kiwanis Clubs must adopt the standard Kiwanis bylaws for clubs and cannot revise these standard bylaws, Kiwanis districts on the other hand must follow the standard Kiwanis district bylaws but are allowed to modify or augment selected aspects of those district bylaws, which many do.

The content of the certificate or articles of incorporation varies widely among states. Some states, such as Illinois (where, coincidentally, all of the Service Organizations were originally organized), prescribe a form for incorporation designed by a state official. Other states, such as Delaware, permit incorporators to design their own certificate of incorporation, provided that it includes certain provisions required by statute. An unincorporated association might be a perfectly good form of organization in California, but less so in states with less favorable statutes governing the operations and liabilities of unincorporated associations and their members. Thus, we do not believe it is practical for completely “uniform” governing documents to exist for subordinates in multiple states.

Second, it is not realistic for the Service Organizations to prescribe fully uniform documents because their subordinates serve different functions. A subordinate serving students and operating under the supervision of a local Service Organization club is likely to require different provisions than a local club or a division or district of the Service Organization itself.

We suggest that the Service consider an alternative allowing more flexibility for the Service Organizations and similar groups. For subordinates that perform specific functions outlined in the bylaws or similar documents of the central organization, the need for specific provisions in the governing documents of the subordinate is not clear. For subordinates that are local chapters or affiliates of a central organization that operates in numerous states, governing documents should be considered uniform if the subordinates must adopt standard provisions specified by the organization for that type of affiliate in whatever organizing documents they have, irrespective of the form of the organization.

3. Section 501(c)(4) Notifications

The Proposed Revenue Procedure contains special provisions to deal with section 501(c)(4) entities, which must file an electronic Form 8976 with the Service within 60 days of their formation. Under the Proposed Revenue Procedure, a subordinate may authorize a representative of the central organization to submit the Form 8976 and to deal with the Service on the subordinate's behalf. Proposed Rev. Proc. § 3.03(3)(c).

The Service Organizations have found that new volunteer organizations find it very challenging to accomplish the requisite filing of Form 8976 within the required period. Because the penalty for failure to timely file is steep, and new organizations have few, if any, assets, organizations that fail to timely file will often simply cease to exist.

Providing the Service Organizations with the option to file Form 8976 on behalf of new subordinates will be a useful tool for use by Service Organizations in assuring compliance by new subordinates. This will likely permit the Service Organizations to benefit from the efforts of volunteers unsophisticated in tax matters that might otherwise be discouraged from their efforts to form a local club to accomplish useful community service work.

III. Conclusion

Notice 2020-36 indicates that there are approximately 440,000 subordinate organizations covered by a group exemption letter. The subordinates of the Service Organizations make-up just under 5% of those subordinate organizations; we expect that, if other community service organizations with similar purposes and structures were included, the number would be closer to 10%.

The Service Organizations, and similar exempt entities structured in a comparable manner, comprise a significant portion of the exempt sector and accomplish many useful community service programs in the United States and the world. Although we agree that Rev. Proc. 80-27 has long been in need of a tune-up like that the Service now provides annually for the critical Revenue Procedures governing exempt organizations, we urge the Service to continue to preserve the useful organizational flexibility for community service organizations that has heretofore existed under the existing Revenue Procedure.

Please do not hesitate to call me at (312) 853-2173 or email me at mclark@sidley.com if we can provide any additional information which would be helpful.

Yours very truly,

Michael A Clark
SIDLEY AUSTIN LLP
Chicago, IL

cc:
Steven Routburg, General Counsel, Rotary International;
David Kingsbury, General Counsel, Lions Clubs International;
David Kress, General Counsel, Kiwanis International;