Attorney Comments on Pension Protection Act Provisions That Affect Supporting Organizations

From: Frank Polk (CBIZ Kessler) [ fpolk@kesslerassoc.com ]

Section 4958(c)(3), added by the Pension Protection Act of 2006, expanded the term "excess benefit transaction" to include "any grant, loan, compensation, or other similar payment" provided by a supporting organization to a substantial contributor, which for purposes of this section includes other supporting organizations. WARF, a supporting organization to the University of Wisconsin, Madison, is a substantial contributor to WiCell, another supporting organization to the University engaged in the derivation of stem cells from federally approved lines to be used in research at the University and other educational institutions. Because WiCell is a relatively small organization, it is most efficient for it to use administrative services (such as accounting, human resources, etc.) provided by WARF employees and WiCell has paid WARF for its proportionate share of the salary and benefits of the WARF personnel providing such services. WARF requests that Treasury clarify that cost sharing arrangements between affiliated charitable organizations, and the cost reimbursement payments associated with such arrangements, will not be considered "compensation or other similar payments" for purposes of section 4958(c) and thus will not give rise to excess benefit transactions.

2. Royalty Payments

WiCell has licensed from WARF the rights to a patented technology used in its exempt function activities, and in return WiCell pays WARF a royalty. The Joint Committee on Taxation's explanation of the Act indicates that payments to substantial contributors made in exchange for property or the use of property -- such as the purchase or lease of a building -- are not considered to be "compensation or other similar payments." WARF requests that Treasury clarify that royalty payments, like lease payments, are not "compensation or other similar payments" for purposes of section 4958(c).

3. Payout Requirement for Type III Supporting Organizations

WARF is a functionally integrated type III supporting organization that has carried out essential technology transfer activities for the University since 1925. Similarly, the University is dependent upon WiCell's cell derivation and distribution activities that are essential to providing stem cells that can be used in federally funded research. The Act requires the Treasury Secretary to promulgate new regulations under section 509 on annual payments required of type III supporting organizations that are not functionally integrated. The Joint Committee on Taxation's technical explanation of the Act indicates that, in revising the regulations, the Secretary has the discretion to impose a payout requirement on all type III supporting organizations, essentially eliminating the category of functionally integrated organizations. This would subject organizations that are currently functionally integrated not only to an annual payout requirement, but also to other restrictions imposed by the Act on organizations that are not functionally integrated, such as the limitation on excess business holdings and restrictions on private foundation funding. WARF requests that Treasury retain the current distinction between organizations that are functionally integrated and those that are not, and that functionally integrated organizations remain free from an annual payout requirement and the other operating restrictions added by the Act.