Methodist Pension Board 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 Gentlemen:

On behalf of The General Board of Pension and Health Benefits of The United Methodist Church, Incorporated in Illinois, d/b/a Wespath Benefits and Investments (the “UMC Pension Board”), we welcome the opportunity to submit comments with regard to 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 currently described in Revenue Procedure 80-27, 1980-1 C.B. 677. The group exemption process provides a valuable convenience for both organizations covered by group rulings and the Internal Revenue Service (the “Service”) in avoiding the need for the submission and issuance of duplicative exemption determination letters. It is especially valuable for church related entities like the UMC Pension Board, which frequently must create new entities to accommodate the changing needs of a large convention or association of churches (“denomination”).

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. These comments will specifically address the new uniform governing instrument requirement and the effective date for adding subordinates.

The UMC Pension Board

The UMC Pension Board was incorporated as an Illinois not for profit corporation in 1908, and received a determination letter dated May 15, 2001 recognizing it as an organization described in section 501(c)(3) of the Code.¹ The UMC Pension Board is an administrative general agency of The United Methodist Church (“Church”). The Church is a global Protestant denomination of more than 12 million members around the world.

The UMC Pension Board is responsible for the general supervision and administration of retirement, disability, death and health benefit plans, programs and funds authorized by the General Conference (the legislative policy-making body) of the Church. It also invests and administers various special purpose funds for the benefit of the Church and Church related entities. As of the end of 2019, it held more than $25 billion in assets. The name under which the UMC Pension Board does business — Wespath — reflects its relationship with the Church and its values: Wes — to recognize and honor John Wesley, the founder of Methodism and a strong advocate for social justice; and Path — referring to our goal of providing participants and Church organizations with a path to follow in helping to achieve retirement, health, investment, and mission objectives.

The UMC Pension Board obtained a group exemption letter for its subordinates dated July 20, 2001 (GEN 3752) recognizing them as Code section 501(c)(3) organizations. Currently, the UMC Pension Board has more than 20 subordinates under the group ruling, including corporations, limited liability companies, and numerous common law and statutory trusts, formed under the laws of several different states.

The UMC Pension Board's mission is to provide retirement and other benefit plans to clergy, lay workers, retirees, and their families according to the principles of the Church. The UMC Pension Board promotes retirement and personal financial planning; offers six HealthFlex group health plans to its participants; provides support tools that target physical, emotional, financial, social, and spiritual well-being; invests in a sustainable manner and seeks competitive returns for its participants; educates clergy about their benefits and finances; and educates leaders of the Church's regional bodies (“Annual Conferences”) and other plan sponsors.

The UMC Pension Board continues to be rooted in its mission to care for those who serve. In 2019, it served over 100,000 participants and sponsored over 4,600 plans. In September 2019, the UMC Pension Board was recognized by the Principles for Responsible Investment (“PRI”) as one of 47 “worldwide leaders” — one of only three U.S.-based organizations to earn this distinction. PRI consists of more than 2,300 organizations committed to responsible, sustainable investment principles. The UMC Pension Board has committed more than $2 billion in Positive Social Purpose Lending Program investments in 50 states and 4 countries; it has also transitioned to green-energy sourced electricity in 2019.

The “Uniform Governing Instrument” Requirement

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 UMC Pension Board has subordinates organized under the laws of various states and subordinates that are organized as different types of legal entities. Although all of the various entities carry out the overall mission of the UMC Pension Board to serve the Church and its clergy and constituent entities, their organizing documents differ because of their respective functions, state of organization, and type of entity.

The documents for the Illinois not for profit corporations incorporate certain common elements. However, the Pension Board's subordinates include numerous trusts formed at various times and under the laws of several different states. In addition, the UMC Pension Board has a few subordinates that are limited liability companies (“LLCs”) classified as associations. The trusts and the LLCs do not have common documents because they serve specialized purposes and are different types of legal entities.

The purpose of requiring common governing instruments is unclear in the context of an organization, like the UMC Pension Board, which exercises “control” — as opposed to “general supervision” — over its subordinates. So long as the central organization controls the subordinates — by acting as trustee of trusts or having control of the governing body of the corporate entities — identity of the governing documents would seem to be a minor concern for the Service, while it is an unnecessary burden, or an impossibility, for the UMC Pension Board.

It is not realistic for the UMC Pension Board to prescribe fully uniform documents because UMC Pension Board's subordinates carry out different functions, are organized as different types of legal entity, and are organized under the laws of different states. Even the same form of legal entity is likely to contain different provisions if the entities must conform to the requirements of the laws of different states. The provisions of corporate documents intended to comply with Illinois law will differ from those in other jurisdictions. And the formation documents for a trust inherently will look very different from the documents for an LLC or not for profit corporation.

We suggest that the Service consider eliminating the uniformity of governing documents requirement for organizations that are under the “control” of the central organization, as defined in the Proposed Revenue Procedure. In any event, more flexibility needs to be allowed to account for differences caused by different legal forms, requirements of state law, and variations in the specific function to be served by the subordinate entity.

Flexibility is particularly important for church related entities like the UMC Pension Board. The activities of an entity serving the needs of a large religious denomination are likely to vary over time. For example, the UMC Pension Board still administers programs to provide funding for clergy that were part of the Evangelical United Brethren Church (which merged with The Methodist Church in 1968 to form the Church of today); legacy entities of the Methodist Episcopal Church South (which reunified with the Church's predecessor in 1939); missionaries and clergy serving in various countries outside of the United States; clergy in specific Annual Conferences; and various other individuals serving current or former agencies of the Church. The Church has a long history of division, reunification, and evolving connectional relationships of its members and constituent entities. As denominational ties evolve, flexibility to create and add new entities to the UMC Pension Board's group exemption letter will continue to be important.

Moreover, we believe that the Constitution encourages the federal government not to place undue burdens on the free exercise of religion. Allowing churches and church-related organizations greater flexibility under administrative frameworks like the Proposed Revenue Procedure has a long history under federal tax law and regulations. The foregoing illustrates the ongoing need for such reasonable accommodations.

Effective Date for Additions to Group Ruling

The Proposed Revenue Procedure (section 10.02, 2020-21 I.R.B. at 856) provides that the effective date for exemption for an entity added to an existing group ruling is the postmark date for the communication from the central organization adding the entity to the group ruling. We believe this procedure is unworkable.

When a new entity is formed, there is often a period of time between the beginning of its existence as a legal entity and the actual commencement of operations. Indeed, some period of time often passes between the incorporation of a not for profit corporation and the initial directors meeting to adopt bylaws, elect officers, and otherwise authorize corporate action. Since a consent to be included in the group ruling (as required by Proposed Revenue Procedure section 5(h), 2020-21 I.R.B. at 853) should be approved by board action or at least an officer, there may be a gap of a month or more between incorporation and completion of the minimum action to be included in a group ruling. Gathering the information for the submission to the Service, and filing it concurrently with the creation of the new legal entity in order to avoid any period for which the entity would not be exempt, would require the UMC Pension Board to make multiple filings each year to account for the addition of new subordinates. This is a substantial increase in the burden on central organizations maintaining group exemption letters for their subordinates.

A newly formed organization can apply for exemption fully retroactive to the date of its formation as long as it does so within 27 months of the end of the month in which the organization is formed. Rev. Proc. 2020-5, § 6.08, 2020-1 I.R.B. 241, 261. We believe that, so long as the filing for the addition to the group exemption occurs within 27 months of the subordinate's formation, it should be treated as timely and effective as of the date of the subordinate's formation.

Conclusion and Recommendation

In summary, we ask respectfully that the Service consider eliminating the uniformity of governing documents requirement for organizations that are under the “control” of the central organization, as defined in the Proposed Revenue Procedure. In any event, more flexibility should be allowed to account for differences caused by different legal forms, requirements of state law, and variations in the specific function to be served by the subordinate entity. This is particularly true of church-related entities given the unique and changing nature of church polity and the history of governmental accommodation of religion.

In addition, we suggest that the Service revise the Proposed Revenue Procedure such that, so long as a filing for the addition of a subordinate to a group exemption occurs within 27 months of the subordinate's formation, it should be treated as timely and effective as of the date of the subordinate's formation.

We also note that section 3.03(2)(b) of the Proposed Revenue Procedure (2020-21 I.R.B. at 851) appears to prevent inclusion of Type I or II supporting organizations in a group ruling with section 509(a)(1) or (2) organizations. Type I or Type II supporting organization status can serve as a useful default public charity classification for church related organizations which fail one of the public support tests over time because additional contributions are no longer required to carry out the purpose of the organization (for example, providing pensions for a dwindling class of beneficiaries).

The rationale for the new requirement of a common public charity classification is unclear, particularly since, after application of the various exceptions to the rule, it applies to exclude only section 509(a)(3) supporting organizations. Type I and II supporting organizations are relatively uncomplicated and common components of multi-entity exempt organization groups. Given the new requirement's relatively narrow application in the context of section 501(c)(3) group rulings, we encourage the Service to reconsider the requirement. Alternatively, if there is a specific regulatory concern that needs to be addressed — like the exclusion of Type III supporting organizations because of their complexity — then perhaps a more narrow rule to address that concern could be developed.

We appreciate the opportunity to provide these comments. We would be pleased to discuss the subject of these comments with Service representatives at your convenience. If further information would be helpful, please contact Andrew Q. Hendren at AHendren@wespath.org or (847) 866-4644 or Michael A. Clark of Sidley Austin LLP, mclark@sidley.com, or (312) 853-2173.

Yours very truly,

Andrew Q. Hendren
Chief Legal and Governance Officer
Wespath Benefits and Investments
Glenview, IL

cc:
Michael A. Clark, Sidley Austin LLP