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Restructuring Exempt Entities and Tax-Exempt Status

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Restructuring Exempt Entities and Tax-Exempt Status

In the past, federal law required exempt businesses that “moved to” (re-organized in) another state, incorporated after gaining approval of its exempt status, or restructured in other ways to re-apply to the IRS for tax-exempt status. Recognizing the added time and expense burden this puts on certain exempt organizations, the IRS now does not generally require a new exemption application from a domestic exempt organization that changes its form or place of organization, if it keeps the same EIN. If such an entity meets the requirements of IRS Revenue Procedure 2018-15, effective January 1, 2018, the reorganized entity now keeps its tax-exempt status and is simply required to notify the IRS of the change to its legal structure.

There are 4 types of restructurings by a domestic business entity qualified as a “corporation” under applicable Treasury Regulations and recognized as tax-exempt under Section 501(c)(3), that are covered by this new IRS revenue procedure:

  1. Incorporating an unincorporated association under the laws of a state;
  2. Reincorporating a corporation under the laws of a different state;
  3. Filing articles of domestication for a corporation under the laws of a different state; and,
  4. A statutory merger of one corporation with and into another corporation.

In all cases, the restructuring organization must be in good standing in the state in which it was originally incorporated (or formed if an unincorporated association). In addition, the surviving entity in the restructure must be a “corporation” (as that term is defined in the applicable Treasury Regulations) and it must carry out the same purposes as the original exempt organization. It is important to note that this new revenue procedure does not apply to:

  1. A surviving entity which is a disregarded entity, LLC, partnership, or foreign business entity; or,
  2. A surviving entity that obtains a new EIN after the restructure.

Additional Requirement for 501(c)(3) Organizations

Restructured corporations previously recognized as exempt under IRC Section 501(c)(3) must continue to meet an important additional requirement in order to maintain this classification. After the re-structure, the organizing document (typically its articles of organization or certificate of incorporation) of the surviving entity must continue to meet the IRS “organizational test.” This means that the organizing document must include certain restrictions on the corporation’s activities, including:

  1. The organization must be organized exclusively for one or more exempt purposes under IRC Section 501(c)(3);
  2. The organization may only devote an insubstantial part of its activities to influencing legislation (lobbying);
  3. The organization may not directly or indirectly participate or intervene in any political campaign on behalf of any candidate for public office; and,
  4. Upon dissolution of the corporation, assets remaining after settling all liabilities must be distributed exclusively for the exempt purposes of the corporation under IRC Section 501(c)(3).

Exempt Organization Reporting Requirements

All exempt organizations that complete one of the corporate reorganizations described above must report the change to the IRS on the IRS Form 990 for the applicable tax year. This means attaching a copy of the organizing or restructuring document (for example, articles of incorporation, merger, or domestication, etc.) to the IRS Form 990 for the year in which the re-structure takes place.

In addition, if the surviving entity is now domiciled in a different state, it must report its new address to the IRS. This is accomplished either by filing IRS Form 8822-B or by indicating the change of address on its next IRS Form 990.

Conclusion

This new revenue procedure from the IRS is good news for many 501(c)(3) tax-exempt organizations, including unincorporated tax-exempt associations that later decide to incorporate, corporations that undergo a statutory merger, and corporations moving to a different state. Previously, these organizations were required to re-apply for federal tax-exempt status, often an expensive and lengthy process.

Now, if the requirements for tax-exempt status continue to be satisfied, the re-structured entity files the proper paperwork with the required state authorities to accomplish the desired structure and then notifies the IRS of the changes. Note, however, that not all states’ laws allow nonprofit corporations to reincorporate under the laws of another state, so you should review the specific laws of both states involved in the reorganization and consult with an attorney when necessary.

Additional Resources

For more information please read IRS Revenue Procedure 2018-15 and see our article regarding liability and the benefits of incorporation . If you have any questions about this topic, please contact Attorney Anne Rosenthal at arosenthal@hurwitassociates.com.

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