02.26.2018
IRS Generally Will Not Require a New Exemption Application from 501(c) Organization that Changes Its Form or Place of Organization

For a variety of reason, a business may desire to change its form of entity (e.g. convert from a limited liability company to a corporation) or change its state of organization (e.g. converting from a California corporation to a Nevada corporation) or merge with another entity.  In the past, if a nonprofit organization wanted to enact changes similar to these, it often was required to submit a new application for tax exemption with the IRS, which can be burdensome.

The IRS has recently made a number of significant changes to the process for applying for recognition of tax exemption under Internal Revenue Code section 501. One of the most significant is found in Revenue Procedure 2018-15, which provides that, in many restructuring situations, the IRS will not require a new exemption application from an organization recognized as exempt under section 501(c), so long as the surviving entity is carrying out the same purposes as the exempt organization had been when it engaged in the restructuring.  One of the stated purposes of this change is to better align the requirements for new exemption applications with the requirements for obtaining new employer identification numbers (EINs) in common restructuring situations.

Restructuring changes that generally will not require a new exemption application include:

  • the incorporation of an unincorporated association;
  • the reincorporation of a corporation formed under the laws of one state under the laws of a different state;
  • the filing by a corporation formed under the laws of one state of articles of domestication under the laws of a different state; and
  • the merger of two corporations.

Changes that generally will still require a new exemption application include:

  • the incorporation of a charitable trust;
  • any restructuring where the surviving organization is a disregarded entity, limited liability company, partnership, or foreign business entity;
  • a restructuring that requires the surviving organization to obtain a new employer identification number; and
  • any restructuring involving a foreign entity becoming a domestic entity.Of course, with any restructuring situation, the nonprofit organization will likely need to take some action at the state level, which may include obtaining consent from or giving notice to the state attorney general’s office before taking certain restructuring actions. Also, the state of incorporation (or reincorporation or domestication) may have a requirement that the organization apply (or reapply) for tax exemption with the state taxing agency. However, the state exemption applications are typically not as burdensome as the federal application.
  • For more information, please contact the author or another member of AALRR’s business and tax team.

Revenue Rulings 67-390 and 77-469 are obsoleted by Revenue Procedure 2018-15.

Of course, with any restructuring situation, the nonprofit organization will likely need to take some action at the state level, which may include obtaining consent from or giving notice to the state attorney general’s office before taking certain restructuring actions.  Also, the state of incorporation (or reincorporation or domestication) may have a requirement that the organization apply (or reapply) for tax exemption with the state taxing agency.  However, the state exemption applications are typically not as burdensome as the federal application.

For more information, please contact the author or another member of AALRR’s business and tax team.

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