IRS Guidance Removes Obstacle to Restructuring Tax-Exempt Organizations

The Internal Revenue Service (IRS) has made it easier for many tax-exempt organizations to restructure. The IRS will now continue to recognize as exempt those organizations that:

  • Change their state law legal structure from an unincorporated association to a corporation.

  • Merely reincorporate in another state.

  • Domesticate in a new state.

  • Merge one corporation with or into another corporation.

Under the previous authority of Revenue Ruling 67-390, issued over 50 years ago, exempt organizations typically were not permitted to retain their Employer Identification Number (EIN) when they engaged in restructuring activities.

As a result, an entity described in IRC Section 501(c)(3) that chose to reorganize was required to file a final Form 990 under the old EIN, obtain a new EIN, file a new application for recognition of tax-exempt status under the new EIN, and then file new returns under the new EIN. This was in addition to changing the EIN on all accounts, which complicated matters for organizations with significant investments. While the IRS eased the rules over the last few decades to allow retention of the original EIN in many cases, the IRS was still requiring that these organizations submit new applications for recognition of tax-exempt status.

In Revenue Procedure 2018-15, the IRS has removed the exemption-related obstacles to many corporate restructurings and now simply requires that exempt organizations report these changes on their Form 990. As part of its efforts to remove or update guidance that creates an excessive burden on taxpayers, this change has allowed the IRS to check off a “near-term burden reduction” goal from its 2017-2018 Priority Guidance Plan.

There are limitations as to which situations the new rules will apply. The reorganized entity must carry out the same exempt purposes under the same paragraph of IRC Section 501(c) as the organization that engaged in the restructuring. Additionally, if the organization is an entity described in 501(c)(3), the new articles of incorporation must continue to meet the organizational test, including the dedication of assets for charitable purposes.

Most restructurings that involve non-corporate entities still face hurdles when it comes to exemption. The new guidance does not apply if the surviving organization is a disregarded entity, LLC, partnership, or foreign business entity. It does not apply to tax-exempt trusts that decide to incorporate or to organizations that merge into LLCs or disregarded entities either.

There is a trap in the new procedure. If the surviving organization does obtain a new EIN, it will be required to submit a new exemption application (Form 1023 or Form 1024) even if the restructuring itself would have qualified and not required a new exemption application.
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