IRS updates on exemption applications after restructuring and DAF guidance

NONPROFIT NEWS

The IRS recently released Revenue Procedure 2018-15 clarifying the circumstances in which an exempt entity that undergoes a corporate restructuring does not need to file a new exemption application. It also recently released a notice and request for comments regarding certain issues pertaining to donor-advised funds, which just maybe is a sign that much-anticipated proposed regulations regarding donor-advised funds are coming soon.

Revenue Procedure 2018-15

The IRS recently released Revenue Procedure 2018-15, which clarifies that the IRS typically will not require a new exemption application from a domestic organization recognized as exempt under IRC Section 501(a) and described in Section 501(c) simply because that organization changes its state or form of organization. In the past, the IRS has stated that a new exemption application is required if an exempt organization changes its legal structure (such as from an unincorporated association to a corporation) or changes its state of incorporation or domestication. However, a new EIN has generally not been required when an exempt entity reincorporates under the laws of another state or for a surviving exempt entity in a merger. Given this discrepancy between the IRS rules regarding new exemption applications and new EINs, the Revenue Procedure sought to clarify the situations involving exempt entity reorganizations in which a new exemption application would not be required.

The Revenue Procedure states what practitioners have long noted: "Requiring a new exemption application after a corporate restructuring often is unnecessary and duplicative, because the IRS requires exempt organizations to report significant organizational changes on their annual Forms 990. Moreover, any possible exemption issues with a corporate restructuring are less burdensome for the IRS to administer when the surviving organization can continue to use the same EIN on its Form 990 as the restructuring organization." It clarifies that domestic business entities classified as corporations for federal tax purposes generally will not be required to file a new exemption application after a corporate restructuring so long as certain conditions are met and makes clear that prior guidance to the contrary in Revenue Rulings 67-390 and 77-469 is obsolete.

Provided a surviving domestic business entity classified as a corporation for federal tax purposes and recognized as exempt continues to carry out the same purposes as the exempt entity that engaged in the corporate restructuring and does not obtain a new EIN, it generally will not be required to file another application to continue to be recognized as exempt under the same 501(c) section. However, the organization must be in good standing with the state in which it was incorporated or formed and, if the organization was recognized as exempt under Section 501(c)(3), the surviving entity's articles of organization must continue to meet the organizational test. A surviving corporation will continue to be required to report any corporate restructuring on its Form 990 for the applicable taxable year, and may also be required to report a change of address appropriately. The Revenue Procedure goes on to provide a series of examples to demonstrate its application.

IRS Request for Comments Regarding DAFs

Near the end of 2017, the IRS issued Notice 2017-73, describing approaches that the IRS and the Department of Treasury are considering with respect to the application of excise taxes on donor-advised funds ("DAFs") in certain situations, and requesting comments on the same. A DAF is currently defined in IRC Section 4966 as a fund or account that is owned and controlled by a sponsoring organization, which is separately identified, and with respect to which the donor or a person designated by the donor has or reasonably expects to have advisory privileges with respect to the distribution or investment of the funds, subject to certain exceptions.

The notice raises three potential areas in which the IRS and Treasury are considering developing proposed regulations: (1) under IRC Section 4967, providing that certain distributions from a DAF that pay for the purchase of tickets to a charity-sponsored event which are used by a donor, donor advisor, or related person would result in an impermissible benefit to such person under Section 4967; (2) also under IRC Section 4967, providing that certain distributions from a DAF that are treated as fulfilling a pledge made separately by a donor, donor advisor, or related person do not result in an impermissible benefit to such person under Section 4967 if certain requirements are met; and (3) modifying the public support computation for public charities described in IRC Section 509(a)(1) and 170(b)(1)(A)(vi) or 509(a)(2) to prevent organizations from using DAFs to avoid being subject to the rules applicable to private foundations.

With respect to issue (1) mentioned above, the notice states that the IRS and Treasury currently agree that the relief of a donor or donor advisor's obligation to pay the full price of a ticket to a charity-sponsored event provides a direct benefit that is more than incidental under Section 4967 and proposed regulations would reflect such view. It also states that the same analysis would apply to payment from a DAF on behalf of a donor or donor advisor of a portion of a membership fee charged by a charity. On issue (2), the IRS stated that it and Treasury currently feel that it would be too difficult to require a sponsoring organization of a DAF to determine whether a donor's prior commitment to a charitable organization was in fact a legally enforceable pledge or merely a statement of charitable intent. Accordingly, they are considering proposed regulations under Section 4967 that would provide that distributions from a DAF to a charity would not provide more than incidental benefit to a donor or donor advisor merely because she or he had made a charitable pledge to that same charity, provided the DAF sponsor does not reference the pledge when making the distribution, the donor or donor advisor doesn't receive any other benefit that is more than incidental, and the donor or donor advisor does not attempt to claim an additional charitable contribution deduction in connection with the DAF distribution.

Finally, on issue (3), the notice indicates that the IRS and Treasury are contemplating treating a distribution from a DAF to a recipient charity as an indirect contribution from the donor to the DAF, rather than as a contribution from the DAF sponsoring organization, solely for the purpose of determining whether the recipient charity receives sufficient public support to qualify as a public charity. The goal of such an approach would be to prevent organizations that would otherwise be classified as private foundations and subject to the applicable rules from circumventing such rules by having donors contribute indirectly through a DAF and thereby increasing the recipient organization's percentage of public support.

The notice requested comments on these issues, as well as how private foundations currently use DAFs and several other issues. Comments were due to the IRS by March. 5, 2018. We are told that Treasury and the IRS are continuing to develop long-awaited proposed regulations that will comprehensively address DAFs. However, the meantime, the notice was "intended to provide interim guidance on these specific issues and to solicit additional comments in anticipation of the issuance of further guidance."

IRS Reminder to Use Current Forms

As discussed last month, the IRS recently revised several of its forms used to apply for tax-exempt status, including the Form 1023 and the Form 1024, and released the new Form 1024A. The IRS must be receiving a number of applications using the old versions of the forms because it recently issued an update reminding people to use the current version of any IRS form to avoid processing delays. It warned that if an applicant uses "a prior version of one of these forms, the IRS will return your application and ask you to resubmit using the current version of the form." The notice also included a reminder that filers submitting a group exemption letter request or exemption application, other than on a Form 1023 or Form 1023-EZ, must also submit Form 8718 with the correct user fee.