Is your not-for-profit thinking about merging or otherwise restructuring?

a man's hand putting a pin into a wall with several pieces of paper hung on a wall by black string and colored pins; used for a blog about restructuring not-for-profits

Recently, the IRS made the process easier for some organizations.

Revising Old Rules
Under previous IRS rules, tax-exempt organizations were required to file new exemption applications when they made certain changes to their structure. Each change was seen as creating a new legal entity that needed an exemption application.

Originally, restructuring organizations would need to file a final Form 990 under their initial Employer Identification Number (EIN), obtain a new EIN and apply for exemption for the new entity. This required changing the EIN on all bank and investment accounts. In previous guidance, the IRS had eased the rules on obtaining new EINs in many circumstances, but still required new applications for exemption. But under Revenue Procedure 2018-15, certain not-for-profits need only report significant organizational changes on their Forms 990.

Meeting Requirements
To avoid having to file a new application, the original organization must be 1) a U.S. corporation or unincorporated association, and 2) exempt as a 501(c) organization. It also must be in good standing in the jurisdiction where it was incorporated or, in the case of an unincorporated association, formed.

The reorganization must:

  • Change from an unincorporated association to a corporation,
  • Reincorporate under the laws of another state after dissolving in the original state,
  • File articles of domestication to transfer a corporation to a new state without dissolving in the original state, or
  • Merge a corporation with or into another corporation.

The resulting, or “surviving,” organization needs to carry out the same exempt purposes as the original organization. If your not-for-profit is a 501(c)(3) organization, your new articles of incorporation must continue to satisfy the IRS’s organizational test.

Exceptions and Caveats
The new rules don’t apply if the surviving organization is a “disregarded entity” (an entity the IRS doesn’t consider to be separate from its owner for tax purposes), limited liability company, partnership or foreign business entity. Nor do the new rules include reorganizations where the surviving organization obtains a new EIN. Surviving organizations that aren’t covered by the new rules must submit a new exemption application to be recognized as exempt.

Surviving organizations have reporting obligations, too. The IRS still requires survivors to report the restructuring on any required Form 990 for the applicable tax year. In the case of a domestication or reincorporation in a different state, the surviving organization also must report its change of address on Forms 8822-B and 990.

Critical Consideration
The new rules have reduced the burden for many not-for-profit restructurings. But they apply only to federal income tax exemptions. Your state could require additional filings. Contact your trusted advisor for more information.