The IRS Determines Nonprofit Corporations Can Reincorporate Without Filing a New Exemption Application
In the new Revenue Procedure 2018-15, the IRS has indicated that it will generally no longer require a new tax exemption application from a Section 501(c) organization that changes its form or place of organization. This change will make it easier for an association or other nonprofit corporation to take advantage of the benefits of re-incorporating in a state that is either more convenient or a state that may have more favorable laws governing nonprofit corporations.
The process of re-incorporating typically requires restructuring of the organization, often by means of a merger, consolidation, or transfer of assets, although certain states do permit single-step conversions or domestication. Such transactions generally require Board of Directors and member approval as set forth under the governing documents and applicable state law. While the procedural challenge associated with restructuring might demonstrate the very reason a nonprofit corporation is considering re-incorporating elsewhere, Rev. Proc. 2018-15 simplifies the process so that the restructuring entity, under certain conditions, is no longer also required to file a new tax exemption application with the IRS.
Under prior guidance, the IRS required an already-exempt organization to file a new exemption application if it opted to re-incorporate in a different state, even when the entity would not otherwise have to obtain a new federal Employer Identification Number (“EIN”). Rev. Proc. 2018-15 now generally eliminates the requirement for corporations to file a new tax exemption application after a corporate restructuring if certain conditions are met. More specifically, the new IRS guidance provides that in a corporate restructuring of a domestic entity that is recognized as an exempt 501(c) organization, the surviving organization will not be required to file a new tax exemption application if it is carrying out the same exempt purposes as the exempt organization that engaged in the corporate restructuring. Prior to restructuring, an exempt organization must be in good standing in the state in which it is formed.
For example, a nonprofit corporation formed on January 1, 2012, under the laws of Maryland and recognized as exempt under Section 501(c)(4) on November 30, 2012, that re-incorporates (i.e., sets up a new legal entity and transfers its assets, programs and activities to the new corporation) under the laws of Virginia on April 1, 2018, will continue to be recognized as tax exempt under Section 501(c)(4) without the necessity of filing a new application for recognition of tax exemption. Rev. Proc. 2018-15 also applies similarly to domestication of an exempt nonprofit corporation, which is a process available in some states by which a corporation simply changes its state or jurisdiction (such as the District of Columbia) to another one. Please note, however, that both states or jurisdictions must have domestication statutes in order for this to be implemented.
Finally, Rev. Proc. 2018-15 does not apply to any corporate restructuring in which the restructuring organization or the surviving organization is a disregarded entity, limited liability company, partnership, or foreign business entity, or if the surviving organization obtains a new EIN. In these cases, a new tax exemption application is still required.