Changing Times: A New Application for Tax Exemption May Not Be Required for Certain Structural Changes

During 2014 the IRS reviewed two private letter rulings (PLR) related to change in an exempt organization’s entity structure. In one case, an exempt entity converted under state law from a public corporation to a nonpublic corporation; in the other, the tax-exempt organization reincorporated itself in a different state. In both cases, the IRS ruled in favor of the exempt organization and contrary to historical revenue rulings. Rather than requiring the entities that underwent these changes to file a new application for exemption, the PLRs indicate that such changes didn’t indicate that a new entity was formed; therefore, the exempt status could continue uninterrupted.

Public to Nonpublic

Released in June 2014, PLR 201426028 reviewed an exempt organization that was mandated under state law to convert from a public corporation to a nonpublic corporation by filing a certification of formation with a certificate of conversion. The state clarified that—even with the conversion—the exempt organization continued in existence uninterrupted from its original date of formation and that its purpose and operations remained the same. As such, the IRS determined that a new entity wasn’t formed; therefore, no new application for exemption was required.

Redomestication and Reincorporation

PLR 201446025, released in November 2014, built on the same concepts as the June PLR. In this situation the exempt organization determined that incorporating in another state would offer it more flexibility than its current state of incorporation. To make the change, the organization planned to file articles of domestication with the new state and a certificate of conversion with its current state. The governing law of the new state indicated that the articles of domestication wouldn’t affect the original date of incorporation, and the state law of the old state indicated the certificate of conversion would allow the organization to continue to exist without interruption, thus maintaining the same liabilities and obligations. The change wouldn’t impact the charitable purpose or operations of the exempt organization. As such, the IRS determined that the change in domicile wouldn’t be a substantial change in character, purpose, or method of operation—and that as a result a new Form 1023 wasn’t required (since the original determination of exemption remained unchanged). However, the changes to the organization’s governing documents would need to be reported on Form 990 as significant changes.

Background

Prior to the two new 2014 PLRs, tax-exempt organizations relied on historical guidance in Revenue Ruling 67-390, which gives four specific examples of changes to structure that would result in a filing of Form 1023:

  • Reorganization from exempt trust to corporation
  • Reorganization from unincorporated association to corporation
  • Reincorporation of tax-exempt organizations under an Act of Congress
  • Reincorporation of an organization under the laws of a second state

In each of the cases addressed in the PLRs, the IRS determined that a new entity was created, thus requiring a new request for exemption using Form 1023 under Section 508(a) of the Internal Revenue Code. In both 2014 PLRs, the IRS determined that, given the specific facts and circumstances, the restructurings didn’t create a new entity and therefore weren’t similar to the examples analyzed in Revenue Ruling 67-390.

We're Here to Help

While the new PLRs are great news for tax-exempt organizations, the rulings leave room for interpretation, because each state has its own set of rules governing reincorporation and redomestication transactions. If your organization is considering a change in structure or domicile, be sure to address the laws specific to your existing and new state, and consult with your Moss Adams tax advisor to determine if the change will require a new application for exemption filing with the IRS.