In the new Revenue Procedure 2018-15, effective for tax years beginning on or after January 1, 2018, the IRS has indicated that it will generally not require a new exemption application from a domestic Internal Revenue Code (“IRC”) Section 501(c) organization that changes its form or place of organization.
Under prior guidance (Rev. Ruls. 67-390 and 77-469), the IRS required organizations to file new exemption applications (e.g., Form 1023, Form 1024) when, for example, an already-exempt unincorporated association decided to incorporate, or when an already-exempt corporation decided to re-incorporate in a different state, even when these entities would not otherwise have to obtain a new federal Employer Identification Number (“EIN”). Similarly, when one corporation merges into another corporation under state law, the surviving corporation does not have to obtain a new EIN.
Rev. Proc. 2018-15 now generally eliminates the requirement for corporations to file a new exemption application after a corporate restructuring, if certain conditions are met. The Rev. Proc. notes that requiring a new exemption application after a corporate restructuring is often unnecessary and duplicative, since the IRS already requires exempt organizations to report significant organizational changes and new programs on their annual Forms 990.
More specifically, Rev. Proc. 2018-15 generally provides that in a corporate restructuring of a domestic business entity that is classified as a corporation under Reg. section 301.7701-2(b)(1) or (2) (which includes an unincorporated association that is not a disregarded entity) and is recognized as an organization described in section 501(c), the surviving organization will not be required to file a new exemption application if it is carrying out the same purposes as the exempt organization that engaged in the corporate restructuring.
The restructuring organization must also be in good standing in the state in which it is incorporated or formed.
This general rule will 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 exemption application is still required.
Some additional guidance may be necessary to explain the example provided of a merger of one exempt entity (“Corporation I”) into a disregarded LLC and subsidiary of another exempt entity (“Corporation J”). In the example in Section 7.08 of Rev. Proc. 2018-15, Corporation J is required to file another exemption application, which seems peculiar. If the LLC is disregarded, then for federal tax purposes, the merger should be viewed as a merger of Corporation I into Corporation J, which expressly does not require a new exemption application.
Lastly, while a new exemption application with the IRS may not be required under the circumstances described above, a new state tax exemption application may still be required after a corporate restructuring. For example, in California, the Franchise Tax Board’s website states: “an unincorporated association that has tax-exempt status must reapply for exemption if it incorporates.”