In Revenue Procedure 2018-15, the IRS describes the circumstances under which it will not require a domestic Section 501(c) organization that changes its form or place of organization to file (or refile) an application for exemption. The revenue procedure obsoletes Revenue Rulings 67-390 and 77-469, which described circumstances under which filing new exemption applications was required. Revenue Procedure 2018-15 is effective for tax years beginning on or after January 1, 2018.

Background

Revenue Ruling 67-390 held that a new application for exemption was required when a tax-exempt entity made certain structural changes, specifically: (1) incorporation of a trust; (2) incorporation of an association; (3) reincorporation by an Act of Congress; and (4) reincorporation under the laws of another state. Similarly, Revenue Ruling 77-469 held that an unincorporated association that incorporated after the enactment of Section 508 (requiring organizations incorporated after October 9, 1969 to apply for tax exemption) was required to file a new application to be recognized as exempt under Section 501(c)(3).

The IRS noted that the rules for filing a new application for exemption under Revenue Rulings 67-390 and 77-469 and associated guidance are generally more burdensome than the rules for obtaining a new Employer Identification Number (EIN), which is typically not required under similar circumstances. In addition, the IRS explained that requiring new exemption applications after corporate restructurings was often unnecessary and duplicative, due to the significant Form 990 reporting required of exempt organizations.

Revenue Procedure 2018-15

Revenue Procedure 2018-15 generally eliminates the requirement for a domestic business entity classified as a corporation for federal income tax purposes to file a new application for exemption after a corporate restructuring under certain conditions. The changes are intended to better align the requirements for filing a new application for exemption with the requirements for obtaining a new EIN in common restructuring situations.

Revenue Procedure 2018-15 applies to corporate restructurings of domestic business entities that are: (1) classified as corporations under Reg. Section 301.7701-2(b)(1) or (2); and (2) recognized as exempt under Section 501(a) as organizations described in Section 501(c). Revenue Procedure 2018-15 does not apply to corporate restructuring transactions in which: (1) the restructuring organization or the surviving organization is a disregarded entity, limited liability company, partnership or foreign business entity; or (2) the surviving organization obtains a new EIN.

Organizations within the scope of the revenue procedure will generally not be required to file a new application for exemption following a corporate restructuring if certain conditions are met, including the following:

1. The surviving organization must carry out the same purpose(s) as the exempt organization that engaged in the corporate restructuring.
2. The restructuring organization must be in good standing with the state in which it was incorporated (or formed in the case of unincorporated associations).
3. If the restructuring organization is exempt under Section 501(a) as an organization described in Section 501(c)(3), the articles of organization of the surviving organization must continue to meet the organizational test.

The surviving organization must report the corporate 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 must also report a change of address.

The revenue procedure includes several examples illustrating the application of these rules. Specifically, the examples illustrate circumstances under which a new application for exemption is not required in cases involving: (1) incorporation of an association; (2) reincorporation in another state; (3) domestication; and (4) merger into an existing tax-exempt organization with the same tax-exempt purpose(s). The examples also demonstrate that a new application for exemption is required when: (1) a trust incorporates; (2) a corporation restructures as a limited liability company; (3) a foreign entity reincorporates; and (4) a corporation merges into a disregarded entity.

Implications

Revenue Procedure 2018-15 is welcome news for tax-exempt organizations that are considering a corporate restructuring. Before this new revenue procedure, when an organization exempt under Section 501(c) changed its corporate structure, the surviving corporation was required to apply for exemption as a new legal entity. Now, under Revenue Procedure 2018-15, certain reorganized domestic tax-exempt organizations will not be required to reapply for tax-exempt status. The essence of the new revenue procedure is based on the EIN rules, and generally doesn't require re-applying for exemption if the surviving corporation is not required to obtain a new EIN.

The corporation must also meet the other requirements of the new rules, which do not apply when the surviving organization modifies its exempt purpose due to the organizational change. Similarly, if the restructuring organization or the surviving organization is a disregarded entity, limited liability company, partnership or foreign business entity, then a new application for exemption will have to be filed.

The revenue procedure also notes that, in these situations, the organization's Form 990 reporting responsibilities are sufficient to notify the IRS of the structural change. Therefore, a tax-exempt organization that falls within the rules of this new revenue procedure should sufficiently disclose the restructuring on its federal Form 990. This may include reporting a name change, a change of address, a change in program service activity, a change to the organization's governing documents, and/or a significant disposition of net assets.

A tax-exempt organization that is considering more substantial changes that do not meet the requirements of this new revenue procedure should consult Revenue Procedure 2018-5 for the requirements to apply for tax-exempt status.

Please contact your Ernst & Young LLP professional for further information.

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— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg

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