In Revenue Procedure 2024-5, the annual revenue procedure with the IRS Exempt Organization division's procedures for issuing determination letters, the IRS announces that it will now issue a determination letter to an IRC Section 501(c)(3) organization seeking to be recognized as a tax-exempt entity under an alternate paragraph of IRC Section 501(c), such as 501(c)(4) (social welfare organizations), 501(c)(6) (business leagues), and 501(c)(7) (social clubs).

Revenue Procedure 2024-5 requires IRC Section 501(c)(3) organizations seeking tax-exempt status under a different paragraph of IRC Section 501(c) to electronically file a complete Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4), at www.pay.gov. The completed Form must establish that the organization:

• Has, as of the submission date of its Form 1024 or 1024-A application, distributed all its assets to another IRC Section 501(c)(3) organization or government entity
• Meets the requirements of the requested IRC Section 501(c) status.

Concurrently with the publication of Revenue Procedure 2024-5, the IRS also published an EO Update newsletter with more details on what information a 501(c)(3) applicant for reclassification must include in its application. For instance, Form 1024 or Form 1024-A must include a description of the assets distributed, the date of distribution, and the name, EIN and address of the recipient exempt organization(s) and/or government entity/entities.

Under Revenue Procedure 2024-5, a new determination letter issued by the IRS would be effective only from the submission date of the Form 1024 or Form 1024-A application. This differs from the general rule that an exemption determination letter can be retroactive to the organization's date of formation, if it applies within 27 months of formation and has been organized and operated exclusively for charitable purposes during those 27 months.

The revenue procedure also states that it applies to an organization seeking retroactive reinstatement of exempt status following automatic revocation of its 501(c)(3) exemption. To qualify for such retroactive reinstatement under a different paragraph of 501(c), the organization must have distributed its assets to another 501(c)(3) organization and must meet the requirements of the 501(c) status requested.

Revenue Procedure 2024-5 also includes changes to 2023-5 made by Revenue Procedure 2023-12, which require:

• Electronic filing for all Forms 8940, Request for Miscellaneous Determination, which are used for requesting a change in foundation status, private foundation termination notices, Form 990 filing exemptions, and other reclassifications
• Government entities to use Form 8940 to request voluntary termination of Section 501(c)(3) status
• Canadian charities to use Form 8940 to request inclusion in the IRS Tax Exempt Organization Search database of organizations eligible to receive tax-deductible charitable contributions, or to request determination on public charity classification
• Private foundations to use Form 8940 to give the IRS notice of intent to terminate private foundation status

Implications

Section 501(c) exempt entities have historically been able to apply to the IRS for reclassification of their foundation status (for instance, to be reclassified from a 509(a)(2) public charity to a 509(a)(3) supporting organization) but could not ask to change from 501(c)(3) exemption status to another paragraph of 501(c) until now. Revenue Procedure 2024-5, effective January 2, 2024, breaks new ground for the IRS by allowing 501(c)(3) public charities to request reclassification under a different IRC Section 501(c) paragraph.

The ability to request this change will be valuable for charities that no longer operate or plan to operate exclusively for 501(c)(3) purposes, and/or no longer need to receive tax-deductible charitable contributions. The requirement to distribute all their assets to a charitable organization/organizations or a government entity/entities before applying for and receiving exemption under another paragraph of 501(c), however, could present a significant obstacle for organizations planning to use substantial non-liquid assets after they convert/reclassify.

Another change in Revenue Procedure 2024-5 that is both helpful and confusing is the statement, "This also applies to an organization automatically revoked under [IRC Section] 6033(j) that was described in [IRC Section] 501(c)(3) that seeks retroactive reinstatement as described in a different paragraph of [IRC Section] 501(c)." It's not clear what "This" in "This also applies" references. For instance, could an auto-revoked, former 501(c)(3) organization seeking reinstatement under a different 501(c) section wait to distribute all its assets to a charity until just before filing its application for reinstatement, and still qualify for retroactive reinstatement of exemption to the effective date of its auto-revocation? Does the statement, "This determination letter will only be effective from the submission date of the new application," preclude an auto-revoked 501(c)(3) organization from seeking retroactive reinstatement of exemption under another exemption category? If so, this would seem to contradict the revenue procedure's suggestion that its 501(c)(3) reclassification procedure applies to auto-revoked 501(c)(3) entities seeking retroactive reinstatement under a different paragraph of 501(c).

Precluding retroactive reinstatement for these entities to the effective date of their auto-revocation would be seemingly inconsistent with prior IRS guidance. In particular, Revenue Procedure 2014-11 requires the IRS to retroactively reinstate, to the effective date of auto-revocation, the 501(c) exemption status of an organization whose exemption was auto-revoked for failure to file a Form 990-series return for three consecutive years.

The IRS will likely harmonize these apparent discrepancies in an amendment to Revenue Procedure 2024-5 and/or in another revenue procedure or notice. In the meantime, consult with your tax advisor if you are considering an application for reinstatement of an auto-revoked 501(c)(3) entity, and whether it would be prudent to request retroactive reinstatement under a different 501(c) category.

The IRS updates this revenue procedure annually, at the beginning of each year, and may also modify or amplify it at other times during the year.