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June 24, 2024
2024-1251

IRS obsoletes guidance enabling exempt organizations to rely upon state law to meet certain exemption standards

In Rev. Proc, 2024-22, the IRS has made obsolete Revenue Procedure 82-2. That revenue procedure identified states in which an IRC Section 501(c)(3) charity could rely on state law to satisfy the requirement that its organizing document require that upon dissolution the charity must distribute all of its assets for IRC Section 501(c) tax-exempt purposes. Similarly, in Revenue Ruling 2024-10, the IRS made obsolete Revenue Ruling 75-38, which identified states in which an IRC Section 501(c)(3) private foundation could rely on state law to satisfy the requirement that its organizing document reference the IRC Section 4941 through 4945 private foundation rules.

In both Revenue Procedure 2024-22 and Revenue Ruling 2024-10, the IRS explained that Revenue Procedure 82-2 and Revenue Ruling 75-38 can no longer be relied upon, given that they were predicated on state laws that have materially changed. The IRS published concurrent guidance (PMTA 2024-02 and PMTA 2024-03) containing updated lists of states whose laws satisfy the requirements described in Revenue Procedure 82-2 and Revenue Ruling 75-38.

Revenue Procedure 2024-22

Treas. Reg. Section 1.501(c)(3)-1(b)(4) requires that an IRC Section 501(c)(3) charity dedicate its assets to charitable purposes. It also requires the charity's organizing document (e.g., articles of incorporation, charter) to provide that, upon the exempt organization's dissolution, its assets must be distributed:

  • For one or more charitable purposes
  • To the federal government for a public purpose
  • To a state or local government for a public purpose
    or
  • By a court to another organization to best accomplish the exempt purpose of the dissolved organization

Alternatively, if the laws of the state in which the charity was created require it to distribute its assets for those charitable purposes, then Treas. Reg. Section 1.501(c)(3)-1(b)(4) does not require the organizing document to specify that the charity's assets must be distributed for charitable purposes upon the charity's dissolution.

In Revenue Procedure 2024-22, the IRS stated that many of the state laws identified in Revenue Procedure 82-2 have materially changed, and thus can no longer be relied upon to meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(b)(4). Accordingly, the IRS made Revenue Procedure 82-2 obsolete through Revenue Procedure 2024-22. The IRS emphasized that an IRC Section 501(c)(3) charity is responsible for ensuring that it meets this requirement, either by including charitable distribution-upon-dissolution language in its organizing document or verifying that the requirements of Treas. Reg. Section 1.501(c)(3)-1(b)(4) are satisfied by applicable state law.

Revenue Ruling 2024-10

For a private foundation to be exempt from tax under IRC Section 501(a), its governing instrument must, under IRC Section 508(e), effectively prohibit the private foundation from engaging in activities that would subject it to the excise taxes under IRC Sections 4941, 4942, 4943, 4944 and 4945, which require private foundations to make minimum annual distributions and prohibit self-dealing, excess business holdings, jeopardizing investments, and taxable expenditures.

Treas. Reg. Section 1.508-3(d)(1), however, allows a private foundation to meet this requirement, by operation of state law, if the law of the state in which the foundation is organized (1) requires the foundation to refrain from acting in a manner that subjects it to the excise taxes under IRC Sections 4941, 4942, 4943, 4944 and 4945, or (2) treats the required provision as contained in the private foundation's governing instrument.

In Revenue Procedure 2024-10, the IRS stated that many of the state laws identified in Revenue Ruling 75-38 have since been amended, repealed or replaced, and thus can no longer be relied upon to meet the requirements of IRC Section 508(e). Accordingly, the IRS made Revenue Ruling 75-38 obsolete through Revenue Procedure 2024-10. The IRS emphasized that an IRC Section 501(c)(3) private foundation is responsible for ensuring that it meets this requirement, either by referencing the IRC Section 4941—4945 requirements in its organizing document or verifying that the requirements of IRC Section 508(e) are satisfied by applicable state law.

PMTA 2024-02

In PMTA 2024-02, Chief Counsel provided updated lists of state laws that require the dedication of assets to exempt purposes upon an exempt organization's dissolution. The list is broken down by entity type and provides additional requirements that must be satisfied, if applicable. IRC Section 501(c)(3) charities created in the states listed in PMTA 2024-02 may rely upon these state laws in lieu of including a corporate-distribution-upon-dissolution clause in their organizing documents to meet the Treas. Reg. Section 1.501(c)(3)-1(b)(4). However, the IRS warned that subsequent changes to state law may affect the accuracy of the lists in PMTA 2024-02.

The IRS stated in PMTA 2024-02 that, even if an organization relies on state law to meet the corporate-distribution-upon-dissolution organizing document clause requirement of Treas. Reg. Section 1.501(c)(3)-1(b)(4), it still must ensure that its articles do not authorize distribution for non-charitable purposes (e.g., to a taxable organization or individuals who are not members of a charitable class). For instance, if a charity's organizing document provides that its assets will be transferred to a particular IRC Section 501(c)(3) organization upon dissolution, the charity's organizing document needs to state that the charity must distribute its assets to another beneficiary or beneficiaries for charitable purposes if the transferee no longer exists or is no longer described in IRC Section 501(c)(3).

PMTA 2024-03

In PMTA 2024-03, Chief Counsel provided an updated list of state laws that satisfy IRC Section 508(e) by requiring private foundations to comply with IRC Sections 4941—4945. Private foundations organized in those states may rely on state law to satisfy IRC Section 508(e), rather than including a provision in their governing documents requiring them to comply with IRC Sections 4941, 4942, 4943, 4944 and 4945. However, the IRS warned that subsequent changes to state law may affect the accuracy of the lists in PMTA 2024-03.

Implications

IRC Section 501(c)(3) private foundations (including non-exempt charitable trusts treated as private foundations) that have relied upon state law rather than include IRC Section 4941—4945 compliance language in their organizing documents should reconsider that reliance, in light of the IRS's obsoleting Revenue Ruling 75-38. Likewise, any IRC Section 501(c)(3) charities that have relied on state law to meet their corporate-distribution-upon-dissolution-organizing-document-clause requirement should reconsider that reliance, in light of the IRS's obsoleting Revenue Procedure 82-2. Such organizations can review PTMAs 2024-02 and 2024-03 to determine the state laws upon which they can currently rely to satisfy these requirements. Those law might change, however, resulting in the PTMA state lists becoming obsolete like those in Revenue Procedure 82-2 and Revenue Ruling 75-38. Accordingly, charities and private foundations should consider including the requisite charitable distribution and private foundation compliance language in their organizing documents, if they haven't already done so, rather than relying on state law. These new IRS rulings underscore the need for tax-exempt organizations to be aware of and comply with continuously evolving state tax laws, which may also affect compliance with federal tax law.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us here.

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Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor