Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption - - PowerPoint PPT Presentation

November 2, 2017 Seattle, Washington

Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption

Lorri Dunsmore Perkins Coie

Perkins Coie LLP

Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption

Lorri A. Dunsmore Anthony McCormick

• November 2, 2017

• “Tax-exempt” and “nonprofit” are different
• “Tax-exempt” usually means

“exempt from federal income tax”

• Tax-exempt status:
• Is granted by IRS
• Gives donors ability to deduct their donations
• n their tax-return (if a 501(c)(3))
• Involves a lot of restrictions and requirements

by the IRS

Tax-Exempt Status

Types of Tax-Exempt Organizations

• A lot of different kinds of organizations can be tax-

exempt . . . for example:

• 501(c)(3): charities
• 501(c)(4): “social welfare organizations”
• 501(c)(5): unions and agricultural organizations
• 501(c)(6): trade associations
• 501(c)(7): social clubs
• 501(c)(8) and (10): fraternal organizations
• Etc. . . .
• We are focusing on 501(c)(3) public charities

• Organizational test
• Articles of Incorporation must contain:
• Purposes clause limiting purposes of the corporation to

501(c)(3) purposes only

• Dissolution clause providing assets will be distributed on

dissolution only for exempt purposes (or to a government)

• Articles of Incorporation cannot contain:
• Provisions expressly empowering organization to engage in

non-exempt activity (e.g., political activity, distributing assets to private individuals or for-profit businesses)

501(c)(3) Tax-Exempt Status

• Operational test
• This is about the activities of the nonprofit
• “Operated exclusively” for exempt purpose
• “Exclusively” = “No substantial part” of

activities may be for a non-exempt purpose

• Absolute prohibition on two things:
• political campaign activity
• private inurement

501(c)(3) Tax-Exempt Status (cont’d)

• IRS resources regarding qualification

for 501(c)(3) status:

• irs.gov/Charities-&-Non-Profits/Charitable-

Organizations/

• IRS Publication 557 (“the basics”)
• IRS Publication 1828 (for churches and religious orgs.)
• IRS Publication 4220 (application process)
• IRS Publication 1771 (charitable contributions)
• IRS Publication 598 (unrelated business)

501(c)(3) Tax-Exempt Status (cont’d)

• With few exceptions, organizations must apply

to be recognized as 501(c)(3) organizations

• The organization must have an EIN to apply
• The organization will submit either Form 1023
• r Form 1023-EZ depending on the size and

activities of the organization

Applying for 501(c)(3) status

• Form 1023
• 11 pages (main form), 8 schedules, and narrative

attachment

• IRS receives around 60,000 applications/year
• The form and all attachments must be mailed to

the IRS

• Fee: $400 / $850
• Processing times from 2 months to well over 1 year
• Must be filed within 27 months of formation

Applying for 501(c)(3) Status Using Form 1023

Applying for 501(c)(3) Status Using Form 1023 (cont’d)

Submitting Form 1023

• If the organization does not qualify to submit form

1023EZ, it must submit form 1023 and submit by mail

• Materials required to be submitted:
• Form 1023 Checklist
• Form 2848
• Form 1023 and applicable schedules (with original signature)
• Attachment to Form 1023 and attachments (such as conflict of

interest policy)

• Articles of Incorporation and any amendments
• Bylaws

• Applications began taking much longer in 2012
• IRS budgets have been continually falling
• IRS response in 2014: Form 1023-EZ
• Deliberate decision to skip some processing on

the front end, to devote more IRS resources to examinations

Applying for 501(c)(3) Status Using Form 1023-EZ

Form 1023-EZ

• Form 1023-EZ
• Simplified application for eligible orgs:
• $50,000 or less annual gross receipts
• $250,000 or less assets
• Other restrictions
• Processing times from 3-6 weeks
• Computerized Online Application (online only) at pay.gov
• Completion requires completion of questionnaire and

completion of online application. No written materials or copies

• f governance documents submitted.
• Reduced Fee: $275
• Must be filed within 27 months of formation

• Download instructions and eligibility worksheet

from http://www.irs.gov/pub/irs-pdf/i1023ez.pdf

• Complete eligibility worksheet by hand (at end of

instructions)

• Gather organizational documents and board

information – must have Articles, bylaws, appointment of directors complete

• Download paper copy of 1023-EZ from pay.gov
• Fill out paper copy of 1023-EZ; review

instructions and resolve any issues

Form 1023-EZ Preparation

• Log in to pay.gov and fill out actual form based

upon paper draft. You can save your work and download PDF version for recordkeeping.

• Client, not lawyer, needs to electronically sign.

Form 1023-EZ Preparation (cont’d)

1023-EZ Qualification Worksheet

• Annual gross receipts: $50,000 or less for 3 years
• Total assets: $250,000 or less
• U.S. organizations only
• No LLCs
• No churches, schools, hospitals, or HMOs
• No credit counseling orgs.
• No joint ventures with for-profits
• In general, no “weird” orgs.

Form 1023-EZ Qualification

• Attestation of Eligibility
• Part I – Identification of Applicant
• Part II – Organizational Structure
• Part III – Specific Activities
• Part IV – Foundation Classification
• Part V – Reinstatement after Automatic

Revocation

• Part VI – Signature

Form 1023-EZ Specific Sections

• Private Inurement
• Lobbying
• Donor substantiation
• Unrelated Business Income
• Form 990 – Annual Report Filing

IRS Restrictions-Requirements for 501(c)(3) Organizations

Private Inurement

• No part of the net earnings of a Section 501(c)(3)
• rganization may inure to any private shareholder or

individual

• What is Private Inurement?
• Any use of charity’s assets or income

for the benefit of an insider

• “Insider” has no precise definition… but we have clues:
• Officers and directors
• Major contributors
• Key employees
• Family of the above

Private Inurement: “Excess Benefit Transactions”

• Applies to Transactions between Section 501(c)(3)

public charities/ 501(c)(4) organizations and insiders

• Insiders = “Disqualified Persons”
• Board members
• Officers
• Family members
• Related corporations, partnerships, LLCs, etc.
• Certain Employees

“Excess Benefit Transactions” (cont’d)

Disqualified person gets “excess benefit”

• Payments for services
• Compensation
• Sales transactions
• Leases
• Loans
• Use of assets

“Excess Benefit Transactions” (cont’d)

Rebuttable Presumption of Reasonableness

• Independent board members
• Disqualified person not participating or present
• Appropriate comparability data
• Document decision in writing
• Importance of Conflict of Interest Policy

Anthony J. McCormick, Associate

Anthony (Tony) McCormick is an associate with the firm's Trust & Estate Planning practice. Tony counsels his clients in both the tax and non-tax aspects of estate planning, with a specific focus on estate planning strategies to efficiently minimize taxes through the creation of wills, trusts, business entities, and charitable organizations and the use of gifts, sales, and other wealth-transfer strategies. Tony's practice also includes advising individuals and tax-exempt organizations on the wide range of legal issues affecting charitable giving, the formation of nonprofit organizations, and the

• rganizational steps required to maintain a

charitable organization's tax exempt status.

Lorri A. Dunsmore, Partner

Lorri Dunsmore has over 25 years of experience representing individuals, businesses and tax-exempt

• rganizations in a variety of charitable, wealth transfer,

business succession and federal tax matters. Lorri regularly works with individuals and tax-exempt

• rganizations to address a wide range of tax and state

law issues impacting charitable giving, formation of nonprofits and addressing the specialized needs of tax- exempt organizations including private foundation excise taxes, excess benefit transactions, lobbying restrictions, fundraising law compliance, commercial co-ventures and joint ventures. Lorri has spoken and written about numerous issues related to nonprofit governance and compliance matters and has worked with a variety of tax-exempt organizations to provide training for board members and officers. Lorri's practice also includes advising clients on the formation,

• peration, management and transfer of family business
• entities. She works closely with families to implement

business succession and wealth transfer strategies. Lorri has experience advising privately held corporations, limited liability companies and professional corporations on issues ranging from formation to dissolution.