Outdated Legal Structure
IRS lifts much of the burden of updating legal structures and re-incorporating in a different state.
Does your organization use a legal structure that is no longer adequate for its needs? Has your organization moved and lost its connection to the state where it was founded? If either of these apply to your organization, you may want to consider re-structuring your legal entity under new guidance issued by the IRS. In Rev. Proc. 2018-15, the IRS announced that a new exemption application is not required if a domestic tax-exempt organization changes its legal structure or re-incorporates in another state. Under prior IRS guidance, an organization was required to file a new exemption application in order to keep its exemption if it made any of these changes.
This new guidance could be useful for tax-exempt organizations that have been active for many years but have been dissuaded from making needed changes because of how complicated the new exemption application would be. Now, a trust can simplify its governance by incorporating as a not-for-profit corporation without risking a denial of its exemption application. Likewise, an unincorporated association that has been risking the assets of its members can take advantage of the liability protections provided by the corporate umbrella.
Over time, an organization’s center of operations may change from one part of the country to another. The organization may be incorporated in a state where it has no offices, employees, or operations of any kind. In this situation, it may make sense for the organization to re-incorporate in another state. This would avoid the need to file annual reports and retain a registered agent in the original state. Under prior law, making this small change by re-incorporating in a new state would have required a full exemption application. Now, this organization can incorporate in the state where it is most active, dissolve its old corporation, and retain its original tax exemption without filing a new application.
We are aware of a case where all of an organization’s employees, property, and operations were located in State A, but it was incorporated in State B. As an out-of-state corporation, it was ineligible for a property tax exemption in State A. Simply changing the state of incorporation allowed that organization to receive a property tax exemption that was worth thousands of dollars per year.
Now, it is less of a burden to make changes to a tax-exempt organization’s corporate structure and state of incorporation. If you would like guidance or assistance in making any of these changes, contact us.
This article is provided for general information and should not be relied upon as legal advice for a specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.
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