November 2, 2017Seattle, Washington

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

Lorri DunsmorePerkins Coie

PerkinsCoieLLP

DeepDiveIntotheForm1023Applicationfor501c3Tax-Exemption

LorriA.DunsmoreAnthonyMcCormick

• November2,2017

• “Tax-exempt”and“nonprofit”aredifferent

• “Tax-exempt”usuallymeans“exemptfromfederal incometax”

• Tax-exemptstatus:• IsgrantedbyIRS

• Givesdonorsabilitytodeducttheirdonationsontheirtax-return(ifa501(c)(3))

• InvolvesalotofrestrictionsandrequirementsbytheIRS

Tax-ExemptStatus

TypesofTax-ExemptOrganizations• Alotofdifferentkindsoforganizationscanbetax-

exempt...forexample:

• 501(c)(3):charities• 501(c)(4):“socialwelfareorganizations”• 501(c)(5):unionsandagriculturalorganizations• 501(c)(6):tradeassociations• 501(c)(7):socialclubs• 501(c)(8)and(10):fraternalorganizations• Etc....

• Wearefocusingon501(c)(3)publiccharities

• Organizationaltest

• ArticlesofIncorporationmust contain:• Purposesclauselimitingpurposesofthecorporationto

501(c)(3)purposesonly

• Dissolutionclause providingassetswillbedistributedondissolutiononlyforexemptpurposes(ortoagovernment)

• ArticlesofIncorporationcannot contain:• Provisionsexpresslyempoweringorganizationtoengagein

non-exemptactivity(e.g.,politicalactivity,distributingassetstoprivateindividualsorfor-profitbusinesses)

501(c)(3)Tax-Exempt Status

• Operationaltest

• Thisisabouttheactivities ofthenonprofit

• “Operatedexclusively”forexemptpurpose

• “Exclusively” =“Nosubstantialpart”ofactivitiesmaybeforanon-exemptpurpose

• Absoluteprohibitionontwothings:• politicalcampaignactivity

• privateinurement

501(c)(3)Tax-ExemptStatus(cont’d)

• IRSresourcesregardingqualificationfor501(c)(3)status:

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

• IRSPublication557(“thebasics”)

• IRSPublication1828(forchurchesandreligiousorgs.)

• IRSPublication4220(applicationprocess)

• IRSPublication1771(charitablecontributions)

• IRSPublication598(unrelatedbusiness)

501(c)(3)Tax-ExemptStatus (cont’d)

• Withfewexceptions,organizationsmustapplytoberecognizedas501(c)(3)organizations

• TheorganizationmusthaveanEINtoapply

• TheorganizationwillsubmiteitherForm1023orForm1023-EZ dependingonthesizeandactivitiesoftheorganization

Applyingfor501(c)(3)status

• Form1023• 11pages(mainform),8schedules,andnarrative

attachment

• IRSreceivesaround60,000applications/year

• TheformandallattachmentsmustbemailedtotheIRS

• Fee:$400/$850

• Processingtimesfrom2monthstowellover1year

• Mustbefiledwithin27monthsofformation

Applyingfor501(c)(3)StatusUsingForm1023

Applyingfor501(c)(3)StatusUsingForm1023(cont’d)

SubmittingForm1023• Iftheorganizationdoesnotqualifytosubmitform

1023EZ,itmustsubmitform1023andsubmitbymail• Materialsrequiredtobesubmitted:

• Form1023Checklist

• Form2848

• Form1023andapplicableschedules(withoriginalsignature)

• AttachmenttoForm1023andattachments(suchasconflictofinterestpolicy)

• ArticlesofIncorporationandanyamendments

• Bylaws

• Applicationsbegantakingmuchlongerin2012

• IRSbudgetshavebeencontinuallyfalling

• IRSresponsein2014:Form1023-EZ

• Deliberatedecisiontoskipsomeprocessingonthefrontend,todevotemoreIRSresourcestoexaminations

Applyingfor501(c)(3)StatusUsingForm1023-EZ

Form1023-EZ• Form1023-EZ

• Simplifiedapplicationforeligibleorgs:

• $50,000orlessannualgrossreceipts

• $250,000orlessassets

• Otherrestrictions

• Processingtimesfrom3-6weeks

• ComputerizedOnlineApplication(onlineonly)atpay.gov

• Completionrequirescompletionofquestionnaireandcompletionofonlineapplication.Nowrittenmaterialsorcopiesofgovernancedocumentssubmitted.

• ReducedFee:$275

• Mustbefiledwithin27monthsofformation

• Downloadinstructionsandeligibilityworksheetfromhttp://www.irs.gov/pub/irs-pdf/i1023ez.pdf

• Completeeligibilityworksheetbyhand(atendofinstructions)

• Gatherorganizationaldocumentsandboardinformation– musthaveArticles,bylaws,appointmentofdirectorscomplete

• Downloadpapercopyof1023-EZfrompay.gov

• Filloutpapercopyof1023-EZ;reviewinstructionsandresolveanyissues

Form1023-EZPreparation

• Logintopay.govandfilloutactualformbaseduponpaperdraft.YoucansaveyourworkanddownloadPDFversionforrecordkeeping.

• Client,notlawyer,needstoelectronicallysign.

Form1023-EZPreparation (cont’d)

1023-EZQualificationWorksheet• Annualgrossreceipts:$50,000orlessfor3years

• Totalassets: $250,000orless

• U.S.organizationsonly

• NoLLCs

• Nochurches,schools,hospitals,orHMOs

• Nocreditcounselingorgs.

• Nojointventureswithfor-profits

• Ingeneral,no“weird”orgs.

Form1023-EZQualification

• AttestationofEligibility

• PartI– IdentificationofApplicant

• PartII– OrganizationalStructure

• PartIII– SpecificActivities

• PartIV– FoundationClassification

• PartV– ReinstatementafterAutomaticRevocation

• PartVI– Signature

Form1023-EZSpecificSections

• PrivateInurement

• Lobbying

• Donorsubstantiation

• UnrelatedBusinessIncome

• Form990– AnnualReportFiling

IRSRestrictions-Requirementsfor501(c)(3)Organizations

PrivateInurement

• NopartofthenetearningsofaSection501(c)(3)organizationmayinuretoanyprivateshareholderorindividual

• WhatisPrivateInurement?• Any useofcharity’sassetsorincome

forthebenefitofaninsider

• “Insider”hasnoprecisedefinition…butwehaveclues:

• Officersanddirectors

• Majorcontributors

• Keyemployees

• Familyoftheabove

PrivateInurement:“ExcessBenefitTransactions”

• AppliestoTransactionsbetweenSection501(c)(3)publiccharities/501(c)(4)organizationsandinsiders

• Insiders=“DisqualifiedPersons”• Boardmembers• Officers• Familymembers• Relatedcorporations,partnerships,LLCs,etc.• CertainEmployees

“ExcessBenefitTransactions” (cont’d)

Disqualifiedpersongets“excessbenefit”• Paymentsforservices

• Compensation• Salestransactions• Leases• Loans• Useofassets

“ExcessBenefitTransactions” (cont’d)

RebuttablePresumptionofReasonableness• Independentboardmembers

• Disqualifiedpersonnotparticipatingorpresent

• Appropriatecomparabilitydata

• Documentdecisioninwriting

• ImportanceofConflictofInterestPolicy

AnthonyJ.McCormick,AssociateAnthony(Tony)McCormickisanassociatewiththefirm'sTrust&EstatePlanningpractice.Tonycounselshisclientsinboththetaxandnon-taxaspectsofestateplanning,withaspecificfocusonestateplanningstrategiestoefficientlyminimizetaxesthroughthecreationofwills,trusts,businessentities,andcharitableorganizationsandtheuseofgifts,sales,andotherwealth-transferstrategies.Tony'spracticealsoincludesadvisingindividualsandtax-exemptorganizationsonthewiderangeoflegalissuesaffectingcharitablegiving,theformationofnonprofitorganizations,andtheorganizationalstepsrequiredtomaintainacharitableorganization'staxexemptstatus.

LorriA.Dunsmore,PartnerLorriDunsmorehasover25yearsofexperiencerepresentingindividuals,businessesandtax-exemptorganizationsinavarietyofcharitable,wealthtransfer,businesssuccessionandfederaltaxmatters.Lorriregularlyworkswithindividualsandtax-exemptorganizationstoaddressawiderangeoftaxandstatelawissuesimpactingcharitablegiving,formationofnonprofitsandaddressingthespecializedneedsoftax-exemptorganizationsincludingprivatefoundationexcisetaxes,excessbenefittransactions,lobbyingrestrictions,fundraisinglawcompliance,commercialco-venturesandjointventures.Lorrihasspokenandwrittenaboutnumerousissuesrelatedtononprofitgovernanceandcompliancemattersandhasworkedwithavarietyoftax-exemptorganizationstoprovidetrainingforboardmembersandofficers.Lorri'spracticealsoincludesadvisingclientsontheformation,operation,managementandtransferoffamilybusinessentities.Sheworkscloselywithfamiliestoimplementbusinesssuccessionandwealthtransferstrategies.Lorrihasexperienceadvisingprivatelyheldcorporations,limitedliabilitycompaniesandprofessionalcorporationsonissuesrangingfromformationtodissolution.