Starting and Funding a Private Foundation
- § 2.5 Acquiring Recognition of Tax-Exempt Status
- (a) Preparing Form 1023
- *(b) Understanding Impact of Recognition Based on Form 1023-EZ
- (c) The Substantially Completed Application
- (d) Recognition Application Procedure and Issuance of Determination Letters and Rulings
- (e) Application Processing Timeline
- (h) Applications Processing Controversy
- § 2.7 When to Report Back to the IRS
- (a) When Should a Ruling Be Requested
§ 2.5 ACQUIRING RECOGNITION OF TAX-EXEMPT STATUS
(a) Preparing Form 1023
p. 45. Add after third paragraph:
Extraordinary turmoil racked the IRS determination process in the recent past, though several changes have improved the work flow. Because the tax code provision that provides an organization's tax exemption is automatically revoked if the entity fails to file a required Form 990 for three consecutive years effective as of the filing due date of the third year,67.1 more than 500,000 organizations were revoked, including many private foundations. The Cincinnati office that processes applications for recognition of tax exemption was inundated with applications for reinstatement beginning in 2010 as the number of applications significantly increased. Concurrently, that office enhanced their scrutiny of applicants for exemption as social welfare organizations to look for potential participation in promoting the election of persons to public office. They developed a "BOLO" (be on the lookout list) to identify applicants that could not satisfy the "exclusively operated for social welfare purposes standard" needed to qualify for exemption.67.2 The standard applied was that the activity aimed at influencing an election could not be the entity's primary activity, though there was no numerical definition of the word primary. Applicants with names that implied political involvement, including Tea Party or Democrat, were given enhanced scrutiny. As a result of pressure from Congress, the media, and the organizations themselves, the system was abandoned and officials in the exempt organization division were relieved of their duties. Regulations were proposed to clarify the rules, but they have been withdrawn.
As a consequence of the turmoil, applications took a significant time to be reviewed and a streamlined procedure to reduce the time required was implemented.67.3 Modest organizations eligible to file either Form 990-EZ or 990-N which filed an application for reinstatement within 15 months of revocation were retroactively reinstated and penalties for failure to file not imposed if they demonstrated reasonable cause by attesting that the organization's failure to file was not intentional and that it has put in place procedures to file in the future. Resubmission after 15 months requires demonstration of reasonable cause. Those entities that were required to and did not file Form 990 or 990-PF must submit the application with a reasonable cause description and complete and submit the returns they failed to file. For these entities, penalties will not be imposed.
The next step to address the turmoil came in June 2014, when the IRS released a new Form 1023-EZ. Prospective exempts with revenue of $50,000 or less and assets of $250,000 or less are eligible to use this abbreviated 4-page application subject to completion of a 7-page eligibility checklist that excludes foreign successors, LLC, churches, schools, hospitals, and many other types of applicants.67.4
Applicants are asked to attest that the organizational documents:
- Limit purposes to one or more exempt purposes, namely, religious, charitable, scientific, testing for public safety, literary, educational, fostering national or international amateur sports competition, or preventing cruelty to children or animals;
- Not expressly empower the entity to engage, otherwise than as an insubstantial part of your activities, in activities that in themselves are not in furtherance of one or more exempt purposes; and
- Provide that, upon dissolution, remaining assets will be used exclusively for charitable purposes.
Form 1023-EZ must be filed electronically, as shown in the form below.
The version of Form 1023 with a box at the top directing one to the Internet at StayExempt.irs.gov, allows submission of the form electronically. This online version contains prompts to technical information contained on the IRS/EO Division and can be very useful.
*(b) Understanding Impact of Recognition Based on Form 1023-EZ
p. 46. Add at end of subsection:
A private foundation, but not a private operating foundation,1 with anticipated revenue below $50,000 during any of its next three years or with total assets the fair market value of which is in excess of $250,000 can submit this form to determine its qualification for tax exemption. Instructions to the form and the Eligibility Worksheet must be studied in considering whether to use the form.
A revised Form 1023-EZ is expected in the future to address what some consider its deficiencies. The form as originally issued requires no financial information, descriptions of proposed activities, disclosure of the organization's history, relationships of persons involved, or description of anticipated sources of revenue distinguishing between money voluntarily contributed and revenue earned from providing services and goods.
Since its original release, many commentators have felt the "self-assertion" of qualification should not be trusted. The instructions to the form2 provide a "donor" (note no mention of a private foundation) can rely on a Form 1023-EZ for deductibility purposes "until the IRS publishes notice of a change in status, unless the donor or contributor was responsible for or aware of the act or failure to act that results in the revocation of the organization's Determination Letter."
Additionally, doubts prevail despite guidance issues by the IRS that states:3
A determination letter recognizing exemption may not be relied upon if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization, or a change in the applicable law. Also, a determination letter issued to an organization that submitted a Form 1023-EZ in accordance with this revenue procedure may not be relied upon if it was based on any inaccurate material information submitted by the July 21, 2014 Bulletin No. 2014-30 236 organization. Inaccurate material information includes an incorrect attestation as to the organization's organizational documents, the organization's exempt purposes, the organization's conduct of prohibited and restricted activities, or the organization's eligibility to file Form 1023-EZ.
IRS Exempt Organization Select Check4 does not disclose whether an entity requested recognition of tax exemption by filing Form 1023 or 1023-EZ.5 It lists organizations eligible to receive tax-deductible charitable contributions. The listings are updated monthly and are divided into three groupings: those that (1) are eligible to receive tax-deductible charitable contributions, (2) were automatically revoked, and (3) have filed Form 990-N (Postcard). Private foundations cannot necessarily use this list. Qualifying entities on the list are identified as PC (public charity), PF (private foundation), or SOUNK (supporting organization, unspecified type).
Private foundations are not customarily in a position, other than by asking questions of a grantee's personnel, to be aware of fact that an application was "based on any inaccurate material information." For this reason and the fact that Select Check contains insufficient information, PF advisors advise against making a grant to an entity with a determination based on the Form 1023-EZ or recommend that Expenditure Responsibility be exercised.6
p. 85, note 82. Delete 2014-9, 2014-2 I.R.B. 281 and insert 2017-5, 2017-1 I.R.B. 230.
(c) The Substantially Completed Application
p. 94, note 105. Delete 2014-2 I.R.B. 281 § 3.08 and insert 2017-5, 2017-1 I.R.B. 230.
(d) Recognition Application Procedure and Issuance of Determination Letters and Rulings
p. 99, heading. Delete and Rulings
p. 99, note 118. Delete 2014-9, 2014-2 I.R.B. 281 and insert 2017-5, 2017-1 I.R.B. 230.
p. 99, note 119. Delete 1.01(6) and insert _______.
p. 100, note 120. first line. Delete 1.01(6) and insert _____.
p. 100, note 122. Delete 2014-9, 2014-2 I.R. 281 § 4.03 and insert 2017-5, 2017-1 I.R.B. 230 § _____.
p. 101, note 129. Delete 2014-9, 2014-2 I.R.B. 281 § 7.02 and insert 2017-5, 2017-1 I.R.B. 230 § _____.
p. 101, note 130. Delete 2014-9, 2014-2 I.R.B. 281 § 4.04 and insert Id. § _____.
p. 101, note 131. Delete 6.01(1) and...