Nonprofit Report - September 2018
The IRS Determines Nonprofit Corporations Can Reincorporate Without Filing a New Exemption Application
By: Richa Fortuna
In the new Revenue Procedure 2018-15, the IRS has indicated that it will generally no longer require a new tax exemption application from a Section 501(c) organization that changes its form or place of organization. This change will make it easier for an association or other nonprofit corporation to take advantage of the benefits of re-incorporating in a state that is either more convenient or a state that may have more favorable laws governing nonprofit corporations.
The process of re-incorporating typically requires restructuring of the organization, often by means of a merger, consolidation, or transfer of assets, although certain states do permit single-step conversions or domestication. Such transactions generally require Board of Directors and member approval as set forth under the governing documents and applicable state law. While the procedural challenge associated with restructuring might demonstrate the very reason a nonprofit corporation is considering re-incorporating elsewhere, Rev. Proc. 2018-15 simplifies the process so that the restructuring entity, under certain conditions, is no longer also required to file a new tax exemption application with the IRS.
Under prior guidance, the IRS required an already-exempt organization to file a new exemption application if it opted to re-incorporate in a different state, even when the entity would not otherwise have to obtain a new federal Employer Identification Number (“EIN”). Rev. Proc. 2018-15 now generally eliminates the requirement for corporations to file a new tax exemption application after a corporate restructuring if certain conditions are met. More specifically, the new IRS guidance provides that in a corporate restructuring of a domestic entity that is recognized as an exempt 501(c) organization, the surviving organization will not be required to file a new tax exemption application if it is carrying out the same exempt purposes as the exempt organization that engaged in the corporate restructuring. Prior to restructuring, an exempt organization must be in good standing in the state in which it is formed.
For example, a nonprofit corporation formed on January 1, 2012, under the laws of Maryland and recognized as exempt under Section 501(c)(4) on November 30, 2012, that re-incorporates (i.e., sets up a new legal entity and transfers its assets, programs and activities to the new corporation) under the laws of Virginia on April 1, 2018, will continue to be recognized as tax exempt under Section 501(c)(4) without the necessity of filing a new application for recognition of tax exemption. Rev. Proc. 2018-15 also applies similarly to domestication of an exempt nonprofit corporation, which is a process available in some states by which a corporation simply changes its state or jurisdiction (such as the District of Columbia) to another one. Please note, however, that both states or jurisdictions must have domestication statutes in order for this to be implemented.
Finally, Rev. Proc. 2018-15 does not apply to any corporate restructuring in which the restructuring organization or the surviving organization is a disregarded entity, limited liability company, partnership, or foreign business entity, or if the surviving organization obtains a new EIN. In these cases, a new tax exemption application is still required.
Stand Up and Be Heard in an Election Year
By: Jeff Altman & Jim Kahl
Originally published by ASAE.
Nonprofit organizations are often overly cautious in speaking out about their causes and interacting with candidates in election years for fear of violating a complex set of laws and rules. You can and should participate in the election-year conversation. Here’s how.
When elections are on the horizon, nonprofit organizations often wonder, “What can we do this election year to further our government affairs and public policy agenda without getting in trouble?” Their concern is understandable: associations and other nonprofit organizations must comply with complex and sometimes contradictory tax, campaign finance, lobbying, and government ethics laws and rules.
But nonprofits do not give up their constitutional free speech rights or their right to petition the government during even-numbered years. To the contrary, election years are perhaps the most critical time for nonprofit organizations to be heard, particularly when their most important issues are the focus of national debates and elections.
Several options are available for nonprofit organizations to advocate on their issues and interact with candidates in this and every election year, while avoiding political law pitfalls that can trip up the unwary.
501(c)(3) Organizations: Advocating on the Issues
Under the Internal Revenue Code, Section 501(c)(3) organizations (including professional and cause-related groups, as well as other charities) are subject to the most extensive restrictions on the scope of their election-year activities. Nonetheless, the rules include broad exceptions that create opportunities.
The most important is that there are no limits whatsoever on discussing and advocating on public policy issues of importance to an organization’s members and supporters. The rules become a little more challenging when legislation is involved, but a 501(c)(3) organization may still engage in lobbying as long as it is not a “substantial part” of the organization’s overall activities. The nonprofit may also make a so-called Section 501(h) election, which provides a safe-harbor limit for permissible lobbying expenditures that is workable for most small and medium-sized organizations.
For example, if legislation is involved, the restrictions apply only to directly lobbying legislators or encouraging your organization’s members or the public to do so. A national print, broadcast, or social media campaign that is solely designed to sway public opinion to support your public policy agenda or even specific legislation will not count as lobbying for tax purposes, as long as there is no “call to action” for the audience to contact their legislators. When an organization does engage in direct or grassroots lobbying, federal and state lobbying laws may impose registration and reporting requirements.
The greatest challenge comes from the IRS rules that prohibit 501(c)(3) organizations from trying to influence elections. However, they do not prohibit you from communicating about issues that divide political candidates.
The IRS applies a subjective “facts and circumstances” test to determine whether an organization’s communications and activities favor or oppose a particular candidate. The factors include whether messages contain references to candidates, campaign positions, voting, or elections, as well as the timing of the communications and whether there may be nonpolitical reasons for them. For example, a 501(c)(3) organization may sponsor ads taking a position on legislation, especially when a vote on the matter is scheduled before the election. If the organization has a history of sponsoring ads taking a position on a legislative or policy issue, the message is less likely to be seen as trying to influence an election. (An explanation and practical applications of this “facts and circumstances” test can be found in IRS Revenue Ruling 2007-41 [PDF].)
Section 501(c)(3) organizations may also sponsor nonpartisan voter education activities, such as publishing voter education guides. They can encourage individuals to participate in the electoral process through voter registration and get-out-the-vote drives, which might include activities such as setting up a registration booth at a convention or public meeting. These efforts must be nonpartisan—they cannot favor or oppose candidates—but you can choose your location and audience.
Finally, 501(c)(3) organizations may sponsor a wide range of candidate forums. They may invite candidates to speak individually at organization events or to appear in candidate debates, as long as the candidates are treated equally. These types of events must also comply with Federal Election Commission (FEC) rules.
For 501(c)(3) organizations that want to engage in more substantial lobbying activities beyond their 501(h) expenditure limits or wish to support or oppose candidates in their political campaigns, the solution may be to set up an affiliated 501(c)(4) or 501(c)(6) organization. The affiliated organization may also establish a political action committee (PAC) to make contributions that are otherwise prohibited.
501(c)(4) and 501(c)(6) Organizations: Supporting Candidates
The Internal Revenue Code allows 501(c)(4) organizations (so-called social welfare advocacy organizations and 501(c)(6) organizations (trade and professional organizations) to engage in unlimited lobbying and public issue advocacy activity. When supporting candidates, these nonprofits must comply with overlapping—and sometimes contradictory—tax and campaign finance rules. The tax code permits nonprofits to make political contributions, support independent candidate advocacy communications, and engage in other election related activities, provided that this is not the organization’s primary purpose. The campaign finance laws in many states permit incorporated entities (both nonprofit and for-profit) to make political contributions, although they are frequently subject to dollar limits. On the other hand, federal campaign finance law and some states, prohibit incorporated entities from making monetary or in-kind political contributions to candidates and political committees. But an advocacy, trade, or professional organization can establish a PAC to make contributions to candidates.
Given this confusing regulatory environment, 501(c)(4) and 501(c)(6) organizations are often hesitant to engage in activities relating to candidates or political parties in an election year for fear of tripping over contribution restrictions. Fortunately, FEC rules offer many opportunities for candidate engagement that may be of use to your organization. For example, a 501(c)(4) or 501(c)(6) can conduct any of the following activities without triggering contribution concerns:
- Communicate with the general public on any subject and through any means, including communications expressly advocating for or against candidates, as long as the communications are not planned or coordinated with any candidate.
- Invite a public official to speak at an issue-oriented event where the official is not appearing in his or her capacity as a candidate.
- Distribute nonpartisan voting records and voter guides.
- Invite a candidate to appear before the organization’s “restricted class”—its supervisory, managerial, and professional employees and its individual and corporate members—and even urge attendees to contribute directly to or vote for the candidate, provided that the organization does not collect and forward any contributions.
These organizations can also establish a PAC, which can solicit contributions from the restricted class and support candidates and political parties. In contrast to the sponsoring organization, the PAC, as a separate legal entity, has no overall expenditure limit on political activities. The PAC may, however, be subject to limits on the amount it can contribute to particular candidates and political committees. A PAC is a well-established and safe vehicle for supporting candidates. Trade and professional organizations, in particular, are likely to have many meetings and events at which PAC contributions can be solicited from members.
While candidates always appreciate receiving PAC contributions, a PAC can be used to support candidates in other ways as well. For example, a federal PAC can host a fundraiser and invite anyone who can legally make a political contribution to attend and give to the candidate. For this type of event, the PAC is not limited to soliciting contributions from its restricted class. Similarly, a federal PAC can encourage the public to contribute to specified candidates. A PAC can also pay for a candidate’s campaign costs within the contribution limits, such as renting a sky suite at a baseball game for a fundraiser. In the long run, a candidate might appreciate these forms of leveraged support far more than a one-time contribution. Keep in mind that separate, and frequently differing, rules apply to PACs created under state law.
Strategic Use of Ethics and Gift Rules
Interacting with candidates for office and elected officials is a central component of most government affairs strategies. This may include providing certain items of value to an official, as long as the organization offering the gift first considers applicable federal or state ethics rules. Fortunately, these rules offer many opportunities for providing things of value to public officials in ways that can support your organization’s government affairs efforts, provided that the organization takes steps to understand and follow the applicable limitations.
For example, at the federal level, while presidential appointees are subject to strict restrictions and gift limits, most other executive branch officials and congressional officials can attend a wide range of functions hosted by nonprofit organizations where food, beverages, and sometimes entertainment are provided. In addition, organizations can usually give officials plaques, awards, and other commemorative items, as well as informational materials about the organization’s industry or cause. These activities may be of even more strategic value if conducted locally with constituents rather than in Washington, DC. Plan your activities in advance to comply with the gift rules so that you avoid the embarrassment of requesting the return of a gift or the imposition of sanctions that may accompany ethics violations.
Advocating on issues and engaging with or supporting candidates are essential activities for many nonprofit organizations in this and every election year. Organizations that take the time to understand the flexibilities that exist in the tax, campaign finance, lobbying, and ethics rules will find many opportunities for achieving their public policy goals.