deep dive into the form 1023 application for 501c3 tax ......nonprofits and addressing the...
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November 2, 2017Seattle, Washington
Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption
Lorri DunsmorePerkins Coie
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PerkinsCoieLLP
DeepDiveIntotheForm1023Applicationfor501c3Tax-Exemption
LorriA.DunsmoreAnthonyMcCormick
• November2,2017
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• “Tax-exempt”and“nonprofit”aredifferent
• “Tax-exempt”usuallymeans“exemptfromfederal incometax”
• Tax-exemptstatus:• IsgrantedbyIRS
• Givesdonorsabilitytodeducttheirdonationsontheirtax-return(ifa501(c)(3))
• InvolvesalotofrestrictionsandrequirementsbytheIRS
Tax-ExemptStatus
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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
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• 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
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• Operationaltest
• Thisisabouttheactivities ofthenonprofit
• “Operatedexclusively”forexemptpurpose
• “Exclusively” =“Nosubstantialpart”ofactivitiesmaybeforanon-exemptpurpose
• Absoluteprohibitionontwothings:• politicalcampaignactivity
• privateinurement
501(c)(3)Tax-ExemptStatus(cont’d)
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• 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)
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• Withfewexceptions,organizationsmustapplytoberecognizedas501(c)(3)organizations
• TheorganizationmusthaveanEINtoapply
• TheorganizationwillsubmiteitherForm1023orForm1023-EZ dependingonthesizeandactivitiesoftheorganization
Applyingfor501(c)(3)status
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• Form1023• 11pages(mainform),8schedules,andnarrative
attachment
• IRSreceivesaround60,000applications/year
• TheformandallattachmentsmustbemailedtotheIRS
• Fee:$400/$850
• Processingtimesfrom2monthstowellover1year
• Mustbefiledwithin27monthsofformation
Applyingfor501(c)(3)StatusUsingForm1023
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Applyingfor501(c)(3)StatusUsingForm1023(cont’d)
SubmittingForm1023• Iftheorganizationdoesnotqualifytosubmitform
1023EZ,itmustsubmitform1023andsubmitbymail• Materialsrequiredtobesubmitted:
• Form1023Checklist
• Form2848
• Form1023andapplicableschedules(withoriginalsignature)
• AttachmenttoForm1023andattachments(suchasconflictofinterestpolicy)
• ArticlesofIncorporationandanyamendments
• Bylaws
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• Applicationsbegantakingmuchlongerin2012
• IRSbudgetshavebeencontinuallyfalling
• IRSresponsein2014:Form1023-EZ
• Deliberatedecisiontoskipsomeprocessingonthefrontend,todevotemoreIRSresourcestoexaminations
Applyingfor501(c)(3)StatusUsingForm1023-EZ
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Form1023-EZ• Form1023-EZ
• Simplifiedapplicationforeligibleorgs:
• $50,000orlessannualgrossreceipts
• $250,000orlessassets
• Otherrestrictions
• Processingtimesfrom3-6weeks
• ComputerizedOnlineApplication(onlineonly)atpay.gov
• Completionrequirescompletionofquestionnaireandcompletionofonlineapplication.Nowrittenmaterialsorcopiesofgovernancedocumentssubmitted.
• ReducedFee:$275
• Mustbefiledwithin27monthsofformation
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• Downloadinstructionsandeligibilityworksheetfromhttp://www.irs.gov/pub/irs-pdf/i1023ez.pdf
• Completeeligibilityworksheetbyhand(atendofinstructions)
• Gatherorganizationaldocumentsandboardinformation– musthaveArticles,bylaws,appointmentofdirectorscomplete
• Downloadpapercopyof1023-EZfrompay.gov
• Filloutpapercopyof1023-EZ;reviewinstructionsandresolveanyissues
Form1023-EZPreparation
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• Logintopay.govandfilloutactualformbaseduponpaperdraft.YoucansaveyourworkanddownloadPDFversionforrecordkeeping.
• Client,notlawyer,needstoelectronicallysign.
Form1023-EZPreparation (cont’d)
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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
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• AttestationofEligibility
• PartI– IdentificationofApplicant
• PartII– OrganizationalStructure
• PartIII– SpecificActivities
• PartIV– FoundationClassification
• PartV– ReinstatementafterAutomaticRevocation
• PartVI– Signature
Form1023-EZSpecificSections
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• PrivateInurement
• Lobbying
• Donorsubstantiation
• UnrelatedBusinessIncome
• Form990– AnnualReportFiling
IRSRestrictions-Requirementsfor501(c)(3)Organizations
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PrivateInurement
• NopartofthenetearningsofaSection501(c)(3)organizationmayinuretoanyprivateshareholderorindividual
• WhatisPrivateInurement?• Any useofcharity’sassetsorincome
forthebenefitofaninsider
• “Insider”hasnoprecisedefinition…butwehaveclues:
• Officersanddirectors
• Majorcontributors
• Keyemployees
• Familyoftheabove
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PrivateInurement:“ExcessBenefitTransactions”
• AppliestoTransactionsbetweenSection501(c)(3)publiccharities/501(c)(4)organizationsandinsiders
• Insiders=“DisqualifiedPersons”• Boardmembers• Officers• Familymembers• Relatedcorporations,partnerships,LLCs,etc.• CertainEmployees
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“ExcessBenefitTransactions” (cont’d)
Disqualifiedpersongets“excessbenefit”• Paymentsforservices
• Compensation• Salestransactions• Leases• Loans• Useofassets
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“ExcessBenefitTransactions” (cont’d)
RebuttablePresumptionofReasonableness• Independentboardmembers
• Disqualifiedpersonnotparticipatingorpresent
• Appropriatecomparabilitydata
• Documentdecisioninwriting
• ImportanceofConflictofInterestPolicy
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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.