IRS Rules Change in State of Domicile may not Affect an Exempt Organization’s Tax-Exempt Status

March 4, 2015Articles Nonprofit Roundup Blog

The IRS recently determined that an exempt organization may change its state of domicile without affecting its tax-exempt status, so long as the exempt organization was not undergoing a substantial change in regards to its organizational form.

When an exempt organization makes a substantial change to its organizational form, it is required to reapply to the IRS for tax-exempt status. In general, whenever original articles of incorporation are filed, and a new entity is created, a separate application for tax-exempt status must be filed with the IRS. For instance, the IRS previously ruled that a change in entity form from an unincorporated association to a corporation and from a trust to a corporation was a substantial change that required the organization to reapply for tax-exempt status. The IRS has also ruled that when an entity is created for the purposes of merging with an existing exempt organization, the surviving entity cannot rely on the previous determination letter from the IRS.

In PLR 201446025, however, an exempt organization, which was incorporated in State A, desired to file Articles of Domestication in State B to move its domicile to State B and subject itself to State B’s more favorable laws. The exempt organization would also file a Certificate of Conversion in State A. Together, these filings would change the exempt organization’s state of domicile without (1) affecting its date of incorporation, (2) affecting its existing liabilities or (3) creating a new legal entity.

The IRS ruled that the exempt organization would not need to reapply for tax-exempt status and could continue to rely on its previously issued determination letter. In so ruling, the IRS noted that the exempt organization would “continue to exist without interruption” and that no separate legal entity would be formed. The IRS did note, however, that the exempt organization would be required to submit the filings, as well as any changes to its remaining organizational documents, with its next Form 990 return.

In sum, an exempt organization wishing to avail itself to less rigorous state laws should determine if its current state of domicile and its desired state of domicile offer a similar conversion/domestification process. If the process is not available, an exempt organization should be aware that changes to its state of incorporation will likely require the exempt organization to reapply for tax-exempt status, a process that can be both time-consuming and costly.