The Internal Revenue Service (the “IRS”) has announced plans to update Revenue Ruling 67-390, which requires an organization to “re-apply” for tax-exemption if it changes its corporate structure, including in situations where an exempt organization reincorporates under the laws of another state (even where there is no change in corporate/charitable purposes). In that revenue ruling, the IRS reasoned that the change resulted in the creation of a new legal entity, and every new legal entity must seek recognition of its tax-exempt status in accordance with IRS procedures.
Showing an evolution in its approach, the IRS issued Private Letter Ruling 201446025 in 2014, holding that a tax-exempt 501(c)(3) organization’s change in state of domicile, without alteration of its charitable purposes or operations, did not create a new legal entity or effect a change in structure requiring the filing of a new application with the IRS for recognition of tax exemption. The IRS held that the organization could continue to rely on the IRS’s determination of its tax-exempt status issued when it was domiciled in State X. The IRS noted that the entity filed a certificate of conversion in State X and articles of domestication in State Y and that the result was not the formation of a new entity but rather the continuation of the same legal entity with a new state of domicile.
The 2016-2017 Priority Guidance Plan could be the latest iteration in the IRS’s approach to this issue. However, the IRS did not give any indication of what to expect in this regard, simply stating that it plans to “[u]pdate Revenue Ruling 67-390.” An update that liberalizes Revenue Ruling 67-390, making it easier for organizations to change their states of domicile—at least with respect to IRS requirements—likely would be well received by the charitable sector.
The IRS’s current position is not the only hurdle standing between tax-exempt organizations and a new domicile: an organization desiring to change its state of domicile must also satisfy applicable state laws and regulatory requirements, which, more often than not, are the primary driving factors in considering such a change.
It remains to be seen whether the IRS’s updating of Revenue Ruling 67-390 will lead to a “rush to exit” certain high regulatory touch states such as New York or California and/or encourage states to modify their corporate statutes to make it easier for organizations to change their states of domicile.
Stay tuned for updates.