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Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption Lorri Dunsmore November 2, 2017 Perkins Coie Seattle, Washington Deep Dive Into the Form November 2, 2017 1023 Application for 501c3 Tax-Exemption Lorri A. Dunsmore


  1. Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption Lorri Dunsmore November 2, 2017 Perkins Coie Seattle, Washington

  2. Deep Dive Into the Form November 2, 2017 • 1023 Application for 501c3 Tax-Exemption Lorri A. Dunsmore Anthony McCormick Perkins Coie LLP

  3. Tax-Exempt Status “Tax-exempt” and “nonprofit” are different • “Tax-exempt” usually means • “exempt from federal income tax” Tax-exempt status: • Is granted by IRS • Gives donors ability to deduct their donations • on their tax-return (if a 501(c)(3)) Involves a lot of restrictions and requirements • by the IRS

  4. Types of Tax-Exempt Organizations A lot of different kinds of organizations can be tax- • exempt . . . for example: 501(c)(3): charities • 501(c)(4): “social welfare organizations” • 501(c)(5): unions and agricultural organizations • 501(c)(6): trade associations • 501(c)(7): social clubs • 501(c)(8) and (10): fraternal organizations • Etc. . . . • We are focusing on 501(c)(3) public charities •

  5. 501(c)(3) Tax-Exempt Status Organizational test • Articles of Incorporation must contain: • Purposes clause limiting purposes of the corporation to • 501(c)(3) purposes only Dissolution clause providing assets will be distributed on • dissolution only for exempt purposes (or to a government) Articles of Incorporation cannot contain: • Provisions expressly empowering organization to engage in • non-exempt activity (e.g., political activity, distributing assets to private individuals or for-profit businesses)

  6. 501(c)(3) Tax-Exempt Status (cont’d) Operational test • This is about the activities of the nonprofit • “Operated exclusively” for exempt purpose • “Exclusively” = “No substantial part” of • activities may be for a non-exempt purpose Absolute prohibition on two things: • political campaign activity • private inurement •

  7. 501(c)(3) Tax-Exempt Status (cont’d) IRS resources regarding qualification • for 501(c)(3) status: irs.gov/Charities-&-Non-Profits/Charitable- • Organizations/ IRS Publication 557 (“the basics”) • IRS Publication 1828 (for churches and religious orgs.) • IRS Publication 4220 (application process) • IRS Publication 1771 (charitable contributions) • IRS Publication 598 (unrelated business) •

  8. Applying for 501(c)(3) status With few exceptions, organizations must apply • to be recognized as 501(c)(3) organizations The organization must have an EIN to apply • The organization will submit either Form 1023 • or Form 1023-EZ depending on the size and activities of the organization

  9. Applying for 501(c)(3) Status Using Form 1023 Form 1023 • 11 pages (main form), 8 schedules, and narrative • attachment IRS receives around 60,000 applications/year • The form and all attachments must be mailed to • the IRS Fee: $400 / $850 • Processing times from 2 months to well over 1 year • Must be filed within 27 months of formation •

  10. Applying for 501(c)(3) Status Using Form 1023 (cont’d) Submitting Form 1023 If the organization does not qualify to submit form • 1023EZ, it must submit form 1023 and submit by mail Materials required to be submitted: • Form 1023 Checklist • Form 2848 • Form 1023 and applicable schedules (with original signature) • Attachment to Form 1023 and attachments (such as conflict of • interest policy) Articles of Incorporation and any amendments • Bylaws •

  11. Applying for 501(c)(3) Status Using Form 1023-EZ Applications began taking much longer in 2012 • IRS budgets have been continually falling • IRS response in 2014: Form 1023-EZ • Deliberate decision to skip some processing on • the front end, to devote more IRS resources to examinations

  12. Form 1023-EZ Form 1023-EZ • Simplified application for eligible orgs: • $50,000 or less annual gross receipts • $250,000 or less assets • Other restrictions • Processing times from 3-6 weeks • Computerized Online Application (online only) at pay.gov • Completion requires completion of questionnaire and • completion of online application. No written materials or copies of governance documents submitted. Reduced Fee: $275 • Must be filed within 27 months of formation •

  13. Form 1023-EZ Preparation Download instructions and eligibility worksheet • from http://www.irs.gov/pub/irs-pdf/i1023ez.pdf Complete eligibility worksheet by hand (at end of • instructions) Gather organizational documents and board • information – must have Articles, bylaws, appointment of directors complete Download paper copy of 1023-EZ from pay.gov • Fill out paper copy of 1023-EZ; review • instructions and resolve any issues

  14. Form 1023-EZ Preparation (cont’d) Log in to pay.gov and fill out actual form based • upon paper draft. You can save your work and download PDF version for recordkeeping. Client, not lawyer, needs to electronically sign. •

  15. Form 1023-EZ Qualification 1023-EZ Qualification Worksheet Annual gross receipts : $50,000 or less for 3 years • Total assets: $250,000 or less • U.S. organizations only • No LLCs • No churches, schools, hospitals, or HMOs • No credit counseling orgs. • No joint ventures with for-profits • In general, no “weird” orgs. •

  16. Form 1023-EZ Specific Sections Attestation of Eligibility • Part I – Identification of Applicant • Part II – Organizational Structure • Part III – Specific Activities • Part IV – Foundation Classification • Part V – Reinstatement after Automatic • Revocation Part VI – Signature •

  17. IRS Restrictions-Requirements for 501(c)(3) Organizations Private Inurement • Lobbying • Donor substantiation • Unrelated Business Income • Form 990 – Annual Report Filing •

  18. Private Inurement No part of the net earnings of a Section 501(c)(3) • organization may inure to any private shareholder or individual What is Private Inurement? • Any use of charity’s assets or income • for the benefit of an insider “Insider” has no precise definition… but we have clues: • Officers and directors • Major contributors • Key employees • Family of the above •

  19. Private Inurement: “Excess Benefit Transactions” Applies to Transactions between Section 501(c)(3) • public charities/ 501(c)(4) organizations and insiders Insiders = “Disqualified Persons” • Board members • Officers • Family members • Related corporations, partnerships, LLCs, etc. • Certain Employees •

  20. “Excess Benefit Transactions” (cont’d) Disqualified person gets “excess benefit” Payments for services • Compensation • Sales transactions • Leases • Loans • Use of assets •

  21. “Excess Benefit Transactions” (cont’d) Rebuttable Presumption of Reasonableness Independent board members • Disqualified person not participating or present • Appropriate comparability data • Document decision in writing • Importance of Conflict of Interest Policy •

  22. Lorri A. Dunsmore, Partner Anthony J. McCormick, Associate Lorri Dunsmore has over 25 years of experience Anthony (Tony) McCormick is an associate with the representing individuals, businesses and tax-exempt firm's Trust & Estate Planning practice. Tony organizations in a variety of charitable, wealth transfer, counsels his clients in both the tax and non-tax business succession and federal tax matters. Lorri aspects of estate planning, with a specific focus on regularly works with individuals and tax-exempt estate planning strategies to efficiently minimize organizations to address a wide range of tax and state taxes through the creation of wills, trusts, business law issues impacting charitable giving, formation of entities, and charitable organizations and the use of nonprofits and addressing the specialized needs of tax- gifts, sales, and other wealth-transfer strategies. exempt organizations including private foundation Tony's practice also includes advising individuals excise taxes, excess benefit transactions, lobbying and tax-exempt organizations on the wide range of restrictions, fundraising law compliance, commercial legal issues affecting charitable giving, the co-ventures and joint ventures. Lorri has spoken and formation of nonprofit organizations, and the written about numerous issues related to nonprofit organizational steps required to maintain a governance and compliance matters and has worked charitable organization's tax exempt status. with a variety of tax-exempt organizations to provide training for board members and officers. Lorri's practice also includes advising clients on the formation, operation, management and transfer of family business entities. She works closely with families to implement business succession and wealth transfer strategies. Lorri has experience advising privately held corporations, limited liability companies and professional corporations on issues ranging from formation to dissolution.

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