In the world of nonprofits, it’s not unusual to start with one entity form and want to change to another (e.g., an unincorporated association to a nonprofit corporation), or to originally incorporate in one state but later desire to be governed by the corporate law of a new state. One sticking point is the view of the IRS that such moves often require a new Form 1023 application to be filed. However, the IRS has made a couple of recent rulings that remove this requirement in some cases.
Background. Historically, under Revenue Ruling 67-390, 1967-2 C.B. 179, the IRS made its position clear that a new entity was deemed to arise, and a new form 1023 was required in the following examples:
- Reorganization from exempt trust to corporate form;
- Reorganization from unincorporated association to corporate form;
- Reincorporation of nonprofit corporate under Act of Congress;
- Reincorporation of an organization under the laws of a second state.
New Rulings. Over the past several months, the IRS has released two private letter rulings that muddy the waters. In PLR 201426028, the IRS holds that conversion from a public nonprofit corporation to a nonprofit corporation would not result in a new entity and would not require a new Form 1023. And in PLR 201446025, the IRS held that a nonprofit corporation formed under the laws of State A that then made use of State B’s redomestication statutes to be governed under State B’s laws did not result in the creation of a new entity and did not require a new Form 1023.
In contrasting PLR 201446025 to the examples in Revenue Ruling 67-390, the IRS emphasized that the redomestication statutes made clear that the corporation would maintain its original incorporation date, and that it would maintain liabilities that it had prior to the change. In PLR 201426028, the IRS even more briefly took the position that there was no structural change in play, and that the change was distinguishable from each of the examples.
However, many states (including Colorado) have conversion statutes that not only allow foreign organizations to convert to domestic status, but also allow domestic entities to convert to another domestic form (i.e., unincorporated association to nonprofit corporation). The statutes clearly provide for all conversions that obligations survive the change; that the resulting entity continues the existence of the converting entity; and that resulting entity is the same as the converting entity. If the IRS views redomestication as not creating a new entity under this type of law, it seems that other entity conversions should likewise be exempt from a requirement to file a new Form 1023. And it may not be clear to organizations and advisers in all states whether a move to a new state is a reincorporation or redomestication, depending on how statutes are drafted.