On October 26, 2005, I "attended" a teleconference entitled "Dealing With the New IRS Form 1023" sponsored by the Taxation Section of the American Bar Association and The ABA Center for Continuing Legal Education. The presenters, including Eve R. Borenstein and Kristin M. Gurdin, provided tips and identified traps with respect to the preparation of the latest (October 2004) version of Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The following is a small sample of their comments:
- About 87,000 Form 1023 applications were received by the IRS in fiscal year 2005 (ending 9/30); 93,000 are projected for receipt in fiscal year 2006.
- About 51% of the applications can be closed on merit (merit closures, which may require only minimal, non-complex information or documentation); nonmerit closures involve incomplete applications or complex issues and/or require research.
- About 1/3 of the applications are prepared with the assistance of a professional (e.g., attorney or CPA).
- The most common reason for rejection of Form 1023 applications is due to a failure to comply with Part III, Required Provisions in Your Organizing Documents.
- Applicants often fail to enter their name and EIN on each page of the application; it is particularly important to do so on page 11 where the applicant must sign a consent (make sure the proper line is signed, directly below the area marked "For Organization").
- To avoid delays in processing an application, applicants are urged to only make an expedited processing request if circumstances warrant, such as where:
– a grant to the applicant is pending and the failure to secure the grant may have an adverse impact on the organization’s ability to continue operations;
– the purpose of the newly created organization is to provide disaster relief to victims of emergencies such as flood and hurricane;
– there have been undue delays in issuing a letter caused by problems within the IRS.
- Part V, 2b: If you answer yes, discuss the proper, applicable safeguards you have established (and private foundations must be careful to be in compliance with self-dealing rules).
- Part V, 3a: See Form 1023 FAQ #5.3 (link below).
- Part V, 4: Answers to 4a-4f should be yes to properly safeguard against excess compensation benefits, but consider a carve-out to certain answers for independent contractors who may not be disqualified persons (customary industry standard such as an engagement letter detailing hourly fees may be sufficient).
- Part V, 5: For all practical purposes, a conflict of interest policy is mandated (5b and 5c).
- Part V, 6: If yes, limit such that total compensation is not in excess of the value that the disqualified person provides in exchange, in order to avoid intermediate sanctions.
- Part V, 8: Be careful of state law prohibitions or procedures with respect to loans to certain insiders (e.g., prior approval by the Attorney General).
- Part VI, 2: Make sure you are serving a "charitable class" if placing limitations on beneficiaries.
- Part VIII, 4d: This is not really an issue for (c)(3) qualification but serves to give you notice that you may need to comply with additional state and local laws regulating fundraising.
- Part VIII, 10: This does not necessarily require a list of all the actual IP owned by the organization; the IRS is specifically interested in situations where the organization intends to exploit its IP commercially.
- Part VIII, 12 and 14: Refer to the Handbook on Counter-Terrorism Measures: What U.S. Nonprofits and Grantmakers Need to Know produced for Independent Sector, InterAction and the Council on Foundations under the auspices of the Day, Berry & Howard Foundation.
- The Customer Account Representatives can be very helpful: 1-877-829-5500.
Click here for "The New Form 1023: What Does It Mean For Charitable Organizations?" – McDermott, Will & Emery Newsletter (December 16, 2004)