Federal Court of Appeals Holds State Schedule B Disclosure Regime Constitutional

• Published date: 01 April 2018
• Date: 01 April 2018
• DOI: http://doi.org/10.1002/npc.30448

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

April 2018

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

No Reliance

The surviving organization may not rely on the deter-

mination letter issued to the restructuring organization

if there has been a material change of facts, inconsis-

tent with tax exemption, in the character, purpose, or

method of operation of the restructuring organization.

Prior Law

Rev. Proc. 67-390 held that a new application for

recognition of exemption was required in four instances

where an organization previously recognized as exempt

from tax makes certain changes in its structure. These

four structural changes are incorporation of a trust,

incorporation of an association, reincorporation by an

act of Congress, and reincorporation under the law of

another state. The rationale was that, in these cases, a

new legal entity was formed, requiring a new applica-

tion. Rev. Rul. 77-469 held that an unincorporated asso-

ciation that incorporated after enactment of IRC § 508

is a new legal entity requiring recognition of exemption.

Examples

A is an unincorporated nonprofit organization formed

on Date 1 under the law of State M. On Date 2, the

IRS recognized A as exempt as a charitable entity. A is a

domestic business entity and is treated as having made an

election to be classified as an association and, thus, a cor-

poration. On Date 3, A incorporates in State M. A, as the

restructuring organization and the surviving organization,

is a domestic business entity classified as a corporation. A

continues to be tax-exempt as a charitable organization,

and thus is not required to file a new application.

B is a charitable trust that was formed on Date 1

under the law of State N. B is a domestic trust; it is not

a business entity. On Date 2, the IRS recognized B as a

charitable entity. On Date 3, B incorporates in State N.

Because the restructuring organization is not a business

entity, B is required to file a new application to be rec-

ognized as exempt.

C is a corporation formed on Date 1 under the law

of State O. C is a domestic business entity. On Date 2,

the IRS recognized C as exempt as a charitable entity. On

Date 3, D files articles of domestication with the corpora-

tion governing agency of State P and a certificate of con-

version with the corporation governing agency of State

O. Under the law of States O and P, C continues to exist

as the same corporation. Because C, as the restructuring

organization and the surviving organization, is a domes-

tic business entity classified as a corporation, C continues

to be recognized as an exempt organization and thus is

not required to file a new application.

D is a corporation formed on Date 1 under the laws

of State S. D is a domestic business entity classified as a

corporation. On Date 2, the IRS recognized D as exempt

as a charitable entity. On Date 3, D converts to a limited

liability company under the law of State T. Because the

surviving corporation D is a limited liability company, D

is required to file a new application for recognition of

exemption to be recognized as a charitable organization.

Rationale for Change

Two reasons are given for this policy change. Requir-

ing a new application for recognition of exemption after

a corporate restructuring is often “unnecessary and

duplicative,” because the IRS requires exempt organiza-

tions to report significant organizational changes on their

annual information returns. Also, exemption issues with a

corporate restructuring are less burdensome for the IRS to

administer when the surviving organization can continue

to use the same identification number on its annual infor-

mation return as the restructuring organization. [28.1(b)]

Note: The IRS, on February 22, published a revised ver-

sion of this revenue procedure, correcting an error in one

of these examples (not one of the above). ◆

FEDERAL COURT OF APPEALS

HOLDS STATE SCHEDULE

B DISCLOSURE REGIME

CONSTITUTIONAL

The US Court of Appeals for the Second Circuit, on

February 15, upheld a district court’s decision that New

York’s requirement that fundraising charities disclose the

identity of their donors to the state’s attorney general

does not violate the First Amendment (Citizens United

and Citizens United Foundation v. Schneiderman). The

district court’s opinion is summarized in the October

2015 issue.

The court found that the mere requirement on a tax-

exempt organization to disclose its donor list to a state’s

authority charged with regulating nonprofit organizations

does not impermissibly chill speech or assembly rights.

The appellants claimed that the state’s disclosure

regulations create a “climate of fear among donors that

limits their ability to raise funds to promote controversial

causes and by operating as a prior restraint on their abil-

ity to ask for money.”

The court accepted, without question, the attorney

general’s justification of the disclosure regulations as

being part of his responsibility to protect the public from

“fraud and self-dealing” by tax-exempt organizations.

It was said that knowing the “source and amount of

large donations can reveal whether a charity is . . . doing

business with an entity associated with a major donor.”

The attorney general asserted that the information in

Schedule B permits detection of schemes such as the

“intentional[] overstate[ment of] the value of noncash

donations in order to justify excessive salaries or perqui-

sites for its own executives.”