By Jeffrey Schragg, CPA
The Internal Revenue Service (IRS) rolled out the new Form 1023- EZ on July 1, 2014 for use by small organization to achieve tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3).
As with any change, questions can arise. For example, may a private foundation and other grantors rely on a determination letter issued to an organization that submitted a Form 1023-EZ in the same manner and to the same extent as a determination letter issued to an organization that submitted a Form 1023?
Typically, a private foundation need not exercise expenditure responsibility when making a grant to certain organizations, including those eligible for Form 1023-EZ use. Revenue Procedure 2014-40, provides that a determination letter “issued to an organization that submitted a Form 1023-EZ . . . may not be relied upon if it was based on any inaccurate material information.” For this purpose, “inaccurate material information includes an incorrect attestation as to the organization’s organizational documents, the organization’s exempt purposes, the organization’s conduct of prohibited and restricted activities, or the organization’s eligibility to file Form 1023-EZ.”
As such, there may be concerns whether a private foundation can rely on the Form 1023-EZ determination letter or whether they must exercise expenditure responsibility. A private foundation does not have the ability to determine whether the organization made an “incorrect attestation” on its tax-exemption application without undertaking the in-depth review that once would have been done by the IRS via the Form 1023 application review process, nor should they have to.
And although the instructions for Form 1023- EZ say, “donors and contributors may rely on an organization’s favorable Determination Letter under section 501(c)(3) until the IRS publishes notice of a change in status, unless the donor or contributor was responsible for or aware of the act or failure to act that results in the revocation of the organization’s Determination Letter,” the instructions do not reference grantors. However, the instructions cite Revenue Procedure 2011-33, which actually references “grantors.” Therefore, the question becomes whether it is safe to assume the grantors may also rely on the Form 1023- EZ determination letter.
It is easy to differentiate determination letters issued to Form 1023 filers vs. Form 1023-EZ filers. Determination letters issued to Form 1023-EZ filers are issued on “Letter 5436,” which opens with: “We’re pleased to tell you we determined you’re exempt from federal income tax . . .”. Currently, determination letters issued to Form 1023 filers, on the other
hand, are issued on “Letter 947,” which opens with: “We are pleased to inform you that upon review of your application for tax exempt status we have determined that you are exempt from Federal income tax . . .”.
Hopefully, the IRS or the Treasury Department will issue guidance or revise the instructions clarifying that a determination letter issued to an organization that submitted a Form 1023- EZ may be relied on by private foundations and other grantors in the same manner and to the same extent as a determination letter issued to an organization that submitted a Form 1023.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com