Discussion Archives:Form 1023 over 27 months exemption date and 501(c)(4)?

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Discussion Forum Index --> Advanced Tax Questions --> Form 1023 over 27 months exemption date and 501(c)(4)?

Discussion Forum Index --> Tax Questions --> Form 1023 over 27 months exemption date and 501(c)(4)?

Rogwadd (talk|edits) said:

16 June 2011
Greetings all! New member here.

I'm wrapping up a Form 1023 for a trade association benevolent fund formed 7 years ago for a former director who had contracted ALS. Contributions were solicited from contractors and vendors and the former director received a little over a third of it that first year. Over the next 5 years, 15% of those original contributions were distributed to people providing financial assistance to association members facing medical challenges, a few educational scholarships, and gifts to a PTO. Over 50% of those initial contributions remain within the Fund.

Granted, the initial funds "earmarked for a specific individual is a bit "hinky" and they should have been more proactive with their application for exemption (the accountant at the time apparently had little experience with nonprofits and never got it completed). However, they want to continue on, start fundraising, and establish a national scholarship fund in the name of the former director. It should be noted that no funds have been received since Year 1, 7 years ago.

The issue I'm having is with Schedule E. The gross receipts test only goes back 5 years resulting in zero annual gross receipts and stops us from continuing with the rest of the schedule. The final question identifies the organization as eligible for exemption as of the postmark date of the application, but offers eligibility for exemption under 501(c)(4) from formation to postmark date.

Anyone have any experience with a situation like this? Do we mention this in our transmittal letter and include the first page of Form 1024 or do we wait for the mutliple exchanges that are expected between us and the IRS?

I can provide more info. Thanks all! Roger

CrowJD (talk|edits) said:

16 June 2011
Sounds like these people have jumped out of the fat and into the fire. No offense but do they ever plan to buckle down and hire a tax professional who has experience with non-profits?

I guess the IRS figures that if they haven't done anything in 5 years, it was just a ruse to begin with to get a pot of money together for this former director (and perhaps take a "charitable deduction" to boot?????).

Albiet the man was sick and he deserves our compassion, but everyone should be so lucky to have such creative friends to help in a time of need.

Anyway, I haven't had enough coffee this morning to give the post the attention it deserves and I'll leave it to the rest of the experts to ponder.

Thewizardof (talk|edits) said:

16 June 2011
All that I know for sure is that even if you did have valid application filed before 01/01/09, because the trade association did not file the Form 990 for the last 3 years, the IRS would have automatically revoked their status and they would have to start from the beginning. Form 1023 instructs that if in existence more than 4 year complete for the last 4 years.

Rogwadd (talk|edits) said:

16 June 2011
Thanks for the response Crow. I agree with you. The intent was there, but they failed in the execution.

A little clarification might be helpful. The former director retired after being diagnosed with ALS. 3 years later when he hit the late stages of the disease, his hardship rose exponentially from the debilitating effects of the disease. The board wished to assist him and others within the industry facing similar difficulties and set up the fund. They engaged the accountant to incorporate the fund (another story) and apply for exemption.

In talking with the client about those past discussions between the board and the "advisor", the client recalls that the fund was to benefit all association members. The former director was just going to be the first recipient. His wife had to submit formal requests for assistance. He passed away that year and the fund continued making distributions to others through last year when they became concerned with their lack of a determination letter. The first call for contributions was done pretty hastily, but the client remembers that any solicitions/correspondence identified that they were not at that time a 501(c)(3). He's searching for documentation to support these assertions.

The fund is inactive until they can get a favorable determination. They don't want to initiate any fundraising efforts until they receive exemption status.

Rogwadd (talk|edits) said:

16 June 2011
Wiz, thanks for the reply. My parents live on Tybee.

Revocation is not the issue as the initial application was never done. We're working on submitting a successful 1023 7 years late.

Regarding Form 1023. I don't know the exact date, but Rev. September 2009 extended that period to 5 years. Also did away with advance ruling process.

CrowJD (talk|edits) said:

16 June 2011
DavidCPA and Natalie probably partcipate in more good discussions about non-profits here than the rest of us combined. They do a lot of work in that area. Maybe they will have time to look at your post. I might have missed someone else who can help as well.

What if you miss something and there is some liability (in hiding) from the past and you don't warn them about it? Who knows?

I get the feeling you are trying to help them and do them a favor and you might end up the loser. You might want to refer this thing off your hands while you're ahead. Just an uneducated guess on my part.

Uncle Sam (talk|edits) said:

17 June 2011
Pardon me for jumping in late here - but for a 501(c)(4) - Form 1024 is the proper form to file.

1023 is for 501(c)(3) organizations only.

Rogwadd (talk|edits) said:

18 June 2011
Uncle Sam,

The org is seeking 501(c)(3). The mention of Form 1024 is to recognize the org as a (C)(4) from date of formation to postmark date of Form 1023 if IRS chooses not to recognize the org as exempt from date of fromation.

Rogwadd (talk|edits) said:

18 June 2011
Crow, your concerns have been discussed. I'm trying to identify any potential liabilities.

CPAdavid (talk|edits) said:

20 June 2011

You write that "the gross receipts test (on Schedule E) only goes back 5 years." Where, specifically, are you reading that? The financial data on Part X only goes back 5 years, but that's different than the gross receipts test on Schedule E.

If the organization had gross receipts of more than $7,500 in its first year, or more than $12,000 in its first two years, then it was required to file Form 1023 within 27 months of formation. It sounds like this organization exceeded that threshold in its initial years, based on your concerns.

If so, and if it wants retroactive exemption under c3 it will need to attach to the 1023 a request that the IRS grant it an extension of time to file Form 1023 along with an explanation of why it was unable to file the application on time. I would attach a schedule showing receipts and expenses for ALL years along with the explanation.

Otherwise, it could ask to be exempt under c3 from date of formation and to be treated as a c4 for prior years if deductions were not taken by individuals for their donations.

Whether or not it was required to file Form 1023, the organization was required to file Form 990-N for 2007, 2008, and 2009 & 2010. How the IRS will handle that is anyone's guess at this point. Since the IRS did not know of the organization's existence, the organization will not appear on the list of revocations. I would prepare and attach to the 1023 a fully completed Form 990-EZ for all years.

Most important will be showing that the organization was not formed purely to help a named individual. Sounds more like they were "inspired" by one individual's needs to help anyone in need. You might refer to Rev Ruling 56-403.

Natalie (talk|edits) said:

June 20, 2011
I would add that you should check state law as well. There may be some compliance issues there.

Rogwadd (talk|edits) said:

21 June 2011
CPAdavid, thank you for the reply. My mistake on the the gross receipts test. The number of years should be the 3 most recent per Pub 557:

3. In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less.

...If the organization had existed for at least 3 years and had met the gross receipts test for all prior tax years but fails to meet the requirement for the current tax year, its tax-exempt status for the prior years will not be lost even if Form 1023 is not filed within 90 days after the close of the current tax year. However, the organization will not be treated as a section 501(c)(3) organization for the period beginning with the current tax year and ending with the filing of Form 1023.

Still searching for any documentation from the client supporting the formation and contribution deductibility....

CPAdavid (talk|edits) said:

21 June 2011

I believe you are misreading the instructions for the gross receipts test. They are:
Gross receipts test. For purposes of the gross receipts test, an organization normally does not have more than $5,000 annually in gross receipts if:

  1. During its first tax year the organization received gross receipts of $7,500 or less,
  2. During its first 2 years the organization had a total of $12,000 or less in gross receipts, AND
  3. In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less.

Note the comma after the first year test, and the "AND" after the second year test. I would read this to mean that all three tests must be passed, which means there is no limitation on the number of years taken into consideration.

In fact, in the quote you included in your last post "...if the organization had existed for at least 3 years and had met the gross receipts test for all prior tax years..." indicates that "all prior tax years" are taken into consideration.

If the organization in question fell below the gross receipts threshold for the first two years, then had zero gross receipts for all years after that, then it was never required (until now) to file Form 1023. Otherwise, the 1023 is delinquent. It isn't clear from the facts given which scenario applies to this organization. In order to explain how the organization currently has assets, you will have to show the income from the first year and explain it.

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