Every January, the IRS releases a series of revenue procedures detailing how organizations can obtain private letter rulings and determinations and listing issues on which the IRS will not rule during the coming year. This year’s procedures make clear that tax-exempt organizations will no longer be able to receive a ruling or any comfort from the IRS that changes in their operations are consistent with their tax-exempt status. In other words, exempt organizations are on their own.
Until recently, an organization could request a private letter ruling from the Exempt Organizations technical branch that a particular activity or transaction would not generate unrelated business taxable income or adversely affect exempt status. The IRS would not rule on factual issues, such as whether a proposed transaction was at a fair market value price, and would not rule on a few specific issues, such as whether participation in a joint venture with a for-profit entity would affect exempt status.
As we reported previously, IRS functions concerning exempt organizations were reallocated at the beginning of 2015. Private letter ruling functions were transferred from the EO Technical group to the Associate Chief Counsel (Tax Exempt and Government Entities) and were governed by Rev. Proc. 2015-1. Rev. Proc. 2015-1 indicated that issues under the jurisdiction of the Associate Chief Counsel (TEGE) included exemption requirements for, and tax treatment of, tax-exempt organizations. Further, the 2015 annual revenue procedure for changes in Section 501(c)(3) organizations’ public charity and private foundation status, Rev. Proc. 2015-10, stated that an exempt organization maintaining the same public charity status could request a letter ruling under Rev. Proc. 2015-1 that a change in its facts and circumstances would not adversely affect its exempt status and public charity status. Nonetheless, during 2015 the Associate Chief Counsel (TEGE) encountered difficulty in ruling that changes in circumstances would not affect tax-exempt status because this conclusion was like a determination of exempt status, an area governed by EO Determinations.
The 2016 annual procedures have addressed this difficulty by providing that the Associate Chief Counsel (TEGE) will not issue private letter rulings as to an exempt organization’s continued exempt status. The annual “no-rule” list, Rev. Proc. 2016-3, added a section 3.01(69) stating that letter rulings would not be issued on
Whether an organization is or continues to be exempt from taxation under §501(a) as an organization described in §§501(c) or 501(d), including, for example, whether changes in an organization’s activities or operations will affect or jeopardize the organization’s exempt status. The Associate Chief Counsel (TEGE) will rule, however, on specific legal questions related to §§501(c) or 501(d) that are not otherwise described in this revenue procedure. For example, although the Associate Chief Counsel (TEGE) would not rule on whether a change in a §501(c)(3) organization’s activities would jeopardize the organization’s exempt status, the Associate Chief Counsel (TEGE) would (subject to the limitations described in this revenue procedure) rule on whether such new activities would further an exempt purpose described in §501(c)(3).
Correspondingly, Rev. Proc. 2016-4, which addresses guidance provided by the Commissioner of the Tax Exempt and Government Entities Division, provides that all letter rulings pertaining to exempt organization issues are issued by the Office of Associate Chief Counsel (TEGE).
Thus, an exempt organization will no longer be able to obtain a private letter ruling that its tax-exempt status is unaffected by an activity or transaction. Rev. Proc. 2016-3 does state that the Associate Chief Counsel (TEGE) may rule on the specific legal question of whether activities further an exempt purpose. The extent to which this power will be exercised, or will be helpful to exempt organizations, remains to be seen.
In addition, in past years, a tax-exempt organization could write to the IRS to notify it of changes in activities. In some cases, the IRS would respond that the changes did not affect the organization’s exempt status. This option has also been foreclosed. Form 990 instructions now provide that the IRS is to be notified of changes in activities through their inclusion on the Form 990.
In short, exempt organizations that have already gone through the determination process are on their own, without IRS help, when activities change, making consultation with legal and tax advisors more critical than ever.