Loss of Tax Exemption due to Involuntary Dissolution
Dear Clients and Friends:
I am in the process of writing a book on the practical application of church law for church leaders. While researching for my Chapter on Church Dissolution I discovered something I want to share with you.
In this Chapter I discuss how a church can dissolve both Voluntarily and Involuntary. One common reason for Involuntary Dissolution is for failing to do the required Annual Report in the state of incorporation. I have occasionally run into this issue thus my annual reminders to you in the Spring.
Recently I read a Private Letter Ruling (PLR 202242011) which raises the stakes even more.
Here the organization lost its tax exemption because the secretary of state revoked its corporate charter for failing to update and file their annual report. Specifically, a charity filed for its 501©(3) and during the pre-contact planning phase of investigation a Revenue Agent found out its corporate status with its state had been revoked. This was discovered when the IRS agent looked at the state’s website. Although the Agent made several attempts to reach out to the nonprofit on this issue requesting “proof that is is in good standing with the state of incorporation” none was apparently provided.
The IRS concluded, for this and other reasons, its tax exempt status under section 501©(3) “should be revoked”.
Lesson here is clear. First, complete the annual report maintaining the church status as current. Second, when contacted by the IRS – answer their inquiries.
Just a thought.