The Nonprofit FAQ
What happens when nonprofits go out of business? |
The IRS offers a "Mini-Publication" as guidance to organizations that are closing or merging on its website at http://www.irs.gov/pub/irs-pdf/p4779.pdf (posted in May 2009). Chip M. Watkins wrote to the cyber-accountability list on May 11, 2000, about the death of nonprofits. Even if a declining organization has had several years of low income, so it isn't ordinarily required to file Form 990, it must file a "final" return,as required by Sec. 6043. (NOTE: Starting in 2008, most exempt organizations have been required to file the "electronic postcard" online Form 990-N no matter how little revenue is received. More information about Form 990-N is available on the IRS website at http://www.irs.gov/charities/article/0,,id=169250,00.html — Ed.) More typically, however, EOs don't formally dissolve. Instead, I surmise that in their later years, they are manned by the most dedicated, but not necessarily the most knowledgeable about legal niceties and bureaucratic requirements. These people are dedicated to the mission but working with declining resources. At some point, they simply give up, they're out of money, they box up the files for a few years, and then they throw them away. Ergo, no final Form 990, no formal dissolution under state law. In those states where the AG registers charities (regardless of whether they solicit), the AG should follow up the apparent disappearance of a charity to ensure that assets haven't been diverted--in smaller cases, my guess is that the charity just ran out of money. But with limited resources, and a lot spent on trying to ensure that major nonprofit hospital assets aren't diverted to for-profit partners, my guess is that the disappearance of a lot of small charities goes unremarked in most offices. Mergers are becoming, I believe, slightly more common, as entrepreneurial EOs find it increasingly difficult to compete for funds for largely overlapping programs. Some are willing to merge to produce better programs with less competition for funds. It's certainly happening among trade associations. (Sec. 501(c)(6)). Articles of merger must be filed with the state in which each merger partner is incorporated, and a final return filed for the non-survivor. No reason for the IRS to act unless a (c)(3) is merged into a non-(c)(3) without appropriate protection, so that inurement might be present. Someone asked in Nonprofit (see http://www.rain.org/mailman/listinfo/nonprofit) on April 30, 2004: It appears that we may have to dissolve our 501(c)(3) organization that has been in existence for about 10 years. We have approximately $300,000 worth of real estate assets. If we sell those, is it possible to return money to the contributors that we have kept very accurate records of since our inception on a pro-rata basis? Sandy Deja, Author of "Prepare Your Own 501(c)(3) Application" an ebook for lay people (http://www.501c3book.com/) responded on May 2: Short answer: NO Long answer: According to Section 1.501(c)(3)-1(b)(4) of the Income Tax Regulations: 4) DISTRIBUTION OF ASSETS ON DISSOLUTION. An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would...be distributed for one or more exempt purposes, or...to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the organizational test if its articles or the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders. The IRS said this another way in their Publication 557, TAX-EXEMPT STATUS FOR YOUR ORGANIZATION (http://www.irs.gov/pub/irs-pdf/p557.pdf): Assets of an organization must be permanently DEDICATED to an exempt purpose. This means that should an organization dissolve, its assets must be DISTRIBUTED for an exempt purpose described in this chapter, or to the federal government or to a state or local government for a public purpose. If the assets could be distributed to members or private individuals or for any other purpose, the organizational test is not met. (If the organizational test is not met, the organization will lose its exempt status and taxes may well be due; in that case, donors might also lose whatever deductions they had taken for donations in previous years. When the plan of dissolution is filed with the Attorney General -- as Chip Watkins explains should happen in his note above -- one of the things the AG will be looking for is improper distribution of the organization's remaining assets. --Ed.) (The distribution of any restricted assets will have to be done in accordance with the original terms of the gift that created the asset; a reason why keeping good records of restricted gifts is an important task. Much expense can be incurred if there are disagreements over the distribution of restricted assets. --Ed.) Posted 5/11/00; 5/2/04 -- PB |