IRS Updates Guidance on State Laws Requirements for Section 501(c)(3) Organizations

The Internal Revenue Service (IRS) has recently issued updated guidance regarding the requirements of state laws for Section 501(c)(3) organizations. The guidance, which includes a Program Manager Technical Advice (PMTA), aims to provide a more current summary of the state laws pertaining to different types of legal entities.

The regulations require all Section 501(c)(3) organizations to dedicate their assets to exempt purposes as described in Section 501(c)(3). The organization can do this by including a dissolution clause in its articles of organization or by relying on state laws that satisfy the dissolution requirement. State laws that satisfy the dissolution requirement were outlined in the now obsolete Rev. Proc. 82-2.

For private foundations under Section 509(a), the governing instrument must contain provisions that ensure compliance with the restrictions imposed by Chapter 42. Valid provisions of state law can serve this purpose, as per Treas. Reg. section 1.508-3(d). Rev. Rul. 75-38 previously listed states with laws meeting these requirements.

IRS Chief Counsel attorneys have highlighted the need to update the guidance due to significant changes in state laws over the past four decades. This led to the obsoletion of Rev. Proc. 82-2 and Rev. Rul. 75-38. The IRS has released new guidance, including PMTAs, to provide current information on state laws.

Alternatively, Chief Counsel attorneys mentioned the challenge of keeping such guidance constantly updated. However, they noted that non-precedential guidance like PMTAs can offer more timely information to taxpayers, even if formal reliance is not permitted.

In light of these changes, the IRS has published new PMTAs detailing the state laws that align with the organizational requirements of Section 501(c)(3) organizations. These updated resources offer valuable insights for organizations seeking tax-exempt status.

Compliance with organizational requirements is crucial for maintaining tax-exempt status. RSM recommends close collaboration with legal counsel to ensure organizational documents meet federal and state tax law requirements. It also emphasizes including necessary language in documents to avoid relying solely on state laws.

The IRS’s efforts to provide up-to-date guidance on state laws demonstrate a commitment to assisting exempt organizations in navigating complex regulatory landscapes. Organizations can benefit from reviewing their governing documents and seeking professional assistance for compliance and exemption applications.