The IRS Form 1023-EZ—A New, Streamlined Option For Some 501(C)(3) Organizations

To be recognized by the IRS as a charity under 501(c)(3) of the Internal Revenue Code once required all organizations to undertake the lengthy and somewhat arduous process of filing the IRS Form 1023. According to the IRS, it could take a novice more than 100 hours to complete the form. After submission, applicants can expect to wait four to six months or, in some circumstances, even longer for a determination as to their organization’s tax-exempt status.

In an effort to reduce the backlog that had been frustrating charitable organizations and their donors, the IRS introduced a new, streamlined version of the application in July of 2014—the IRS Form 1023-EZ. “Previously, all of these groups went through the same lengthy application process — regardless of size,” said IRS Commissioner John Koskinen. “It didn’t matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.” The IRS hopes that the change will speed up the application process for smaller charitable organizations, and free up resources for the review of applications of larger, more complex organizations. In theory, the effect should be a reduction in backlog and turnaround time for organizations of all sizes.  The form can only be completed online and currently costs $400.

Organizations Eligible for the Form 1023-EZ

Not all charitable organizations are eligible to apply for exemption under section 501(c)(3) using Form 1023-EZ. To determine eligibility, an organization must complete the Form 1023-EZ Eligibility Worksheet. The worksheet lists 26 questions for perspective organizations. If the answer to any of those questions is “yes”, the organization is ineligible and must file the full Form 1023. For starters, organizations must be small in the eyes of the IRS. This mean that the organizations must: (1)  anticipate less than $50,000 in annual gross receipts each year for the first 3 years, and (2) have already had less than $50,000 in annual gross receipts for all 3 prior years (if applicable), and (3) have total assets valued at under $250,000.

In addition, an organization’s ties with a foreign country, its business structure and history of any predecessor organizations, and its purpose and activities can render the organization ineligible for the 1023-EZ. For example, organizations investing more than 5% of assets in non-publicly traded securities, charitable risk pools, schools, colleges, and universities, and churches and church associations are unable to take advantage of the streamlined application. Your organization should carefully examine the Eligibility Worksheet available on the IRS website. Some organizations that are eligible should consider filing the long-form 1023 instead, especially those nonprofits that expect grant funding and/or corporate giving to be an essential part of their income stream.

Be Sure to Closely Examine These Parts of Your Application, Because the IRS Will

There are many factors that can disqualify your organizations for tax-exempt status, and many are less-than-obvious. Two of the most important and easily overlooked concern the organization’s governing documents.

First, the articles of organization or articles of incorporation must contain a purpose clause that restricts the organization’s activities to those that qualify for tax-exempt status under IRC 501(c)(3). Those purposes are charitable, educational, religious, literary, scientific, testing for public safety, fostering national or international amateur sports competition, and prevention of cruelty to children or animals. The regulations then include, within charitable, the following purposes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare. Merely referencing section 501(c)(3) will not ensure that your purposes are limited to those described in that section. In fact, all of the language in your organizing document will be considered. According to the IRS, the following is a satisfactory example of a limitation of purpose clause:

The organization is organized exclusively for charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code.

In addition, your articles must contain a dissolution clause that will permanently dedicate the organization’s assets for a section 501(c)(3) purpose. According to the IRS, naming a specific organization to receive your assets upon dissolution will only be acceptable if your articles state that the organization must be exempt under 501(c)(3) at the time the dissolution takes place and the articles provide for an acceptable alternative if the specific organization is not exempt. Remember that state law concerning dissolution may not be sufficient to satisfy the 1023 and 1023-EZ requirements regarding dissolution.

The 1023-EZ provides a helpful alternative for smaller non-profits hoping to avoid the expense and delay of the traditional Form 1023. However, organizations should be mindful of its eligibility requirements and the common deficiencies of organizational documents that can delay or even prevent non-profit recognition by the IRS.

Written by Taylor Barnett (’16), Wake Forest School of Law Student Practitioner

Presentation to Associated Artists of Winston-Salem

Wednesday, March 19th 2014. In partnership with Associated Artists of Winston Salem, the Community Law & Business Clinic’s (CLBC) Arts & Entertainment Group led an informative presentation about practical legal issues relevant to artists. The presenters, Leslie Evans, Disha Ghandi, Michael Glotzbach and James Goodwin covered topics such as trademarks and copyrights, insurance protection and tax compliance.

The recent sale of WhatsApp to Facebook for $19 billion is a high-profile indication that products of the creative process can be valuable indeed. Unfortunately, without proper legal guidance and compliance, creativity-based businesses and individual artists can be blindsided by trouble, often before they can get traction in the marketplace. Being fluent in these topics and working with an attorney who understands the field can often head off issues before they arise.

You can see pictures from the event at AAWS’s Facebook page. You may also download a copy of the presentation.

If you are an artist or entertainer and would like legal assistance or more information about legal issues affecting you or your business, please contact the CLBC.

Posted by Casey Crowley

Section 501(c)(4): The Other Tax Exemption

The following post was written by guest blogger and CLBC student John Nail (JD ’14).

Download a digital copy of this guide.

Determining which section of the Internal Revenue Code to pursue tax exemption under is an important consideration for nonprofit planners, one that will likely have a lasting impact on their organization. Most nonprofits receive tax-exempt recognition by meeting the requirements of a charitable organization under section 501(c)(3); however, many entities that fail to meet those strenuous requirements may qualify for recognition as a “social welfare organization” under section 501(c)(4). This post looks at the requirements for a “social welfare organization” and provides a brief comparison between social welfare organizations under section 501(c)(4) and charitable organizations under section 501(c)(3).

An entity is exempt under section 501(c)(4) as a “social welfare organization” if it is operated exclusively for the promotion of social welfare, which means that the entity is engaged in some way in promoting the common good and general welfare of the community. A social welfare organization cannot provide a benefit for a private group or for its members; however, the organization does not have to benefit every member of society equally if any limitations on the benefit are a result of the activity the organization pursues and are not imposed by the organization. While the exemption may seem overly broad, the IRS has analogized section 501(c)(4) to a “catchall” provision for beneficial nonprofit entities that are not exempt under other provisions of the Internal Revenue Code. Section 501(c)(4) has been used by a wide range of entities, including those that supervise facilities that teach safe handling and care of firearms, conduct annual festivals to further regional customs and traditions, and are created to make loans to businesses to induce relocation to economically depressed areas.

There is substantial overlap between entities that would qualify as charitable organizations under section 501(c)(3) and social welfare organizations under section 501(c)(4), but there are several differences that should be considered. First, contributions to a 501(c)(4) organization are generally not deductible for the donor, but they are under section 501(c)(3). Second, a 501(c)(3) entity risks its tax exemption if it engages in any insubstantial nonexempt activities (like political lobbying), while a 501(c)(4) organization can engage in nonexempt activities as long as those activities are not the primary activities of the organization, which can still result in substantial nonexempt activities. The “primary activities” of a social welfare organization is determined by looking at the facts and circumstances that surround the activities. Finally, an organization is not operated for social welfare if its primary activity is carrying on a business with the general public; however, an organization exempt under section 501(c)(3) may operate a business if the sole purpose for the business is to raise funds for charity.

While there are benefits to pursuing exemption under other provisions of the Internal Revenue Code, the catchall qualities of section 501(c)(4) provides many beneficial entities a pathway to tax-exempt status and should be considered by nonprofit planners. For more information see IRS Guidance on Section 501(c)(4) Organizations and Requirements for Exemption – Social Welfare Organizations.

Posted by Casey Crowley

Filing Public Records Requests Against North Carolina Non-Profits

The following post was written by guest blogger and CLBC student Garin Scollan (JD ’14).

You may download a digital copy of this guide.

Under N.C. Gen. Stat. § 132-1(b), “the public records and public information compiled by the agencies of North Carolina government or its subdivisions are the property of the people. Therefore, it is the policy of this State that the people may obtain copies of their public records and public information free or at minimal cost unless otherwise specifically provided by law.” The term “public record” is defined as “all documents, papers, letters, maps, books, photographs, films, sound recordings, magnetic or other tapes, electronic data-processing records, artifacts, or other documentary material, regardless of physical form or characteristics, made or received pursuant to law or ordinance in connection with the transaction of public business by any agency of North Carolina government or its subdivisions.” N.C. Gen. Stat. Ann. § 132(1)(a) (2012).

So while an organization may be a non-profit corporation, in some cases it can be considered an agency of the government for purposes of North Carolina’s public records statute. News & Observer Pub. Co. v. Wake Cnty. Hosp. Sys., Inc., 55 N.C. App. 1, 11 (1981). News & Observer Pub. Co. v. Wake Cnty. Hosp. Sys., Inc. ruled that the nature of the relationship between a non-profit corporation and the County determines if the non-profit corporation is an “agency of North Carolina government.” To prove the County exercises supervisory responsibilities and control, you should look to the non-profit corporation’s Articles of Incorporation and Lease. The Articles of Incorporation are available at the North Carolina Secretary of State website. The Lease is recorded at the County Records Office.

Once you determine that a non-profit corporation or any other entity you want public records from is an agency of the government, you must follow steps to request the public records:

  • Step 1: Send the “custodian” a public records request in the form of a letter. This letter must state how you would like to receive the public records, either by mail or electronically. The letter should also define what records you are actually requesting, rather than just asking for all the records concerning a certain matter. For example, a request could ask for “any and all written communications in any form, including all notes and log entries.”
  • Step 2: If the records request is denied, ask the custodian why it was denied.
  • Step 3: If the custodian is relying on an exemption, ask her to release the nonexempt portions of the record with the exempt portions removed or redacted.
  • Step 4: File a civil action against the agency to compel disclosure. These actions are given priority. “However, in order for the court to have jurisdiction to issue an order compelling the production of public records, the requesting party must initiate mediation of the dispute through the court. See N.C. Gen. Stat 132-9(a); see also N.C. Gen. Stat. 7A-38.3E9(b).


The custodian of the records is the official in charge of an office that holds the public records. When you make a public records request, your letter should be sent to a person in charge of maintaining the public records and the City Clerk’s office. You can Google who the City Clerk is for the County you are making the public records request in.

For more information on making a public records request, visit the following websites:

Posted by Casey Crowley

Nonprofit Essentials – Budget & Financing

It was a pleasure seeing everyone again for the Budget & Financing session of the Nonprofit Essentials series. As we discussed during the session, I have included electronic versions of several documents and links to resources below.

  1. The Powerpoint presentation is electronically accessible. Note that the slides we skipped due to time constraints have been included.
  2. An electronic copy of the financial ratio analysis exercise we did is available.  Recall that standalone ratios are most useful when appropriate sector comparisons are made. Guidestar is a great resource for finding 501(c)(3) organizations’ Form 990 financial data.
  3. We skipped over the business model portion of the presentation, but I think it’s a very useful tool. Steve Blank’s Business Model Canvas can be found online, along with my transcription of the text portions of that document.  Blank’s website, Business Model Generation, is also worth a visit; it includes a good video about applying the Business Model Canvas.
  4. In passing, I referenced a Stanford Social Innovation Review article called 10 Nonprofit Funding Models. The article goes into detail about the basic templates for revenue generation in nonprofits, and is an interesting read.
  5. Lastly, here is a link to Dan Palotta’s TED Talk, The Way We Think About Charity is Dead Wrong. The talk raises interesting questions about the scale and nature of spending in charitable organizations, including the overhead issue we discussed.

Posted by Casey Crowley

Essentials of Business for Nonprofits – Budgeting and Finance

Thanks to all who attended the Essentials of Business for Nonprofits – Budgeting and Finance session on October 17, 2013 at the Wake Forest Charlotte Center. A couple of quick notes:

  1. The Powerpoint slides are available online.
  2. The financial ratio analysis exercise can also be found online, for those that did not pick up a copy. Additional useful resources on nonprofit financial ratio analysis are available from the Nonprofits Assistance Fund. Especially useful are a) a list of common ratios and b) an Excel spreadsheet for calculating them.
  3. Since business models are covered in another segment of the program, we did not cover them in detail. However, I did reference a Stanford Social Innovation Review article called 10 Nonprofit Funding Models that I wanted to provide a link to.
  4. Lastly, I mentioned the Community Law & Business Clinic, a legal clinic at Wake Forest School of Law that offers pro bono work for–among others–nonprofit organizations. Several people asked for more information on areas of practice and how to apply, all of which can be found at the CLBC website.

We look forward to seeing you at the next session.

Posted by Casey Crowley

Nonprofit Essentials – Governance Slides

Participants in the NPE class for September 24, 2013 can find the Powerpoint slides here:

- Part 1 – Introduction and Board Governance
- Part 2 – Governance Best Practices

During the session, several people asked about the role of high-income executives in the nonprofit sector. The TED talk that was referenced during our discussion is called The way we think about charity is dead wrong, presented by Dan Pallotta.

Thanks to everyone who attended; we look forward to seeing you at the next session.

Posted by Casey Crowley

Community Law & Business Clinic offers capacity-building programs for nonprofits in Charlotte and Winston-Salem

The Community Law Clinic will once again offer capacity building programs for nonprofit organizations during the 2013-2014 academic year. The Essentials of Business for Nonprofit Organizations program, offered in Charlotte, provides nonprofit leaders with targeted seminars on key issues facing today’s nonprofits. More details and registration information for the Essentials of Business for Nonprofit Organizations are available.

The Nonprofit Essentials program, offered in Winston-Salem, also provides nonprofit leaders with seminars on vital aspects of operating successful nonprofits. Details and registration information for the Winston-Salem sessions are available.

Both series include courses on board governance, human resources, strategic planning, fund development and program evaluation. Courses are taught in a seminar format over an afternoon and are designed to provide participants with core skills during a 3-hour session.

The nonprofit sector plays a vital role in establishing and maintaining our quality of life. Through the Essentials of Business for Nonprofit Leaders and Nonprofit Essentials Programs, the Community Law Clinic strives to add the resources of Wake Forest University to the missions of the many organizations that make our community a better place to live.

Posted by Steve Virgil

What’s the Difference Between a Manager and a Director?

A common problem in the non-profit realm is the relative murkiness of the director role in the organization.

Leadership in for-profit corporations is relatively clear-cut, though not necessarily simple. Boards of Directors are responsible for high-level functions, including strategic-level oversight of operations and financial position, managing and supervising upper-level managers, and making sure that the fiduciary duties they owe the company are being fulfilled. Managers in these companies are in charge of implementing the strategic-level initiatives and policies of the Board of Directors. The overarching goal, of course, is to maximize value for stockholders, who are the owners of the company.

These roles in the not-for-profit ream, however, can be unclear or unstructured. Part of the problem lies in the fact that the organizations are small and the reporting structure flat. It is common for a non-profit founder to wear several hats, especially at the startup stage.

So what does a not-for-profit Director actually do? Simply put, a good director raises or donates money, and makes sure program services are administered in a responsible and sustainable way. If you find yourself doing day-to-day management activities as a director, it’s time to find new managers.

Posted by Casey Crowley