Real Help With Your 501(c)(3) Application
A. By November, 2022, more than 20,000 501(c)(3) private foundations recognized via Form 1023-EZ had shed their private foundation status, either by going through a Form 8940 re-classification, or by going out of business. What's behind these tens of thousands of erroneous private foundation rulings? I believe that the instructions for Part IV of Form 1023-EZ are behind most of these wrongful private foundations. These instructions are clearly wrong.
Under current tax law, start-up 501(c)(3)s are entitled to the benefit of the doubt when it comes to the public charity support tests. The Income Tax Regulations set forth a separate test specifically for new organizations: an organization that can reasonably be expected to meet the one-third support test (or the 10% facts and circumstances test) by the end of its first 5 tax years will qualify as publicly supported for its first 5 years. This rule is set forth in Income Tax Regs section 1.170A-9(f)(4)(v)(A) (word search for "first five years of an organization's existence"). IRS Publication 557 (2023) also discusses this rule on page 34.
The 1023-EZ databases published by the IRS indicate that around 90% of EZ applications are filed by "new" organizations - ones that could qualify as public charities because of the "reasonable expectation" rule. You will look in vain, however, for any mention of a separate test for new organizations or a "reasonable expectation" rule in Form 1023-EZ or the instructions. Instead, the EZ instructions specifically tell new organizations to project future income for the balance of their initial 5 year period and then perform one of the one third public support tests. In fact, the Regulations do not require new organizations to perform either of these actions.
It is not clear why the "reasonable expectation" rule is not mentioned in either the Form 1023-EZ application or the instructions. To my amazement, I learned that the rule was correctly stated in the original 1023-EZ instructions issued in 2014, but removed when the instructions were re-issued in 2018! (I have written to the IRS multiple times about this, but have received no response – that is why I am posting on-line help to correct these mis-classifications.)
The misleading Form 1023-EZ instructions are probably not responsible for ALL of the organizations wrongly determined to be private foundations. Some people who have responded to my emails have indicated that they checked the "private foundation" box in Part IV simply because they misunderstood what was meant by the term "private foundation." Others told me they thought they should be extra cautious because they were signing Form 1023-EZ under penalties of perjury. A few told me they were quite certain that the pay.gov software changed their answer after they left that page of the form!
This information is not available in the 2020 revision of Prepare Your Own
Question 8 - Why Did This Misclassification Happen?