Merger under state law may result in a new entity or in one of the parties to the merger ceasing its existence. In either case, the IRS must determine whether the post-merger entity continues to be organized and operated for section 501(c)(3) purposes.
Accordingly, you should notify the IRS, by letter to EO Customer Account Services, of the merger, and submit copies of any amendments to your articles of organization or by-laws as part of the merger transaction. You may also wish to consider whether the merger will result in other adverse tax consequences, such as recognition of gains on assets transferred.
See an article on the effect of Internal Revenue Code section 337 and Treasury Regulation section 1.337(d)-4 on exempt organizations.
You may want to request a private letter ruling on the tax consequences of a merger.
New Information about Mergers and Terminations
Most tax-exempt organizations that end their operations, either through shutting down, transferring their assets or merging with another tax-exempt organization, must inform the IRS about the details of the action. To understand how this is accomplished we suggest you read: New Fact Sheet on Termination or Merger of Exempt Organizations
Nonprofits continue to pursue merger and acquisition activity as they react to market conditions and move quickly to increase their geographical footprint and reap the benefits of economies of scale. However, the opportunity for an M&A to fail is greatest after the deal is closed, especially if the combined businesses are expected to operate as a cohesive organization with little preparation for integration.
Edward Charles will help in resolving issues such as cultural, operational integration issues before the organization sign agreement papers. We will assist regarding which leaders will assume control, what technologies will be preserved and what service standards will be followed. The ability to retain key people in the operation will be
critical to the success of both parties.
BWB Solutions helps nonprofit organizations accomplish their mission. They work with all types of nonprofits, helping them become stronger through strategic planning, research, board development and organizational capacity building. Make sure and also check out their blog: http://www.nonprofitboardcrisis.typepad.com/
Bridging The Organizational Divide – The Making Of A Nonprofit Merger
By John Emmeus Davis
Navigating A Non-Profit Merger: Participatory Tools For Success, The Lifeworks Story http://www.meetingsolution.com/Files/6b.NavigatingMerger.pdf
Making a Merger Go Smoothly for Nonprofit Workers By Marilyn Dickey
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.