A nonprofit organization completing Internal Revenue Service Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, must answer whether it meets the agency’s definition of a successor organization. The IRS provides the definition in Form 1023 and in the instructions for the form. A successor organization meets one or more of the three IRS criteria: It has assumed the activities of a previous organization, has assumed ownership of at least 25 percent of the previous organization’s assets and was created through conversion of a previous organization from a for-profit to a nonprofit.

Successor Organization

The IRS regulates the granting and continuation of tax-exempt status for nonprofit or charitable organizations. Tax-exempt status requires transparency in financial management, such as reporting on the use and disposal of assets to ensure that individuals do not benefit financially from a nonprofit organization. Part VII, Line 1, of Form 1023 requires an applicant that answers “yes” to the successor question to complete Schedule G of the form. A successor organization must complete Schedule G whether the previous organization, called the predecessor organization, was a for-profit or a nonprofit.

Schedule G

The IRS uses the information applicants provide in Schedule G to determine whether the successor organization’s creation results in financial benefits to for-profit businesses or to individuals, such as those who were involved with the predecessor organization or to private shareholders of a business or corporation. Schedule G questions ask for detailed information and documentation about the predecessor organization, including assets and the relationship between individuals involved with the predecessor and successor organizations.

Schedule G asks why the successor is taking over the organization and asks applicants to explain a previous relationship that influences the transaction. Applicants answer questions about the predecessor organization’s tax status, whether the current applicant has applied for tax-exempt status in the past and information about prior revocation or suspension of tax-exempt status. The successor organization provides the name, employer identification number and contact information for the board, owners or principal shareholders of the predecessor organization and a description of the organization’s activities.

Financial Relationship

Applicants that assume ownership of 25 percent or more of the fair market value of the predecessor organization’s assets must provide information about agreements, a list of assets and values, disposal of assets and restrictions placed on the use of assets. The IRS also wants to know if the successor organization assumes the debts or liabilities of the predecessor organization. Schedule G requires applicants to report any continued financial relationship with individuals involved with the predecessor or for-profit businesses. For instance, the applicant would report plans to rent property from an individual or for-profit business involved with either organization.