Converting a Private Foundation
to a Public Charity
Typical Problem:
The IRS has granted a nonprofit exempt status under section 501(c)(3) of the IRS Code but has mischaracterized the organization as a "private foundation"and not the desired "public charity". The nonprofit wants to change that characterization
The problem typically occurs where the nonprofit has used the simplified on-line IRS Form 1023-EZ to apply for the exemption but made an error by failing to check one of the boxes on the application.
Solution:
There is no magic wand that can make the problem disappear but, with a little work, the problem can be resolved.
First educate yourself on the difference between a private foundation and a public charity (the main difference is that to be considered a "public charity" at least 30% of the organization's support must come from "public" sources). Click the link below and then scroll down to read the relevant subsections.
Next, read a good overview article on how to make the change
Next, read the IRS information page linked below entitled "Termination of private foundation status". Most nonprofits will end up choosing the option for Termination of private foundation status under section 507(b)(1)(B) - advance ruling request). The nonprofit will need to complete IRS Form 8940 on-line through the "pay.gov" website (the user fee payable to the IRS is typically $550).
Here is an information page on how IRS Form 8940 is created and filed
Understanding 60 month "Advanced Ruling" Period option
Using IRS Form 8940 the most attractive choice for most nonprofits would be to choose the option for "Operating as a public charity for a continuous period of 60 months after giving appropriate notice.
The key is to understand what is meant by this 60 month period (referred to as the "advanced ruling period"). With this option the IRS will begin treating the nonprofit as a public charity from the first day of the designated 60 month period (that is, the IRS will presume that the nonprofit meets the "public support" test) but at the end of the 60 month period the nonprofit will be required to submit documentation as to where its support actually came from during that period.