How do I Relinquish an IRS 501 C 7 Exemption?

A social or recreational club that is exempt from federal taxation under section 501(c)(7) of the Internal Revenue Code (IRC) must notify the Internal Revenue Service (IRS) that it wants to terminate the election. Technically, there is no provision in the IRC that allows organizations to voluntarily relinquish tax-exempt status once granted. While it is possible to force an involuntary termination or to try to re-organize nonprofit operations into a for-profit corporation, both options entail significant liability. If an organization wants to terminate its tax-exempt status, the best practice is to dissolve the corporation, file final paperwork with the IRS and to re-incorporate as a new entity, if necessary.

• 1

  Create a liquidation plan. A liquidation plan specifies how assets of the organization will be distributed upon dissolution. A nonprofit organization must distribute any remaining assets upon dissolution to another tax-exempt entity. If your organization is small with few assets, you might not need to put an official plan in writing. However, the directive to distribute assets to another nonprofit is major IRS requirement. The bigger your organization, the more useful this document will be to provide proof that the organization complied with the law. Larger organizations must attach this sort of proof to its final tax return.

• 2

  Pass a corporate resolution, or take a vote of the members if required, to authorize the dissolution of the organization. There is no easy way to relinquish the organization's tax-exempt status without dissolving the organization first, because terminating the election requires the organization to distribute its assets to another tax-exempt entity. For instance, if all you wanted to do was change your membership organization from a tax-exempt entity to a for-profit entity, you would dissolve the nonprofit corporation and reorganize as a for-profit corporation.

• 3

  File articles of dissolution with the secretary of state's office of the state where your organization is incorporated. A template of the articles of dissolution should be available for download on the secretary of state's (or comparable government entity's) website. Download the form, fill it out and file it. Make sure to request the state return a certified copy of the articles to you. You may need to provide a copy to the IRS.

• 4

  Prepare a final Form 990 (nonprofit information tax return) for the IRS. There are three versions of the 990: 990-N, 990-EZ and the full 990. The version you must use depends on your organization's gross receipts. Check the IRS website for the current threshold amounts and to download the correct version. All versions of the form have a header section where the organization will check "Terminated" and answer yes to the question whether the organization liquidated, terminated, or dissolved and, if applicable, to the question whether the organization engaged in a significant disposition of assets. Complete the rest of the form, following the instructions.

• 5

  Prepare a Schedule N, "Liquidation, Termination, Dissolution, or Significant Disposition of Assets." Indicate how the organization's assets were distributed to prove that the assets were distributed to another tax-exempt entity.

• 6

  File Form 990 with the IRS within 5 and 1/2 months of the end of the organization's tax year. Attach the organization's articles of dissolution, corporate resolution and plan of liquidation.