Schedule G of the Form 1023 is for organizations that are considered successor to another organization. If the IRS thinks your "new" nonprofit is really the second life of an older entity, they stop treating you like a new applicant. They start digging through the old organization's history, problems, assets, and insiders. That is why Form 1023 asks whether you are a successor organization and forces you onto Schedule G.
Form 1023 Schedule G analysis is one of the IRS's quickest ways to catch private benefit, inurement, insider control, and disguised asset transfers, and one of the most common instigator of follow-up questions.
Form 1023 Schedule G Table of Contents
- What is a Successor Organization
- Definition and Purpose of Successor Organizations
- IRS Schedule G Questions and How to Answer Them
- Form 1023 Schedule G: Leadership and Ownership of the Predecessor
- Form 1023 Schedule G: Successor to a For-Profit Organization
- Form 1023 Schedule G: Origin and Relationship Between the Entities
- Form 1023 Schedule G: Ongoing Relationships With Predecessor Insiders
- Form 1023 Schedule G: Transfers of Assets From the Predecessor
- Form 1023 Schedule G: Transfers of Debts or Liabilities
- Form 1023 Schedule G: Leasing or Rental Arrangements With Insiders or the Predecessor
What is a Successor Organization
A successor organization is any new entity that takes over the operations, activities, assets, or functions of another organization, whether for profit or nonprofit. That includes mergers, reorganizations, conversions, restructures, and quiet asset transfers dressed up as "brand new" beginnings.
You are a successor if any of the following are true:
- You took over activities previously conducted by another organization.
- You took, or will take, twenty five percent or more of the fair market value of another organization's net assets.
- You were created through the conversion of a for profit entity into a nonprofit entity.
If any apply, the IRS expects Schedule G.
For purposes of this schedule, a "for-profit" organization is one in which persons are permitted to have an ownership or partnership interest, such as corporate stock. It includes sole proprietorships, corporations, and other entities that provide for ownership interests.
The other organization is the predecessor organization. You should complete this schedule regardless of whether the predecessor (other organization) was exempt or not exempt from federal income tax.
Definition and Purpose of Successor Organizations
Definition: A successor organization is a new entity that takes over or continues the operations, assets, or functions of a prior entity, which can be either for-profit or non-profit. The new organization might have been formed as a result of a merger, consolidation, conversion, reorganization, or transfer of assets from the predecessor.
Purpose of Inquiry: The IRS needs to assess whether the new organization is simply a continuation of a prior entity, especially if that entity had activities or practices that would affect its eligibility for tax-exempt status.
IRS Schedule G Questions and How to Answer Them
These are the exact questions the IRS uses on Schedule G, along with what they are actually asking and how to answer them without triggering unnecessary follow up.
List the name, last address, and EIN of the predecessor organization and describe its activities.
The IRS uses this information to identify the exact organization being succeeded so it can compare operations, assets, leadership, and filings. The description must be factual and operational. State what the predecessor actually did, who it served, how it functioned, and the scope of its programs.
Do not rewrite the mission statement or attempt to rehabilitate history. If the predecessor was inactive, stalled, or poorly operated, acknowledge it. The IRS already has access to prior Form 990 filings, state records, and public information.
Form 1023 Schedule G: Leadership and Ownership of the Predecessor
List the owners, partners, principal stockholders, officers, and governing board members of the predecessor organization. Include names, addresses, and ownership interests if the predecessor was a for-profit entity.
The IRS uses this information as an insider map to identify continuity of control. Overlapping leadership is not automatically disqualifying, but failure to disclose it is. The IRS compares names, roles, and ownership stakes to assess private benefit, continuity of control, and self-dealing risk.
If the predecessor was for-profit, list exact ownership percentages. If individuals exercised authority or influence without ownership, list them anyway. The IRS will cross-reference corporate records, state filings, and prior returns regardless of disclosure.
Form 1023 Schedule G: Successor to a For-Profit Organization
Indicate whether the organization is a successor to a for-profit entity. If yes, explain the relationship with the predecessor organization and why the activities or assets of a for-profit entity were taken over or converted to nonprofit status.
This is the highest-risk area of Schedule G. The IRS presumes a risk of private benefit when a for-profit entity converts to nonprofit form.
The explanation must clearly demonstrate:
- All ownership interests were fully extinguished
- No insider received a financial advantage from the transition
- There is a legitimate charitable reason for nonprofit status
Be direct about why the for-profit ceased operating or changed form, who initiated the conversion, and why nonprofit status is appropriate for the activities now conducted. Ambiguity here triggers follow-up questions.
Form 1023 Schedule G: Origin and Relationship Between the Entities
Explain the relationship between the predecessor and successor organizations and why the successor took over the predecessor's activities or assets.
This explanation must describe:
- The actual relationship between the entities
- Why the predecessor stopped operating or why a successor was needed
- Which activities or assets were transferred and why
Avoid vague language. The IRS wants concrete facts showing that the successor is organized and operated for charitable purposes and is not continuing noncompliant or private benefit patterns.
Form 1023 Schedule G: Ongoing Relationships With Predecessor Insiders
Disclose whether the organization maintains or will maintain a working relationship with any persons previously identified or with any for-profit entity in which those persons own more than thirty-five percent.
The IRS uses this disclosure to identify conflicts of interest. Any ongoing relationship is reviewed for private benefit, self-dealing, or preferential treatment.
If a relationship exists, describe:
- The nature of the relationship
- Whether it is arm's length and necessary
- How compensation or payments were determined
- How governance safeguards ensure independence
The IRS assumes conflict unless board independence and disinterested approval are demonstrated.
Form 1023 Schedule G: Transfers of Assets From the Predecessor
Disclose whether any assets were transferred from the predecessor organization, whether by gift or sale.
If assets were transferred, provide:
- A detailed inventory of each asset
- The fair market value of each asset
- The valuation method used
- Whether the transfer was a gift, sale, or combination
- Any restrictions or conditions on use or sale
Asset transfers are a primary private benefit checkpoint. Do not guess values or use round numbers. If assets came from insiders or insider-controlled entities, be prepared for heightened scrutiny.
Form 1023 Schedule G: Transfers of Debts or Liabilities
Disclose whether any debts or liabilities were transferred from the predecessor organization.
If liabilities were transferred, identify:
- Each individual liability
- The exact amount owed
- How the amount was determined
- The full name of the creditor
- The charitable reason for assuming the liability
This disclosure screens for insider bailouts. Transfers that appear to relieve personal or insider debt invite follow-up questions or denial.
Form 1023 Schedule G: Leasing or Rental Arrangements With Insiders or the Predecessor
Disclose whether the organization will lease or rent property or equipment to or from the predecessor, predecessor insiders, or for-profit entities controlled by those persons.
If such arrangements exist, describe:
- What is being leased
- Who owns the property and their relationship to the predecessor
- How rental value was determined and supported
- Independent board approval and documentation
- Confirmation that terms reflect fair market value
Leasing arrangements are a common private benefit trap. The IRS expects written valuation support and disinterested approval.