Ask FIO: Merger Liabilities

This is the first Ask FIO column, where FIO Partners responds to YOUR questions - it comes from an organization in California that is considering a merger.

"First, our potential merger partners have been told that a merger may reopen their 501c3 to being re-evaluated by the IRS. Second, they are afraid that they may be held responsible for any unknown future liabilities although we have declared all existing liabilities which we are committed to resolving before the asset transfer. I'm unsure how to proceed on these two issues. Any insights you could offer would be much appreciated."

Both of the issues you name are legitimate concerns…that is, they are not far fetched or impossible events.  That said, risk is part of life and risk management is often the best we can do.  Re: 501c3 status…if the missions of the two organizations are close, this shouldn't be a problem and a review is improbable.  If such a review did occur, your merger partner would be vulnerable if some part of their or your activities is not within the scope of the IRS definition for 501c3 status.  Is there cause for concern?  Have your auditors or theirs ever flagged this as a concern?  At worst, that part of the activities would be viewed as UBIT…unrelated business income and would become taxable.   To my knowledge, the IRS is not known for pulling 501c3 status outright unless there is flagrant abuse.

Re: future liabilities:  the largest areas of potential future liabilities are likely to be personnel and personal injury/negligence claims, with professional liability issues a distant third.  I assume you have insurance…your current coverage should extend to claims filed after the merger, if the events occurred during the time when the policy was active.  Check with your insurer(s) to make sure this is the case.   Your merger partner should be looking at your turnover rate, employee grievances filed, firings in the last few years, any charges of human rights violations, etc.  If there are no such incidents, then the possibility of something like that coming up is greatly reduced.  Similarly with negligence, personal injury, or professional liability incidents.  You should be obligated to disclose any such incidents that are not resolved as well as any that have occurred so your partner can determine if you had a habit of acting irresponsibly.  Again, no such incidents, and the risk of their having to deal with something is greatly reduced.

Essentially, there isn't a way for them to entirely eliminate any risk, but you should be able to build a base of information that allows them to clearly determine how much risk they actually have.  In the end, how risk aversive they are will determine what they do.

I hope that is helpful.

Jane

Got a question? If you have a question that you would like answered by FIO - just send it over to info@ fiopartners.com!