PLR 200003045: Endowment grants to supporting charity qualify as distributions

Plain-English summary

Two private foundations proposed annual grants over ten years to build the endowment of a supporting charity. The IRS ruled that the grants would preserve the recipient's § 509(a)(3) public charity status, count as qualifying distributions for the foundations, and avoid taxable expenditure and foundation termination taxes. The recipient also would not incur transferee liability for the foundations' taxes. The IRS warned that if the charity lost its § 509(a)(3) status within three years of a grant, different transfer rules would apply.

Ruling snapshot

• Question: What would the foundations' endowment grants mean for their taxes and the recipient's charity status?
• Outcome: Approved: the grants qualified and did not trigger the specified taxes or liability on the represented facts.
• Key authorities: IRC §§ 507, 509, 4942(g), 4945(d); Treas. Reg. §§ 1.507-1(b)(8), 1.507-3(e).

Full text (IRS public release)

SIN: 4945.00-00                              200003045
Internal Revenue Service           Department of the Treasury
                                   Washington, DC 20224
OP:E:EO:T:4

                                   Contact Person:
                                   Telephone Number
                                   In Reference to:
                                   Date: OCT 18 1999

Legend:
B=
C=
D=
E=
F=

Dear Sir or Madam:

This is in response to your letter dated April 30, 1999, in
which you requested certain rulings with respect to a proposed
transfer of assets from B and C to D.

B is exempt under section 501(c)(3) of the Code and is
classified as a private foundation under section 509(a). C is
exempt under section 501(c)(3) and is classified as a private
foundation under section 509(a). D is exempt under section
501(c)(3) and has been determined to be nonprivate foundation
with classification under section 509(a)(3).

D owns and operates a cultural, educational, and charitable
center in E. The center, which is open to the public as well as
to numerous educational groups, is designed to promote the
appreciation of history, arts, and industry in F. In addition to
operating the center, D furthers its exempt purposes by operating
a historical dwelling and a botanic garden in E.

For the past several years, B and C have made annual grants
to D to help meet the expenses of operating the center and D's
other exempt purposes. Now B and C desire to assist D by making
grants on an annual basis from B and C's investment assets.
Unlike the operational grants, these grants are designed to help
build D's endowment.

B and C intend that the grants will reduce and eventually
eliminate the annual operational grants. In light of the purpose

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of the grants, B and C do not intend to continue awarding grants
once D's endowment is self-sufficient. B and C plan to award the
grants to D over a ten-year period.

You have represented that since D received its letter
classifying it as a section 509(a)(3) organization in 1989, it
has operated and been treated for all purposes as an organization
described in section 509(a)(3).

You have represented that the grants to D will be made for
purposes described in section 170(c)(2)(B) of the Code; that D is
not controlled by B and C; and that D is not a private foundation
because it is an organization described in section 509(a)(3).

You have further represented that neither B and C will
voluntarily terminate its status as a private foundation under
section 507(a)(1) in connection with the grants (or otherwise).
In addition, there have been neither willful repeated acts (or
failures to act) nor a willful and flagrant act (or failure to
act) with respect to either B or C, and the involuntary
termination provisions of section 507(a)(2) therefore are not
applicable to B or C.

Section 507(a) of the Code, which provides for the voluntary
and involuntary termination of private foundation status,
provides, in part, that except for transfers described in section
507(b), an organization's private foundation status will be
terminated only if (1) the organization notifies the Service of
its intent to terminate or (2) there has been either willful
repeated acts (or failures to act), or a willful and flagrant act
(or failure to act) giving rise to liability for tax under
chapter 42.

Section 507(b)(2) of the Code provides that when a private
foundation transfers assets to another private foundation
pursuant to any liquidation, merger, redemption,
recapitalization, or other adjustment, organization or
reorganization, the transferee foundation shall not be treated as
a new organization.

Section 507(c) of the Code imposes a termination tax on each
organization described in section 507(a).

Section 1.507-1(b)(7) of the Income Tax Regulations provides
that neither a transfer of all of the assets of a private
foundation, nor a significant disposition of assets (as defined
in section 1.507-3(c)(2)) by a private foundation (whether or not
any portion of such significant disposition of assets is made to
another private foundation) shall be deemed to result in a

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termination of the transferor private foundation under section
507(a) of the Code unless the transferor private foundation
elects to terminate, pursuant to section 507(a)(1) or section
507(a) (2), is applicable.

Section 1.507-1(b)(8) of the regulations provides that if a
private foundation makes a transfer described in paragraph (7) of
this paragraph and prior to, or in connection with, such
transfer, liability for any tax under chapter 42 is incurred by
the transferor foundation, transferee liability may be applied
against the transferee organization for payment of such taxes.

Section 509(a) of the Code provides that the term “private
foundation” means an organization described in section 501(c)(3)
other than certain organizations described in section 509(a)(1),
(2),(3), or (4).

Section 4942(a) of the Code imposes a tax on a private
foundation's undistributed income for failure to distribute the
required amounts of income. Under the provisions of section
4942, a private foundation must have qualifying distributions
equal to its minimum investment return.

Section 4942(g)(1) of the Code provides that the term
“qualifying distribution” means any amount paid to accomplish one
or more purposes described in section 170(c)(2)(B), or any amount
paid to acquire an asset used or held for use directly in
carrying out one or more charitable purposes described in section
170(c) (2) (B), other than any contribution to (i)an organization
controlled (directly or indirectly) by the foundation or one or
more disqualified persons (as defined in section 4946) with
respect to the foundation, except as provided in paragraph (3),
or (ii)a private foundation which is not an operating foundation
(as defined in subsection (j) (3), except as provided in paragraph
(3), or (B)any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes described in
section 170(c)(2)(b).

Section 4945 of the Code imposes a tax on the foundation on
each "taxable expenditure" as defined in section 4945(d).
Section 4945(d) (4) of the Code provides that for purposes of this
section, the term "taxable expenditure" means any amount paid or
incurred by a private foundation as a grant to an organization
unless (A) such organization is described in paragraph
(1),(2),or(3) of section 509(a) or is an exempt operating
foundation (as defined in section 4940(d)(2)), or (B) the private
foundation exercises expenditure responsibility with respect to
such grant in accordance with subsection (h).

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Based upon the above facts, the grants to D from B and C
would not jeopardize D's status under section 509(a)(3) of the
Code. The grants do not change the relationship between D and
the organization it supports and do not cause D to become
controlled by a disqualified person.

Grants to D, an organization described in section 501(c)(3)
of the Code, would serve a charitable purpose within the meaning
of section 170(c)(2)(B) by helping D to build an endowment. D is
not controlled by B and C or by disqualified persons with respect
to B and C. Therefore the grants made by B and C to D would
constitute qualifying distributions within the meaning of section
4942(g) (1).

D has been classified as not a private foundation by reason
of section 509(a)(3) of the Code. Section 4945(d) (4) states that
a grant to an organization described in section 501(c)(3) that
has been classified as not a private foundation is not a taxable
expenditure.

Since neither B nor C is voluntarily terminating its
existence and since there have been no willful, repeated or
flagrant acts giving rise to liability under Chapter 42, no tax
will be imposed under section 507(c) as a result of the grants.

Since D is a public charity within the meaning section
509(a)(3), the transferee liability provisions of section 1.507-
1(b)(8) of the regulations do not apply. However, you should
note that under section 1.507-3(e) of the regulations if D loses
its status under section 509(a)(3) within three years after the
making of a grant, the grant will be treated as a transfer
described in section 507(b)(2) and the provisions of section
1.507-3(a) apply to D.

Accordingly, based on the information furnished, we rule as
follows:

1. After receiving the grants from B and C, D will continue
to be an organization described in section 509(a)(3) of the Code.

2. The grants will constitute qualifying distributions by B
and C under section 4942(g) of the Code.

3. The grants will not constitute taxable expenditures by B
and C under section 4945(d) of the Code.

4. The grants will not result in the imposition of tax on B
and C under section 507(c) of the Code.

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5. The grants will not result in the imposition of
transferee liability on D for taxes under section 1.507-1(b)(8)
of the regulations. You should note the provisions of section
1.507-3(e) of the regulations would apply in the event that D is
reclassified as a private foundation.

We are informing the EP/EO key district office of this
action. Please keep a copy of this ruling with your
organization's permanent records.

This ruling is directed only to the organization that
requested it. Section 6110(k)(3) of the Code provides that it
may not be used or cited as precedent.

Sincerely,

Gerald V. Sack
Chief, Exempt Organizations
Technical Branch 4