PLR 200003049: Foundation asset transfer does not trigger termination tax or self-dealing

Plain-English summary

A private foundation proposed to transfer all its net assets to a new private foundation in another state. The new foundation would pursue the same charitable work under the same managers, and the original foundation planned to dissolve afterward. The IRS ruled that the transfer would be a reorganization under § 507(b)(2) and would not terminate the original foundation's private foundation status or trigger § 507(c) tax. It also ruled that the transfer would not be self-dealing or a taxable expenditure. These conclusions relied in part on the foundation having no outstanding grants requiring expenditure responsibility.

Ruling snapshot

• Question: What tax consequences would follow the foundation's transfer of all net assets to a commonly managed foundation?
• Outcome: Approved: the transfer qualified under § 507(b)(2) and did not trigger the specified taxes.
• Key authorities: IRC §§ 507, 4940, 4941, 4945; Treas. Reg. §§ 1.507-1(b)(7), 1.507-3(a)(9).

Full text (IRS public release)

SIN: 507.00-00                              200003049
Internal Revenue Service           Department of the Treasury
                                   Washington, DC 20224

                                   Contact Person
                                   Telephone Number

                                   In Reference to:
                                   OP:E:EO:T:4
                                   Date: OCT 19 1999

Legend:
B=
C=
D=

Dear Sir or Madam:

This is in response to your letter dated April 8, 1999, in
which you requested certain rulings with respect to the proposed
transfer of all of the net assets of B to C.

B is exempt under section 501(c)(3) of the Code and is
classified as a private foundation under section 509(a).

We have determined that C is exempt under section 501(c)(3)
of the Code and is classified as a private foundation under
section 509(a) in separate correspondence.

B is organized and operated to make charitable contributions
to other organizations provided that such organizations qualify
as exempt organizations under section 501(c)(3) of the Code. The
officers and directors of B have determined that its operation
can be better accomplished and more conveniently administered if
transferred to the state of D. B plans to transfer all of its
net assets to C, a newly created foundation that is located and
incorporated in D. C will have the same charitable purposes as B
and will continue to carry on B's charitable activities.
Thereafter, B will dissolve. B will not engage in any activity
or have legal or equitable title to any assets following the
transfer of its net assets.

The management of B and C is in the hands of the same
parties. B and C are controlled by an interlocking Board of
Directors.

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B represents that it does not have any outstanding grants
with respect to which it is required to exercise expenditure
responsibility under section 4945 of the Code.

B has not notified the Service that it intends to terminate
its private foundation status, nor has B ever received
notification that its status as a private foundation has been
terminated. Furthermore, B has not committed willful repeated
acts or failures to act or a willful and flagrant act or failure
to act giving rise to a termination pursuant to section 507(a)(2)
of the Code.

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 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
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), as applicable.

Section 1.507-3(a)(5) of the regulations provides that,
except as provided in section 1.507-3(a)(9) (which only relates
to 507(b)(2) transfers where all net assets are transferred to
one or more controlled private foundations), a private foundation
is required to meet the distribution requirements of section 4942
of the Code for any taxable year in which it makes a section
507(b)(2) transfer of all or part of its net assets to another
private foundation. Such transfer shall itself be counted toward

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satisfaction of the requirements to the extent the amount
transferred meets the requirements of section 4942(g).

Section 1.507-3(a)(9)(i)and(iii) of the regulations provides
that if a private foundation transfers all of its net assets to
another private foundation that is effectively controlled (within
the meaning of section 1.482-1(a)(3) of the regulations) by the
same or persons who effectively controlled the transferor
private, the transferee shall be treated as if it were the
transferor for purposes of Chapter 42 and sections 507 through
509 of the Code.

Section 1.507-3(b) of the regulations provides that since a
transfer of assets, pursuant to any liquidation, merger,
redemption, recapitalization, or other adjustment, organization
or reorganization to an organization not described in section
501(c)(3) (other than an organization described section
509(a)(4)) or section 4947, is a taxable expenditure under
section 4945(d)(5), in order for such transfer of assets not to
be a taxable expenditure, it must be to an organization described
in section 501(c)(3) (other than an organization described in
section 509(a)(4)) or treated as described in section 501(c)(3)
under section 4947.

Section 4940(a) of the Code imposes a tax on the net
investment income of private foundations.

Section 4941(a) of the Code imposes a tax on each act of
self-dealing between a disqualified person and a private
foundation. The rate of tax shall be equal to 5 percent of the
amount involved with respect to the act of self-dealing for each
year (or part thereof) in the taxable period.

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).

Section 4945(h) of the Code provides that expenditure
responsibility referred to in subsection (d)(4) means that the
private foundation is responsible to exert all reasonable efforts
and to establish adequate procedures (1) to see that the grant is
spent solely for the purpose for which made, (2) to obtain full

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and detailed reports with respect to such expenditures, and (3)
to make full and detailed reports to the Secretary.

Section 53.4945-5(b)(2)(i) of the Foundation and Similar
Excise Taxes Regulations provides, in part, that before making a
grant to an organization with respect to which expenditure
responsibility must be exercised under this section, a private
foundation should conduct a limited inquiry concerning the
potential grantee. Such inquiry should be complete enough to
give a reasonable man assurance that the grantee will use the
grant for the proper purposes.

Section 53.4945-5(b)(7)(i) of the regulations refers to the
rules relating to the extent to which the expenditure
responsibility rules contained in section 4945(d)(4) and (h), and
this section apply to transfers of assets described in section
507(b)(2).

Based upon the above facts, the transfer of the net assets
of B to C will allow C to continue the same charitable purpose
and activities previously conducted by B. Moreover, C will be
controlled by the same governing body that controlled B.

Since B is not terminating its existence and since there
have been no willful, repeated or flagrant act giving rise to
liability under Chapter 42, no tax will be imposed on B under
section 507(c) as a result of the transfer of assets from B to C.

Since C should be treated as if it is B for the purposes of
Chapter 42, the transfer of assets from B to C will not impose
additional tax under section 4940 and will not be an act of self-
dealing under section 4941 of the Code.

Since B has no outstanding grants with respect to which it
is required to exercise expenditure responsibility, B will not be
obligated to satisfy the expenditure responsibility requirement
of section 4945(d)(4) of the Code, and the transfer of assets to
C will not be a taxable expenditure under section 4945 of the
Code.

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

1. The transfer of assets from B to C will constitute a
transfer of assets pursuant to a reorganization under section
507(b)(2) of the Code and C will not be treated as a newly
created organization.

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2. B's transfer of assets will not result in the termination
B's status as a private foundation under section 507(a) of the
Code and will not result in the imposition of tax under section
507(c) of the Code.

3. B's transfer of assets will not be an act of self-dealing
under section 4941 of the Code.

4. B's transfer of assets will not be a taxable expenditure
under section 4945 of the Code.

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