PLR 200003051: Hospital grant does not cause indirect self-dealing

Plain-English summary

A private foundation pledged a grant to a public charity raising money for a new medical facility. The facility operator was considering land owned by a person disqualified with respect to the foundation. The IRS ruled that the grant, which would pass through the charity to the operator, would not be indirect self-dealing under § 4941(d)(1). Its conclusion rested on the operator's independent site selection, a proposed lease at fair market value, and the foundation's lack of control over the charity or use of the grant. The ruling addresses the foundation's grant on those represented facts.

Ruling snapshot

• Question: Would the foundation's grant become indirect self-dealing if the facility operator leased land from a disqualified person?
• Outcome: Approved: the grant would not constitute self-dealing under § 4941(d)(1) on the represented facts.
• Key authorities: IRC §§ 4941(d)(1), 4946(a)(1); Treas. Reg. § 53.4941(d)-1(b)(8), Example 3.

Full text (IRS public release)

200003051

Internal Revenue Service                 Department of the Treasury
Washington, DC 20224
UIL: 4941.04-00
In Reference to: OP:E:EO:T:3
Date: OCT 21 1999

LEGEND:
V =
W =
X =
Y =
Z =

Dear Sir or Madam:

This is in response to a ruling request dated July 22, 1999,
submitted on your behalf by your authorized representatives. You
are seeking rulings on the federal income tax consequences of a
proposed transaction, as more fully set forth below.

X is an organization that has been recognized as exempt from
federal income tax under section 501(c)(3) of the Internal revenue
Code, and is a private foundation described in section 509(a).

Y has been recognized as exempt from federal income tax under
section 501(c)(3) and is classified as a public charity described
in sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code. Of the ten

members of Y’s board of directors, one is a disqualified person
with respect to X.

Z has also been recognized as exempt from federal income tax
under section 501(c)(3) of the Code and classified as a public
charity described in sections 509(a)(1) and 170(b)(1)(A)(iii) of
the Code. Of the twelve members of Z’s board of directors, no
individual is a disqualified person with respect to X.

The mission of X is to assist state charities in developing
their internal capacity to meet present and future needs. X has
historically made grants to charitable organizations in the V area
of the state, where X’s family is a major employer and intimately
involved in community affairs. One family member serves on the
board of Y. This member’s father had served as chairman of the
board of Y.

In the last four years, X has provided over $180,000 to
organizations that provide medical or health services in or around
Y. To continue its support of local medical facilities, X has
pledged $100,000 to Y for the construction of a new medical
facility in V.

At the time of the pledge, Z had not yet chosen a site for the
medical facility, but there was a possibility that Z would select
property owned by W, a disqualified person with respect to X.

The V community currently lacks a hospital that provides
adequate emergency and extended medical care to the residents of
the area since its hospital had earlier declared bankruptcy and was
forced to merge with Z. Through its operation of several regional
health care systems, Z has acquired experience operating a facility
in a rural community such as V. The individuals serving on the
board of Z are not disqualified persons with respect to X and X has
no control over any Board member.

After the merger, Z scaled back the medical services provided
in the V area, offering only urgent care, imaging and minimal
laboratory work. The closest hospital that provides inpatient care
and emergency care is twenty miles away. In addition to limiting
medical services available to residents, local businesses were also
affected by the closure of the hospital. The hospital had been the
largest employer in the area and resulting layoffs brought a
downturn in the local economy.

Z is moving forward with plans to reopen the existing facility
in V to meet local demands, but long-term success of medical
services in the community requires that a new facility be built.
The overall economies of operating a modern and efficient building,
constructed for present day medical services outweigh the benefits
of updating an old facility.

Z investigated the feasibility of building a limited service
hospital in V. The analysis revealed that its network of healthcare
systems and management experience would help to avert the fiscal
problems that occurred with the old hospital.

After the board of Z decided to build a new hospital in the V
area, Y began a fundraising campaign to raise a portion of the
amount needed for construction of the facility. Y was originally
created to raise funds for the V hospital. Now its purpose has
expanded to medical services and healthcare organizations in
general. Although one member of X’s family is a member of the board
of Y, neither X or any group of its disqualified persons controls
Y.

Y has over 100 volunteers soliciting a list of 200 potential
donors to reach its goal. As part of the solicitation process, it
submitted a request to X for a $100,000 grant. Prior to the grant
request, it had been reported in a local newspaper that Z might
consider locating the facility near the interstate highway. X
pledged $100,000 towards the campaign goal, regardless of the
location selected by Z for the new facility.

Z considered several parcels of land on which to locate the
new hospital. To conduct a preliminary search of potential sites
for the facility, Z hired a real estate consultant who was not a
disqualified person with respect to X nor was it directly or
indirectly controlled by X. The consultant was not a vendor to X or
any disqualified person with respect to X. The consultant
recommended seven parcels of land to the Advisory Committee of Z’s
board. Two of the seven parcels recommended are owned by W, a
partnership and a disqualified person with respect to X. The
Advisory Committee forwarded the list of potential sites to Z’s
Stewardship Committee, which made a recommendation to the full
board for final selection.

Although none of the seven properties had been ruled out
initially, it was highly unlikely that the W parcels would be
chosen because Z did not want to lease the land for its new
facility; its preference being to buy a fee outright. However, Z
subsequently contacted W and informed them that after a thorough
analysis, they are considering a long-term lease of one of the two
parcels of land owned by W. Z gave six reasons for choosing the W
parcel: (1) it has freeway visibility with access to a larger
geographical market; (2) all utilities are accessible at the site;
(3) it is located at the north end of town where growth is
occurring and is the closest site to one of Z’s tertiary care
facilities, while maintaining the rural Medicare distance
designation of twenty miles; (4) it is free of contaminants; (5) it
is ready for construction with the least infrastructure costs; and
(6) long-term leasing is now acceptable given the above outlined
economies.

If Z chooses one of the parcels, it will be leased at its fair
market value, as determined by the parties, using independent
appraisers. Over the past several years W has had inquiries from
over fifty businesses that have expressed an interest in leasing
various parcels in the area of the two parcels that Z is
considering.

If Z selects property owned by W for building the new hospital
facility, fulfilling the pledge by X is contingent on the approval
of this ruling request.

Section 4941(a) of the Code imposes a tax on each act of
self-dealing between a disqualified person and a private
foundation.

Section 4941(dad)(1) of the Code, in relevant part, provides
that the term "self-dealing" includes any direct or indirect --

(A) sale or exchange, or leasing, of property between a
private foundation and a disqualified person;

(B) lending of money or other extension of credit between
a private foundation and a disqualified person;

(C) furnishing of goods, services, or facilities between
a private foundation and a disqualified person;

(D) payment of compensation (or payment or reimbursement
of expenses) by a private foundation to a disqualified
person;

(E) transfer to, or for the use by or for the benefit of, a

disqualified person of the income or assets of a private

foundation. -

Section 4946(a)(1) of the Code provides in general that, the
term “disqualified person" means, with respect to a private
foundation, a person who is --

(A) a substantial contributor to the foundation,

(B) a foundation manager (within the meaning of
subsection (b)(1)),

(C) an owner of more than 20 percent of --
(i) the total combined voting power of the
corporation,

(ii) the profits interest of a partnership, or

(iii) the beneficial interest of a trust or
unincorporated enterprise, which is a substantial
contributor to the foundation,

(D) a member of the family (as defined in subsection (d)
of any individual described in subparagraph (A), (B), or
(C).

Section 53.4941(d)-1(b)(5) of the Foundation and Similar
Excise Taxes Regulations provides that an organization is
"controlled" by a private foundation if the foundation or one of
its foundation managers (acting only in such capacity) may, only by
aggregating their votes or positions of authority, require the
organization to engage in a transaction which if engaged in with
the private foundation would constitute self-dealing. Similarly, an
organization is controlled by a private foundation in the case of
a transaction between the organization and a disqualified person,
if such disqualified person, together with one or more persons who
are disqualified persons by reason of such a person’s relationship
(within the meaning of section 4946(a)(1)(C) through (G)) to such
disqualified person, may only by aggregating their votes or
positions of authority with that of the private foundation, require
the organization to engage in such a transaction.

Example (3) of section 53.4941(d)-1(b)(8) of the regulations
provides that:

Private foundation Y made a grant to M University, an
organization described in section 170(b)(1)(A)(ii), for
the purpose of conducting a seminar to study methods for
improving the administration of the judicial system. M
is not controlled by Y within the meaning of subparagraph
(5) of this paragraph. In conducting the seminar, M made
payments to certain government officials. By the nature
of the grant, Y had reason to believe that government
officials would be compensated for participation in the
seminar. M, however, had completely independent control
over the selection of such participants. Thus, such grant
by Y shall not constitute an indirect act of self-dealing
with respect to the government officials.

You have represented that Z hired an independent real estate
consultant to find the best possible location for the facility and
that Z had independent control over the selection of the property
for the medical facility. Z’s ultimate selection of one of the W
properties was based on objective criteria including location,
accessibility to the freeway and related tertiary care facilities,
accessibility of utilities, and cost-effective infrastructure. In
addition, any lease entered into with W would be at arm’s length
and would be based on the fair market value of the property.

You have further represented that X has no control over Y or
over the use that Y makes of the grant funds and has not otherwise
earmarked funds to be used for the benefit of disqualified persons.
Therefore, the grant by X to Y will not constitute an indirect act
of self-dealing. Example 3 of section 53.4941(d)-1(b)(8).

Based on the information submitted and the representations
made therein, we rule as follows:

(1) X’s grant to Y, which will be distributed to Z in
connection with its building program for the V area, does
not constitute an act of self-dealing under the
provisions of section 4941(d)(1) of the Code.

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

Because this ruling may help resolve any questions regarding
your exempt status, you should keep a copy of this ruling letter in
your permanent files.

If you have any questions please call the person whose name
and telephone number appear in the heading of this letter.

Sincerely,

Robert C. Harper, Jr.
Chief, Exempt Organizations
Technical Branch 3