PLR 200030028: Healthcare charities' merger preserves exemption and public charity status

Plain-English summary

Two exempt organizations that raised funds and supported healthcare services proposed a merger, with one organization surviving. They represented that the survivor would carry on both organizations' charitable work while reducing fundraising costs. The IRS ruled that the merger would not harm the survivor's section 501(c)(3) exemption or its public charity classification. It also ruled that transfers of liabilities, assets, services, and personnel under the merger would not create unrelated business taxable income or recognized gain or loss under sections 511 through 514. The rulings assumed no material change in the submitted facts.

Ruling snapshot

• Question: Would the healthcare organizations' merger preserve exemption and public charity status without creating unrelated business income or gain?
• Outcome: Approved on the represented facts.
• Key authorities: IRC §§ 170(b)(1)(A)(vi), 501(c)(3), 509(a)(1), and 511 through 514.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Number: 200030028
Date: APR 27 2000
S.I.N. # 501.03-11
Contact Person:
ID Number:
Telephone Number:
Employer Identification Number:

Legend:
M=
T=
N=
O=
V=
P=
R=

Dear Sir or Madam:

This is in response to your letter requesting rulings regarding the federal tax consequences associated
with the transactions described below.

M is a T nonprofit corporation and is recognized as exempt from federal income tax under section
501(a) of the Internal Revenue Code (the Code) as an organization described in section 501(c)(3) of the
Code. M is classified as other than a private foundation within the meaning of section 509(a) of the
Code. The sole member of M is N, an entity which is also exempt under section 501(c)(3) of the Code.

O is a T nonprofit corporation and is recognized as exempt from federal income tax under section
501(a) of the Code as an organization described in section 501(c)(3) of the Code. O is classified as
other than a private foundation within the meaning of section 509(a) of the Code. N is also the sole
member of O . Prior to V , M and O were parts of distinct healthcare systems. O was one of several
health care related entities, including an acute care hospital and a corporate parent of several nursing
homes in T , which shared N as a common corporate member. M was part of a separate system which
included P , an acute care hospital, which shared R as a common corporate member. In V , N became
the sole corporate member of M and P .

R has recently been dissolved. It is proposed that M will merge with and into O , with O being the
surviving corporate entity. N will be the sole member of O . You indicate that M and O have determined
that a merger of their two organizations would enhance efficiency and reduce costs in the fund raising

efforts of the organizations to support health care services in their respective communities. Following
the proposed merger, O will continue the charitable activities of each of the merging organizations with, it
is believed, the same broad based public financial support.

You represent that the merger will be accomplished pursuant to state law. The Plan of Merger has
been approved and adopted by the Boards of Directors of M and O . You have submitted a copy of your
Plan of Merger and indicate that it will be effective upon the filing with and approval of the appropriate
state agencies and the state court after a hearing upon notice to the state Attorney General. On the filing
of the Certificate of Merger, the individual corporate existence of M will cease and O will survive. The
proposed Certificate of Merger does not change the charitable purposes of M. You state that once the
merger is accomplished, O will carry on all of the fund raising and health care support services and
related activities currently conducted by M and O .

Based on the foregoing facts, you have requested the following rulings:

1. The proposed merger of M into O will not adversely affect the tax exempt status of O under
section 501(c)(3) and subsequent to the proposed merger O will continue to be tax exempt
under section 501(c)(3) of the Code.

2. Subsequent to the proposed merger of M into O, O will retain its classification as a public charity
pursuant to the provisions of sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code.

3. To the extent the liabilities, funds, assets, services or personnel are transferred to O by M
pursuant to the merger, such transfers will not generate unrelated business taxable income or
result in the recognition of any gain or loss under sections 511 through 514 of the Code.

Section 501(a) of the Code provides an exemption from federal income tax for organizations
described in section 501(c)(3), including organizations that are organized and operated exclusively for
charitable, educational or scientific purposes.

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations (Regulations) provides that the term
“charitable” is used in section 501(c)(3) of the Code in its generally accepted legal sense.

In the general law of charity, the promotion of health is considered to be a charitable purpose.
Restatement (2nd), Trusts, Sections 368 and 372, IV Scott on Trusts (3rd ed. 1967), Sections 368 and
372.

Section 511(a) of the Code imposes a tax on the unrelated business income tax of organizations
described in section 501(c).

Section 512(a)(1) of the Code defines unrelated business taxable income as the gross income
derived by an organization from any unrelated trade or business regularly carried on by it, less the
allowable deductions which are directly connected with the carrying on of the trade or business, with
certain modifications.

Section 512(b)(5) of the Code defines the term “unrelated business taxable income” as the gross
income derived from any unrelated trade or business regularly carried on by the organization, less
allowable business expenses directly connected with the carrying on of such trade or business. This
section excludes all gains and losses from the sale, exchange, or other disposition of property other than
(1) stock in trade or other property which would be property includable in inventory if on hand at the end
of the year, and (2) property held primarily for sale to customers in the ordinary course of the
organization’s trade or business.

Section 513(a) of the Code defines unrelated trade or business as any trade or business the conduct
of which is not substantially related (aside from the need of the organization for funds or the use it makes
of the profits derived) to the exercise of the organization's exempt purposes or functions.

Section 1.513-1(d)(2) of the Regulations provides, in part, that a trade or business is related to
exempt purposes only where the conduct of the business activities has a causal relationship to the
achievement of exempt purposes; and it is substantially related for purposes of section 513 only if the
causal relationship is a substantial one. Thus, for the conduct of trade or business from which a
particular amount of gross income is derived to be substantially related to purposes for which exemption
is granted, the production or distribution of goods or the performance of the services from which the
gross income is derived must contribute importantly to the accomplishment of exempt purposes.

Section 514(a) of the Code provides for income from unrelated debt-financed property to be included
in the computation of unrelated business taxable income.

Sections 514(b)(1)(A)(i) and (ii) of the Code in defining debt-financed property exclude any property
substantially all the use of which is substantially related (aside from the need of the organization for
income or funds) to the exercise or performance of such organization of its charitable, educational, or
other purpose or function constituting the basis for its exemption under section 501, or (ii) any purpose
to which clause (i) does not apply, to the extent that its use is so substantially related.

M and O have determined that a merger of their two organizations would enhance efficiency and
reduce costs in the fund raising efforts of the organizations to support health care in their respective
communities. You represent that when M and O merge, they will function as one entity with one staff. O
will carry out all of the fund raising and health care support services and related activities currently
conducted by M and O . You further state that O ’s Articles of Incorporation indicate, among other
things, that the objects and purposes of O shall be exclusively within such purposes enumerated in
section 501(c)(3) of the Code with the ultimate goal of fostering and facilitating the delivery of health care
services to the community by developing financial programs and soliciting contributions for and on behalf
of the exempt entities in your health care system.

Accordingly, based on the facts and representations set forth, we rule as follows:

1. The proposed merger of M into O will not adversely affect the tax exempt status of O under
section 501(c)(3) of the Code and subsequent to the proposed merger O will continue to be tax
exempt under section 501(c)(3) of the Code.

2. Subsequent to the proposed merger of M into O , O will retain its classification as a public
charity pursuant to the provisions of sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code.

3. To the extent the liabilities, funds, assets, services or personnel are transferred to O by M
pursuant to the merger, such transfer will not generate unrelated business taxable income or
result in the recognition of any gain or loss under sections 511 through 514 of the Code.

These ruling are based on the understanding that there will be no material changes in the facts upon
which they are based.

These rulings do not address the applicability of any section of the Code or Regulations to the facts
submitted other than with respect to the sections described.

These rulings are directed only to the organization that requested it. Section 6110(j)(3) of the Code
provides that they may not be used or cited as precedent.

We are informing your key District Director of this action. Please keep a copy of this ruling in your
permanent records.

Sincerely,

(signed) Marvin Friedlander
Manager, Exempt organizations
Technical Group 1