PLR 200229053: Foundation may transfer all assets to successor foundation

Plain-English summary

A private foundation organized as a trust proposed to transfer all its assets to a nonprofit corporation that would continue its charitable work. The IRS ruled that the transfer would qualify under section 507(b)(2) and would not terminate the trust's private foundation status or trigger the section 507(c) termination tax. The recipient would succeed to the trust's aggregate tax benefit. The transfer would be neither self dealing nor a taxable expenditure, and the trust would not need to exercise expenditure responsibility for the assets transferred. These rulings assumed that the recipient would be recognized as a section 501(c)(3) organization classified as a private foundation.

Ruling snapshot

• Question: What happens when the trust transfers all its assets to a successor private foundation?
• Outcome: Approved, assuming the recipient receives the stated tax status
• Key authorities: IRC §§ 507(b)(2), 4941, 4945

Full text (IRS public release)

Significant Index No. 507.00-00

DEPARTMENT OF THE TREASURY 200229053

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: APR 25 2002 Contact Person:

Identification Number:

Telephone Number:
(202) 283-8954

T: EO: B4

Employer Identification Number:

Legend:
B=
C=

Dear Sir or Madam:

This is in response to your letter dated January 10, 2002, in which you requested certain rulings with respect to a proposed transfer of all of the assets of B to C.

B was originally created as a trust for the purpose of making charitable contributions to other organizations that are exempt under section 501(c)(3) of the Internal Revenue Code. B is recognized as exempt under section 501(c)(3) of the Code and classified as a private foundation under section 509(a). C is in the process of preparing a Form 1023 application to be filed with the Service seeking recognition of exempt status under section 501(c)(3) of the Code and classification as a private foundation under section 509(a)

B is managed and controlled by four trustees. The trustees have decided to approve a plan under which B would transfer all of its assets to C. Under the plan, C would be the surviving entity. The trustees have determined that B’s purposes would be more effectively carried out through C, a nonprofit corporation. Furthermore, use of the corporate form would better protect the trustees from liability, thereby facilitating the recruitment of qualified trustees. After the transfer of assets to C, C will continue the charitable activities previously conducted by B. Three of the four trustees of B will serve as trustees of C following the transfer.

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 stated that it has not committed willful repeated acts or failures to act or a

200229053

willful and flagrant act (or failure to act) giving rise to liability for tax under Chapter 42.

Section 507(a) of the Code states, 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 have 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 tax on an organization that terminates its private foundation status under section 507(a) of the Code.

Section 1.507-1(b)(6) of the Income Tax Regulations provides that if a private foundation transfers all or part of its assets to one or more other private foundations pursuant to a transfer described in section 507(b)(2) of the Code, such transferor foundation will not have terminated its foundation status under section 507(a)(1).

Section 1.507-1(b)(7) of the 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)) by a private foundation (whether or not any portion of such 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) is applicable.

Section 1.507-3(a)(2)(i) of the regulations provides that a transferee organization, in the case of a transfer described in section 507(b)(2) of the Code, shall succeed to the aggregate tax benefit of the transferor organization in an amount equal to the amount of such aggregate tax benefit of the transferor organization, multiplied by a fraction the numerator of which is the fair market value of the assets (less encumbrances) transferred to such transferee and the denominator of which is the fair market value of the assets of the transferor (less encumbrances) immediately before the transfer. Fair market value is determined at the time of transfer.

Section 1.507-3(a)(9)(i) of the regulations provides that, if a transferor private foundation transfers assets to a private foundation which is effectively controlled (within the meaning of section 1.482-1A(a)(3)), directly or indirectly, by the same person or persons who effectively control the transferor private foundation, the transferee foundation will be treated as if it were the transferor foundation, for purposes of sections 4940 through 4948 and sections 507 through 509 of the Code. The transferee is treated as the transferor in the proportion which the fair market value of the transferor's assets that were transferred bears to the fair market value of all of the assets of the transferor immediately before the transfer.

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Section 1.507-3(d) of the regulations provides that unless a private foundation gives notice under section 507(a)(1) of the Code, a transfer of assets described in section 507(b)(2) of the Code will not constitute a termination of the transferor’s private foundation status.

Section 1.507-4(b) of the regulations provides that the tax on termination of private foundation status under section 507(c) of the Code does not apply to a transfer of assets pursuant to section 507(b)(2) of the Code unless the provisions of 507(a) become applicable.

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

Section 4945 of the Code imposes tax upon a private foundation's making of any taxable expenditure under section 4945(d).

Section 4945(d)(4) of the Code defines the term taxable expenditure to include any amount paid or incurred by a private foundation as a grant to an organization unless (A) the organization is described in subparagraphs (1), (2), or (3) of section 509(a) of the Code or is an exempt operating foundation as defined in section 4940(d)(2) of the Code, or (B) the private foundation exercises expenditure responsibility with respect to such grant in accordance with section 4945(h) of the Code. The exercise of expenditure responsibility requires the foundation that makes the transfer to keep detailed records of the way the payment is spent by the recipient foundation.

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

Section 4946(a)(1) of the Code defines the term “disqualified person” as a person who is a substantial contributor to a private foundation, a foundation manager, an owner of more than 20% of a corporation or partnership which is a substantial contributor to the private foundation, a family member of persons described above, or a corporation, partnership, trust or estate of which persons described above own more than 35% of the combined voting power.

Section 53.4945-5(b)(7)(i) of the Foundation and Similar Excise Taxes 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).

Section 53.4945-6(c)(3) of the regulations provides that a transfer of assets of a private foundation under section 507(b)(2) of the Code is not a taxable expenditure if such transfer is to an organization described in section 501(c)(3) (other than an organization described in section 509(a)(4)) or treated as so described under section 4947(a)(1).

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Section 53.4946-1(a)(8) of the regulations provides that, for purposes of section 4941, the term “disqualified person” does not include any organization described in section 501 (c)(3) (other than an organization described in section 509(a)(4)).

Under section 507(b)(2) of the Code, in the case of a transfer of assets of any private foundation 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 newly created organization. Thus, the transfer by B to C will constitute in the aggregate an “adjustment, organization, or reorganization” within the meaning of section 507(b){2). Accordingly, the transfer by B to C will not be treated as a transfer to a newly created organization.

Because B is not terminating its existence and assuming there has 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.

Because B is transferring all of its assets to C , and B and C are effectively controlled by the same persons, C will be treated as B. The transfer will be treated as not having taken place for expenditure responsibility purposes under section 4945(h) of the Code. Thus, the transfer will not be a taxable expenditure under section 4945(d)(4). Therefore, B need not exercise expenditure responsibility with regard to the merger.

Because B, as an organization described in section 501(c)(3) of the Code, is not a disqualified person with respect to C, the transfer of assets to C will not constitute an act of self- dealing within the meaning of section 4941 of the Code.

Because the proposed transfer is described in section 507(b)(2) of the Code, C, as transferee, will not be treated as a newly created organization. It will instead be treated as a possessing all of the attributes and characteristics of the transferor, B, because C will be receiving all of B’s net assets.

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

1. The transfer of the assets of B to C will be a transaction described in section 507(b)(2) of
   the Code.

2. The transfer of the assets of B to C will not result in the termination of B’s private
   foundation status.

3. The transfer of the assets of B to C will not result in the imposition of tax under section
   507(c) of the Code.

4. C will succeed to all of B’s aggregate tax benefit pursuant to section 1.507-3(a)(2) of the
   regulations.

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5. The transfer of the assets of B to C will not be an act of self-dealing under section 4941
   of the Code.

6. The transfer of the assets of B to C will not be a taxable expenditure under section 4945
   of the Code, and B will not be required to exercise expenditure responsibility with respect to any of the assets transferred to C.

These rulings are issued on the assumption that C will be recognized as exempt under section 501(c)(3) of the Code and classified as a private foundation under section 509(a).

We are informing the TE/GE office of this action. Please keep a copy of this ruling in 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.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely,

Gerald V. Sack
Manager, Exempt Organizations
Technical Group 4