PLR 200545048: Foundation asset split avoids transfer and termination taxes

Plain-English summary

A private foundation planned to divide all its assets between two related private foundations to resolve disagreements about its management. The IRS ruled that the transfers fell under section 507(b)(2), did not themselves terminate the transferring foundation's status, and would not trigger the foundation termination tax. The transfers also would not produce investment income, self-dealing, or taxable expenditures, and the foundation did not have to exercise expenditure responsibility over them. The recipients would receive proportionate shares of any excess qualifying distributions. The transferring foundation still had to file for its dissolution year, but later annual returns would not be required while it had no assets or activities; reasonable costs it incurred for the transfers could count as qualifying distributions.

Ruling snapshot

• Question: What taxes, distribution rules, and filing duties applied to the foundation's planned transfer of all its assets?
• Outcome: Approved the requested transfer treatment, subject to the stated conditions.
• Key authorities: IRC §§ 507(b)(2), 507(c), 4940, 4941, 4942, 4945, 6033, 6043(b).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 200545048
Release Date: 11/10/2005
SE:T:EO:RA:T

Date: August 17, 2005
Contact Person:

Identification Number:

Telephone Number:
UIL Number: 507.00-00, 501.03-02, 509.03-00, 4940.00-00, 4941.04-00, 4942.03-05, 4944.00-00, 4945.04-06

Employer Identification Number:

Legend:

P=
S=
T=

Dear -------------------:

This is in response to a letter from your authorized representative requesting a ruling on P’s behalf concerning P's proposed transfers of all of its assets to S and T pursuant to section 507(b)(2) of the Internal Revenue Code.

Facts

P, S, and T are exempt from federal income tax under section 501(c)(3) of the Code and are private foundations under section 509(a), which are effectively controlled by the same persons.
Over time, differences of opinion have arisen among the Board members of P as to the management and charitable activities of P. To resolve this discord, P proposes to transfer fifty-four percent of its assets to S, and forty-six percent to T. After the transfers, P will notify the Service of its intent to terminate its private foundation status under section 509(a) pursuant to section 507(a)(1). P has no expenditure responsibility grants outstanding under section 4945(h).

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Rulings Requested

The following rulings are requested:

(1) P’s transfers to S and T will not result in termination of P’s private foundation status under section 507(a) of the Code, but instead will constitute a transfer described in section 507(b)(2).

(2) P's status as a private foundation will not terminate because of the transfer of its assets to S and T, and P will not be liable for any tax imposed by section 507(c) of the Code on termination of a private foundation.

(3) P's transfers to S and T will not give rise to any net investment income or constitute any other taxable sale or disposition under section 4940 of the Code.

(4) P's transfers to S and T will not constitute any act of self-dealing under section 4941 of the Code by P, or P’s foundation manager, as defined in section 4946.

(5) Upon P's transfers to S and T, they will each succeed to a portion of P's excess qualifying distributions, if any, based upon each transferee foundation's proportionate share of P's total assets received, under section 4942(i) of the Code, and the record-keeping requirements of section 4942(g)(3)(B) will not apply to P during any period in which P has no assets.

(6) P's transfers of all of its assets to S and T will not constitute taxable expenditures under section 4945 of the Code.

(7) P will not be required to exercise any expenditure responsibility under section 4945(h) of the Code with respect to its transfers of all of its assets to S and T, because P will have disposed of all of its assets.

(8) P will be required under section 6043(b) of the Code to file its annual return for the year of its dissolution.

(9) P and its foundation managers will not be required to file the annual information return required under section 6033 of the Code for any tax years following the tax year in which the last transfers of all of P's assets occur if during such subsequent tax years P has neither legal nor equitable title to any assets nor engages in any activities.

(10) The payments of legal, accounting, and other expenses, if reasonable in amount, incurred by P in connection with this private letter ruling request and in carrying out the transfers of assets, will be considered qualifying distributions under section 4942(g)(1)(A) of the Code.

(11) The payments of legal, accounting, and other expenses, if reasonable in amount, incurred by P in connection with this private letter ruling request and in carrying out the transfers of assets, will not constitute taxable expenditures under section 4945 of the Code or acts of self- dealing under section 4941.

Law

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Section 501(c)(3) of the Code provides for the exemption from federal income tax of nonprofit organizations organized and operated exclusively for the charitable and/or other exempt purposes stated in that section.

Section 509(a) of the Code describes organizations exempt from federal income tax under section 501(c)(3) are private foundations subject to the provisions of Chapter 42 of the Code.

Section 507(a)(1) of the Code and section 1.507-1(b)(1) of the Income Tax Regulations provide that a private foundation may voluntarily terminate its private foundation status by submitting to the Internal Revenue Service a statement of its intention to voluntarily terminate its private foundation status pursuant to section 507(a)(1) of the Code and by paying any termination tax under section 507(c) of the Code.

Section 507(c) of the Code impose excise tax on a private foundation which voluntarily terminates its private foundation status under section 507(a)(1). This section 507(c) tax is equal to the lower of: (a) the aggregate tax benefits that have resulted from the private foundation's exempt status under section 501(c)(3) or (b) the value of the net assets of the private foundation.

Section 507(b)(2) of the Code concerns the transfer of assets by one private foundation to one or more other private foundations, and provides that each transferee private foundation shall not be treated as a newly created organization.

Section 1.507-3(c)(1) of the regulations indicates that a transfer under section 507(b)(2) of the Code includes a transfer of assets from one private foundation to one or more other private foundations pursuant to any reorganization, including a significant disposition of 25% or more of the transferor foundation's assets.

Section 1.507-3(a)(1) of the regulations provides that, in a transfer of assets from one private foundation to one or more private foundations pursuant to a reorganization, each transferee private foundation shall not be treated as a newly created organization, but shall succeed to the transferor's aggregate tax benefits under section 507(d) of the Code.

Section 507(d) of the Code indicates that the aggregate tax benefits of a private foundation refer to the value of its exemption from federal income tax and of the deductions taken by its donors during its existence.

Section 1.507-1(b)(9) of the regulations provides that a private foundation which transfers all of its net assets is not required to file annual information returns required by section 6033 of the Code for subsequent tax years after its tax year of such transfer when it has no assets or activities.

Section 1.507-3(a)(5) of the regulations indicates that a transferor private foundation is required to meet its charitable distribution requirements under section 4942 of the Code, even for any tax year in which it makes a transfer of its assets to another private foundation pursuant to section 507(b)(2) of the Code.

Section 1.507-3(a)(7) of the regulations provides that, where a private foundation has transferred all of its assets to another private foundation in a transfer under section 507(b)(2) of the Code, it is not required to exercise expenditure responsibility under section 4945(h) of the Code with respect to such transfer.

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Section 1.507-3(a)(9)(i) of the regulations provides that, if a private foundation transfers assets to one or more private foundations which are effectively controlled directly or indirectly within the meaning of section 1.482-1(i)(4) of the regulations by the same persons who effectively control the transferor foundation, each 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.

Each transferee is treated as its transferor in the proportion which the fair market value of the transferor's assets transferred to the transferee bears to the fair market value of all of the transferor's assets immediately before the transfer.

Section 1.507-3(a)(9)(ii) of the regulations provides that a transfer of assets under section 507(b)(2) of the Code does not relieve the transferor private foundation from filing its own final tax year return as required by section 6043(b) of the Code.

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 under section 507(b)(2) of the Code.

Sections 1.507-1(b)(7) and 1.507-3(d) of the regulations provide that a transferor foundation's transfer of assets under section 507(b)(2) of the Code will not constitute any termination of the transferor foundation's private foundation status under section 509(a) of the Code.

Section 4940 of the Code imposes excise tax on certain investment income of a private foundation.

Section 4941 of the Code imposes excise tax on any act of self-dealing between a private foundation and any of its disqualified persons under section 4946.

Section 53.4946-1(a)(8) of the Foundation and Similar Excise Taxes Regulations provides that, for purposes of self-dealing under section 4941 of the Code, an exempt organization under section 501(c)(3) of the Code is not a disqualified person.

Section 4942 of the Code requires that a private foundation must expend annual qualifying distributions under section 4942(g) for the conduct of exempt purposes.

Revenue Ruling 78-387, 1978-2 C.B. 270, describes the carryover of a transferor private foundation's excess qualifying distributions under section 4942(i) of the Code where the transferor and the transferee foundations are controlled by the same persons under section 1.507-3(a)(9)(i) of the regulations. Under that regulation, the transferee is treated as the transferor so that the transferee can reduce its own distributable amount under section 4942 of the Code by its share of the amount, if any, of the transferor foundation's excess qualifying distributions under section 4942(i) of the Code.

Revenue Ruling 2002-28, 2002-1 C.B. 942, describes the tax effects of a private foundation distributing all of its assets to other private foundations under section 507 of the Code under various situations, where the transferor and the transferee foundations are controlled by the same persons under section 1.507-3(a)(9)(i) of the regulations .

Section 4942 of the Code requires that a private foundation must expend annual qualifying

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

Section 4945(d)(4) of the Code requires that, in order to avoid making a taxable expenditure, a transferor private foundation must exercise expenditure responsibility under section 4945(h) on its grants to another private foundation.

Section 4945(h) of the Code defines expenditure responsibility in terms of the grantor private foundation requiring pre-grant inquiry and post-grant reports as to the grantee private foundation on its uses of the grant.

Section 4945(d)(5) of the Code provides that a taxable expenditure includes any amount expended by a private foundation for purposes other than exempt purposes.

Section 53.4945-6(c)(3) of the regulations allows a private foundation to transfer its assets to exempt organizations under section 501(c)(3) of the Code, including private foundations, pursuant to section 507(b)(2) of the Code, without the transfers being taxable expenditures under section 4945 of the Code.

Section 6033 of the Code provides that exempt organizations under section 501(a) must file an annual return.

Section 6043(b) of the Code provides that exempt organizations under section 501(a) must file an information return on liquidation, dissolution, termination or contraction, if it was exempt for any of its last five years.

Analysis

Ruling Request 1

Under section 1.507-3(d) of the regulations, P's transfers of its assets under section 507(b)(2) of the Code will not terminate P's private foundation status under section 509(a).

Under section 1.507-3(c)(1) of the regulations, a transfer under section 507(b)(2) of the Code includes a transfer of assets from one private foundation to one or more other private foundations pursuant to any reorganization or liquidation, including a significant disposition of 25% or more of the transferor private foundation's assets. Because P will transfer all of its assets, P's transfers will be a significant disposition of its assets under section 1.507-3(c)(1) of the regulations and, thus, will be transfers under section 507(b)(2) of the Code.

Ruling Request 2

Under section 1.507-3(d) of the regulations, P's transfers of its assets under section 507(b)(2) of the Code will not terminate P's private foundation status under section 509(a).

Under section 1.507-4(b) of the regulations, P's transfers of its assets under section 507(b)(2) of

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P's filing of its voluntary notice of intent to terminate its private foundation status under section 509(a) of the Code pursuant to section 507(a)(1) will not result in any termination tax under section

507(c) because, under section 507(e), the value of P's assets after it has transferred all of its assets will be zero.

Ruling Request 3

Under section 4940 of the Code, P's transfers of its assets to S and T will not result in any income or tax under section 4940.

Ruling Request 4

Under section 4941 of the Code, P's transfers of its assets will not be acts of self-dealing because P's transfers will be for exempt purposes under section 501(c)(3) of the Code to organizations S and T, which are exempt from federal income tax under section 501(c)(3) of the Code, and which are not disqualified persons under section 4946 of the Code, for purposes of section 4941 of the Code, pursuant to section 53.4946-1(a)(8) of the regulations.

Ruling Request 5

As in Revenue Ruling 78-387, cited above, after P transfers all of its assets, P's excess qualifying distribution carryover, if any, under section 4942(i) of the Code, will carry over to P's transferees S and T, in proportion to the assets transferred to each, and may be used by each transferee to meet its own distribution requirements under section 4942.

Under section 1.507-3(a)(5) of the regulations, P's recordkeeping requirement under section 4942(g)(3)(B) of the Code, if any, will not apply after P has transferred all of its assets.

Ruling Request 6

Under section 53.4945-6(c)(3) of the regulations, private foundation P can make transfers of its assets pursuant to section 507(b)(2) of the Code to exempt organizations under section 501(c)(3) of the Code, including private foundations, without the transfers being taxable expenditures under section 4945 of the Code. Thus, P's transfers of its assets to S and T will not be taxable expenditures under section 4945 of the Code and will not subject P to tax under that section.

Ruling Reques t 7

Section 1.507-3(a)(7) of the regulations provides that, where a private foundation transfers all of its assets to an exempt organization under section 501(c)(3) of the Code pursuant to section 507(b)(2) of the Code, it has no expenditure responsibility requirement under section 4945(h) of the Code on such transfers. Thus, P will not have to exercise expenditure responsibility under section 4945(h) of the Code with respect to its transfer of all of its assets to S and T.

Ruling Request 8

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Upon P's dissolution, P will be required under section 6043(b) of the Code to file its annual return for the year of such dissolution.

Ruling Request 9

Under section 1.507-1(b)(9) of the regulations, P will no longer be required to file its annual return, Form 990-PF, under section 6033 of the Code for any tax years subsequent to its tax year in which it transfers all of its assets.

Ruling Request 10

Under section 4942(g)(1)(A) of the Code and section 53.4942(a)-3(a)(2)(i) of the regulations, qualifying distributions include the reasonable and necessary administrative expenses paid to accomplish one or more exempt purposes. The legal, accounting, and other necessary expenses incurred to implement P's transfer to S and T, if reasonable in amount, will be paid to further the exempt purposes of S and T and will be qualifying distributions under section 4942(g)(1)(A) of the Code.

Ruling Request 11

Under section 53.4945-6(c)(3) of the regulations, private foundation P can make transfers of its assets pursuant to section 507(b)(2) of the Code to organizations exempt under section 501(c)(3), including private foundations, without the transfers being taxable expenditures under section 4945. Thus, the costs associated with P's transfers of its assets to S and T will not be taxable expenditures under section 4945 and will not subject P to tax under that section.

Under section 4941 of the Code, P's transfers of its assets and payments for costs associated with such transfers will not be acts of self-dealing because P's transfers will be for exempt purposes under section 501(c)(3) to organizations S and T which are exempt from federal income tax under section 501(c)(3) and which are not disqualified persons under section 4946, for purposes of section 4941, pursuant to section 53.4946-1(a)(8) of the regulations.

Conclusion

Accordingly, we rule that:

1. P's transfers of all of its assets to S and T will qualify as transfers under section 507(b)(2) of
   the Code, and will not constitute a termination of P's status as a private foundation under section 509(a) pursuant to section 507(a).

2. P's transfers of all of its assets to S and T will qualify as transfers under section 507(b)(2) of
   the Code, and will not constitute a termination of P's status as a private foundation under section 509(a) pursuant to section 507(a). P's transfers of assets to S and T will not result in tax under section 507(c).

3. P's transfers of its assets to S and T will not result in investment income or tax under section

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   4940 of the Code.

4. P's transfers of its assets to S and T, will not constitute acts of self-dealing and will not
   subject P's foundation managers or disqualified persons to tax under sections 4941(a)(1) or 4941(a)(2) of the Code.

5. As a result of its transfers to S and T, P's excess qualifying distributions carryover under
   section 4942(i) of the Code will be transferred to S and T in proportion to the assets transferred to each. P will not be required to comply with the recordkeeping requirements of section 4942(g)(3)(B) with respect to its transfers after it transfers all of its assets.

6. P's transfers of its assets to S and T will not constitute taxable expenditures or subject P to
   tax under section 4945 of the Code.

7. P will not have to exercise expenditure responsibility under section 4945(h) of the Code with
   respect to its transfers of its assets because P will transfer all of its assets to S and T.

8. P will be required under section 6043(b) of the Code to file its annual return for the year of
   its dissolution.

9. P and its foundation managers will not be required to file the annual information return
   required under section 6033 of the Code for any tax years following the tax year in which the last transfers of all of P's assets occur if during such subsequent tax years P has neither legal nor equitable title to any assets nor engages in any activities.

10. The legal, accounting, and other expenses, if reasonable in amount, incurred by P in
    connection with this private letter ruling request and in carrying out the transfers of assets, will be considered qualifying distributions under section 4942(g)(1)(A) of the Code on the basis that they have been made to achieve the charitable purposes of the grants.

    11. The payments of legal, accounting, and other expenses, if reasonable in amount, incurred
        by P in connection with this private letter ruling request and in carrying out the transfers of assets, will not constitute taxable expenditures under section 4945 or acts of self-dealing under section 4941.

    This ruling is based on the understanding there will be no material changes in the facts upon
    which it is based.

    This ruling does not address the applicability of any section of the Code or regulations to the
    facts submitted other than with respect to the sections described.

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

    This ruling will be made available for public inspection under section 6110 of the Code after
    certain deletions of identifying information are made. For details, see enclosed Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make available for

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public inspection is attached to Notice 437. If you disagree with our proposed deletions, you should follow the instructions in Notice 437.

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.

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Debra J. Kawecki
Manager, Exempt Organizations
Technical Group 1

Enclosure
Notice 437