PLR 1020025: IRS approved a private foundation's transfer of all assets to another foundation

Plain-English summary

The IRS approved a private foundation's plan to transfer all of its net assets to another private foundation for less than full and adequate consideration. The transfer qualified under IRC § 507(b)(2), so the recipient would not be treated as a newly created organization and would succeed to the transferring foundation's aggregate tax benefit, subject to the regulatory limitation tied to the fair market value of the transferred assets. The IRS also ruled that the transfer would not be self-dealing, a jeopardizing investment, or a taxable expenditure, provided the required Form 990-PF information reporting was satisfied. The transfer would not adversely affect either organization's tax-exempt status. After the transfer, the foundation could voluntarily terminate without section 507(c) tax because it would have no assets.

Ruling snapshot

• Question: Could a private foundation transfer all of its assets to another private foundation and then terminate without adverse tax consequences?
• Outcome: Approved
• Key authorities: IRC §§ 501(c)(3), 507(a)(1), 507(b)(2), 507(c), 4941, 4944, 4945, and 6110(k)(3); Treas. Reg. §§ 1.507-3, 1.507-4, and 53.4946-1

Full text (IRS public release)

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

Number: 201020025
Release Date: 5/21/2010

Date: 2/26/10
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:

UIL: 507.01-00, 4941.00-00, 4944.00-00, 4945.00-00
Legend:

N =
B =
C =
D =

Dear :

This is in response to your ruling request regarding the proper treatment of a transfer of all of
your net assets to another private foundation under sections 501, 507, 4941, 4944, and 4945 of
the Internal Revenue Code (“Code”).

Facts:

You are an irrevocable charitable trust that is recognized as an organization described in section
501(c)(3) of the Code and classified as a private foundation under section 509(a). B, who is
deceased, created you to provide donations for “religious, charitable, scientific, literary and
educational purposes within the United States”. N is a nonprofit corporation that is recognized as
tax-exempt under section 501(c)(3) and classified as a private foundation under section 509(a).

C and D incorporated N to fund charitable, educational, scientific, literary or religious purposes. B’s
daughter, D, and two granddaughters are members of the governing bodies of both organizations.
Since your purposes are similar to N’s, you wish to reduce costs by transferring all of your net
assets to N for less than full and adequate consideration. The governing bodies of both
organizations voted unanimously in favor of the transfer. You represented that you and N are not
effectively controlled by the same person or persons.

You state that neither organization is an operating foundation or has any excess business holdings
within the meaning of sections 4942(j)(3) and 4943 of the Code. In addition, you state that neither
organization has any obligation to exercise expenditure responsibility over outstanding grants
pursuant to section 4945. Finally, you state that the Service has not notified either organization of
any tax imposed by section 507(c) due to any willful or flagrant acts or failures to act.

Rulings Requested:

You have requested the following rulings:

1. Your transfer constitutes a transfer of assets from one private foundation to another private
   foundation pursuant to a plan of liquidation or merger under section 507(b)(2) of the Code, and
   consequently, N will not be treated as a newly created organization.

2. Your transfer will not terminate your private foundation status and will not result in tax imposed
   by section 507(c).

3. N will succeed to your aggregate tax benefit pursuant to section 1.507-3(a)(2)(i) of the Income
   Tax Regulations (“regulations”).

4. Your transfer of assets to N does not constitute an act of self-dealing pursuant to section 4941.

5. Your transfer of assets to N does not constitute a jeopardizing investment within the meaning of
   section 4944.

6. Your transfer of assets to N does not constitute a taxable expenditure within the meaning of
   section 4945(d).

7. Your transfer of assets to N will not adversely affect either organization’s tax-exempt status
   under section 501(c)(3).

8. Your termination after the transfer described above, which will occur pursuant to notification of
   termination under section 507(a)(1), will not result in any tax liability under section 507(c).

Law:

Section 501(c)(3) of the Code provides an exemption from federal tax for organizations that are
organized and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes, no part of the net earnings of which inures to the benefit of any
private shareholder or individual.

Section 507(a)(1) of the Code states 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) and by paying any
termination tax under section 507(c).

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

Section 507(c) of the Code imposes an excise tax equal to the lower of: (1) the aggregate tax
benefits that have resulted from the private foundation's exempt status under section 501(c)(3), or
(2) the value of the net assets of the private foundation on an organization that voluntarily
terminates its private foundation status.

Section 4941(a) of the Code imposes an excise tax on acts of self-dealing between a private
foundation and any of its disqualified persons as defined in section 4946.

Section 4944(a) of the Code imposes a tax on any investment that jeopardizes an exempt
organization’s charitable purpose.

Section 1.507-3(a)(1) of the regulations states that in the case of a significant disposition of
assets to one or more private foundations, within the meaning of paragraph (c) which describes
a section 507(b)(2) of the Code transfer, the transferee organization shall not be treated as a
newly created organization, but shall succeed to those attributes and characteristics of the
transferor organization described in section 1.507-3(a)(2), (3), and (4), which include its
aggregate tax benefit, substantial contributors, and chapter 42 tax and penalty liabilities.

Section 1.507-3(a)(2)(i) of the regulations states that a transferee organization to which this
paragraph applies shall succeed to the aggregate tax benefit of the transferor organization in an
amount determined as follows: Such amount shall be an amount equal to the amount of such
aggregate tax benefit 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 shall be determined as of the time of transfer.

Section 1.507-3(a)(2)(ii) of the regulations states that notwithstanding subdivision (i) of the
subparagraph, a transferee organization which is not effectively controlled (within the meaning of
section 1.482-1(a)(3)), directly or indirectly, by the same person or persons who effectively
control the transferor organization shall not succeed to an aggregate tax benefit in excess of the
fair market value of the assets transferred at the time of the transfer.

Section 1.507-3(a)(3) of the regulations states that, for purposes of section 507(d)(2), in the
event of a transfer of assets described in section 507(b)(2), any person who is a “substantial
contributor” (within the meaning of section 507(d)(2)) with respect to the transferor foundation
will be treated as a “substantial contributor” with respect to the transferee foundation, regardless
of whether such person meets the $5,000-two percent test with respect to the transferee
organization at any time.

Section 1.507-3(a)(4) of the regulations states that if a private foundation incurs a liability for
one or more of the taxes imposed under chapter 42 (or any penalty resulting therefrom) prior to,
or as a result of, making a transfer of assets described in section 507(b)(2) to one or more
private foundations, in any case where transferee liability applies, each transferee foundation
shall be treated as receiving the transferred assets subject to such liability to the extent that the
transferor foundation does not satisfy such liability.

Section 1.507-3(a)(5) of the regulations states that, except as provided in subparagraph (9) of
this paragraph, a private foundation is required to meet the distribution requirements of section
4942 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.

Section 1.507-3(c)(1) of the regulations states that a transfer of assets is described in section
507(b)(2) if it is made by a private foundation to another private foundation pursuant to any
liquidation, merger, redemption, recapitalization, or other adjustment, organization, or
reorganization.

Section 1.507-3(c)(2) of the regulations defines the term “significant disposition of assets to one
or more private foundations” as any disposition or series of dispositions where the cumulative
total of dispositions is 25 percent or more of the fair market value of the net assets of the
foundation at the beginning of the taxable year.

Section 1.507-4(b) of the regulations states that private foundations that make transfers
described in section 507(b)(2) are not subject to the tax imposed under section 507(c) with
respect to such transfers unless the provisions of section 507(a) become applicable.

Section 53.4946-1(a)(8) of the Foundation and Similar Excise Tax Regulations (“regulations”)
states that, for purposes of section 4941 of the Code only, the term “disqualified person” shall not
include any organization which is described in section 501(c)(3) (other than an organization
described in section 509(a)(4)).

Analysis:

Ruling 1:

Section 507(b)(2) of the Code describes a transfer from one private foundation to another
private foundation according to any liquidation, merger, redemption, recapitalization, or other
adjustment, organization, or reorganization. Section 1.507-3(c)(1) of the regulations describes
the terms “other adjustment, organization, or reorganization” as including any partial liquidation or
any other significant distribution of assets to one or more private foundations, other than transfers
for full and adequate consideration or distributions out of current income. The term “significant
disposition of assets to one or more private foundations” is defined by section 1.507-3(c)(2) as
any disposition or series of dispositions where the aggregate value transferred is 25 percent or
more of the fair market value of the net assets of the foundation at the beginning of the taxable
year. Since you are transferring all of your net assets to N, a private foundation, for less than full
and adequate consideration, your proposed transfer is a significant disposition of assets that
qualifies as a transfer under section 507(b)(2). When a private foundation makes a transfer
described in section 507(b)(2) of the Code, the transferee foundation is not treated as a newly
created organization under section 1.507-3(a)(1) of the regulations. Since your transfer is
described in section 507(b)(2), N will not be treated as a newly created organization.

Rulings 2 and 8:

Pursuant to section 1.507-4(b) of the regulations, a private foundation that makes a transfer
described in section 507(b)(2) of the Code is not subject to the tax imposed under section
507(c) with respect to such transfer unless the provisions of section 507(a) become applicable.
As discussed in Ruling 1 above, your transfer will constitute a significant distribution of assets
described in section 507(b)(2). You stated that the Secretary has not notified you of any tax
imposed by section 507(c) due to any willful or flagrant acts or failures to act. Therefore, your
proposed transfer of assets to N under section 507(b)(2) will not terminate your private foundation
status under section 507(a) and does not result in a termination tax imposed by section 507(c).
Thereafter, the voluntary termination of your private foundation status will be a taxable event
within the meaning of section 507(a)(1). However, no tax will be due under section 507(c) since
you will have no assets at the time of the voluntary termination.

Ruling 3:

In the case of a significant disposition of assets to one or more private foundations within the
meaning of section 507(b)(2) of the Code, the transferee organization shall be treated as
possessing those attributes and characteristics of the transferor organization which are described
in subparagraphs (2), (3), and (4) of section 1.507-3(a) of the regulations. As discussed in Ruling 1
above, your transfer is described in section 507(b)(2).

Section 1.507-3(a)(2) states, in part, that a transferee organization to which this paragraph
applies shall succeed to the aggregate tax benefit of the transferor organization. However,
section 1.507-3(a)(2)(ii) states, in part, that a transferee organization that is not effectively
controlled, directly or indirectly, by the same person or persons who effectively control the
transferor organization shall not succeed to an aggregate tax benefit in excess of the fair market
value of the assets transferred at the time of transfer. You represent that the same person or
persons do not effectively control you and N. Therefore, N will succeed to your aggregate tax
benefit in an amount determined by the ratio described in the regulations, not in excess of the fair
market value of the transferred assets at the time of transfer.

Accordingly, N will be treated as possessing your attributes and characteristics as described and
within the limitations of sections 1.507-3(a)(2), (3), and (4) of the regulations.

Ruling 4:

Section 4941(a) of the Code imposes an excise tax on each act of self-dealing between a
disqualified person and a private foundation. Sections 4941 and 1.507-3(a) of the regulations
determine whether the proposed transfer of all of your assets to N will constitute an act of self-
dealing between a private foundation and its disqualified persons, as defined in section 4946.
Under section 53.4946-1(a)(8) of the foundation regulations, a “disqualified person” does not
include organizations that are exempt under section 501(c)(3). Your transfer of assets to N is not
an act of self-dealing because N is recognized by the Service as an organization exempt from tax
under section 501(c)(3).

Rulings 5 and 7:

Section 4944 of the Code imposes a tax on any investment that jeopardizes an exempt
organization’s charitable purpose. Because you will make the transfer to further charitable
purposes and N is exempt under section 501(c)(3), the transfer will not adversely affect either
your or N’s exempt status, nor will it be treated as a jeopardizing investment within the meaning
of section 4944.

Ruling 6:

While a section 507(b)(2) transfer is a grant for which expenditure responsibility ordinarily must
be exercised, section 1.507-3(a)(7) provides generally that section 4945(d)(4) and (h) shall not
apply with respect to any grants made by the grantor during any period in which the grantor has
no assets, except for information reporting on Form 990-PF in the year of the transfer.

Conclusion:

Based on the foregoing, we rule as follows:

1. Your transfer constitutes a transfer of assets from one private foundation to another private
   foundation pursuant to a plan of liquidation or merger under section 507(b)(2) of the Code,
   and consequently, N will not be treated as a newly created organization.

2. Your transfer will not terminate your private foundation status and will not result in tax
   imposed by section 507(c).

3. N will succeed to your aggregate tax benefit pursuant to section 1.507-3(a)(2)(i) of the
   regulations so long as the aggregate tax benefit is not in excess of the fair market value of
   the assets transferred at the time of the transfer.

4. Your transfer of assets to N does not constitute an act of self-dealing pursuant to section
   4941.

5. Your transfer of assets to N does not constitute a jeopardizing investment within the
   meaning of section 4944.

6. Your transfer of assets to N does not constitute a taxable expenditure within the meaning of
   section 4945(d), assuming that you meet your expenditure responsibility information
   reporting requirements on Form 990-PF for the year of the transfer.

7. Your transfer of assets to N will not adversely affect either organization’s tax-exempt status
   under section 501(c)(3).

8. Your termination after the transfer described above, which will occur pursuant to notification
   of termination under section 507(a)(1), will not result in any tax liability under section 507(c).

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

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 by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that there will
be no material changes in these facts. 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. Because it could help resolved questions concerning your federal income tax status,
this ruling should be kept in your permanent records.

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,

Ronald J. Shoemaker
Manager, Exempt Organizations
Technical Group 2

Enclosure
Notice 437