PLR 1132027: IRS approved a private foundation's transfer of all assets to a successor corporation

Plain-English summary

The IRS ruled that a charitable trust could transfer all of its assets and operations, without consideration, to a state not-for-profit corporation that would seek recognition as a section 501(c)(3) private operating foundation. The transfer qualified under section 507(b)(2), so the successor would carry over specified tax attributes and characteristics of the trust. Those carryovers included aggregate tax benefits, substantial-contributor status, and potential liabilities for Chapter 42 excise taxes. The successor would also be treated as the transferor for private-foundation purposes under sections 4940 through 4948 and 507 through 509. The ruling did not determine the successor's exempt status, which it would have to establish separately.

Ruling snapshot

• Question: Could the trust transfer all assets to a successor private operating foundation and preserve the transferor's private-foundation tax attributes and special rules?
• Outcome: approved
• Key authorities: IRC §§ 501(c)(3), 4940, 4942, 4942(j)(3), 507(b)(2), 507(d)(2), 508, 509, and 6110; Treas. Reg. §§ 1.507-3(a)(1) through (4) and (9), and 1.507-3(c)(1) and (2)

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201132027
Release Date: 8/12/2011
Contact Person:

Date: May 17, 2011
identification Number:

UIL: 507.00-00
Telephone Number:

Employer Identification Number:

LEGEND:

City
State
Y

Date 1

Dear

This is in response to your ruling request, dated June 13, 2008, with respect to the proposed
transfer of your assets to a private operating foundation in the manner and under the
circumstances described below.

Facts:

You are organized as a charitable trust, recognized as exempt from federal income tax under
section 501(c)(3) of the Internal Revenue Code (Code), and classified as a private operating
foundation within the meaning of section 4942(j)(3). You operate a life-care retirement facility
for the aged in City, State. To better protect your assets and provide a more clearly
understandable form of business organization, your trustees propose to transfer all of your
assets and operations, for no consideration, to Y, a state not-for-profit corporation, organized on
Date 1. Y will apply for recognition of exemption under section 501(c)(3) and seek classification
as a private operating foundation under section 4942(j)(3). The board of directors of Y will be
the same as your trustees.

Ruling Requested:

You have requested the following ruling:

Y, a state not-for-profit corporation, will be permitted to take advantage of any special
rules or savings provisions under Chapter 42 to the same extent as available to the
present testamentary trust.

Law:

Section 501(c)(3) of the Code provides, in pertinent part, that an organization must be
organized and operated exclusively for religious, charitable, or educational purposes and no
part of its net earnings may inure to the benefit of any private shareholder or individual.
Section 507(b)(2) of the Code provides that in the case of a transfer of assets of any private
foundation to another private foundation pursuant to a liquidation, merger, redemption,
recapitalization, or other adjustment, organization or reorganization, the transferee foundation
shall not be treated as a newly created organization.

Section 4940(a) of the Code generally imposes an excise tax on a private foundation's net
investment income for the taxable year.

Section 4940(e) of the Code provides for a reduction in the excise tax on net investment income
to one percent where a private foundation meets certain distribution requirements.

Section 4940(e)(6) of the Code provides that in the case of a private foundation which is a
successor to another private foundation, the determination of whether the successor foundation
qualifies for the reduced excise tax shall be made by taking into account the experience of the
transferor foundation and the successor foundation.

Section 4942 of the Code generally imposes a tax on the income of a private foundation (other
than an operating foundation under section 4942(j)(3)) for any taxable year, which has not been
distributed before the first day of the second (or any succeeding) taxable year following such
taxable year.

Section 4942(c) of the Code provides that the term "undistributed income" means, with respect
to any private foundation for any taxable year as of any time, the amount by which the
distributable amount for such taxable year exceeds the qualifying distributions made before
such time out of such distributable amount.

Section 4942(i) of the Code provides for a carryover of the amount by which qualifying
distributions during the five preceding taxable years (other than amounts required to be
distributed out of corpus under section 4942(g)(3)) have exceeded the distributable amounts for
such years.

Section 4942(j)(3) of the Code provides in part that the term "operating foundation" means any
organization that makes certain qualifying distributions directly for the active conduct of the
activities constituting the purpose or function for which it is organized. An operating foundation
must meet (i) the "income" test and (ii) either the "assets" test, the "endowment" test or the
“support” test.

Section 1.507-3(a)(1) of the Treasury Regulations (regulations) provides that, in a section
507(b)(2) transfer, a transferee organization will not be treated as a newly created organization.
The transferee organization is treated as possessing those attributes and characteristics of the
transferor organization which are described in section 1.507-3(a)(2), (3) and (4).

Section 1.507-3(a)(2)(i) of the regulations provides that a transferee organization shall succeed
to the aggregate tax benefit of the transferor organization in 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.

Section 1.507-3(a)(3) of the regulations provides, in general, that in the event of a transfer of
assets described in section 507(b)(2) of the Code, any person who is a substantial contributor
(within the meaning of section 507(d)(2)) with respect to the transferor foundation shall be
treated as a substantial contributor with respect to the transferee foundation.

Section 1.507-3(a)(4) of the regulations provides that if a private foundation incurs liability for
one or more of the taxes imposed under chapter 42 (or any penalty resulting there from) prior to,
or as a result of, making a transfer of assets described in section 507(b)(2) of the Code 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)(9)(i) of the regulations provides that if a private foundation transfers all of its
net assets to one or more private foundations that are effectively controlled, directly or indirectly,
by the same person or persons that effectively controlled the transferor private foundation, the
transferee private foundation will be treated as if it were the transferor private foundation for
purposes of sections 4940 through 4948 of the Code and section 507 through 509.

Section 1.507-3(c)(1) of the regulations provides 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. For purposes of section 507(b)(2), the terms “other adjustment, organization or
reorganization" shall include any partial liquidation or any other significant disposition of assets
to one or more private foundations, other than transfers for full and adequate consideration or
distributions out of current income.

Section 1.507-3(c)(2) of the regulations provides that the term "significant disposition of assets
to one or more private foundations" includes any disposition (or series of related dispositions) by
a private foundation to one or more private foundations of 25 percent or more of the fair market
value of the net assets of the transferor foundation at the beginning of the taxable year in which
the transfers occur.

Section 53.4940-1(d) of the Foundations and Similar Excise Tax Regulations (foundation
regulations) provides that gross investment income means the gross amounts of income from
interest, dividends, rents, and royalties received by a private foundation from all sources, but
does not include such income to the extent included in computing the tax imposed by section
511 of the Code.

Section 53.4940-1(f) of the foundation regulations provides that for purposes of the tax imposed
by section 4940 of the Code, there shall be taken into account only capital gains and losses
from the sale or other disposition of property held by a private foundation for investment
purposes.

Rev. Rul. 2002-28, 2002-1 C.B. 941, discusses, among other things, a private foundation's
responsibilities when it transfers all of its assets to one or more effectively controlled private
foundations and gives detailed information as to the applicability of the excise taxes imposed by
sections 4940-4945 of the Code. The ruling presents three situations in which a private
foundation transfers all of its assets to one or more other effectively controlled private
foundations. In Situation Two, the trustees of a private foundation trust created a not-for-profit
corporation to carry on the trust's charitable activities, which the trustees have determined can
be more effectively accomplished by operating in corporate form. All of the trust's assets and
liabilities are transferred to the not-for-profit corporation.

Analysis:

After Y is recognized as an organization described in section 501(c)(3) of the Code and
classified as a private operating foundation under section 4942(j)(3), you will transfer, for no
consideration, 100 percent of your assets to Y. Our evaluation of the facts and circumstances in
your ruling request indicates that the proposed transfer of all of your assets to Y would be
similar to the facts and circumstances described in Situation Two of Rev. Rul. 2002-28, supra.
Your transfer is described in section 507(b)(2). Therefore, Y would be treated as if it were you
for purposes of Chapter 42 and sections 507 through 509, as outlined below.

SECTION 507

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 will transfer all of your assets to Y, a private foundation, for no consideration
and such transfer will not be a distribution out of current income, your proposed transfer will be
a significant disposition of assets that qualifies as a transfer under section 507(b)(2).

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 above,
your transfer will be described in section 507(b)(2). Accordingly, Y will be treated as possessing
your attributes and characteristics as described in sections 1.507-3(a)(2), (3), (4) and (9).

Under section 1.507-3(a)(2) of the regulations, Y will be treated as possessing your aggregate
tax benefit consistent with section 1.507-3(a)(1) and (2)(i). Under section 1.507-3(a)(3), any
person who is a “substantial contributor’ with regard to you will be treated as a “substantial
contributor” with respect to Y. Finally, under section 1.507-3(a)(4), where transferee liability
applies, Y will be treated as receiving the transferred assets subject to your prior excise tax
liabilities under chapter 42 (and any penalties resulting therefrom), if any, to the extent you did
not previously satisfy those liabilities.

Under section 1.507-3(a)(9)(i) of the regulations, if a private foundation transfers all of its net
assets to another private foundation which is effectively controlled by the same person or
persons which effectively controlled the transferor private foundation, for purposes of Chapter
42 (section 4940 et seq.) and part Il of subchapter F of chapter 1 of the Code (sections 507
through 509) such a transferee private foundation shall be treated as if it were the transferor.
You, a private foundation, will transfer all of your assets to Y, a private foundation that will be
controlled by the same persons that control you. Accordingly, Y will be treated as if it were you
for all private foundation purposes.

SECTION 4940

Section 4940(a) of the Code generally imposes an excise tax on a private foundation's net
investment income for the taxable year. Sections 53.4940-1(d) and (f) of the foundation
regulations state that gross investment income includes interest, dividends, rents, royalties and
capital gains from the sale or other disposition of property held for investment purpose.
Because you will transfer all of your assets to Y, who will be effectively controlled by the same
persons, any excess section 4940 tax that you paid may be used by Y to offset its own section
4940 tax liability. See section 1.507-3(a)(9)(i).

After you transfer all your assets to Y, Y will be treated as your successor for purposes of
section 4940(e)(6) of the Code and will be entitled to take into account your qualifying
distributions experience from certain prior years in determining whether it satisfies the
requirements of section 4940(e) for the reduced rate of tax.

SECTION 4942

Section 4942 of the Code generally imposes a tax on the undistributed income of a private
foundation (other than an operating foundation under section 4942(j)(3)) for any taxable year.
Since you will transfer all of your assets to Y, who will be effectively controlled by the same
persons, Y will be treated as though it were you under section 1.507-3(a)(9)(i) of the regulations.
Therefore Y will assume all obligations with respect to your “undistributed income’ within the
meaning of section 4942(c), if any, and Y will reduce its own distributable amount under section
4942 by the amount of your excess qualifying distributions under section 4942(i).

Conclusion:

Based on the foregoing, we rule as follows:

Y will be permitted to take advantage of any special rules or savings provisions under
Chapter 42 to the same extent as available to you.

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 assumes that Y will apply for recognition of exemption under section 501(c)(3) of the
Code and seek classification as a private operating foundation under section 4942(j)(3);
however, this ruling makes no determination as to the exempt status of Y. Y must obtain its own
determination letter recognizing it as a tax-exempt entity.

This ruling is based on the understanding there will be no material changes in the facts upon
which it is based. Any changes that may have a bearing upon your tax status should be
reported to the Service. 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 this letter could help resolve any future questions about tax consequences of your
activities, you should keep a copy of this ruling 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 and Declaration of Representative currently on file

with the Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Acting Manager,
Exempt Organizations
Technical Group 1

Enclosure:
Notice 437