IRS approves restructuring of a tax-exempt organization into association, union, and foundation entities

Plain-English summary

The IRS approved two parts of a proposed restructuring by a tax-exempt organization. The organization planned to transfer its charitable assets and liabilities to a new § 501(c)(3) public charity, while a § 501(c)(6) association would provide shared administrative services and act as a billing agent for a § 501(c)(5) labor organization. The IRS concluded that the asset transfer would not adversely affect the organization’s exempt status and that the billing arrangement would not jeopardize the association’s exemption, so long as its non-§ 501(c)(6) activities did not become primary activities. The ruling was limited to the described facts and did not resolve the tax consequences of other past, present, or future activities.

Ruling snapshot

• Question: Would the proposed transfer of charitable assets and shared administrative and billing activities preserve the described tax-exempt statuses?
• Outcome: approved
• Key authorities: IRC §§ 501(c)(3), 501(c)(5), 501(c)(6), 509(a), and 6110; Treas. Reg. §§ 1.501(c)(3)-1(b)(4), 1.501(c)(3)-1(c)(1) and (2), 1.501(c)(5)-1(a), and 1.501(c)(6)-1.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201217022 Contact Person:
Release Date: 4/27/2012
Date: February 1, 2012 Identification Number:

U.I.L.: 501.03-00; 501.05.00; Telephone Number:
501.06-03
Employer Identification Number:

Legend:

Association
Foundation
Union

Dear

We have considered your ruling request dated January 12, 2009 as modified by your letters of
November 2, 2010, January 28, 2011, and September 29, 2011 regarding the effect of a
proposed restructuring from an organization tax-exempt under § 501(c)(3) into three new
entities classified as tax-exempt under §§ 501(c)(3), (5), and (6) of the Internal Revenue Code
(“Code”).

Facts:

You are a charitable and educational organization, exempt from federal taxation under

§ 501(c)(3) of the Code and classified as not a private foundation pursuant to § 509(a)(2). Your
membership includes faculty, administrators, researchers, and related professionals at all types
of American higher education institutions, as well as, the general public who support your
mission. You were formed to promote academic freedom and freedom of expression in
academia and in society in general. You are a national organization, although local
autonomous chapters may be formed at individual institutions of higher education.

A primary mission is to develop policy statements on academic freedom and freedom of
expression to include such related issues as quality of higher education, tenure, shared
governance and due process, professional ethics, workplace discrimination, and collective
bargaining. Your activities also include: mediation and litigation on an individual or group basis;
publishing a bi-monthly magazine and offering annual training programs; making grants and
awards to individuals in support of academic freedom; monitoring federal and state legislation
and conducting limited direct and grassroots lobbying; providing incidental member benefits
such as insurance and financial products; and supporting collective bargaining through financial
and operational assistance to collective bargaining chapters.

Your wide-ranging activities are illustrated by your sources of annual revenues. Approximately
eighty-five percent (85%) of your revenues come from membership dues. The balance comes
from grant income, contributions, publication subscriptions and sales, meeting registrations, and
dues paid to a collective bargaining fund by collective bargaining chapters.

You have determined that you can best achieve your broad mission by restructuring to
segregate activities into separate, but related entities. Your restructuring is designed to transfer
some of your current activities into the other entities. You have formed three tax-exempt entities
in which to restructure: Association, a professional association exempt under § 501(c)(6);
Union, a labor organization tax-exempt under § 501(c)(5); and Foundation, a charitable and
educational organization tax-exempt under § 501(c)(3) and classified as a public charity
pursuant to § 509(a)(1). You plan to transfer your existing assets and liabilities to Foundation,
the new § 501(c)(3) public charity, and dissolve as part of the proposed restructuring plan
(“Restructuring”).

Your Restructuring will be guided by a Memorandum of Understanding (“MOU”) and Cost
Sharing Agreement (“Agreement”) between you and the new entities. You represent that all
charitable assets will be retained in the new § 501(c)(3), Foundation. You will transfer all of
your assets and liabilities to Foundation, except your office furniture, equipment, and computer
hardware and software. The entire inventory of these used items of personal property will be
sold to Association at fair market value (“FMV").

As part of the Restructuring, Association will provide administrative functions for Association,
Union, and Foundation pursuant to an Agreement and MOU. This will include Association
acting as billing agent for Union. You will transfer to the new § 501(c)(6), Association,
employees and liabilities going forward related to employment, such as payroll, retirement
plans, and health insurance. You represent that Association’s employees will be shared with
Foundation and Union, with these two entities reimbursing the Association for their respective
shares of the cost. You represent that Foundation will pay only those employment-related
expenses documented by employee timesheets for actual work on § 501(c)(3) activities. A
different allocation will be utilized for certain unfunded liabilities, such as post-retirement health
care coverage for employees who transfer from you to Association as a result of the
Restructuring. In this case, Foundation, as the transferee charity that received your assets and
liabilities, will be responsible for that percentage of the employee’s post-retirement benefit
attributable to his or her time as an employee of you. You represent that all of Association's
non-501(c)(6) activities together will not constitute Association's primary activities.

Requested Rulings:

1. The transfer of assets from you to the successor Foundation will not adversely affect
   your tax-exempt status under § 501(c)(3) of the Code.

2. Association may act as a billing agent for Union pursuant to a cost-sharing agreement
   without jeopardizing Association‘s tax-exempt status under § 501(c)(6) of the Code so
   long as all of Association's non-501(c)(6) activities do not constitute Association's
   primary activities.

Law:

Section 501(c)(3) provides, in part, for the exemption from federal income tax of organizations

organized and operated exclusively for religious, charitable, scientific, or educational purposes
provided no part of the net earnings of which inures to the benefit of any private shareholder or
individual.

Section 501(c)(5) provides for the exemption from federal income tax of labor, agricultural, or
horticultural organizations.

Section 501(c)(6) provides, in part, for the exemption from federal income tax of business
leagues, chambers of commerce, real estate boards, or boards of trade, not organized for profit
and no part of the net earnings of which inures to the benefit of any private shareholder or
individual.

Section 1.501(c)(3)-1(b)(4) of the Income Tax Regulations (“regulations”) provides that an
organization is not “organized exclusively” for one or more exempt purposes unless its assets
are dedicated to an exempt purpose so that upon dissolution, its net assets are distributed for
one or more exempt purposes.

Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated
exclusively” for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more of such exempt purposes specified in section 501(c)(3) of the Code. An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Section 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or
more exempt purposes if its net earnings inure in whole or in part to the benefit of private
shareholders or individuals.

Section 1.501(c)(5)-1(a) provides, in part, that the organizations entitled to exemption from
income tax under § 501(c)(5) have no net earnings inuring to the benefit of any member and
have as their object the betterment of the condition of those engaged in such pursuits.

Section 1.501(c)(6)-1 provides that a business league is an association of persons having some
common business interest, the purpose of which is to promote such common interest and not to
engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the
same general class as a chamber of commerce or board of trade. Thus, its activities should be
directed to the improvement of business conditions of one or more lines of business as
distinguished from the performance of particular services for individual persons.

In Rev. Rul. 71-504, 1971-2 C.B. 231, a medical society tax-exempt under § 501(c)(6) was
denied reclassification as an organization exempt under § 501(c)(3) because of its substantial
non-charitable and non-educational purposes and activities.

In Rev. Rul. 71-505, 1971-2 C.B. 232, a bar association tax-exempt under § 501(c)(6) was

denied reclassification as an organization exempt under § 501(c)(3) because of its substantial
non-charitable and non-educational purposes and activities.

In Better Business Bureau v. U.S., 326 U.S. 279, 283 (1945), the Supreme Court held that the
presence of a single non-charitable or non-educational purpose, if substantial in nature, will
preclude exemption under § 501(c)(3) regardless of the number or importance of truly charitable
or educational purposes.

Analysis:

Ruling Request No. 1:

You are an association tax-exempt under § 501(c)(3) and classified as a public charity under

§ 509(a). As such, your assets are dedicated to one or more exempt purposes and may only be
transferred to another public charity or to a Federal, state or local government for such exempt
purposes upon dissolution. § 1.501(c)(3)-1(b)(4). The transfer of your § 501(c)(3) assets and
activities to Foundation, another public charity, complies with the organizational requirements of
§ 501(c)(3) and will not adversely affect your tax-exempt status.

Under §§ 1.501(c)(3)-1(c)(1) and (2), an organization will not be regarded as being “operated
exclusively” for one or more exempt purposes if more than an insubstantial part of its activities is
not in furtherance of an exempt purpose or if its net earnings are distributed in whole or in part
to the benefit of private shareholders or individuals. An organization may not be classified
under § 501(c)(3) if it has substantial non-charitable and non-educational purposes and
activities, regardless of the number or importance of truly charitable or educational purposes it
may otherwise have. See Better Business Bureau v. U.S., 326 U.S. 279, 283 (1945); See also
Rev. Rul. 71-504, 1971-2 C.B. 231 and Rev. Rul. 71-505, 1971-2 C.B. 232 (medical society and
bar association exempt as § 501(c)(6) entities may not be reclassified as organizations exempt
under § 501(c)(3) because of their substantial non-charitable and non-educational purposes and
activities).

We have not evaluated nor determined whether your past activities that are not § 501(c)(3)
activities are or have been more than an insubstantial part of your activities or if your net
earnings were distributed in whole or in part to the benefit of private shareholders or individuals.
Therefore, this ruling applies only to your transfer of assets to Foundation, and not to any other
of your past, present, or future activities.

Ruling Request No. 2:

Association is organized as a business league under § 501(c)(6). Section 1.501(c)(6)-1 of the
regulations defines a business league as an association of persons having a common business
interest. The activities of the association must be directed to the improvement of business
conditions of one or more lines of business as distinguished from the performance of particular
services for individual persons.

Thus, Association’s primary activities must be described as permitted activities under
§ 501(c)(6) of the Code in order to meet the requirements for § 501(c)(6). Services for

individual members are not such activities. Among other activities, Association plans to act as a
billing agent for Union. This is a business activity of a kind ordinarily carried on for profit.
Whether this is a permitted service depends upon whether it is a primary activity of Association.
Association will also provide administrative services for Union and Foundation. All of
Association's non-501(c)(6) activities taken together must not constitute Association's primary
activities for it to maintain its § 501(c)(6) status.

Ruling:

1. The transfer of assets from you to the successor Foundation will not adversely affect
   your tax-exempt status under § 501(c)(3) of the Code. This ruling does not address the
   affect on your tax-exempt status of any activities other than this transfer of assets to
   Foundation.

2. Association may act as a billing agent for Union pursuant to a cost-sharing agreement
   without jeopardizing Association‘s tax-exempt status under § 501(c)(6) of the Code so
   long as all of Association‘s non-501(c)(6) activities together do not constitute
   Association‘s primary activities.

This ruling will be made available for public inspection under § 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 resolve 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,

Virginia G. Richardson
Acting Manager, Exempt Organizations
Technical Group 4

Enclosure
Notice 437