IRS approves shared services among retirement-community organizations

Plain-English summary

The IRS ruled that a supporting organization could share assets, personnel, facilities, and services with the retirement communities it supported without creating unrelated business income. The supporting organization provided oversight, management, strategic planning, and administrative functions for the communities. The IRS concluded that the transfers and shared services were related to the organizations' exempt purposes and were treated as accounting matters among closely related exempt organizations. The ruling applied to transfers made to support the organizations' charitable retirement-community operations.

Ruling snapshot

• Question: Would exempt-purpose transfers and shared services between a supporting organization and retirement communities create unrelated business income under IRC §§ 511 through 514?
• Outcome: Approved.
• Key authorities: IRC §§ 501(a), 501(c)(3), 509(a)(1), 509(a)(3), 511, 512, 513, 514, and 6110; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.513-1(b), 1.513-1(d)(1), and 1.513-1(d)(2); Rev. Ruls. 72-124, 79-18, 77-72, and 78-41

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201222040 Contact Person:
Release Date: 6/1/2012
Identification Number:

Date: March 9, 2012
Telephone Number:

Employer Identification No.:

UIL: 509.02-02 Supporting Organizations

UIL: 513.00-00 Unrelated v. Not Unrelated Trade or Business

Dear

You request a ruling concerning certain consequences under §§501, 509 and 511-514 of
the Internal Revenue Code (the “Code”) relating to the proposed transfer of assets
described below.

FACTS:

You have been recognized as exempt under §501(c)(3) and classified as a §509(a)(3)
supporting organization. Your specified Supported Organizations have received rulings
recognizing their tax exempt status under §501(c)(3) and their non-private foundation
classification under §509(a)(1).

Each of your Supported Organizations operates a retirement community that provides
housing, health care and other services to serve the special needs of the aged within the
meaning of §501(c)(3) and Rev. Ruls 72-124 and 79-18. You will be the sole member
of each Supported Organization. You are a non-stock corporation whose Articles of
Incorporation identify each of the Supported Organizations by name. You are
authorized to appoint three directors to the board of each Supported Organization, all of
whom may also be directors on your board. At least one director of each Supported
Organization will serve on your board.

You function as a parent of the system of retirement communities; providing oversight,
supervision, management and strategic planning for the Supported Organizations. You
develop policies for standards of care and operation for the Supported Organizations.
You carry out various executive, administrative, financial, policy setting, planning and
other functions of the Supported Organizations, coordinate activities by or among them
and supervise overall policy and planning. As a Supporting Organization of each of the
Supported Organizations, you represent that you perform functions for the benefit of

each Supported Organization--functions that each Supported Organization would
otherwise be required to perform.

Each of the Supported Organizations has transferred a pro rata amount of funds to you
to fund your start-up and initial working capital requirements. Each of the Supported
Organizations regularly makes contributions to support your on-going operations.

In addition to your initial start-up and on-going operational costs, in the future, there may
be additional sharing of funds, assets, services and personnel throughout the system
determined on a case by case basis and only as needed to support the exempt
purposes of any Supported Organization or the Supporting Organization System as a
whole. This may be accomplished through formal execution of contracts or other less
formal arrangements, a combination of gratuitous transfers, sales, leases or charges for
services, all as the individual facts and circumstances warrant, and to ensure that each
entity is fully capable of fulfilling its respective exempt purpose. This would mean funds
may be transferred to and from you and the Supported Organizations.

Ruling Requested:

Transfers, contributions or sharing of assets, personnel, facilities and services,
including the execution of contracts for the sharing of assets and services between
you and the Supported Organizations shall, to the extent related to the exempt
purposes of these entities, not give rise to any unrelated business income under
§§511 through 514 to you.

LAW:

Section 501(c)(3) of the Code describes organizations that are organized and operated
exclusively for charitable purposes.

Section 511 imposes a tax on unrelated business taxable income of organizations
exempt from federal income tax under §§501(a) and 501(c)(3).

Section 512(a)(1) defines “unrelated business taxable income” as the gross income
derived by any organization from any unrelated trade or business regularly carried on by
it, less allowable deductions and computed with modifications in §512(b).

Section 513(a) defines the term “unrelated trade or business” as any trade or business
which is not substantially related (aside from the need of such organization for income or
funds or the use it makes of profits derived) to the exercise or performance by such
organization of the purposes or function constituting the basis for its exemption under
§501.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations ("the regulations") provides
that in order to be exempt as an organization described in section §501(c)(3), the
organization must be both organized and operated exclusively for one or more exempt
purposes.

Section 1.513-1(b) states that the term "trade or business" has the same meaning as in
§162, and generally includes any activity carried on for the production of income from
the sale of goods or the performance of services.

Section 1.513-1(d)(1) provides that gross income derives from "unrelated trade or
business," within the meaning of §513(a), if the conduct of the trade or business which
produces the income is not substantially related (other than through the production of
funds) to the purposes for which exemption is granted. This requirement necessitates
an examination of the relationship between the business activities which generate the
particular income in question and the accomplishment of the organization's exempt
purposes.

Section 1.513-1(d)(2) states that to be "substantially related" to the exempt purposes of
the organization, the business activity must have a causal relationship to the
achievement of exempt purposes, and it must contribute importantly to the
accomplishment of those purposes; and it is substantially related for purposes of §513
only if the causal relationship is a substantial one. Thus, for the conduct of a trade or
business from which a particular amount of gross income is derived to be substantially
related to purposes for which exemption is granted, the production or distribution of the
goods or the performance of the services from which the gross income is derived must
contribute importantly to the accomplishment of exempt purposes.

Rev. Ruls. 72-124, 1972-1 C.B. 145, and 79-18, 1979-1 C.B. 194, hold that providing
housing for the elderly can be a charitable purpose within the meaning of §501(c)(3) if it
is specially designed for the elderly, provides for their health, emotional, social and
recreational needs, is built at the lowest feasible cost, is priced within the financial reach
of a significant segment of the community served, and if the organization maintains
residents who become unable to pay.

Rev. Rul. 77-72, 1977-1 C.B. 157, holds that inter-organizational indebtedness between
a parent and its wholly owned subsidiary is not acquisition indebtedness within the
meaning of §514(c), but merely a matter of accounting between related organizations.

Rev. Rul. 78-41, 1978-1 C.B. 148, holds that when a trust performs a function that the
hospital could carry out itself in the performance of its exempt purpose such as the
payment of malpractice claims against the hospital, the trust's performance of an integral
part of the hospital's function was also exempt under §501(c)(3).

ANALYSIS:

You and Supported Organizations function to meet the housing, health, and financial
needs of elderly persons which is considered a charitable purpose within the meaning of
§501(c)(3). Rev. Ruls 72-124 and 79-18. The relationship among the several
organizations advances their charitable purposes.

By providing overall policy and planning guidance, coordinating activities between the
communities and assuming various functions that the Supported Organizations would
otherwise conduct, you enhance the ability of each Supported Organization to serve the
special needs of the aged of its particular community. Rev. Rul. 78-41. You relieve each
entity of administrative and other burdens and allow them to focus on providing housing,
health care and services for their residents.

You have represented that these activities are related to your tax-exempt purposes and
those of your Supported Organizations because the transfers of cash, assets and

personnel, and the sharing of personnel, services, facilities and expenses permit all of
the entities to more efficiently carry out their respective tax-exempt operations. Transfers
that are related to your exempt purpose will not result in unrelated business activity.
Transfers between closely related exempt organizations for their exempt purposes are
regarded as matters of accounting. Rev. Rul. 77-72. Furthermore, such transfers are not
generally regarded as trades or businesses regularly carried on for the production of
income. Section 1.513-1(b). Thus, the transfers will not give rise to unrelated business
taxable income under §§511 through 514 to you.

RULING:
Based upon the information provided above, we rule as follows:

Transfers, contributions or sharing of assets, personnel, facilities and services,
including the execution of contracts for the sharing of assets and services between
you and the Supported Organizations shall, to the extent related to the exempt
purposes of these entities, not give rise to any unrelated business income under
section §§511 through 514 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 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 representatives.

Sincerely,

Ronald Shoemaker
Manager Technical Group 2

Enclosure: Notice 437