PLR 1231016: IRS grants more time for a private foundation election

Plain-English summary

The IRS granted a private foundation an extension of time to elect to treat prior-year excess qualifying distributions as current-year distributions out of corpus. The foundation had not made the election with its Form 990-PF because its CPA did not recommend it, and the missed election caused an older carryover to expire. The IRS found that the foundation acted reasonably and in good faith, and that granting relief would not prejudice the government because the related taxpayer's aggregate tax liability would not be lower than it would have been if the election had been timely made. The foundation was given 60 days from the ruling letter to file an amended Form 990-PF. The ruling did not decide the propriety of deductions under IRC § 170.

Ruling snapshot

• Question: Could the private foundation receive more time to make the election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv)?
• Outcome: Approved, a 60-day extension was granted
• Key authorities: IRC §§ 170(b)(1)(B), 170(b)(1)(F), 4942, 4942(h), 4946, 6501(c)(4), and 6110; Treas. Reg. §§ 53.4942(a)-3 and 301.9100-3

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201231016 Contact Person:
Release Date: 8/3/2012
Date: April 12, 2012 Identification Number:

UIL: 4942.03-02 Telephone Number:
4942.03-06
Employer Identification Number:

Legend:

Foundation = year 1
Founder = year 5
Corporation = year 6
State =

[illegible]

Dear

We have considered your request dated April 14, 2010 for discretionary relief under § 301.9100-
3 of the Procedure and Administrative Regulations (“administrative regulations”), for an
extension of time to make an election to treat prior-year distributions as current-year
distributions out of corpus pursuant to § 53.4942(a)-3(c)(2)(iv) of the Foundation and Similar
Excise Tax Regulations (“foundation regulations”).

FACTS:

You are a State nonprofit corporation recognized as exempt from federal income tax under

§ 501(c)(3) of the Internal Revenue Code (“Code”) and classified as a private foundation under
§ 509(a). You are a grant-making foundation. Founder is a disqualified person with respect to
you pursuant to § 4946.

On date1, Founder contributed shares of Corporation stock to you, with a fair market value of

$ x. This was the sole contribution made to you during tax year 6. Your distributable amount for
year 6 was $ y. You had no undistributed income for year 5 or prior years. You made larger
qualifying distributions in year 6 than your required distributable amount of $y. This resulted in
an excess qualifying distribution of w for year 6, which you carried forward. You also had

excess qualifying distributions in each of the preceding five years (year 1 through year 5), which
you had carried forward. These excess qualifying distributions totaled $z. Since excess
qualifying distributions may be carried over only for five years before they expire, your excess
qualifying distribution for year 1 would expire if you did not use it by year 6. Thus, your total
excess qualifying distributions available for year 6 included the entire amount of excess
distribution carryovers in the five prior tax years, year 1 through year 5, plus your qualifying
distribution in year 6, or $z + w.

You could have used your excess distribution carryovers from prior years, beginning in year 1 to
apply against your distributable amount for year 6. You did not do so. You were eligible to treat
your carryovers from those prior years as current distributions out of corpus under section
53.4942(a)-3(c)(2)(iv) of the regulations. However, your CPA did not recommend, and you did
not make, the required election under § 4942(h) with your year 6 Form 990-PF to do this.
Therefore, your excess distribution carryover for year 1 expired, unused, in year 6.

Your Founder, who contributed appreciated stock to you in year 6, took only a 30 percent
deduction as provided by § 170(b)(1)(B)(i), since you were a private foundation not described in
subparagraph 170(b)(1)(F) for year 6. This was because you did not make the § 4942 election
to treat eligible excess distribution carryovers from prior years as current distributions out of
corpus.

Several years later new accountants reviewed Founder’s individual tax returns for prior years.
These new accountants discovered that had you made the election on your year 6 Form 990-
PF, you could have qualified as a pass-through or conduit foundation under § 170(b)(1)(F)(ii) for
year 6, and Founder could have claimed a larger charitable deduction on his individual tax
return.

You have submitted sworn statements by CPAs for you and Founder for year 6 stating that no
communication took place between them regarding your excess qualifying distributions or
election. You also have represented that you made this ruling request before the failure to
make the election was discovered by the Service, and that granting the relief you request would
not result in Founder and you having a lower aggregate tax liability than if the election was
timely made. You have filed this ruling request to receive discretionary relief for an extension of
time to make a timely election under § 53.4942(a)-3(c)(2)(iv) of the foundation regulations for
the year 6 tax year. You also submitted Form 872-B, Consent to Extend the Time to Assess
Miscellaneous Excise Taxes, with your ruling request. Upon receipt of the requested
extension, you will promptly file an amended Form 990-PF for tax year 6 with the election made,
and file amended Form 990-PF returns for subsequent tax years for which a return has already
been filed.

REQUESTED RULING:

You request that the Commissioner, in accordance with the discretionary relief provisions of

§ 301.9100-3 of the administrative regulations, grant you an extension of time in which to make
a timely election under § 53.4942(a)-3(c)(2)(iv) of the foundation regulations for the year 6 tax
year ending December 31..

LAW:

Section 170(b) of the Code describes various percentage limitations on the deductibility of
contributions to public charities or private foundations.

Section 170(b)(1)(B)(i) of the Code states, in part, that a 30 percent deduction limitation applies
to an individual’s contribution base for the taxable year when the contribution is made to a
private foundation not described in subparagraph 170(b)(1)(F).

Section 170(b)(1)(F)(ii) of the Code provides, in part, that contributions by an individual to a
private foundation that makes qualifying distributions that are treated as distributions out of
corpus in an amount equal to 100% of the contribution within three months and 15 days of the
end of the private foundation’s taxable year, are deductible at 50 percent of the taxpayer’s
contribution base for the taxable year.

Section 4942 of the Code, in general, imposes excise taxes on the “undistributed income’ of a
private foundation when it fails to make “qualifying distributions” in the distributable amount for
any taxable year.

Section 4942(d) of the Code defines a private foundation's “distributable amount” for any
taxable year as an amount equal to —

(1) the sum of the minimum investment return plus the amounts described in subsection
(f)(2)(C), reduced by

(2) the sum of the taxes imposed on such private foundation for the taxable year under subtitle
A and section 4940.

Section 4942(h) of the Code provides rules as to the treatment of “qualifying distributions” made
during a taxable year. Generally, qualifying distributions for a taxable year are treated as made
(A) first out of the undistributed income of the immediately preceding taxable year (if the private
foundation was subject to tax imposed by this section for the preceding year) to the extent
thereof, (B) second out of undistributed income for the taxable year to the extent thereof, and
(C) then out of corpus.

Section 4946 of the Code defines the term “disqualified person” to mean, in part, with respect to
a private foundation, a person who is a substantial contributor to the foundation or a foundation
manager.

Section 53.4942(a)-3(c)(2)(iv) of the foundation regulations provides that in order to satisfy
distribution requirements under § 170(b)(1)(F)(ii), a donee organization may elect to treat as a
current distribution out of corpus any amount distributed within the prior five tax years which was
treated as a distribution out of corpus and was or is not availed of for any other purpose. Such
election must be made by attaching a statement to Form 990-PF with respect to the tax year for
which such election is to apply. Such statement must contain a declaration by an appropriate
foundation manager that the foundation is making an election under this paragraph and it must
specify that the distribution was treated as a distribution out of corpus in a designated prior taxable
year (or years). For purposes of such elections, see § 1.9100-1 relating to extensions of time for
making certain elections.

Section 53.4942(a)-3(d)(1) of the foundation regulations provides for the order of treatment of
qualifying distributions.

Section 53.4942(a)-3(d)(2) of the foundation regulations provides that a private foundation may
elect to treat any portion of a qualifying distribution not treated as made out of the undistributed
income of the preceding tax year as made out of undistributed income of a prior taxable year or
out of corpus. The election must be made by filing a statement with the Commissioner during
the taxable year in which such qualifying distribution is made or by attaching a statement to the
Form 990-PF for that taxable year.

Section 53.4942(a)-3(e)(1) of the foundation regulations provides for the carryover of excess
qualifying distributions for up to five years to reduce distributable amounts in the five-year
adjustment period. Earlier excess qualifying distributions are applied before later ones.

Section 53.4942(a)-3(e)(2) of the foundation regulations provides that an excess of qualifying
distributions is created for a tax year if --

(i) the total qualifying distributions treated as made out of the undistributed income for
such tax year or as made out of corpus with respect to such tax year (other than
amounts distributed in satisfaction of §§ 170(b)(1)(F)(ii) or 4942(g)(3) or applied to a
prior tax year by election under §§ 53.4942(a)-3(c)(2)(iv) or 53.4942(a)-2(d)(2)),
exceeds

(ii) the distributable amount for such tax year (determined without regard to
§ 53.4942(a)-3(e), which provides for carryovers).

Section 301.9100-3(a) of the administrative regulations provides that requests for extensions of
time for regulatory elections may be granted when the taxpayer provides evidence to establish
to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith,
and the grant of relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) of the administrative regulations provides that a taxpayer is deemed to
have acted reasonably and in good faith if the taxpayer:

(i) Requests relief under this section before the failure to make the regulatory election is
discovered by the Internal Revenue Service (“Service”);

(ii) Failed to make the election because of intervening events beyond the taxpayer’s control;

(iii) Failed to make the election because, after exercising reasonable diligence (taking into
account the taxpayer’s experience and the complexity of the return or issue), the taxpayer
was unaware of the necessity for the election;

(iv) Reasonably relied on the written advice of the Service; or

(v) Reasonably relied on a qualified tax professional, including a tax professional employed by
the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the

election.

Section 301.9100-3(b)(2) of the administrative regulations provides that a taxpayer will not be
considered to have reasonably relied on a qualified tax professional if the taxpayer knew or
should have known that the professional was not:

(i) Competent to render advice on the regulatory election; or
(ii) Aware of all relevant facts.

Section 301.9100-3(b)(3)(ii) of the administrative regulations provides, in part, that a taxpayer is
deemed to have not acted reasonably and in good faith if the taxpayer was informed in all
material respects of the required election and related tax consequences, but chose not to file
the election.

Section 301.9100-3(c)(1) of the administrative regulations provides that the Commissioner will
grant a reasonable extension of time to make a regulatory election only when the interests of
the Government will not be prejudiced by the granting of relief.

Section 301.9100-3(c)(1)(i) of the administrative regulations provides, in part, that the interests
of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax
liability in the aggregate for all taxable years affected by the election than the taxpayer would
have had if the election had been timely made.

Section 301.9100-3(d)(2) of the administrative regulations states, in part, that for relief to be
granted, the Service may require the taxpayer to consent under section 6501(c)(4) of the Code
to an extension of the period of limitations on assessment for the taxable year in which the
regulatory election should have been made and any taxable years that would have been
affected by the election had it been timely made.

Section 301.9100-3(e) of the administrative regulations specifies evidence which must be
provided when a taxpayer requests relief under this section.

Internal Revenue Manual 1.2.53.4 Delegation Order 30-3 (formerly DO-183, Rev. 8), Extension
of Time for Making Certain Elections, provides, in part, authority to grant a reasonable extension
of the time fixed by regulations for the making of an election or application for relief in respect of
tax under all subtitles of the Code, except subtitles E, G, H, and I, subject to the requirements of
26 CFR 301.9100-1. Authority delegated to Director, EO; Manager, EO Technical; Manager,
EO Technical Guidance and Quality Assurance.

ANALYSIS:

Private foundations are required to distribute minimum amounts of income to charity each year
or pay substantial excise taxes pursuant to § 4942 of the Code. A foundation that makes a
greater than required qualifying distribution in one tax year, may carry that excess forward for up
to five years to use towards a qualifying distribution in a future year. Section 53.4942(a)-3(e)(1).
Pursuant to § 53.4942(a)-3(c)(2)(iv) of the foundation regulations, a foundation may elect to

treat excess distribution carryovers from its five prior tax years as a current distribution out of
corpus in order to qualify as a conduit or pass-through foundation under § 170(b)(1)(F){ii).

You did not make such an election when you timely filed your Form 990-PF for year 6.
However, § 301.9100-3(a) of the administrative regulations provides, in part, that requests for
extensions of time for regulatory elections may be granted when the taxpayer provides evidence
to establish that the taxpayer acted reasonably and in good faith, and the grant of relief will not
prejudice the interests of the Government.

You have submitted documentation showing that you acted reasonably and in good faith under
§ 301.9100-3(b)(1) of the administrative regulations in that you reasonably relied on your CPA
who failed to make, or advise you to make, the election for year 6. Founder’s accounting
professional did not communicate with you or your CPA. You were unaware of the
consequences of making the election. You have submitted affidavits and other evidence to
corroborate these facts which satisfy the procedural requirements for relief under § 301.9100-
3(e) of the administrative regulations.

To qualify for discretionary relief to now make the election, you must also demonstrate that the
interests of the Government will not be prejudiced by the granting of relief according to

§ 301.9100-3(c)(1) of the administrative regulations. The government’s interest is prejudiced if
granting relief will result in affected taxpayers, in the aggregate, having a lower tax liability than
if the election had been timely made. Section 301.9100-3(c)(1)(i) of the administrative
regulations. In addition, the Government's interests are prejudiced if the taxable year in which
the regulatory election should have been made or any taxable years that would have been
affected by the election had it been timely made, are closed by the period of limitations on
assessment under § 6501(a) of the Code before the taxpayer’s receipt of a ruling granting relief
under this section. Section 301.9100-3(c)(1)(ii). In this instance, we must look at the effect of
the election on the tax liability on both you and your Founder, a disqualified person.

In year 6 you made qualifying distributions in excess of the distributable amount, so you were
not liable for excise tax under § 4942 of the Code. You also made excess qualifying
distributions in years 1 through 5 and had no undistributed amount during those years. Thus,
the excess qualifying distributions for years 1 through 5 could be carried forward up to five years
according to § 53.4942(a)-3(e)(3) of the foundation regulations. These excess qualifying
distribution carryovers from years 1 through 5 were available to be used in year 6. This is not a
case of attempting to refresh expired carryovers in a manner not permitted by the Code and
regulations. Consequently, your request for relief to extend the time to elect to treat your
excess qualifying distributions from year 1 through year 5 as made out of corpus in year 6 does
not lower your tax liability for those years or year 6.

While granting the relief you request will allow the Founder to amend his individual income tax
return to lower his tax liability for year 6, his tax liability will not be lower than it would have been
if you had timely made the election. A taxpayer may deduct up to 50 percent of his contribution
base for the taxable year if the donee-private foundation makes qualifying distributions that are
treated as distributions out of corpus in an amount equal to 100% of the contribution within three
months and 15 days of the end of the private foundation’s taxable year. Section 170(b)(1)(F)(ii).
Because you had already made large excess qualifying distributions that were carried over from

year 1 through year 5, your election to treat those excess qualifying distributions as year 6
distributions made out of corpus meets the timing requirement of section 170(b)(1)(F)(ii). Those
year 1 through 5 carryovers totaled $z. In addition, your qualifying distribution for year 6 was
greater than the distributable amount by $w. In total, your excess qualifying distributions in
years 1 through 6 were greater than 100% of the Founder’s year 6 contribution, $x. Therefore,
you were able to make qualifying distributions that are treated as distributions out of corpus in
an amount equal to 100% of your year 6 contribution during year 6.

You submitted Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise
Taxes, with your ruling request. This extended the period of limitations under § 6501(a) on
assessment of excise taxes under § 4942 during the pendency of this ruling request.

Thus, granting this extension of time to make the election will not prejudice the Government's
interest pursuant to § 301.9100-3(c)(1)(i) of the administrative regulations.

RULING:

Based on the facts and circumstances represented, the Commissioner, through his delegate,
has exercised his authority under § 301.9100-3 of the regulations, to grant you an extension of
time in which to make an election under § 53.4942(a)-3(c)(2)(iv) of the foundation regulations for
the year 6 tax year ending December 31.. You must file an amended Form 990-PF for year 6
to make this election within 60 days of the date of this letter ruling.

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. This office does not have jurisdiction over § 170 of the Code. Therefore, this ruling
does not address the propriety of deductions under § 170 or whether the facts presented by the
taxpayer with regard to § 170 are correct. 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,

Michael Seto, Acting
Manager, EO Technical

Enclosure
Notice 437