Community trust and nonprofit corporation treated as a single entity

Plain-English summary

An existing community trust asked whether it and a newly formed nonprofit corporation could be treated as one entity for federal tax purposes. The IRS found that the trust and corporation had a common governing body, common governing documents, charitable purposes, and the powers required by the community-trust regulations. The IRS ruled that they would be treated as a single entity, and that qualifying funds could be treated as component parts of that community trust. The corporation therefore took on the trust's tax-exempt status under IRC § 501(c)(3), and the two organizations could operate and file returns under the trust's employer identification number.

Ruling snapshot

• Question: Could the community trust and its affiliated nonprofit corporation be treated as one community trust for federal tax purposes?
• Outcome: Approved.
• Key authorities: IRC §§ 501(c)(3), 6033, and 6110(k)(3); Treas. Reg. § 1.170A-9(f)(11).

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201403016 Contact Person:
Release Date: 1/17/2014

Date: 11/19/2012 Identification Number:

Uniform Issue List Telephone Number:

170-19-00 Employer Identification Number:

Legend:
Corporation

Counties
State
Foundation
Date

Date1

Dear

This letter supersedes our letter dated November 19, 2012, which was in reply to your letter of
Date, requesting a ruling that you and Corporation may be treated as a single entity and that
funds created within either Foundation or Corporation that otherwise meet the requirements of
Treas. Reg. § 1.170A-9(f)(11) (2011) will be treated as component parts of a single entity
community trust.

FACTS

You are a community trust created in Date1 to serve the charitable needs of the Counties. You
have historically operated as a community trust. You have been recognized as an organization
exempt under I.R.C. § 501(c)(3). You are organized pursuant to a Resolution and Declaration
of Trust (“trust document”).

According to the trust document, you are organized for the purpose of accepting gifts, grants,
bequests or devises to be held in trust, the principal or income available for distribution for any
charitable, religious, educational, literary, scientific or public welfare to any charitable
organization. Your current trustees are certain banks located in Counties.

You have a distribution committee that is composed of representatives of the Counties. Your
distribution committee is the board of directors of the Corporation. The distribution committee
and the trustee have determined that reorganizing your organization into a joint corporate/trust
structure will allow you to attract more contributions and advance your charitable mission.

Accordingly, your distribution committee and trustees formed Corporation, a State nonprofit
corporation. The Corporation is operated exclusively for religious, charitable, scientific, literary
and educational purposes and to support your charitable activities.

Corporation's original Articles of Incorporation and Bylaws stated that its purpose is to receive
money and other property by gift, administer funds, and make distributions for charitable
purposes for the benefit of the residents of the Counties. It has been described to the local
community as your affiliate since its inception.

According to your trust document and the bylaws of the Corporation all gifts, devises and
bequests of property are made subject to the terms and conditions of these documents.

Your trust document and organizing documents of the Corporation require that both
organizations be subject to a common governing body. Specifically, the board of directors of
the Corporation serves as the distribution committee of the trust, thus giving the distribution
committee control over the Corporation.

Your trust document and Corporation's organizing documents state that all gifts, devises and
bequests of property are made subject to the terms and conditions of the resolution. Your
distribution committee and board of directors of the Corporation each have the responsibility to
ensure that the application and distribution of funds are made exclusively for one or more of
your charitable purposes.

Further, your trust document and Corporation's organizing documents each give their boards of
directors the power to modify conditions or restrictions concerning the distributions of income
and principal for charitable purposes and to remove any trustee that has breached its fiduciary
duty or failed to produce a reasonable return of net income.

Ruling Requested

You and Corporation may be treated as a single entity; funds of either organization which
otherwise meet the requirements of Treas. Reg. § 1.170A-9(f)(11)(ii) should be treated as
component parts of a single community trust; that by virtue of the combination of you and
Corporation as component parts of a single community trust, the Corporation is included under
and takes on all the entitlements of your status as a tax exempt organization under I.R.C. §
501(c)(3); and that you and Corporation as a single community trust, may operate and file a
single Form 990 Return of Organization Exempt From Income Tax Return under your E.I.N.

Law

I.R.C. § 6033 describes the general filing requirements for exempt organizations and in
particular specifies certain information required by § 501(c)(3) organizations, in § 6033(b).

Treas. Reg. § 1.170A-9(f)(11)(i) states that any organization that meets the requirements in
Treas. Reg. § 1.170A-9(f)(11)(iii) through (vi) will be treated as a single entity, rather than as an

aggregation of separate funds. In addition, all funds associated with such organization (whether
a trust, not-for-profit corporation, unincorporated association, or a combination thereof), which
meet the requirements of Treas. Reg. § 1.170A-9(f)(11)(ii), will be treated as component parts of
such organization.

Treas. Reg. 1.170A-9(f)(11)(ii) provides that, to be treated as a component part of a community
trust referred to in paragraph (f)(11)(i) of this section, a trust or fund: (A) must be created by gift,
bequest, legacy, devise, or other transfer to a community trust which is treated as a single entity
under Treas. Reg. § 1.170A-9(f)(11); and (B) may not be directly or indirectly subjected by the
transferor to any material restriction or condition with respect to the transferred assets.

Treas. Reg.§ 1.170A-9(f)(11)(iii) provides that the organization must be commonly known as a
community trust, fund, foundation or other similar name conveying the concept of a capital or
endowment fund to support charitable activities in the community or area it serves.

Treas. Reg. § 1.170A-9(f)(11)(iv) provides that all funds of the organization must be subject to a
common governing instrument or a master trust or agency agreement, which may be embodied
in a single document or several documents containing common language. In addition, if a
community trust adopts a new governing instrument (or creates a corporation) to put into effect
new provisions (applying to future transfers to the community trust), the adoption of such new
governing instrument (or creation of a corporation with a governing instrument) which contains
common language with the existing governing instrument shall not preclude the community trust
from meeting the requirements of this paragraph.

Treas. Reg. § 1.170A-9(f)(11)(v) provides: (A) that the organization must have a common
governing body or distribution committee, which either directs or monitors the distribution of all
the funds exclusively for charitable purposes. In addition, the governing body must have the
power in the governing instrument, or other applicable document: (B)(1) to modify any restriction
or condition on the distributions of funds for any specified charitable purposes or to specified
organizations if in the sole judgment of the governing body, such restriction or condition
becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable
needs of the community or area served; (B)(2) to replace any participating trustee, custodian, or
agent for breach of fiduciary duty under state law; and (B)(3) to replace any participating trustee,
custodian, or agent for failure to produce a reasonable return of net income over a reasonable
period of time.

Treas. Reg. § 1.170A-9(f)(11)(v)(E) provides that the governing body must commit itself to
exercise these powers in the best interests of the community trust.

Treas. Reg. § 1.170A-9(f)(11)(v)(F) provides that the governing body must commit itself to
obtain information and take other appropriate steps with the view to seeing that each
participating trustee, custodian or agent, with respect to each restricted trust or fund that is, and
with respect to the aggregate of the unrestricted trusts or funds that are, a component part of the
community trust, administers such trust or fund in accordance with the terms of its governing
instrument and accepted standards of fiduciary conduct to produce a reasonable return of net

income, with due regard to safety of principal, in furtherance of the exempt purposes of the
community trust.

Treas. Reg. § 1.170A-9(f)(11)(vi) provides that the organization must prepare periodic financial
reports treating all of the funds held by the community trust, either directly or in component
parts, as funds of the organization.

Treas. Reg. § 1.170A-9(f)(12)(i) indicates, that those entities which fail to qualify as component
parts of a community trust will be treated as a separate entity for purposes of Subchapter A of
Chapter 61 of Subtitle F. I.R.C. § 6033 if the Form 990 filed annually by the community trust
included financial information with respect to such fund and treated such fund in the same
manner as other component parts. They will be treated as the entity's separate returns and the
first such return filed by the community trust will be treated as the notification required of the
separate entity for purposes of § 508(a).

Analysis

Treas. Reg. § 1.170A-9(f)(11)(i) states, in part, that any organization that meets the four
requirements in Treas. Reg. § 1.170A-9(f)(11)(iii) through (vi) will be treated as a single entity,
rather than as an aggregation of separate funds.

You have been established under the name Foundation for nearly a century. You and
Corporation are both named for the community they serve and are commonly known in the
community as endowment funds that support charitable activity in that community. Therefore,
you meet the requirement of Treas. Reg. § 1.170A-9(f)(11)(iii).

Your trust document and the Corporation’s organizing documents state that all gifts, devises
and bequests of property are made subject to the terms and conditions of these documents.
Therefore, all the donor funds will be subject to a common governing instrument or a master
trust or agency agreement, which may be embodied in several documents containing common
language, within the meaning of Treas. Reg. § 1.170A-9(f)(11)(iv). Accordingly, you meet this
requirement.

Your trust document and the organizing documents of the Corporation each state that your
distribution committee and Board of Directors of the Corporation, which are required to be the
same people, have the responsibility to ensure that the application and distribution of funds are
made exclusively for one or more of your charitable purposes. Thus, you satisfy the
requirement of Treas. Reg. § 1.170A-9(f)(11)(v) that a common governing body monitor the
distribution of all funds for charitable purposes.

Your trust document and the organizing documents of the Corporation each give their boards of
directors' the power to modify conditions or restrictions concerning the distributions of income
and principal for charitable purposes and to remove any trustee that has breached its fiduciary
duty or for failure to produce a reasonable return of net income. Therefore, you meet the
requirement of Treas. Reg.§ 1.170A-9(f)(11)(v).

Your trust document and the organizing documents of the Corporation require that each
organization prepare annual reports. You have continuously prepared such reports in which you
treated your component funds as your funds. Similarly, you expect to report the funds and
assets of Corporation as part of a single entity. Therefore, both you and Corporation meet this
requirement of Treas. Reg. § 1.170A-9(f)(11)(vi).

Although you and Corporation will continue to be legally separate entities, you will be treated as
a single entity rather than as an aggregation of separate funds for federal tax law purposes
because you meet the requirements described in Treas. Reg. §§ 1.170A-9(f)(11)(iii) through (vi),
as required by Treas. Reg. § 1.170A-9(f)(11)(i), ‘

Once a single entity is identified, the component part provisions of the regulations determine
whether a particular fund or trust may be considered part of the single entity. All funds
associated with an organization (whether a trust, non-for-profit corporation, unincorporated
association or a combination) that are treated as a single entity, and which meet the
requirements of Treas. Reg. § 1.170A-9(f)(11)(ii), will be treated as component parts of such
organization. Treas. Reg. § 1.170A-9(f)(11)(i).

RULING
Based on your facts and representations:

You and Corporation will be treated as a single entity under Treas. Reg. § 1.170A-9(f)(11)(i). In
addition, funds of either such organization which otherwise meet the requirements under Treas.
Reg. § 1.170A-9(f)(11)(ii), should be treated as a component parts of a single entity community
trust; that by virtue of the combination of you and Corporation as component parts of a single
entity community trust, Corporation is included under and takes on all the entitlements of your
status as a tax exempt organization under I.R.C. § 501(c)(3); and that you and Corporation as a
single entity community trust, operate and file returns under your E.I.N. listed in the heading of
this letter.

This ruling will be made available for public inspection under I.R.C. § 6110 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. I.R.C. § 6110(k)(3) 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,

Ronald Shoemaker
Manager, Exempt Organizations
Technical Group 2

Enclosure
Notice 437