Private foundation may transfer all assets and later terminate

Plain-English summary

A trust classified as a private foundation planned to transfer all of its assets to a new private foundation controlled by the same people. It would remain as a dormant shell until receiving more assets after the founder's wife died, transfer those assets too, and then voluntarily terminate. The IRS approved eleven rulings. The transfers would qualify under § 507(b)(2), would not generate investment income or self-dealing, and would carry the transferor's Chapter 42 attributes, liabilities, distribution obligations, and expenditure-responsibility duties to the new foundation. If the trust gave its termination notice at least one day after the second full transfer, its remaining assets and resulting § 507(c) termination tax would be zero. Reasonable legal, accounting, and transaction expenses would count as qualifying distributions and would not be taxable expenditures.

Ruling snapshot

• Question: Could a private foundation transfer all assets twice to a commonly controlled successor, remain dormant between transfers, and then terminate without adverse Chapter 42 consequences?
• Outcome: Approved, subject to the successor receiving recognition under § 501(c)(3) and the stated timing conditions
• Key authorities: IRC §§ 501(c)(3), 507, 4940, 4941, 4942, and 4945; Treas. Reg. §§ 1.507-1, 1.507-3, 1.507-4, and 1.507-7

Full text (IRS public release)

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

GOVERNMENT ENTITIES September 5, 2014
DIVISION

Contact Person:

Number: 201448026
Release Date: 11/28/2014 Identification Number:

Telephone Number:

UIL: 501.03-00, 507.06-00, 4940.02-01, 4941.04-00, Employer Identification Number:
4942.03-05, 4945.04-00

Dear

This is in response to your letter dated March 23, 2012 in which you requested certain rulings
with respect to I.R.C. §§ 501(c)(3), 507, 4940, 4941, 4942, and 4945.

Background:

You are a trust that has been recognized as exempt as a trust described in § 501(c)(3), and you
have been classified as a private foundation under § 509(a). Your purposes are encouraging
and rewarding excellence in scientific, health and public safety, literary, fine arts, and
educational purposes. Your assets consist entirely of liquid, or nearly liquid, assets that were
granted to you at your founding and upon your founder’s death. You will also receive additional
assets in the future upon the death of your founder’s wife. You are seeking to transfer, without
consideration, all of your assets to a new private foundation. At the death of your founder's
wife, upon the receipt of further assets, you will transfer all of those assets to this same new
private foundation.

The new foundation was formed by your trustees and is currently seeking recognition of
exemption as an organization described in § 501(c)(3). The new foundation’s purposes are the
same as your purposes. You have provided that the new foundation will be effectively
controlled by the same people who effectively control you. After transferring all of your assets to
the new foundation, but prior to the death of your founder’s wife, you will continue to exist with
no assets. You will continue to file a Form 990-PF, Return of Private Foundation or Section
4947(a)(1) Trust Treated as Private Foundation for all years in which you exist. Upon the death
of your founder’s wife you will again transfer all of your assets to the new foundation. After the
second transfer you will seek to terminate your private foundation status and your existence as
a trust. You will notify the Service of your termination no earlier than one day after your second
transfer of all of your assets. You have stated that you have not and will not notify the Secretary
of your intent to terminate your status as a private foundation and that you have not ever either
committed willful repeated acts, or failures to act, or committed a willful and flagrant act, or
failure to act, which gives rise to tax under Chapter 42.

Rulings Requested:

1. The transfer of all of your assets will not adversely affect your status as a § 501(c)(3)
   organization, and you may continue in existence as a dormant shell and still maintain
   your § 501(c)(3) status.

2. The transfer will qualify as a transfer under § 507(b)(2) and will not result in a
   termination of your foundation status or cause the imposition of the termination tax
   under § 507(c).

3. The new foundation will not be treated as a newly created organization as a result of
   the transfers.

4. Following the transfers, you will be eligible to terminate your private foundation status
   through the voluntary termination procedures pursuant to § 507(a)(1).

5. Pursuant to § 1.507-7(b)(1), the date for determining the value of your assets, for
   purposes of calculating the termination tax pursuant to § 507(c), shall be the date
   proper notification is given and provided that such notice is given at least one day after
   the second transfer of all of your assets, then the amount of termination tax due shall be
   zero dollars.

6. After each transfer, the new foundation will be treated as if it were you for purposes of
   §§ 4940 through 4948 and §§ 507 through 509, and the new foundation will be
   responsible for any of your excise tax liabilities under Chapter 42 to the extent that you
   do not satisfy such liabilities.

7. The transfers will not give rise to any gross investment income or capital gain net
   income within the meaning of § 4940 and any excess § 4940 tax paid by you may be
   used by the new foundation to offset its § 4940 tax liability.

8. The transfers will not constitute self-dealing under § 4941.

9. You will not be required to meet the qualifying distribution requirements of § 4942 for
   either taxable year of transfers provided that the new foundation’s distributable amount
   for the year of each transfer is increased by your distributable amount. In addition, the
   new foundation’s own distributable amount under § 4942 shall be reduced by your
   excess qualifying distributions under § 4942(i), if any.

10. The transfers will not constitute taxable expenditures within the meaning of § 4945, and
    you will not be required to exercise expenditure responsibility with respect to the assets
    transferred to the new foundation. The new foundation, as successor to you, will be
    required to exercise expenditure responsibility with respect to any of your expenditure
    responsibility grants.

11. If reasonable in amount, the legal, accounting, and other expenses incurred by you and
    new foundation in connection with this ruling request and with effectuating the transfers
    will be considered qualifying distributions under § 4942 and will not constitute taxable
    expenditures pursuant to § 4945.

Law:

I.R.C. § 501(c)(3) provides that organizations may be exempted from tax if they are organized
and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes and “no part of the net earnings of which inures to the benefit of any
private shareholder or individual.”

I.R.C. § 507(a) provides that the status of any organization as a private foundation shall be
terminated only if such organization notifies the Secretary of its intent to accomplish such
termination, or there have been willful and repeated acts, or a willful and flagrant act, giving rise
to liability for tax under chapter 42, and the Secretary notifies such organization that it is liable
for such tax.

I.R.C. § 507(b)(2) provides that for purposes of §§ 507, 508, and 509 in the case of a transfer of
assets of any private foundation to another private foundation pursuant to any liquidation,
merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the
transferee foundation shall not be treated as a newly created organization.

I.R.C. § 4940(a) imposes a tax on each private foundation which is exempt from taxation under
§ 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to 2
percent of the net investment income of such foundation for the taxable year.

I.R.C. § 4940(c)(1) defines net investment income as the amount by which (A) the sum of the
gross investment income and the capital gain net income exceeds (B) the deductions allowed
by paragraph (3).

I.R.C. § 4940(c)(3) allows as a deduction all the ordinary and necessary expenses paid or
incurred for the production or collection of gross investment income or for the management,
conservation, or maintenance of property held for the production of such income, determined
with the modifications set forth in subparagraph (B).

I.R.C. § 4941 imposes a tax on each act of self-dealing between a disqualified person and a
private foundation.

I.R.C. § 4941(d)(1) defines self-dealing as the furnishing of goods, services, or facilities between
a disqualified person and a private foundation as well as the payment of compensation by a
private foundation to a disqualified person.

I.R.C. § 4942(a) imposes a tax on undistributed income of a private foundation for any taxable
year, which has not been distributed by the first day of the second taxable year following such
taxable year.

I.R.C. § 4942(c) defines undistributed income as the amount by which the distributable amount
for such taxable year exceeds the qualifying distributions made before such time out of such
distributable income.

I.R.C. §§ 4942(d) and (e) define distributable amount as an amount equal to five percent of the
excess of the fair market value of all assets of the foundation over its acquisition indebtedness
for such assets minus the sum of the taxes imposed on such foundation for the taxable year
under § 4940.

I.R.C. § 4942(g)(1) defines qualifying distribution as any amount (including that portion or
reasonable and necessary administrative expenses) paid to accomplish one or more purposes
described in section 170(c)(2)(B), other than any contribution to an organization controlled by
the foundation or one or more disqualified person with respect to the foundation, except as
provided in § 4942(g)(3).

I.R.C. § 4942(i) provides that if, for the taxable years in the adjustment period for which an
organization is a private foundation-- (A) the aggregate qualifying distributions treated (under
subsection (h)) as made out of the undistributed income for such taxable year or as made out of
corpus (except to the extent subsection (g)(3) with respect to the recipient private foundation or
§ 170(b)(1)(F)(ii) applies) during such taxable years, exceed (B) the distributable amounts for
such taxable years (determined without regard to this subsection), then, for purposes of this
section (other than subsection (h)), the distributable amount for the taxable year shall be
reduced by an amount equal to such excess.

I.R.C. § 4945(a) imposes a twenty percent tax on each taxable expenditure of a private
foundation.

I.R.C. § 4945(d) defines taxable expenditure as any amount paid or incurred by a private
foundation as a grant to an organization unless the private foundation exercises expenditure
responsibility with respect to such grant in accordance with subsection (h) or an amount paid for
any purpose other than one specified in § 170(c)(2)(B).

I.R.C. § 4945(h) defines expenditure responsibility as the private foundation will assert all
reasonable efforts and establish adequate procedures to see that the grant is spent solely for
the purpose for which it was made, to obtain full and complete reports from the grantee on how
the funds are spent, and to make full and detailed reports with respect to such expenditures to
the Secretary.

I.R.C. § 4946(a)(1) provides that a “disqualified person,” with respect to a private foundation,
includes a substantial contributor, as defined under § 507(d)(2), a foundation director or officer,
and any spouse, ancestor, child, grandchild, great grandchild, of that contributor, director, or
Officer.

Treas. Reg. § 1.501(c)(3)-1(c)(1) states 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. An organization will not be so regarded if
more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. § 1.507-1(b)(1) provides that in order to terminate its private foundation status
under paragraph (a)(1) of this section, an organization must submit a statement to the district
director of its intent to terminate its private foundation status under § 507(a)(1).

Treas. Reg. § 1.507-3(a)(2) provides that a transferee organization to which § 507(b)(2) applies
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 transferred to such transferee and the denominator of which is
the fair market value of the assets of the transferor immediately before the transfer.

Treas. Reg. § 1.507-3(a)(4) provides that if a private foundation incurs liability for one or more of
the taxes imposed under chapter 42 prior to, or as a result of, making a § 507(b)(2) transfer to
one or more private foundations, each transferee foundation shall be treated as receiving the
transferred assets subject to such liability to the extent that the transferor does not satisfy such
liability.

Treas. Reg. § 1.507-3(a)(5) provides that a private foundation is required to meet the
distribution requirements of § 4942 for any taxable year in which it makes a § 507(b)(2) transfer
of all or part of its net assets to another private foundation. Such transfer shall itself be counted
toward satisfaction of such requirements to the extent the amount transferred meets the
requirements of § 4942(g).

Treas. Reg. § 1.507-3(a)(9)(i) provides that if a private foundation transfers all of its net assets
to one or more private foundations which are effectively controlled by the same person or
persons which effectively controlled the transferor private foundation such a transferee
foundation shall be treated as if it were the transferor.

Treas. Reg. § 1.507-3(c) provides that for the purposes of § 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. The term significant
disposition of assets” shall include any disposition for a taxable year where the aggregate of the
dispositions to one or more private foundations is twenty-five percent or more of the fair market
value of the net assets of the foundation at the beginning of the taxable year.

Treas. Reg. § 1.507-3(d) states that unless a private foundation voluntarily gives notice
pursuant to § 507(a)(1), a transfer of assets described in § 507(b)(2) will not constitute a
termination of the transferor’s private foundation status under § 507(a)(1).

Treas. Reg. § 1.507-4(b) provides that if a private foundation makes a transfer makes a transfer
described in § 507(b)(1)(A) or (2), then it is not subject to the tax imposed under § 507(c) with
respect to such transfer unless the provisions of § 507(a) become applicable.

Treas. Reg. § 1.507-7(b)(1) provides that in the case of a termination under § 507(a)(1), the
date referred to in paragraph (a)(1) of this section shall be the date on which the terminating
foundation gives the notification described in § 507(a)(1).

Treas. Reg. § 53.4941 (d)-2(f)(2) provides that the fact that a disqualified person receives an

incidental or tenuous benefit from the use by a foundation of its income or assets will not, by
itself, make such use an act of self-dealing. Thus, the public recognition a person may receive,
arising from the charitable activities of a private foundation to which such person is a substantial
contributor, does not in itself result in an act of self-dealing since generally the benefit is
incidental and tenuous. For example, a grant by a private foundation to a section 509(a)(1), (2),
or (3) organization will not be an act of self-dealing merely because one of the section 509(a)(1),
(2), or (3) organization's officers, directors, or trustees is also a manager of or a substantial
contributor to the foundation.

Treas. Reg. § 43-4942(a)-3(a)(2) provides that any amount (including program-related
investments, as defined in § 4944(c), and reasonable and necessary administrative expenses)
paid to accomplish one or more purposes described in § 170(c)(1) or (2)(B)

Treas. Reg. § 53.4945-5(c)(2) provides that if a private foundation makes a grant to a private
foundation for endowment, for the purchase of capital equipment, or for other capital purposes
the grantor foundation shall require reports from the grantee on the use of the principal and the
income from the grant funds. The grantee shall make such reports annually for its taxable year
in which the grant was made and the immediately succeeding two taxable years.

Treas. Reg. § 53.4945-6(b)(1)(v) provides that any payment which constitutes a qualifying
distribution under § 4942(g) or an allowable deduction under § 4940 will not ordinarily be treated
as taxable expenditures under § 4945(d)(5).

Treas. Reg. § 53.4945-6(c)(2) provides that any expenditures for unreasonable administrative
expenses, including compensation, consultant fees, and other fees for services rendered, will
ordinarily be taxable expenditures under section 4945(d)(5) unless the foundation can
demonstrate that such expenses were paid or incurred in the good faith belief that they were
reasonable and that the payment or incurrence of such expenses in such amounts was
consistent with ordinary business care and prudence. The determination whether an
expenditure is unreasonable shall depend upon the facts and circumstances of the particular
case.

Treas. Reg. § 53.4945-6(c)(3) provides that if a private foundation transfers assets as described
in § 507(b)(2), the transferred assets will not be considered used exclusively for purposes
described in § 170(c)(2)(B) unless the assets are transferred to a fund or organization described
in § 501(c)(3).

Treas. Reg. § 53.4946-1(a)(8) provides that for purposes of § 4941 only, the term “disqualified
persons’ shall not include any organization which is described in § 501(c)(3) (other than
organizations described in § 509(a)(4)).

Revenue Ruling 64-182, 1964-1 C.B. 186, provides that corporation organized exclusively for
charitable purposes derives its income principally from the rental of space in a large commercial
office building which it owns, maintains, and operates. The charitable purposes of the
corporation are carried out by aiding other charitable organizations, selected in the discretion of
its governing body, through contributions and grants to such organizations for charitable
purposes. The ruling holds that the corporation is deemed to meet the primary purpose test of §
1.501(c)(3)-1(e)(1) of the regulations, and to be entitled to exemption under § 501(c)(3), where it

is shown to be carrying on through such contributions and grants a charitable program
commensurate in scope with its financial resources.

Revenue Ruling 78-387, 1978-2 C.B. 270, provides that a private foundation that had a
carryover of excess qualifying distributions as described in § 4942(i) transferred all its assets to
another private foundation that was controlled by the same persons who controlled the first
foundation. The transferee foundation may reduce its distributable amount under § 4942(d) by
such carryover.

Revenue Ruling 2002-28, 2002-1 C.B. 241, provides, “A transfer of assets described in §
507(b)(2) does not constitute a termination of the transferor's private foundation status under §
507(a)(1) unless the transferor voluntarily gives notice pursuant to § 507(a)(1). See §§ 1.507-1(b)(6) and 1.507-3(d). The transferor foundation is not required to provide such notice. In
Situation 1, P’s dissolution under state law has no effect on whether P has terminated its private
foundation status for federal tax purposes.” The ruling also goes on to state that the
distributions are made to § 501(c)(3) organizations, which cannot be disqualified persons for §
4941 purposes, therefore there is no self-dealing. The ruling also commented on § 4945 stating
that, "because each transferor foundation transfers all of its assets to one or more private
foundations effectively controlled by the same persons that effectively control the transferor, the
transferee foundations are treated as though they were the transferor for purposes of § 4945.
See § 1.507-3(a)(9)(i). Because the transferee foundations are treated as the transferor
foundation rather than as recipients of expenditure responsibility grants, there are no
expenditure responsibility requirements that must be exercised under § 4945(d)(4) or (h) with
respect to the transfers to the transferee foundations. See § 1.507-3(a)(9)(i) and (iii)(example
2).”

Analysis:

RULING 1: The transfer of all of your assets will not adversely affect your status as a §
501(c)(3) organization, and you may continue in existence as a dormant shell and still maintain
your § 501(c)(3) status.

In order to be exempt under § 501(c)(3) an organization must be operated exclusively for an
exempt purpose. Section 1.501(c)(3)-1(c)(1). Rev. Rul. 64-182, supra, provides that the
provision of grants to exempt organizations is a charitable purpose under § 501(c)(3). Here,
you are providing a grant to an organization that is expected to be recognized as exempt under
§ 501(c)(3). The provision of grants to such an organization is in furtherance of your exempt
purpose, therefore it does not create a substantial non-exempt purpose. The transfer of assets
described by you does not affect your exempt status under § 501(c)(3). Additionally, you will
continue to operate for an exempt purpose following your distribution since you will continue to
operate charitable activities commensurate in scope with your financial resources, see Rev. Rul.
64-182, and you have a specific plan to continue such charitable distributions upon the receipt
of funds for which you have an identifiable legal right in the future. Your proposed transactions
do not jeopardize your tax exemption. You will also continue to file Form 990-PFs in the
intervening years avoiding the effects of § 6033(j).

RULINGS 2, 3, and 6: The transfer will qualify as a transfer under § 507(b)(2) and will not result
in a termination of your foundation status or cause the imposition of the termination tax under §

507(c); the new foundation will not be treated as a newly created organization as a result of the
transfers; and after each transfer, the new foundation will be treated as if it were you for
purposes of §§ 4940 through 4948 and §§ 507 through 509, and the new foundation will be
responsible for any of your excise tax liabilities under Chapter 42 to the extent that you do not
satisfy such liabilities.

Section 507(b)(2) 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) 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 § 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 are
transferring more than 25 percent of the fair market value of your net assets to the new foundation,
a private foundation, for no consideration, your proposed transfer is a significant disposition of
assets that qualifies as a transfer under section 507(b)(2). Therefore, the new foundation will not
be considered a new organization, and it will assume your aggregate tax benefit and liabilities in
proportion to the fair market value of the real and personal property it receives over your total net
asset value prior to the transfer. See Section 1.507-3(a)(2).

Pursuant to § 1.507-4(b) a private foundation that makes a transfer described in § 507(b)(2) is
not subject to the tax imposed under § 507(c) with respect to such transfer unless the provisions
of § 507(a) become applicable. Your transfer will constitute a significant distribution of assets
described in § 507(b)(2). You have stated that you have not and will not notify the Secretary of
your intent to terminate your status as a private foundation and that you have not ever either
committed willful repeated acts (or failures to act) or committed a willful and flagrant act (or
failure to act) which gives rise to tax under Chapter 42. Therefore, your proposed transfer of
assets to the new foundation under § 507(b)(2) will not terminate your private foundation status
under § 507(a) and does not result in a termination tax imposed by § 507(c).

Section 1.507-3(a)(1) provides that in the case of a significant disposition of assets to one or
more private foundations within the meaning of paragraph (c), supra, the transferee organization
shall not be treated as a newly created organization. Under § 1.507-3(a)(9)(i) 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, the transferee private foundation is treated as if it were the transferor. Here, you are
transferring all of your net assets, so, assuming that the new foundation is effectively controlled
by the same persons that control you as you have stipulated, the new foundation is not treated
as a newly created organization. Instead it will be treated as you for all private foundation
purposes, including §§ 4940 through 4948 and §§ 507 through 509.

RULINGS 4 and 5: Following the transfers, you will be eligible to terminate your private
foundation status through the voluntary termination procedures pursuant to § 507(a)(1): and
pursuant to § 1.507-7(b)(1), the date for determining the value of your assets, for purposes of
calculating the termination tax pursuant to § 507(c), shall be the date proper notification is given

and provided that such notice is given at least one day after the second transfer of all of your
assets, then the amount of termination tax due shall be zero dollars.

Section 1.507-1(b)(1) provides that in order for a private foundation to terminate its private
foundation status under § 507(a)(1) it must submit a statement to the Service of its intent to
terminate its private foundation status under § 507(a)(1). Where there have been no willful,
repeated acts or failures to act, and no flagrant act or failure to act, which would give rise to
taxes and penalties under Chapter 42, a taxpayer may elect to terminate its private foundation
status by notifying the Manager, Exempt Organizations Determinations of its intent to
accomplish such termination and paying any termination tax deemed to be due under § 507(c).
Since you have committed no willful, repeated acts or failures to act and no flagrant act or
failure to act, which would give rise to taxes and penalties under Chapter 42, you are eligible to
terminate your private foundation status through a voluntary termination.

Section 507(c) imposes a tax on a terminating private foundation equal to the lesser of the
aggregate tax benefit resulting from its § 501(c)(3) status and the value of its net assets.
Section 1.507-7(b)(1) provides that in the case of a voluntary termination, the date for
determining the value of the foundation’s assets for purposes of the termination tax shall be the
date on which the foundation gives the notification described in § 507(a)(1). You state that you
will provide notification no earlier than one day after the full transfer of all of your assets
following the death of your founder's wife. At this point you will have no assets. Your situation
is substantially similar to that found in Rev. Rul. 2002-28, supra, where the organizations in all
three situations provide notice at least one day after transferring all of their assets. The ruling
determined that in this case the organizations would owe zero dollars under § 507(c). Similar to
the organizations in Rev. Rul. 2002-28, you will owe zero dollars in termination taxes under §
507(c) if you provide notice of termination no earlier than one day after the transfer of all of your
assets.

RULING 7: The transfers will not give rise to any gross investment income or capital gain net
income within the meaning of § 4940 and any excess § 4940 tax paid by you may be used by
the new foundation to offset its § 4940 tax liability.

Section 4940(a) generally imposes an excise tax on a private foundation's net investment
income for the taxable year. Section 4940(c)(1) defines net investment income as the amount
by which the sum of the gross investment income and the capital gain net income exceeds the
deductions allowed under § 4940(c)(3).

Rev. Rul. 2002-28, supra, holds that transfers from a private foundation to one or more private
foundations which are transfers described in § 507(b)(2), do not constitute investments of the
transferor for purposes of § 4940, thus the transfers do not give rise to net investment income
subject to tax under § 4940(a). In addition, because the transferor foundation transfers all of its
assets to one or more private foundations effectively controlled by the same persons that
effectively control the transferor, any excess § 4940 tax paid by the transferor may be used by
the transferee to offset the transferees’ § 4940 tax liability.

Your transfer to the new foundation is similar to those found in Rev. Rul. 2002-28 in that it is a
transfer described in § 507(b)(2), supra, that is made to another private foundation that is
effectively controlled by the same persons that effectively control you. Since your transfer is the

10

same as that found in Rev. Rul. 2002-28 your transfer is not an investment thus does not give
rise to tax under § 4940. Additionally, any excess § 4940 taxes paid by you may be used by the
new foundation to offset its own § 4940 tax liability.

RULING 8: The transfers will not constitute self-dealing under § 4941.

Section 4941(a) imposes an excise tax on each act of self-dealing between a disqualified person
and a private foundation. Sections 4941 and 1.507-3(a) determine whether the proposed transfer
of your assets to the new foundation will constitute an act of self-dealing between a private
foundation and its disqualified persons, as defined in § 4946. Under § 53.4946-1(a)(8), a
“disqualified person” does not include organizations that are exempt under § 501(c)(3). Rev. Rul.,
2002-28, supra, also discusses the distribution from a private foundation to another § 501(c)(3)
organization stating that such a distribution is not subject to § 4941 due to the exception for §
501(c)(3) organizations. Any benefit to your foundation managers is incidental and tenuous under
the circumstances. Therefore, your transfer of assets to the new foundation is not an act of self-
dealing assuming that the new foundation is recognized by the Service as an organization exempt
from tax under § 501(c)(3).

RULING 9: You will not be required to meet the qualifying distribution requirements of § 4942
for either taxable year of transfers provided that the new foundation's distributable amount for
the year of each transfer is increased by your distributable amount. In addition, the new
foundation's own distributable amount under § 4942 shall be reduced by your excess qualifying
distributions under § 4942(i), if any

Section 1.507-3(a)(9)(i) provides that if the same persons control the both the transferee and
transferring organization then they will be treated as the same organization for purposes of §§
4940 through 4948. Rev. Rul. 2002-28, supra, states that the transfers to the transferee
foundations are not treated as qualifying distributions because, in the situations described in the
revenue ruling, the transferee foundations are treated as though they were the transferor
foundations for purposes of section 4942. Furthermore, Rev. Rul. 2002-28 provides that the
transferee foundation assumes all obligations with respect to the transferor's “undistributed
income’ within the meaning of § 4942(c), if any, and reduces its own distributable amount under
§ 4942 by the transferor foundation's excess qualifying distributions under § 4942(i).
Additionally, Rev. Rul. 78-387, supra, provides that when a private foundation transfers all of its
assets to another private foundation that is controlled by the same persons as the transferring
organization, then the transferee foundation may reduce its distributable amount under §
4942(d) by the amount of the transferor’s excess qualifying distributions as described in §
4942(i). Thus, your transfer to the new foundation will not be a qualifying distribution and the
new foundation will assume your obligations for qualifying distributions, if any, or reduce its own
qualifying distribution requirements by any excess distributions you may have as described in §
4942(i).

RULING 10: The transfers will not constitute taxable expenditures within the meaning of §
4945, and you will not be required to exercise expenditure responsibility with respect to the
assets transferred to the new foundation. The new foundation, as successor to you, will be
required to exercise expenditure responsibility with respect to any of your expenditure
responsibility grants.

11

With a § 507(b)(2) transfer, if all of the assets of a private foundation are transferred to another
private foundation effectively controlled by the same person(s) the transferee foundation will be
treated as if it were the transferor organization and would be subject to any liabilities not paid by
the transferor. Sections 1.507-3(a)(4) and (9)(i). Since the transferee organization in such a
transaction is treated as the transferor there are no expenditure responsibility requirements with
respect to such transactions. Section 1.507-3(a)(9)(iii), Example(2); Rev. Rul. 2002-28, supra.
You have represented that the same persons effectively control both you and the new
foundation. Given your representations of effective control, the new foundation will be treated
as you for § 4945 purposes. Since the new foundation is treated as you there are no
expenditure responsibility requirements that must be exercised under §§ 4945(d)(4) and (h) with
respect to your transfer of assets to the new foundation. Any expenditure responsibilities
remaining after the transfer of all of your assets to the new foundation will be assumed by the
new foundation.

RULING 11: If reasonable in amount, the legal, accounting, and other expenses incurred by
you and new foundation in connection with this ruling request and with effectuating the transfers
will be considered qualifying distributions under § 4942 and will not constitute taxable
expenditures pursuant to § 4945.

Section 53.4942(a)-3(a)(2)(i) defines the term qualifying distribution as any amount (including
reasonable and necessary administrative expenses) paid to accomplish one or more purposes
described in § 170(c)(2)(B). Since your legal, accounting, and other expenses incurred in
connection with this ruling request and with effectuating the transfers will be reasonable and
consistent with ordinary business care and prudence and paid to accomplish one or more
purposes described in § 170(c)(2)(B), the granting of assets to an organization described in §
501(c)(3), such expenses are considered qualifying distributions under § 4942.

Under section 53.4945-6(b)(2) of the regulations, legal, administrative and other expenses
incurred by a private foundation are not taxable expenditures if the foundation can demonstrate
that such expenses were paid or incurred in the good faith belief that they were reasonable and
that the payment or incurrence of such expenses in such amounts was consistent with ordinary
business care and prudence. The determination whether an expenditure is reasonable depends
upon the facts and circumstances of a particular case. Thus, your payment of such reasonable
expenses, assuming that you can demonstrate ordinary care and prudence, will not constitute a
taxable expenditure under § 4945.

Rulings:

1. The transfer of all of your assets will not adversely affect your status as a § 501(c)(3)
   organization, and you may continue in existence and still maintain your § 501(c)(3)
   status.

2. The transfer will qualify as a transfer under § 507(b)(2) and will not result in a
   termination of your foundation status or cause the imposition of the termination tax
   under § 507(c).

3. The new foundation will not be treated as a newly created organization as a result of
   the transfers.

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4. Following the transfers, you will be eligible to terminate your private foundation status
   through the voluntary termination procedures pursuant to § 507(a)(1).

5. Pursuant to § 1.507-7(b)(1), the date for determining the value of your assets, for
   purposes of calculating the termination tax pursuant to § 507(c), shall be the date
   proper notification is given and provided that such notice is given at least one day after
   the second transfer of all of your assets, then the amount of termination tax due shall be
   zero dollars.

6. After each transfer, the new foundation will be treated as if it were you for purposes of
   §§ 4940 through 4948 and §§ 507 through 509, and the new foundation will be
   responsible for any of your excise tax liabilities under Chapter 42 to the extent that you
   do not satisfy such liabilities.

7. The transfers will not give rise to any gross investment income or capital gain net
   income within the meaning of § 4940 and any excess § 4940 tax paid by you may be
   used by the new foundation to offset its § 4940 tax liability.

8. The transfers will not constitute self-dealing under § 4941.

9. Your transfer to the new foundation will not be a qualifying distribution and the new
   foundation will assume your obligations for qualifying distributions, if any, or reduce its
   own qualifying distribution requirements by any excess distributions you may have as
   described in § 4942(i).

10. The transfers will not constitute taxable expenditures within the meaning of § 4945, and
    you will not be required to exercise expenditure responsibility under § 4945(h) with
    respect to the assets transferred to the new foundation. The new foundation, as
    successor to you, will be required to exercise expenditure responsibility with respect to
    any of your expenditure responsibility grants.

11. If reasonable in amount, the legal, accounting, and other expenses incurred by you and
    new foundation in connection with this ruling request and with effectuating the transfers
    will be considered qualifying distributions under § 4942 and will not constitute taxable
    expenditures pursuant to § 4945.

This ruling is contingent upon the new foundation receiving a favorable determination letter from
the Internal Revenue Service stating that the new foundation has been recognized as an
organization described in § 501(c)(3).

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. Specifically, this ruling does not reach any conclusion as to the qualifying distribution
status of your proposed transfer under § 4942(g)(3). 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
Manager, Exempt Organizations

Enclosure
Notice 437