Charitable asset transfer does not create unrelated business income

Plain-English summary

A voluntary employees’ beneficiary association planned to terminate after all participants had been paid and no benefit claims or liabilities remained. After paying termination expenses, it would transfer its remaining assets to charitable organizations. The IRS explained that section 512(a)(3)(B) treats income set aside for a purpose specified in section 170(c)(4) as exempt function income for a section 501(c)(9) organization. Because the assets’ income would be transferred for those charitable purposes, it would be excluded when computing unrelated business taxable income. The IRS ruled that the transfer itself would not create unrelated business taxable income for the association.

Ruling snapshot

• Question: Would transferring the terminating association’s remaining assets to charities create unrelated business taxable income?
• Outcome: Approved
• Key authorities: IRC §§ 170(c)(4), 501(c)(9), 511, 512(a)(3)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201545027
Release Date: 11/6/2015
Index Number: 511.00-00, 512.09-03

Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
Telephone Number:
Refer Reply To:
CC:TEGE:EB:HW
PLR-T-103513-15
Date: June 15, 2015

Legend:

Taxpayer =

Bankruptcy Trust =

Bankruptcy Court =

Company A =

Company B =

Company C =

Plan =

Date X =

Year 1 =

Year 2 =

Year 3 =

Dear :

This responds to your letter dated May 9, 2014, requesting a ruling under section 512 of
the Internal Revenue Code (Code) regarding the transfer of Taxpayer's remaining

assets to various charitable organizations upon Taxpayer's termination.

FACTS

PLR-T-103513-15 2

Taxpayer received a determination letter, dated Date X, stating that it is a voluntary
employees’ beneficiary association under section 501(c)(9) of the Code. Bankruptcy
Trust is a business trust established pursuant to an order of the Bankruptcy Court in
connection with the insolvency of Company A. Company A was formed after its former
parent company, Company B, went bankrupt in Year 1. Company A and its affiliates,
including Company C, filed for Chapter 11 protection in Bankruptcy Court in Year 2. In
Year 3, Bankruptcy Trust took over the Company A bankruptcy estate.

Company B provided welfare benefits to its employees through Plan, including medical
benefits, group term life insurance benefits, severance benefits, and disability benefits
(“Plan Benefits”). Company B established Taxpayer to hold and invest the contributions
it made and to pay or provide Plan Benefits to employees. Bankruptcy Trust is the
successor in interest and assignee of certain assets and obligations of Company A,
including those relating to Plan.

Taxpayer intends to terminate and transfer all remaining trust assets, after payment of
administrative expenses related to the termination, to various charitable organizations.
Taxpayer represents that there are no remaining participants in Plan, all benefits owed
under Plan have been paid, and there are no outstanding benefit claims or liabilities.

RULING REQUESTED

Taxpayer has requested a ruling that the transfer of the remaining trust assets to
charitable organizations will not result in unrelated business taxable income to
Taxpayer.

LAW

Section 511 of the Code imposes a tax on the unrelated business taxable income of
exempt organizations, including organizations described in section 501(c)(9).

Section 512(a)(1) provides, generally, that the term “unrelated business taxable income”
means the gross income derived by any organization from any unrelated trade or
business (as defined in section 513) regularly carried on by it, less the deductions
allowed by Chapter 1 which are directly connected with the carrying on of such trade or
business, both computed with the modifications provided in section 512(b).

Section 512(a)(3)(A) provides that, in the case of an organization described in section
501(c)(9), the term "unrelated business taxable income” means the gross income
(excluding any exempt function income), less the deductions allowed by Chapter 1
which are directly connected with the production of the gross income (excluding exempt
function income), both computed with modifications.

PLR-T-103513-15 3

Section 512(a)(3)(B) provides that the term “exempt function income” means the gross
income from dues, fees, charges, or similar amounts paid by members of the
organization as consideration for providing the members or their dependents or guests
goods, facilities, or services in furtherance of the purposes constituting the basis for the
exemption of the organization to which such income is paid. The term also means all
income (other than an amount equal to the gross income derived from any unrelated
trade or business regularly carried on by such organization computed as if the
organization were subject to paragraph (1)), which is set aside—

(i) for a purpose specified in section 170(c)(4), or

(ii) in the case of an organization described in paragraph (9), (17), or (20) of
section 501(c), to provide for the payment of life, sick, accident, or other benefits,

including reasonable costs of administration directly connected with a purpose
described in clause (i) or (ii). If during the taxable year, an amount which is attributable
to income so set aside is used for a purpose other than that described in clause (i) or
(ii), the amount shall be included, under subparagraph (A), in unrelated business
taxable income for the taxable year.

Section 512(a)(3)(E) limits amounts set aside to provide benefits described in section
512(a)(3)(B)(i) that can be treated as exempt function income.

Section 170(c)(4) provides that the term "charitable contribution" includes a contribution
or gift by an individual to or for the use of a domestic fraternal society, order, or
association, operating under the lodge system, but only if such contribution or gift is to
be used exclusively for religious, charitable, scientific, literary, or educational purposes,
or for the prevention of cruelty to children or animals.

ANALYSIS AND CONCLUSION

The provisions of section 512(a)(3)(B) of the Code indicate that the income of an
organization exempt under section 501(c)(9) set aside for a purpose specified in
section 170(c)(4) is exempt function income and, therefore, is excluded in computing
the organization's unrelated business taxable income. Since the income generated by
Taxpayer's assets will be transferred to charitable organizations for purposes specified
in section 170(c)(4), the income is considered exempt function income for purposes of
section 512(a)(3), and is excluded from gross income in determining the unrelated
business taxable income of Taxpayer. Thus, the transfer of the remaining trust assets
from Taxpayer to charitable organizations will not, in and of itself, result in unrelated
business taxable income to Taxpayer.

PLR-T-103513-15 4

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Specifically, this ruling does not
address tax consequences to Bankruptcy Trust.

Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Sincerely,
/S/

Janet A. Laufer

Senior Technician Reviewer

Health & Welfare Branch

Office of Associate Chief Counsel
(Tax Exempt & Government Entities)