Private foundation split receives favorable tax rulings

Plain-English summary

A private foundation whose directors disagreed about how to carry out its mission proposed transferring half of its cash and publicly traded securities to a second private foundation. The IRS ruled that the transfer furthered the first foundation's exempt purposes, qualified as a section 507(b)(2) transfer, and did not terminate the first foundation's private foundation status. The transfer would not be a taxable expenditure if the first foundation exercised expenditure responsibility, and it would not constitute self-dealing because the recipient foundation was a section 501(c)(3) organization rather than a disqualified person. Reasonable legal, accounting, and related transfer expenses would be qualifying distributions and would not be taxable expenditures. The first foundation could count transferred assets toward its section 4942 distribution requirement only to the extent the second foundation made the required pass-through distributions and the first foundation kept sufficient records. The rulings were limited to the requesting foundation and did not determine either foundation's continuing exempt status.

Ruling snapshot

• Question: What federal tax rules apply when one private foundation transfers half its assets to another private foundation?
• Outcome: The IRS issued seven favorable rulings, subject to expenditure-responsibility, pass-through, recordkeeping, and reasonableness conditions.
• Key authorities: IRC §§ 501, 507, 4941, 4942, and 4945

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201606030
Release Date: 2/5/2016

Third Party Communication: None

Index Number: 501.03-02, 507.06-00, Date of Communication: Not Applicable
4941.04-00, 4942.03-05,
4945.04-00 Person To Contact:
, ID No.

Telephone Number:

Refer Reply To:
CC:TEGE:EOEG:E03

PLR-T-103493-15

Date:
October 09, 2015

Legend

Foundation 1 =
Foundation 2 =
A =
B =
C =
D =
E =
Date 1 =
Date 2 =
Year 1 =

Dear                  :

This is in response to the letter dated December 2, 2014, and additional submissions in
which Foundation 1’s counsel requested on behalf of Foundation 1 rulings under section
501, 507, 4941, 4942, 4944, and 4945 of the Internal Revenue Code.¹

Background

Based on the documents and representations submitted on behalf of Foundation 1, the
relevant facts on which Foundation 1's request for rulings is based are as follows:

1 The Internal Revenue Code of 1986, as amended, to which all subsequent “section” references are
made unless otherwise indicated.

PLR-T-103493-15 2

Foundation 1 was recognized as an exempt organization described in section 501(c)(3)
of the Code and classified as a private foundation under section 509(a) on Date 1.
Foundation 1 was founded by A, who is now deceased. Foundation 1's directors are B,
C, and D. B is A’s niece, and C is A’s nephew. B and C disagree on how to carry out
Foundation 1’s exempt purposes. Consequently, Foundation 1’s directors propose to
transfer one-half of Foundation 1's assets to Foundation 2. B created Foundation 2 on
Date 2, and the IRS recognized it in Year 1 as an organization described in section
501(c)(3) of the Code and classified it as a private foundation under section 509(a).
After the proposed transfer, Foundation 1’s directors will be C, D, and E, and
Foundation 2’s directors will be B, D, and E.

Under the proposed transfer, Foundation 1 will transfer one-half of the fair market value
of its total assets as of the date of the transfer, which consist of cash and publicly held
securities, to Foundation 2 for no consideration. The proposed transfer will not be made
out of Foundation 1’s current income. Foundation 1 represents that it will exercise
expenditure responsibility over all assets transferred to Foundation 2. Foundation 1
also represents that it will not seek to terminate its private foundation status under
section 507 of the Code and will continue to operate with the remaining one-half share
of its assets. Foundation 1 further represents that there have been neither any willfully
repeated acts (or failures to act) nor a willful and flagrant act (or failure to act) giving rise
to tax under Chapter 42 of the Code. Finally, Foundation 1 represents that any legal,
accounting, and other expenditures incurred in connection with the proposed transfer
will be reasonable, necessary, and consistent with ordinary business care.

Rulings Requested, Law, and Analysis

Requested Rulings 1:

1. The proposed transfer will be in furtherance of Foundation 1’s section
501(c)(3) purpose.

Section 501(a) of the Code exempts from federal income tax organizations that are
described in section 501(c). Section 501(c)(3) describes organizations that are organized
and operated exclusively for charitable and other designated exempt purposes.
Organizations described in section 501(c)(3) must operate exclusively for an exempt
purpose.

Revenue Ruling 64-182, 1964-1 C.B. 186, provides that a corporation organized
exclusively for charitable purposes is entitled to exemption under section 501(c)(3)
where it is shown to be carrying on through contributions and grants a charitable
program commensurate in scope with its financial resources.

Under the proposed transfer, Foundation 1 will transfer an amount equal to 50 percent
of the fair market value of its assets to Foundation 2. Foundation 1 will continue to

PLR-T-103493-15 3

operate for exempt purposes following the proposed transfer of assets in a manner
commensurate in scope with its remaining financial resources. Accordingly, Foundation
1’s proposed transfer of assets will be in furtherance of Foundation 1’s section 501(c)(3)
purpose.

Requested Rulings 2 and 3:

2. The proposed transfer will qualify as a transfer described in section 507(b)(2)
of the Code, and Foundation 2 will not be treated as a newly created
organization for purposes of Part Il, Subchapter F, Chapter 1 of the Code.

3. The proposed transfer of Foundation 1’s assets will not be described in
section 507(a) of the Code.

Section 507(a) says that, except as provided in subsection (b), the status of any
organization as a private foundation shall be terminated only if (1) it notifies the Secretary
of its intent to accomplish such a termination, or (2) with respect to such organization,
there have been either willful repeated acts (or failure to acts), or a willful and flagrant act
(or failure to act), giving rise to liability for tax under Chapter 42, and the Secretary notifies
such organization that it is liable for the tax imposed by section 507(c), and either such
organization pays the tax (or any portion not abated under section 507(g)) or the entire
amount of such tax is abated under section 507(g).

Section 507(b)(2) says that in the case of a transfer of assets of any private foundation to
another private foundation pursuant to any liquidation or other adjustment, organization, or
reorganization, the transferee foundation shall not be treated as a newly created
organization. A transfer described in section 507(b)(2) is referred to as a “section
507(b)(2) transfer.”

The exception in section 507(a) for what is “provided in subsection (b)” excludes section
507(b)(2) transfers from imposition of the termination tax. Accordingly, a transfer of assets
described in section 507(b)(2) from one private foundation to another does not trigger the
termination tax on the transferor private foundation if the transferee private foundation
involved in the transfer “is not...treated as a newly created organization.”

This is explained in more detail in the applicable regulations. Section 1.507-3(a)(1) of the
Treasury Regulations states that in the case of a transfer of assets described in section
507(b)(2), including a significant disposition of assets to one or more private foundations
within the meaning of paragraph (c) of Treas. Reg. section 1.507-3, the transferee
organization will not be treated as a newly created organization. Similarly, Treas. Reg.
section 1.507-1(b)(6) provides that if a private foundation transfers all or part of its assets
to one or more other private foundations pursuant to a transfer described in section
507(b)(2) and Treas. Reg. section 1.507-3(c), such transferor foundation will not have
terminated its private foundation status under section 507(a)(1).

PLR-T-103493-15 4

Treas. Reg. section 1.507-3(c)(1) of the Regulations describes the terms “other
adjustment, organization, or reorganization” as including any 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 Treas. Reg. section 1.507-
3(c)(2) as any disposition or series of dispositions by a private foundation to one or
more private foundations, where the aggregate value transferred is 25 percent or more
of the fair market value of the net assets of the transferor foundation at the beginning of
the taxable year. Foundation 1 will be transferring 50 percent of its assets to
Foundation 2. Foundation 1 will not receive any consideration for the amounts
transferred, and none of the amounts will be out of current income. Accordingly,
Foundation 1’s proposed transfer will constitute a significant disposition of assets that
will qualify as a section 507(b)(2) transfer.

Treas. Reg. section 1.507-4(b) provides, in part, that a private foundation that makes
transfers described in section 507(b)(2) is “not subject to the tax imposed under section
507(c) with respect to such transfers unless the provisions of section 507(a) become
applicable.” Foundation 1 has represented that it has not and will not notify the
Secretary of any intent to terminate its status as a private foundation within the meaning
of section 507(a)(1) and that it has not 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 within the meaning of section 507(a)(2). Therefore, because the
proposed transfer will be described in section 507(b)(2) and because Foundation 1 will
not give the notice described in section 507(a)(1) or be described in section 507(a)(2),
Foundation 1's proposed transfer of assets to Foundation 2 will not be described in
section 507(a), and Foundation 2 will not be treated as a newly created organization for
this purpose.

The conclusion that Foundation 2 will not be treated as a newly created organization is
reached herein only for purposes of responding to Foundation 1’s request for the ruling
that the proposed transfer will be described in section 507(b)(2). Section 6110(j)(3)
provides, in part, that unless “the Secretary otherwise establishes by regulations, a
written determination may not be used or cited as precedent.” For this purpose, section
6110(b)(1)(A) provides that a “written determination” generally means “a ruling,
determination letter, technical advice memorandum, or Chief Counsel advice.” The
request for rulings to which this letter is directed was submitted by Foundation 1, not by
Foundation 2. Accordingly, Foundation 2 may not use or cite this letter as precedent.
See also, section 11.02 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1, 59.

Requested Ruling 4:

4. The proposed transfer will not constitute a taxable expenditure within the
meaning of section 4945 of the Code, provided Foundation 1 exercises the

PLR-T-103493-15 5

expenditure responsibility required by section 53.4945-5(c)(2) of the Treasury
Regulations, with respect to the transfer.

Section 4945(a) imposes a tax on each “taxable expenditure” of a private foundation.
Section 4945(d)(4) provides that the term “taxable expenditure” includes any amount paid
or incurred by a private foundation (such as, in this case, Foundation 1) as a grant to a
private non-operating foundation (such as, in this case, Foundation 2) unless the grantor
private foundation exercises expenditure responsibility with respect to such grant in
accordance with section 4945(h)

Treas. Reg. section 53.4945-4(a)(2) provides that for purposes of section 4945, the term
“grants” includes such expenditures as “payments to exempt organizations to be used in
furtherance of such recipient organizations’ exempt purposes.” Foundation 1 has
represented that Foundation 2 received recognition as an organization described in
section 501(c)(3) and as a private, non-operating foundation, prior to Foundation 1 making
any transfers of assets to it, and that Foundation 2 will be responsible for maintaining its
tax-exemption thereafter.

Treas. Reg. section 53.4945-6(c)(3) allows a private foundation to transfer its assets to
exempt organizations described in section 501(c)(3), including private foundations,
pursuant to section 507(b)(2), without the transfers being taxable expenditures under
section 4945. However, Treas. Reg. section 53.4945-6(c)(3) does not override the
requirement under section 4945(d)(4) that grants to private, non-operating foundations be
subject to the expenditure responsibility requirements of section 4945(h). Such an
override is available under Treas. Reg. section 1.507-3(a)(9) when the transfer of assets is
a section 507(b)(2) transfer of all of the transferor's assets, but it is not available when the
transfer does not constitute a transfer of all of the transferor's assets, as is the case here.
Consequently, Foundation 1 will have to exercise expenditure responsibility with respect to
all grants to Foundation 2, including the proposed transfer of assets described in section
507(b)(2), to avoid liability for tax under section 4945.

Requested Ruling 5:

5. The proposed transfer will not constitute acts of self-dealing prohibited by
section 4941 of the Code as to Foundation 1’s directors.

Section 4941(a) of the Code imposes taxes on each act of self-dealing between a
disqualified person and a private foundation. Taxes are imposed on both the self-dealers
involved in an act of self-dealing and on any foundation managers who knowingly
participate in an act of self-dealing. Even though section 4941 does not impose a tax ona
private foundation when an act of self-dealing occurs, a foundation with respect to which
there has been an act of self-dealing is required to report it to the IRS on its annual
information return, which is the Form 990-PF in this case.

PLR-T-103493-15 6

Section 4941(d)(1) of the Code provides that the term “self-dealing” includes any direct or
indirect transfer to, or use by or for the benefit of, a disqualified person of the income or
assets of a private foundation. Section 4946(a)(1) defines the term “disqualified person.”
Treas. Reg. section 53.4946-1(a)(8) provides that the term “disqualified person” does not
include organizations that are exempt under section 501(c)(3). Thus, Foundation 2, by
definition, will not be a “disqualified person” with respect to Foundation 1.

In Situation 1 in Rev. Rul. 2002-28, supra, P is recognized as exempt from federal tax
under section 501(c)(3) and is classified as a private foundation under section 509(a).
Pursuant to a plan of dissolution, after satisfying all of its outstanding liabilities, P
distributes all of its remaining assets in equal shares to X, Y, and Z. Rev. Rul. 2002-28,
states, in part, that the transfers in question are to section 501(c)(3) organizations, which
are not treated as disqualified persons for purposes of section 4941. Rev. Rul. 2002-28
concludes that the transfers do not constitute self-dealing transactions and are not subject
to tax under section 4941(a)(1).

Foundation 1’s proposed transfer of assets to Foundation 2 will not constitute an act of
self-dealing, assuming that Foundation 2 was recognized by the IRS as an organization
described in section 501(c)(3) and exempt from tax under section 501(a).

This letter is directed to Foundation 1, not to Foundation 2, B, C, D, E, or any other
disqualified person with respect to Foundation 1. As previously stated, section 6110(j)(3)
provides, in part, that unless “the Secretary otherwise establishes by regulations, a written
determination may not be used or cited as precedent.” Accordingly, neither Foundation 2,
B, C, D, E, nor any other disqualified persons with respect to Foundation 1 may use or cite
this letter as precedent. See section 11.02 of Rev. Proc. 2015-1, supra, at 59.

Requested Ruling 6:

6. The legal, accounting, and other expenditures incurred by Foundation 1 to
effectuate the proposed transfer will not be treated as taxable expenditures
under section 4945 of the Code, and to the extent that they are reasonable,
they will be treated as qualifying distributions under section 4942 of the Code.

Section 4942(a) of the Code generally imposes a tax on the undistributed income of a
private foundation (other than an operating foundation under section 4942(j)(3)) for any
taxable year, that has not been distributed before the first day of the second (or any
succeeding) taxable year following such taxable year. Section 4942(c) defines
undistributed income for any taxable year as the amount by which the distributable amount
for such taxable year, exceeds the qualifying distributions made out of such distributable
amount for such taxable year.

Section 4942(g)(1)(a) and Treas. Reg. section 53.4942(a)-3(a)(2)(i) provide, in part, that
the term “qualifying distribution” means any amount, including reasonable and necessary

PLR-T-103493-15 7

administrative expenses, paid to accomplish one or more purposes described in section
170(c)(1) or (2)(B). Section 170(c)(2)(B) lists the following purposes: “religious, charitable,
scientific, literary, or educational purposes, or to foster national or international amateur
sports competition (but only if no part of its activities involve the provision of athletic
facilities or equipment), or for the prevention of cruelty to children or animals.” These
purposes are the same as the purposes listed in section 501(c)(3). Thus, a grant by a
private foundation to another organization described in section 501(c)(3) ordinarily is an
amount paid to accomplish a purpose described in section 170(c)(2)(B) and may be
considered to be a qualifying distribution.

Assuming that Foundation 1’s legal, accounting, and other expenses incurred in
connection with the proposed transfer will be reasonable and consistent with ordinary
business care and prudence and paid to accomplish one or more purposes described in
section 170(c)(2)(B), such expenses will be considered qualifying distributions under
section 4942.

Section 4945(a) imposes a tax on “each expenditure” of a private foundation. Section
4945(d)(5) provides that the term “taxable expenditure” includes any amount paid or
incurred by a private foundation for any purpose other than one specified in section
170(c)(2)(B).

Treas. Reg. section 53.4945-6(b)(2) provides that 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 the
particular case. Thus, Foundation 1’s payment of reasonable legal, accounting, and other
expenses relating to the proposed transfer, assuming that Foundation 1 can demonstrate
ordinary business care and prudence, will not constitute taxable expenditures under
section 4945.

Requested Ruling 7:

7. The assets that will be transferred by Foundation 1 to Foundation 2 in the
proposed transfer could be treated as a qualifying distribution for Foundation
1's distribution requirements under section 4942 of the Code.

Treas. Reg. section 1.507-3(a)(5) provides that except as provided in Treas. Reg.
section 1.507-3(a)(9), (relating to section 507(b)(2) transfers in which all of the
transferor’s assets are transferred to one or more effectively controlled transferee
private foundations), a private foundation is required to meet the distribution
requirements of section 4942 for any taxable year in which it makes a transfer described
in section 507(b)(2) to another private foundation. Such a transfer itself will be counted

PLR-T-103493-15 8

toward satisfaction of those requirement to the extent the amount transferred meets the
requirements of section 4942(g), including the recordkeeping requirements of section
4942(g)(3)(B).

Section 4942(g)(1)(A) states, in part, that a “qualifying distribution” includes any amount
(including that portion of reasonable and necessary administrative expenses) paid to
accomplish one or more purposes described in section 170(c)(2)(B), other than any
contribution to (i) an organization controlled (directly or indirectly) by the foundation or
disqualified persons with respect to the foundation or (ii) any private foundation that is
not an operating foundation under section 4942(j)(3), except as provided in section
4942(g)(3). Foundation 2 will not be an operating foundation.

Section 4942(g)(3) provides that the term “qualifying distribution” includes a contribution
to (i) another charitable organization controlled directly or indirectly by the transferor
foundation or one or more disqualified persons with respect to the transferor or (ii) a
private non-operating foundation if two requirements are satisfied. The first such
requirement is that the transferee organization satisfy certain “pass-through”
requirements. See section 4942(g)(3)(A). The second requirement is that the
transferor obtains adequate records or other sufficient evidence from the transferee
organization(s) showing that the required pass-through distributions were made. See
Section 4942(g)(3)(B).

Accordingly, if Foundation 2 makes qualifying distributions in the manner required by
the pass-through rules of section 4942(g)(3)(A) and if Foundation 1 obtains sufficient
records to satisfy the recordkeeping requirements of section 4942(g)(3)(B), then
Foundation 1 may count as qualifying distributions those portions of the amounts
distributed to Foundation 2 that satisfy the requirements of section 4942(g)(3)(A) and

(B).
Conclusion

Based on the foregoing, and assuming the accuracy of the facts and representations set
forth herein, we rule as follows:

1. The proposed transfer of 50 percent of Foundation 1’s assets to Foundation 2 will
be in furtherance of Foundation 1’s section 501(c)(3) purpose, as described
above.

2. The proposed transfer of assets will qualify as a transfer of assets described in
section 507(b)(2) of the Code. Given this decision, for purposes of applying
section 507(b)(2) and Chapter 42 to Foundation 1 only, Foundation 2 will not be
treated as a newly created organization as a result of the proposed transfer of
assets.

PLR-T-103493-15 9

3. The proposed transfer of Foundation 1’s assets will not be described in section
507(a).

4. The proposed transfer of assets to Foundation 2 will not constitute a taxable
expenditure under section 4945 of the Code, provided Foundation 1 exercises
expenditure responsibility with respect to the transfers in accordance with section
4945(h).

5. Foundation 1 will not be deemed to have engaged in any acts of self-dealing
under section 4941 by effectuating the proposed transfer of assets, including the
formation of Foundation 2 and the payment by Foundation 1 of reasonable
expenses necessary to effect such transactions.

6. The reasonable legal, accounting, and other expenditures incurred by
Foundation 1 to effectuate the proposed transfer will not constitute taxable
expenditures under section 4945, and all such reasonable expenses will be
qualifying distributions under section 4942.

7. Foundation 1 may count the assets distributed in the proposed transfer toward
the satisfaction of its minimum distribution requirement under section 4942 to the
extent that Foundation 2 makes qualifying distributions described in section
4942(g)(3)(A) and Foundation 1 obtains sufficient records to satisfy the
requirements of section 4942(g)(3)(B).

This letter does not address the applicability of any section of the Code or Regulations
to the facts submitted other than with respect to the sections specifically described.
Neither does this letter constitute a determination that Foundation 1 is exempt from tax
under section 501(a) or is a private foundation under section 509(a). Because it could
help resolve questions concerning your federal income tax status, this ruling should be
kept in your permanent records.

This letter will be made available for public inspection under section 6110 of the Code
after certain deletions of identifying information are made. For details, see the 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 the Notice 437. If you
disagree with our proposed deletions, you should follow the instructions in the Notice
437.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an individual with authority to bind the taxpayer and upon the understanding that
there will be no material changes in the facts. This office has not verified any of the
materials submitted in support of the request for rulings, and such material is subject to
verification on examination.

PLR-T-103493-15 10

No ruling is granted as to whether Foundation 1 qualifies as an organization described
in sections 501(c) and 509(a), and, except as expressly provided above, no opinion is
expressed or implied concerning the federal income tax consequences of any other
aspects of any transaction or item of income set forth in the ruling.

This letter is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited by others as precedent.

A copy of this letter must be attached to any tax return to which it is relevant.
Alternatively, if Foundation 1 files its returns electronically, it may satisfy this
requirement by attaching a statement to its return that provides the date and control
number of this letter.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

If you have any questions about this ruling, please contact the person whose name and
phone number are shown in the heading of this letter.

Sincerely,

Kenneth M. Griffin

Chief

Exempt Organization Branch 3

(Tax Exempt & Government Entities)

Enclosure: Notice 437, Notice of Intention to Disclose
Redacted copy of this letter

cc: