Foundation's paid data services further its charitable mission

Plain-English summary

A private operating foundation collected and analyzed neighborhood data to improve the lives of low-income children and their families. It proposed charging social-sector organizations reasonable fees for technical assistance projects that advanced the same mission, added useful data to its repository, and generally produced public results. The IRS ruled that these services were substantially related to the foundation's exempt purpose and therefore were not an unrelated trade or business. The fee income was not subject to unrelated business income tax, and the activity was a functionally related business that did not create excess-business-holdings tax under IRC § 4943.

Ruling snapshot

• Question: Will mission-related paid data-analysis services create unrelated business income or excess-business-holdings tax for the foundation?
• Outcome: approved; neither tax applied on the represented facts
• Key authorities: IRC §§ 501(c)(3), 511, 512, 513, 4942(j), 4943; Treas. Reg. § 1.513-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201701002 Third Party Communication: None
Release Date: 1/6/2017 Date of Communication: Not Applicable
Index Number: 513.00-00, 511.00-00,
512.00-00, 4942.05-02, Person To Contact:
4943.00-00 -----------------------------------------------------
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--------------------- ------------------------------
----------------------------------------------------- Telephone Number:
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------------------------------------- Refer Reply To:
------------------------------ CC:TEGE:EOEG:EO1
PLR-109422-16
Date:
October 05, 2016

Legend

Foundation = ------------------------------
State = -------------
City = -----------

Dear -------------------:

This letter responds to a letter from your authorized representative dated March 18,
2016, as well as subsequent correspondence, submitted on behalf of the Foundation,
requesting rulings that:

(1) Fees received by the Foundation for technical assistance services described in the
ruling request will not cause the Foundation to be treated as being engaged in an
unrelated trade or business as defined in section 513 of the Internal Revenue Code
(Code), because the services have a substantial causal relationship to the achievement
of the Foundation’s exempt purpose;

(2) The income derived from such fees will not be subject to unrelated business income
tax imposed by section 511 of the Code;

(3) The services will not constitute a “business enterprise” within the meaning of section
4943(d)(3) of the Code because they will qualify as a “functionally related business”
within the meaning of section 4942(j) of the Code; and
PLR-109422-16 2

(4) Because the services will not be a business enterprise within the meaning of section
4943(d)(3) of the Code, the Foundation’s provision of the Services will not subject the
Foundation to excise taxes on excess business holdings under section 4943 of the
Code.

FACTS

The Foundation is a tax-exempt organization described in section 501(c)(3) of the Code
and classified as a private operating foundation under sections 509(a) and 4942(j)(3). It
was formed for the charitable purpose of improving the lives of low income children and
their families in State. The Foundation represents that, among other exempt activities, it
furthers this charitable purpose through the collection, analysis, interpretation, and
sharing of City metro region neighborhood data to improve community decision-making.

The Foundation represents that the data usage agreements entered into with
government agencies and school districts give the Foundation access to raw data that is
not typically available in the public domain and is not available to commercial ventures.
The Foundation maintains a repository containing the usage agreement data, along with
publicly available data obtained from the U.S. Census Bureau, Internal Revenue
Service (Service), and U.S. Department of Housing and Urban Development, which
enables it to conduct proactive, in-depth analysis of community issues and cover a wide
array of information about the people, education, and health of the metro City area. The
Foundation maintains on its website a free, user-friendly searchable database tool of
neighborhood indicators based on information in its repository, but the searchable
database does not reveal raw usage agreement data. The searchable database allows
users to find information on key social issues affecting the City metro region
neighborhoods.

In addition to collecting and making neighborhood data publicly available through its
searchable database tool, the Foundation offers technical assistance to “social sector
organizations” – nonprofits, foundations, government agencies, and community
organizations. The Foundation defines “technical assistance” as a request that cannot
be met through independent review of the tools on the Foundation’s website. The
Foundation represents that a client social sector organization seeks technical
assistance because it does not have the in-house technical or subject-matter expertise
to run the type of analysis it is requesting.

A social sector organization seeking the Foundation’s services initiates a project request
to the Foundation. The Foundation represents that it administers an extensive
screening process similar to its grantmaking screening process to ensure that each
project it agrees to undertake for a client social sector organization will provide
information and insight to advance the Foundation’s mission, in addition to ensuring that
the services will be provided only to those specific social sector organizations that are
focused on improving the lives of low-income children and their families.
PLR-109422-16 3

The Foundation represents that, except in the case where there are privacy restrictions
on the data source, all of the data and information provided by the client for the project
is added to the Foundation’s repository for use in other projects as needed by the
Foundation. The Foundation represents that these projects provide the Foundation with
data about the health and well-being of City metro region children, their families, and
their communities so that the Foundation can better understand community needs and
highlight the greatest potential for impact. The additional data informs the Foundation’s
grantmaking activities and assists the Foundation with tracking community change
occurring as a result of its funding efforts. The Foundation represents that completed
projects are made available to the public on its website.

The Foundation previously absorbed all costs of providing technical assistance, but
absorbing all costs severely limits the number of projects that the Foundation engages
in each year. In order to enable it to engage in more projects that bring in valuable new
data and identify research questions not previously explored, the Foundation proposes
to charge a “reasonable fee” for technical assistance requests. The Foundation will not
charge for requests that require less than four hours of staff time. In addition, the
Foundation represents that it will scope its pricing in alignment with clients’ ability to
pay. The Foundation represents that, on a case by case basis, it will charge fees less
than cost.

The Foundation will continue to perform certain data activities without charge, including
making data publicly available through its web-based searchable database tool,
engaging in local and national partnerships to improve the data repository, and
encouraging data-based decision-making.

The Foundation represents that, if it accepts a technical assistance request, the contract
between the Foundation and the client social sector organization will provide that the
client will not use the resulting product or information for any purpose other than the
exempt purpose for which the Foundation agreed to provide the product or information,
and will not resell the product or information.

LAW AND ANALYSIS

Ruling Requests 1 & 2

Section 511 of the Code imposes a tax on a section 501(c)(3) organization’s unrelated
business taxable income (as defined in section 512 of the Code). Section 512 defines
the term “unrelated business taxable income” as the gross income derived by an
organization from any unrelated trade or business (as defined in section 513) regularly
carried on by it, less allowable deductions, both computed with the modifications
provided in section 512(b). Generally, income will be treated as derived from the
conduct of an “unrelated trade or business” if: (1) it is income from trade or business; (2)
PLR-109422-16 4

such trade or business is regularly carried on by the organization; and (3) the conduct of
such trade or business is not substantially related (other than through the production of
funds) to the organization's performance of its exempt functions. See §1.513-1(a) of the
regulations.

Under §1.513-1(d)(2) of the regulations, a substantial causal relationship must exist
between the conduct of the organization's trade or business activities that generated the
income and the achievement of the organization's exempt purpose. A substantial
causal relationship exists where the production or distribution of the goods or the
performance of the services (from which the income is derived) contributes importantly
to the accomplishment of the organization's exempt purpose. See §1.513-1(d)(2).
Therefore, where the goods or services do not contribute importantly to the
accomplishment of the organization's exempt purposes, the income earned is not
derived from the conduct of related trade or business. See §1.513-1(d)(2).

Rev. Rul. 72-369, 1972-2 C.B. 245, held not exempt under section 501(c)(3) of the
Code an organization formed to provide managerial and consulting services at cost to
unrelated section 501(c)(3) organizations. The services consisted of writing job
descriptions and training manuals, recruiting personnel, constructing organizational
charts, and advising organizations on specific methods of operation. These activities
were designed for the individual needs of each client organization. Receipts of the
organization were from services rendered. Disbursements were for operating
expenses. The Service reasoned that providing managerial and consulting services on
a regular basis for a fee is a trade or business ordinarily carried on for profit. The fact
that the services were provided at cost and solely for exempt organizations was not
sufficient to characterize the activity as charitable within the meaning of section
501(c)(3) of the Code. Furnishing the services at cost lacked the donative element
necessary to establish the activity as charitable. The case was distinguished from Rev.
Rul. 71-529, where an organization controlled by a group of exempt organizations
provided investment management services for a charge substantially less than cost
solely to that group.

Similarly, in B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court
concluded that a corporation formed to provide consulting services to nonprofit
organizations was not exempt under section 501(c)(3) of the Code because its activities
constituted the conduct of a trade or business that is ordinarily carried on by commercial
ventures organized for profit. Its primary purpose was not charitable, educational, nor
scientific, but rather commercial. The court explained that the corporation had
completely failed to demonstrate that its services were not in competition with
commercial businesses. Also, the organization's financing did not resemble that of the
typical organization described in section 501(c)(3) of the Code. It had not solicited, nor
had it received, voluntary contributions from the public. Its only source of income was
from fees from services, and those fees were set high enough to recoup all projected
costs, and to produce a profit. Moreover, it did not appear that the corporation ever
PLR-109422-16 5

planned to charge a fee less than “cost.” And finally, the corporation had failed to limit
its clientele to organizations that were section 501(c)(3) exempt organizations.

In this case, the Foundation’s technical assistance services are substantially related to
the performance of its exempt functions. The services are part of the organization’s
exempt data activities. The Foundation’s screening process ensures that it only
undertakes projects that will provide valuable research and data to serve its charitable
mission of improving the lives of low income children and their families. Performing the
data analysis and interpretation services related to each project gives the Foundation
access to new data and identifies new research questions related to its charitable
mission. The Foundation makes the results of each project publicly available on its
website. It also requires that its clients never sell the results of any project or use the
results for any purpose other than the exempt purpose for which the Foundation agreed
to provide its products or services; namely, to improve the lives of low income children
and their families.

The Foundation is not like the organizations in B.S.W. Group, Inc. v. Commissioner and
Rev. Rul. 72-369, because its technical assistance services have a primarily charitable
purpose and differ from those available through commercial ventures. In B.S.W. Group,
Inc., as in Rev. Rul. 72-369, the consulting services served the individual needs of the
clients, but the services themselves were not inherently charitable, nor did they further
the charitable purpose of the organization itself. In this case, the technical assistance
services themselves further charitable purposes. Further, providing the technical
assistance furthers the Foundation’s own charitable purposes because the Foundation
uses resulting data and analysis for its own research and grantmaking purposes, in
addition to assisting client social sector organizations to perform their own charitable
activities. In addition, the Foundation’s services differ from those commercially
available because the Foundation has access to raw data that is not available to
commercial ventures and its activities are performed by employees of the Foundation
who have developed particular knowledge and extensive understanding of issues facing
low income children and their families in City metro region and perform such functions
as part of other activities that further the Foundation’s exempt purposes. Finally, unlike
the organization in B.S.W. Group, Inc., which did not appear to charge any fee less than
cost, and the organization in Rev. Rul. 72-369, which charged fees at cost, the
Foundation will determine on a case-by-case basis whether to charge a fee below cost
to complete the project.

Therefore, the Foundation’s technical assistance services will not constitute an
unrelated trade or business under section 513 of the Code. Furthermore, the income
derived from those activities will not be subject to the unrelated business income tax
imposed by section 511.

Ruling Requests 3 & 4
PLR-109422-16 6

Section 4943(a) of the Code imposes a tax equal to 10 percent of the value of any
excess business holdings of a private foundation in a business enterprise. Section
4943(d)(3) provides that the term “business enterprise” does not include a functionally
related business (as defined by section 4942(j)(4)). Section 4942(j)(4) defines a
“functionally related business” as: (1) a trade or business which is not an unrelated
trade or business (as defined in section 513); or (2) an activity which is carried on within
a larger aggregate of similar activities or within a larger complex of other endeavors
which is related (aside from the need of the organization for income or funds or the use
it makes of the profits derived) to the exempt purposes of the organization.

In this case, the technical assistance services constitute a “functionally related
business” because they are a trade or business which is not an unrelated trade or
business as defined in section 513 of the Code. Thus, the Foundation will not be
subject to tax under section 4943(a).

CONCLUSION

Based solely on the facts and representations submitted, we rule that the Foundation’s
technical assistance services are substantially related to the Foundation’s exempt
purpose and will not be subject to unrelated business income tax under section 511 of
the Code or excess business holdings tax under section 4943(a).

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, as specified in Rev. Proc. 2016-1,
2016-1 I.R.B. 1, § 7.01(15)(b). The office has not verified any of the material submitted
in support of the request for rulings, and such material is subject to verification on
examination. The Associate Office will revoke or modify a letter ruling and apply the
revocation retroactively if there has been a misstatement or omission of controlling
facts; the facts at the time of the transaction are materially different from the controlling
facts on which the ruling is based; or in the case of a transaction involving a continuing
action or series of actions, the controlling facts change during the course of the
transaction. See Rev. Proc. 2016-1, § 11.05.

No ruling is granted as to whether Foundation qualifies as an organization described in
section 501(c) of the Code or section 4942(j)(3), 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 letter.

This ruling 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 as precedent.
PLR-109422-16 7

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

                                                                               Sincerely,


                                                _______________________________

                                                                      Mary Jo Salins
                                                                 Acting Branch Chief
                                                      Exempt Organizations Branch 1
                                                             Associate Chief Counsel
                                                (Tax Exempt and Government Entities)

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