Company-hosted youth job training will not be foundation self-dealing

Plain-English summary

A private foundation planned a job-training and education program for at-risk local youth. A related for-profit company, which was a disqualified person because it substantially funded the foundation, would host participants and donate facilities, employee time, supplies, supervision, and mentoring. The foundation would not pay or reimburse the company, and the company agreed not to hire participants for a stated period after they left the program. The IRS ruled that the arrangement was not self-dealing because the company furnished its resources without charge for the foundation's charitable and educational purposes. Any public recognition or benefit from participants' training work was only incidental or tenuous.

Ruling snapshot

• Question: Would a private foundation commit self-dealing by operating a youth job-training program with free facilities, staff time, and materials from a related company?
• Outcome: approved, the described program would not involve acts of self-dealing
• Key authorities: IRC §§ 501(c)(3), 4941(d); Treas. Reg. § 53.4941(d)-2(f)

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201718002 [Third Party Communication:
Release Date: 5/5/2017 Date of Communication: Month DD, YYYY]
Index Number: 4941.00-00
Person To Contact:
---------------------------------- --------------------, ID No. ------------------
----------------------------------------- Telephone Number:
------------------------------------- ----------------------
Refer Reply To:
In Re: Letter Ruling Regarding Activities CC:TEGE:EOEG:EO2
Under I.R.C. Section 4941 PLR-116677-16
Date:
January 31, 2017

LEGEND

Foundation = ----------------------------------
Program = -------
Company = ------------------------
X = ---

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

This letter responds to a letter submitted from your authorized representative dated May
20, 2016, and subsequent submissions dated June 29, 2016, October 20, 2016,
November 29, 2016, and December 22, 2016, on behalf of Foundation, requesting a
ruling on the proper treatment of Program under § 4941 of the Internal Revenue Code
(hereafter the “Code”) of 1986, as amended. Foundation represents the facts as
follows.

FACTS

Foundation is a tax-exempt private foundation described in § 501(c)(3) of the Code.
Foundation was formed and is funded by Company. Foundation states that its purpose
is to strengthen the fabric of the local community by providing support in the areas of
leadership development, education, environment, economic development, diversity, and
human needs.

Company is a for-profit corporation located in the same community as Foundation.
Foundation states that Company is a disqualified person with respect to Foundation
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because it is a substantial contributor to Foundation. Currently, Company operates a
summer employment jobs training program for high school and college age youths in
the same local community as that in which Foundation is located.

Foundation intends to establish Program to further its exempt purpose. Program will
provide on-the-job training and education to at-risk, underserved, and under-exposed
youths living in the local community. Program will teach the basic skills needed to
obtain and hold an entry level job, thereby reducing poverty and improving the
employment prospects of this at-risk population. Participants will receive training in skills
with widespread application (e.g. management, information technology, human
resources, marketing, design, and support) in addition to soft skills. Foundation states
that to make its Program more effective it intends to model its Program after Company’s
job training program and intends to do so by utilizing Company’s resources in the
operation of Program.

Program participants will be nominated to Program by local charitable organizations.
Nominated participants will be selected based upon prior academic performance,
performance on tests designed to measure ability and aptitude for higher education,
recommendations from instructors or other individuals not related to applicants, financial
need and personal interviews. Employees and relatives of either Foundation or
Company are ineligible to participate in Program. Program will be for a term of three
months during the summer or eight months during the school year.

Foundation states that it will fund the direct operating costs of Program. This includes
the hiring of Foundation employees, as necessary, to handle the human resources and
other administrative costs of operating Program, other than the employee time and
resources donated by Company discussed below. Foundation states any purchases it
makes in connection with operating Program will be from independent third parties.
Foundation will provide participants with bi-weekly grants, with the total amount of
grants a Program participant may receive being dependent upon a qualitative
assessment of Program participant’s charitable need. Foundation represents that it will
enter into a Memorandum of Understanding with Company that Company will not hire or
make any offer to hire any Participant for a period of X years after Participant exits
Program.

Foundation states Company will host Program participants free of charge at its facilities
and will donate both the employee time and resources involved in hosting Program.
This includes the supervision, training and mentoring, and any goods such as office
supplies and other training materials used in connection with Program. Furthermore,
Company will place participants in a sponsoring department at Company as determined
by Foundation. Foundation represents that any goods or services provided by
Company, in connection with Program, will be provided free of charge, and that such
goods or services will be used by Foundation exclusively for charitable and educational
purposes within the meaning of § 501(c)(3) of the Code. Foundation also states that it
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will not make any distributions to Company, including any payment or reimbursement of
expenses.

RULING REQUESTED

The Program will not involve any acts of self-dealing by Foundation under § 4941 of the
Code.

LAW

Section 501(c)(3) of the Code defines organizations exempt from taxation to include a
foundation organized and operated exclusively for religious, charitable, scientific,
educational purposes, or for the prevention of cruelty to children or animals, provided no
part of the net earnings of which inures to the benefit of any private shareholder or
individual, no substantial part of the activities of which is carrying on propaganda, or
otherwise attempting, to influence legislation (except as otherwise provided in
subsection (h)), and which does not participate in, or intervene in (including the
publishing or distributing of statements), any political campaign on behalf of (or in
opposition to) any candidate for public office.

Section 4941 of the Code imposes a tax on each act of self-dealing between a
disqualified person and a private foundation.

Section 4941(d) (1) of the Code provides that the term “self-dealing” means any direct
or indirect (A) sale or exchange, or leasing, of property between a private foundation
and a disqualified person; (B) lending of money or other extension of credit between a
private foundation and a disqualified person; (C) furnishing of goods, services, or
facilities between a private foundation and a disqualified person; (D) payment of
compensation (or payment or reimbursement of expenses) by a private foundation to a
disqualified person; (E) transfer to, or use by or for the benefit of, a disqualified person
of the income or assets of a private foundation.

Section 4941(d)(2)(C) of the Code provides that the furnishing of goods, services, or
facilities by a disqualified person to a private foundation shall not be an act of self-
dealing if the furnishing is without charge and if the goods, services, or facilities so
furnished are used exclusively for purposes specified in § 501(c)(3).

Treas. Reg. § 53.4941(d)-2(f)(2) excludes certain “incidental or tenuous” benefits from
the definition of self-dealing. 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
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foundation to a § 509(a) (1), (2), or (3) organization will not be an act of self-dealing
merely because such organization is located in the same area as a corporation which is
a substantial contributor to the foundation, or merely because one of the § 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. § 53.4941(d)-2(f)(9) illustrates an incidental benefit in two examples. In
Example (1), M, a private foundation, makes a grant of $50,000 to the governing body
of N City for the purpose of alleviating the slum conditions which exist in a particular
neighborhood of N. Corporation P, a substantial contributor to M, is located in the same
area in which the grant is to be used. Although the general improvement of the area
may constitute an incidental and tenuous benefit to P, such benefit by itself will not
constitute an act of self-dealing. In Example (4), A, a disqualified person with respect to
private foundation S, contributes certain real estate to S for the purpose of building a
neighborhood recreation center in a particular underprivileged area. As a condition of
the gift, S agrees to name the recreation center after A. Since the benefit to A is only
incidental and tenuous, the naming of the recreation center, by itself, will not be an act
of self-dealing.

ANALYSIS

Foundation represents that it will not make any payments or distributions to Company, a
disqualified person, for Company’s costs associated with Program, and all purchases
made by Foundation will be made from independent parties. Foundation states that
Company will donate free of charge both the use of its facilities and employees to train
Program participants, and the use of any office supplies or material necessary for
Program. Foundation also states that the provision of goods, services, and facilities by
Company, in connection with Program, will be used by Foundation exclusively for
purposes described within § 501(c)(3) of the Code. In addition, pursuant to the
Memorandum of Understanding, Company agrees that it will not hire or make any offer
to hire, any Participant for a period of X years after the Participant exits Program.

Based on the facts represented, there is no sale or exchange between the Foundation
and Company, and any furnishing or goods or services by Company to Foundation is
done without charge and used by Foundation exclusively for exempt purposes. See §
4941(d)(2)(C) of the Code. Additionally, any insubstantial or accompanying benefit to
Company for its donations to Foundation in connection with the Program--such as
public recognition to Company from assisting Foundation in operating Program or
tangential benefit from the work of the Program participants during and as part of the
training and education in the Program--is an incidental or tenuous benefit and thus
excepted from the definition of self-dealing under Treas. Reg. § 53.4941(d)-2(f)(2). See
also, § 53.4941(d)-2(f)(2)(9) Examples (1) and (2). Accordingly, Foundation’s Program
as described does not involve acts of self-dealing under § 4941(d)(1) of the Code.
PLR-116677-16 5

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 appropriate party, as specified in Rev. Proc. 2017-1, 2017-1 I.R.B. 1, §
7.01(15)(b). This office has not verified any of the material submitted in support of the
request for ruling, 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 was 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. 2017-1, § 11.05.

No ruling is granted as to whether Taxpayer qualifies as an organization described in §
501(c)(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 described in this letter ruling.

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

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

                                   Sincerely,


                                   _______________________
                                   Andrew F. Megosh, Jr.
                                   Senior Tax Law Specialist
                                   (Tax Exempt & Government Entities)

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