A private foundation gets extra time to make a missed corpus-distribution election

Plain-English summary

A private foundation received large stock contributions from substantial donors and made grants, but it did not distribute a full 100 percent of those contributions in the same year. To help its donors qualify for the more generous "conduit foundation" charitable deduction under § 170(b)(1)(F)(ii), the foundation could elect under Treas. Reg. § 53.4942(a)-3(c)(2)(iv) to treat amounts it had distributed out of corpus in an earlier year as current distributions. That election must be attached to the year's Form 990-PF, and the foundation's tax firm did not make it on the timely filed return. After the firm discovered the error (by reading an article about the election), the foundation filed an amended Form 990-PF and asked the IRS for late-election relief under the "9100" regulations (Treas. Reg. § 301.9100-3). The IRS granted the relief, finding the foundation acted reasonably and in good faith by relying on a qualified tax professional, caught the mistake before the IRS did, and would not gain any improper tax advantage. The foundation was given 60 days to file the amended return with the election statement attached. The lesson: a private foundation that misses this kind of regulatory election can usually still make it through discretionary 9100 relief when a competent adviser dropped the ball.

Ruling snapshot

• Question: May a private foundation get an extension of time to make a late election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv) to treat a prior-year corpus distribution as a current distribution?
• Outcome: Approved (9100 relief granted under Treas. Reg. § 301.9100-3; 60 days to file the amended Form 990-PF with the election).
• Key authorities: IRC § 4942; Treas. Reg. §§ 53.4942(a)-3(c)(2)(iv), 301.9100-1 through 301.9100-3; IRC § 170(b)(1)(F)(ii).

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201831007                                              [Third Party Communication:
Release Date: 8/3/2018                                         Date of Communication: Month DD, YYYY]
Index Number: 4942.00-00, 9100.00-00
                                                               Person To Contact:
------------------------------------------------------         --------------------, ID No. ------------------
-------------------------                                      Telephone Number:
---------------------------------------                        ----------------------
                                                               Refer Reply To:
                                                               CC:TEGE:EOEG:EO2
                                                               PLR-133618-17
                                                               Date:
                                                               April 25, 2018




Legend



Foundation         = ------------------------------------------------------
Year 1             = -------
B                  = ----------------------
C                  = ----------------------------------------------------------------------------------------------
Firm               = -----------------------------

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

This letter responds to Foundation’s ruling request dated October 31, 2017 submitted by
its authorized representative for discretionary relief under Treas. Reg. § 301.9100-3 for
an extension of time to make the election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv).

FACTS

Foundation is recognized as an organization described in § 501(c)(3) of the Internal
Revenue Code1 and classified as a private foundation under I.R.C. § 509(a).
Foundation provides grants to further the charitable purposes of organizations
described in I.R.C. § 501(c)(3).

During Year 1, Foundation received stock contributions with a fair market value of B
dollars from four individuals who are substantial contributors to Foundation, and as
such, are disqualified persons under I.R.C. § 4946.



1
  The Internal Revenue Code of 1986, as amended, to which all subsequent I.R.C. § references are
made unless otherwise indicated.
PLR-133618-17                                 2

Foundation distributed qualifying distributions in Year 1 in the amount of C dollars, an
amount less than 100 percent of the contributions received in Year 1. Foundation
engaged Firm to prepare Foundation’s Year 1 Form 990-PF, Return of Private
Foundation. Foundation relied on Firm to advise Foundation on the proper completion
of the Form 990-PF. Firm handles the Foundation’s taxes as well as the individual tax
returns of its officers and related donors. Foundation’s original 990-PF for Year 1 was
filed timely.

In connection with the preparation of the Year 1 Form 990-PF, Firm states that it
calculated the excess distribution carryovers in a manner that was not consistent with
having made a valid election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv) by not reducing
the carryover from the Year 1 Qualifying Distributions. The election to apply distribution
carryovers to meet the conduit foundation requirement should have been made when
the Year 1 Form 990-PF was prepared and filed.

Firm discovered Foundation’s failure to make the election for Year 1 in April, 2017, as a
result of an officer of Firm reading an article which addressed this election. Upon this
discovery, Firm notified Foundation and filed an amended Form 990-PF for Year 1 in
May, 2017. Foundation was under the mistaken belief that there was an automatic
extension for a period of six months from the extended due date of the return.

Foundation now seeks permission from the Service to make a late election using the
amended Form 990-PF for Year 1 already filed with the Service. Foundation has
submitted a sworn affidavit from an officer of Firm. The affidavit declares that the officer
of the Firm was unaware of the election until reading the article related to the election.

The information returns prepared by Firm meet the requirement to make the election.
Foundation asserts that none of the excess qualifying distributions were used for any
other purpose, and there was no intention to use them for any other purpose.

Foundation discovered the failure to make the regulatory election and submitted a
request for relief before the failure to make the regulatory election was discovered by
the Service. Foundation also states that it is not under examination by the Service, and
as of the date of the ruling request has not received any communication from the
Service regarding the Foundation’s omission to make the election.

LAW AND ANALYIS

I.R.C. § 170(b)(1)(F)(ii) provides, in part, that contributions by an individual to a private
foundation that makes qualifying distributions that are treated as distributions out of
corpus in an amount equal to 100 percent of the contribution within three months and 15
days of the end of the private foundation's taxable year, are deductible at 50 percent of
the Foundation's contribution base for the taxable year.
PLR-133618-17                                 3

I.R.C. § 4942(a) provides for the imposition on the undistributed income of a private
foundation for any taxable year, which has not been distributed before the first day of
the second (or any succeeding) taxable year following such taxable year (if such first
day falls within the taxable period), a tax equal to 30 percent of the amount of such
income remaining undistributed at the beginning of such second (or succeeding) taxable
year.

I.R.C. § 4942(d) defines a private foundation's “distributable amount” for any taxable
year as an amount equal to (1) the sum of the minimum investment return plus the
amounts described in subsection (f)(2)(C), reduced by (2) the sum of the taxes imposed
on such private foundation for the taxable year under subtitle A and I.R.C. § 4940.

I.R.C. § 4942(h) provides rules as to the treatment of “qualifying distributions” made
during a taxable year. Generally, qualifying distributions for a taxable year are treated
as made (A) first out of the undistributed income of the immediately preceding taxable
year (if the private foundation was subject to tax imposed by this section for the
preceding year) to the extent thereof, (B) second out of undistributed income for the
taxable year to the extent thereof, and (C) then out of corpus.

Treas. Reg. § 53.4942(a)-3(c)(2)(iv) provides that a donee organization may elect to
treat as a current distribution out of corpus any amount distributed in a prior taxable
year which was treated as a distribution out of corpus under paragraph (d)(1)(iii) of this
section provided that (a) such amount has not been availed of for any other purpose,
such as a carryover under paragraph (e) of this section or a redistribution under this
paragraph for a prior year, (b) such corpus distribution occurred within the preceding 5
years, and (c) such amount is not later availed of for any other purpose. Such election
must be made by attaching a statement to the return the foundation is required to file
under I.R.C. § 6033 with respect to the taxable year for which such election is to apply.
Such statement must contain a declaration by an appropriate foundation manager
(within the meaning of I.R.C. § 4946(b)(1) that the foundation is making an election
under this paragraph and it must specify that the distribution was treated under
paragraph (d)(1)(iii) of this section as a distribution out of corpus in a designated prior
taxable year (or years). This election is permissible in order to satisfy distribution
requirements under I.R.C. § 170(b)(1)(F)(ii).

Furthermore, for purposes of making the election, an extension of time for making the
election may be available under the relief provisions found in Treas. Reg. § 301.9100-1.
Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in Treas. Reg. §§ 301.9100-2 and
301.9100-3 to make certain regulatory elections. Treas. Reg. § 301.9100-1(b) defines a
“regulatory election” as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, notice or
announcement published in the Internal Revenue Bulletin.
PLR-133618-17                                 4

Treas. Reg. §§ 301.9100-1 through 301.9100-3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make an
election. Treas. Reg. § 301.9100-2 provides automatic extensions of time for making
certain elections. Treas. Reg. § 301.9100-3 provides extensions of time for making
elections that do not meet the requirements of Treas. Reg. § 301.9100-2.

Treas. Reg. § 301.9100-3(a) provides that requests for extensions of time for regulatory
elections may be granted when a foundation provides evidence to establish to the
satisfaction of the Commissioner that a foundation acted reasonably and in good faith,
and the grant of relief will not prejudice the interests of the Government.

Treas. Reg. § 301.9100-3(b)(1) provides that a foundation is deemed to have acted
reasonably and in good faith if the foundation:
(i) Requests relief under this section before the failure to make the regulatory election is
discovered by the Service;
(ii) Failed to make the election because of intervening events beyond the foundation's
control;
(iii) Failed to make the election because, after exercising reasonable diligence (taking
into account the foundation's experience and the complexity of the return or issue), the
Foundation was unaware of the necessity for the election;
(iv) Reasonably relied on the written advice of the Service; or
(v) Reasonably relied on a qualified tax professional, including a tax professional
employed by the foundation, and the tax professional failed to make, or advise the
foundation to make the election.

Treas. Reg. § 301.9100-3(b)(2) provides that a foundation will not be considered to
have reasonably relied on a qualified tax professional if the foundation knew or should
have known that the professional was not:
(i) Competent to render advice on the regulatory election; or
(ii) Aware of all relevant facts.

Treas. Reg. § 301.9100-3(b)(3)(ii) provides, in part, that a foundation is deemed to have
not acted reasonably and in good faith if the foundation was informed in all material
respects of the required election and related tax consequences, but chose not to file the
election.

Treas. Reg. § 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time to make a regulatory election only when the interests of the
Government will not be prejudiced by the granting of relief.

Treas. Reg. § 301.9100-3(c)(1)(i) provides, in part, that the interests of the Government
are prejudiced if granting relief would result in a taxpayer having a lower tax liability in
the aggregate for all taxable years affected by the election than the foundation would
have had if the election had been timely made.
PLR-133618-17                                 5


Treas. Reg. § 301.9100-3(d)(2) provides, in part, that for relief to be granted, the
Service may require the foundation to consent under I.R.C. § 6501(c)(4) to an extension
of the period of limitations on assessment for the taxable year in which the regulatory
election should have been made and any taxable years that would have been affected
by the election had it been timely made.

Treas. Reg. § 301.9100-3(e)(2) & (3) specifies evidence which must be provided when
a foundation requests relief under this section which includes (a) affidavit and
declaration from foundation and (b) affidavits and declarations from other parties.

Treas. Reg. § 301.9100-3(e)(4) further requires additional information to support
request for relief under Treas. Reg. § 301.9100-3(a) which includes:
(i) The foundation must state whether the foundation’s return(s) for the taxable year in
which the regulatory election should have been made or any taxable years that would
have been affected by the election had it been timely made is being examined, or is
being considered by an appeals office or a federal court. The foundation must notify the
Service office considering the request for relief if the Service starts an examination of
any such return while the foundation’s request for relief is pending;
(ii) The foundation must state when the applicable return, form, or statement used to
make the election was required to be filed and when it was actually filed;
(iii) The foundation must submit a copy of any documents that refer to the election;
(iv) When requested, the foundation must submit a copy of the foundation’s return for
any taxable year for which the foundation requests an extension of time to make the
election and any return affected by the election; and
(v) When applicable, the foundation must submit a copy of the returns of other
foundations affected by the election.

Foundation is an organization recognized as exempt under I.R.C. § 501(c)(3) and
classified as a private foundation under I.R.C. § 509(a). Foundation is a private
foundation required to distribute all undistributed income by the close of the following
tax year. See § I.R.C. 4942(a); see also I.R.C. § 4942(d) which defines “distributable
amount.”

Pursuant to Treas. Reg. § 53.4942(a)-3(c)(2)(iv), a private foundation may elect to treat
as a current distribution out of corpus any amount distributed in a prior taxable year
which was treated as a distribution out of corpus provided that such amount has not
been availed of for any other purpose, such as a carryover under paragraph (e) of this
section, or a redistribution under this paragraph for a prior year, and such corpus
distribution occurred within the preceding five years, and such amount is not later
availed for any other purpose. Foundation asserts that it met the requirements in Year
1 to make the election but did not properly make this election when it timely filed its
Year 1 Form 990-PF and that it acted reasonably and in good faith at all times because
it relied on the experience of a qualified tax professional to properly prepare its returns.
PLR-133618-17                                  6


Under Treas. Reg. § 301.9100-3(a), when the foundation is required to make the
election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv) but fails to, a request for an
extension of time for regulatory election(s) may be granted if the foundation provides
evidence (including an affidavit) to establish to the satisfaction of the Commissioner that
the foundation acted reasonably and in good faith, and the grant of the relief will not
prejudice the interests of the Government. As further explained in Treas. Reg. §
301.9100-3(b)(1), the foundation will be deemed to have acted reasonably and in good
faith if, among other things, the foundation requests relief under this section, before the
failure to make the regulatory election is discovered by the Service, or if the foundation
failed to make the election because of intervening events beyond their control, or failed
to make the election because after exercising reasonable diligence (taking into account
the foundation's experience and the complexity of the return or issue), the foundation
was unaware of the necessity of the election, or the foundation reasonably relied on a
qualified tax professional, including a tax professional employed by the foundation, and
the foundation failed to make, or advise the foundation to make, the election.

Foundation provided documentation which included an affidavit from Firm, an
experienced tax preparation firm, to support the position that it acted reasonably and in
good faith as required by Treas. Reg. § 301.9100-3(b)(1). Foundation reasonably relied
on Firm to properly advise it about the returns they prepared for Foundation and to
explain the technical areas of the Form 990-PF. Foundation did not have any reason to
believe that Firm was not competent to render advice about required regulatory
elections. In addition, the discovery of the failure to properly make the election on the
Form 990-PF for Year 1 was by Firm rather than by the Internal Revenue Service.

In order to qualify for discretionary relief, a foundation must demonstrate that the
interests of the Government will not be prejudiced by the granting of relief as required
under Treas. Reg. § 301.9100-3(c)(1). Foundation represented and provided support to
show that its request for relief for the late filing of an election under Treas. Reg. §
53.4942(a)-3(c)(2)(iv) to treat as current distribution out of corpus the amounts
distributed in the prior taxable years, that are available as excess distributions
carryovers held in corpus, does not result in it or its grantor(s) having lower tax liabilities
than if they had timely properly filed such election. The affidavits and other evidence
provided satisfy the requirements of Treas. Reg. § 301.9100-3(b)-(c) and the procedural
requirements of Treas. Reg. § 301.9100-3(e). Therefore, to grant Foundation an
extension of time to make the election will not prejudice the Government’s interest.


RULING

Based solely on the facts and representations submitted by Foundation, we conclude
that the requirements of Treas. Reg. § 301.9100-3 have been satisfied. As a result,
Foundation is granted an extension of time to make an election under Treas. Reg. §
PLR-133618-17                                 7

53.4942(a)-3(c)(2)(iv) in Year 1. The election shall be made by filing an amended Form
990-PF and attaching a statement making the election to the amended return.
Foundation shall have 60 days from the date of this letter ruling to file any relevant
amended returns. The amended return and any subsequent returns should reflect the
revised carryover amounts.

In addition, a copy of this letter must be attached to the relevant returns. If Foundation
files electronically it may satisfy this requirement by attaching a statement to the return
that provides the date and control number of this letter ruling.



                                       Sincerely,



                                       Andrew F. Megosh, Jr.
                                       Senior Tax Law Specialist, EO Branch 2
                                       (Tax Exempt & Government Entities)

Enclosure (1)


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