PLR 9946036: Blood service reorganization preserves exemption and public charity status

Plain-English summary

A parent organization in a blood service system planned to transfer its clinical service programs to a new affiliate and focus on administration and support for other affiliates. It also planned to share funds, assets, and personnel within the system. The IRS ruled that the transfer and support services would preserve the parent's § 501(c)(3) exemption and change its public charity classification to a § 509(a)(3) supporting organization. The affiliates' exemptions and public charity status would remain intact. On the stated facts, the sharing arrangements would further the organizations' charitable purposes and would not generate unrelated business taxable income under §§ 511 through 514. The rulings assumed no material change in the facts.

Ruling snapshot

• Question: Would the reorganization or sharing resources affect exemption, public charity status, or unrelated business taxable income?
• Outcome: Approved: the parent becomes a supporting organization; the affiliates retain their status; no unrelated business taxable income arises from the described sharing.
• Key authorities: IRC §§ 501(c)(3), 509(a)(3), and 511–514; Treas. Reg. §§ 1.509(a)-4(f)(1), (4) and 1.513-1(d)(2).

Full text (IRS public release)

UIL 501.03-11

DEPARTMENT OF THE TREASURY 199946036

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

Date: Contact Person:

AUG 20 1999

ID Number:

Telephone Number:

Employer identification Number:
Key District Office:

Legend:
A=
B=
C=
D=
E=

Dear Sir or Madam:

This is in response to a letter from your authorized representative requesting a series of rulings on your behalf regarding the tax consequences associated with the transactions described below.

A is exempt from federal income tax under section 501(c)(3) of the Code and is classified as a nonprivate foundation under section 509(a)(1) of the Internal Revenue Code. A is the parent entity in a health care system that provides blood and blood-related products and services to the community. B, C and D are exempt entities affiliated with A. A’s current activities include: (1) blood-related clinical service programs; (2) educational programs and (3) administrative services for its affiliated entities. You have stated that A proposes to transfer its blood-related clinical service programs to E.

B is exempt from federal income tax under section 501(c)(3) of the Code and is classified as a nonprivate foundation under section 509(a)(2) of the Code. B recruits donors and collects and distributes blood and blood products to hospitals in its service region. You have stated that B is the primary source for blood products throughout its service region.

C is exempt from federal income tax under section 501(c)(3) of the Code and is classified as a nonprivate foundation under section 509(a)(2) of the Code. C provides blood products and services.

D is exempt from federal income tax under section 501(c)(3) of the Code and is classified as a nonprivate foundation under section 509(a)(3) of the Code. D’s primary activity is the management of an investment portfolio for the benefit of and to make distributions to the other members of the system.

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E is being recognized as exempt from federal income tax under section 501(c)(3) of the Code and is being classified as a nonprivate foundation under section 509(a)(2) of the Code by letter of even date.

You have stated that this reorganization will improve the efficiency of the system by transferring health care services to operating entities so that A may focus on administration of the system and the operating entities may focus on becoming service providers. You have stated that A has amended its Articles of Incorporation and Bylaws to provide that its purposes are to advance, promote and support B, C and E. In addition, the Bylaws of A have been amended to provide that at least one of the directors of each of the supported organizations will be directors of A.

You have stated that the governing documents of the supported organizations will be amended to provide that A will be the sole member of the entity and to reserve certain powers to A to provide it with sufficient control and authority to ensure that the system operates as one exempt unit.

You have requested the following rulings:

1. The transfer of the clinical services programs to E and the provision of administrative and
   managerial services to the affiliated exempt organizations will not adversely affect A’s exemption under section 501(c)(3) of the Code and the proposed reorganization will not adversely affect the nonprivate foundation status of A, which will be reclassified to a supporting organization under section 509(a)(3).

2. The proposed reorganization will not adversely affect the tax-exempt or nonprivate foundation
   status of any of the exempt affiliated organizations.

3. Any sharing or transfer of funds, assets and/or personnel by and among A and the exempt
   affiliates will not jeopardize the tax exempt status or nonprivate foundation status of these entities or generate unrelated business taxable income.

Section 501(a) of the Code provides an exemption from federal income tax for organizations described in section 501(c)(3), including organizations that are organized and operated exclusively for charitable, educational or scientific purposes.

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations provides that the term "charitable" is used in section 501(c)(3) of the Code in its generally accepted legal sense.

Revenue Ruling 66-323, 1966-2 C.B. 216, provides that a blood bank that provides a community with facilities fo the collection, storage and distribution of human blood and blood products may be exempt under section 501(c)(3) of the Code.

Revenue Ruling 69-545, 1969-2 C.B. 117, provides that the promotion of health is a charitable purpose within the meaning of section 501(c)(3) of the Code.

Revenue Ruling 67-149, 1967-1 C.B. 133, provides that an organization providing only financial assistance to organizations exempt under section 501(c)(3) of the Code may qualify for exemption under section 501(c)(3).

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Revenue Ruling 78-41, 1978-1 C.B. 148, provides that a trust created by an exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital is operated exclusively for charitable purposes and is exempt under section 501(c)(3) of the Code.

Section 501(c)(3) organizations do not jeopardize their tax exempt status by transferring their assets to other organizations exempt under section 501(c)(3) where the assets transferred are used to further exempt charitable purposes.

Section 1.509(a)-4(f)(1) of the Income Tax Regulations provides that section 509(a)(3)(B) of the Code sets forth three different types of relationships, one of which must be met in order to meet the requirements of that subsection. One of those requirements is “operated, supervised or controlled in connection with.” Section 1.509(a)-4(f)(4) of the regulations provides that in the case of supporting organizations which are "supervised or controlled in connection with" one or more publicly supported organizations, the distinguishing feature is the presence of common supervision or control among the governing bodies of all organizations involved, such as the presence of common directors.

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

Section 512(a)(1) of the Code defines unrelated business taxable income as the gross income derived by an organization from any unrelated trade or business regularly carried on by it, less the allowable deductions which are directly connected with the carrying on of the trade or business, with certain modifications.

Section 512(b)(1) of the Code provides, in part, that interest and dividends are excluded from the computation of an exempt organization’s unrelated business taxable income.

Section 512(b)(3) of the Code provides that rents from real property (and its incidental related personal property) are not treated as unrelated business income unless the real property is debt- financed under section 514. Debt-financed property does not include any property substantially related to the exercise or performance by such organization of its exempt purposes.

Section 512(b)(4) of the Code provides that notwithstanding paragraphs (1), (2), (3), or (5), in the case of debt-financed property (as defined in section 514), there shall be included, as an item of gross income derived from an unrelated trade or business, the amount ascertained under section 514(a)(1), and there shall be allowed, as a deduction, the amount ascertained under section 514(a)(2).

Section 512(b)(5) of the Code provides that all gains and losses from the sale of property other than inventory or property held for sale to customers are excluded from unrelated business taxable income.

Section 512(b)(13) of the Code provides, in part, that notwithstanding paragraphs (1), (2), or (3), amounts of interest, annuities, royalties, and rents derived from any organization (in this paragraph called the "controlled organization”) of which the organization deriving such amounts (in this paragraph called the “controlling organization”) has control (as defined in section 368(c)) shall

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be included as an item of gross income (whether or not the activity from which such amounts are derived represents a trade or business or is regularly carried on).

Section 513(a) of the Code defines unrelated trade or business as any trade or business the conduct of which is not substantially related (aside from the need of the organization for funds or the use it makes of the profits derived) to the exercise of the organization’s exempt purposes or functions.

Section 514(b) of the Code defines debt-financed property as any property which is held to produce income and with respect to which there is an acquisition indebtedness at any time during the taxable year. :

Section 1.513-1(d)(2) of the regulations provides, in part, that a trade or business is related to exempt purposes only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes; and it is substantially related for purposes of section 513 of the Code only if the causal relationship is a substantial one. Thus, for the conduct of trade or business from which a particular amount of gross income is derived to be substantially related to purposes for which exemption is granted, the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute importantly to the accomplishment of exempt purposes.

Contributions to organizations exempt from federal income tax under section 501(c)(3) of the Code do not fall within the definition of unrelated business income under section 512, nor create taxable gain or loss to the transferor or transferee.

The proposed transaction will not adversely affect A’s exemption under section 501(c)(3) of the Code because A will continue to promote the health of the community by serving the administrative needs of B, C and E pursuant to Revenue Ruling 78-41, supra. A will continue to qualify as a nonprivate foundation; however it will be reclassified as a supporting organization under section 509(a)(3) of the Code because it will be supervised or controlled in connection with B, C and E.

The proposed transaction will not adversely affect the exempt status or the nonprivate foundation status of B, C, D and E. B, C and E promote health pursuant to Revenue Ruling 66-323, supra. D will not adversely affect its exempt status because its exemption will continue to be based on the fact that, like the organization described in Rev. Rul. 78-41, supra, it is performing an essential function for B, C and E. Their status as nonprivate foundations will not be adversely affected because the basis for their classification as nonprivate foundations will not be changed by the reorganization.

The transfer and sharing of funds, assets and/or personnel by and among A, B, C, D and E is substantially related to the attainment of the exempt purposes that will be furthered by the reorganization. Therefore, such transactions will not give rise to liability for unrelated business income tax under sections 511 through 514 of the Code.

Accordingly, based on all the facts and circumstances described above, we rule:

1. The transfer of the clinical services programs to E and the provision of administrative and
   managerial services to the affiliated exempt organizations will not adversely affect A’s exemption

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under section 501(c)(3) of the Code and the proposed reorganization will not adversely affect the nonprivate foundation status of A, which will be reclassified to a supporting organization under section 509(a)(3).

2. The proposed reorganization will not adversely affect the tax-exempt or nonprivate foundation
   status of any of the exempt affiliated organizations.

3. Any sharing or transfer of funds, assets and/or personnel by and among A and the exempt
   affiliates will not jeopardize the tax exempt status or nonprivate foundation status of these entities or generate unrelated business taxable income.

These rulings are based on the understanding that there will be no material changes in the facts upon which they are based.

These rulings are directed only to the organizations that requested them. Section 6110(j)(3) of the Code provides that they may not be used or cited by others as precedent.

These rulings do not address the applicability of any section of the Code or regulations to the facts submitted other than with respect to the sections described.

We are informing your key District Director of this action. Please keep a copy of these rulings in your permanent records.

Sincerely,

Marvin Friedlander
Chief, Exempt Organizations
Technical Branch 1