Private Foundation-PLR

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DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

Number: 200843040
Release Date: 10/24/2008
Date: July 30, 2008

Contact Person:

Identification Number:
Telephone Number:
Employer Identification Number:

SE:T:EO:RA:T:3
UIL: 507.00-00
4941.00-00
4942.00-00
4943.00-00
4944.00-00
4945.00-00

Dear ********:

We have considered your ruling request dated September 6, 2007, and supplemental correspondences, concerning the federal income and excise tax consequences under sections 501(c)(3), 507, 508, 509, 4940, 4941, 4942, 4943, 4944, and 4945 of the Internal Revenue Code of 1986, as amended (hereafter “Code”), related to a proposed merger in the manner and for the purposes described below. You are hereafter referred to as “X”.

Facts :

Y is an organization described in sections 501(c)(3) and 509(a) of the Code and recognized as a private operating foundation. Y’s primary charitable purpose is to provide, through its operating unit, chaplains for the religious and spiritual needs of (i) patients (and their families) of hospitals and nursing homes; and of (ii) policemen, law enforcement officials, firemen, emergency service personnel and employees of governmental agencies and their families. Y’s charitable purpose also includes providing grants for health care and medical related purposes. Y’s sole member is X. X is an organization described in sections 501(c)(3) and 509(a) of the Code and recognized as a private non-operating foundation. X’s primary purpose is to engage in charitable grant-making activities. You represent that the same fourteen individuals who comprise Y’s Board of Trustees also comprise the Board of Trustees of X. Furthermore, you represent that the same persons who serve as Y’s officers also serve in the same positions as X’s officers. In order for X and Y to simplify their governance structure and to reduce administrative expenses, they propose through a Joint Merger Agreement to engage in a statutory merger of X into Y pursuant to local state law. Y will be the surviving organization, and after the merger, Y will change its name to X. Y represents that after the merger, Y will continue to engage in the charitable activities for which Y’s tax-exempt status was granted and Y will also undertake the charitable grant-making activities for which X’s tax-exempt status was granted. Furthermore, X and Y each report that neither organization has excess business holdings before the proposed merger.

Y proposes to amend and restate its Articles of Incorporation and Bylaws to reflect the following changes as a result of the merger:

Y and X will become one corporation, which shall be Y, and which shall survive the merger;
X’s separate existence shall cease;
Y shall possess all of its own and all of X’s rights, privileges and franchises;
All of X’s property and assets shall be transferred to and vest in Y; and
Y shall be responsible for all obligations and liabilities of X, including X’s obligation to exercise expenditure responsibility under section 4945(h) of the Code for grants made by X prior to the merger.

Y states that after the consummation of the merger of X into Y, Y will convert from a private operating foundation to a private non-operating foundation for its fiscal year ending on Date 1.

You have requested the following rulings:

The merger and resulting transfer of X’s assets and liabilities to Y will not adversely affect the section 501(c)(3) of the Code tax-exempt status of either X or Y.
From and after the effective date of the merger and the amendment and restatement of Y’s Articles of Incorporation, Y will continue to exist as an organization that is exempt from taxation under section 501(c)(3) of the Code.
The merger of X into Y and the resulting transfer of X’s assets and liabilities to Y: (a) will not result in termination of X’s status under section 507 of the Code; (b) will qualify as a transfer under section 507(b)(2); and (c) will not cause Y to be treated as a newly created organization.
X and Y are controlled by the same persons and for purposes of the excise taxes imposed in sections 507-509 of the Code, Y will be treated as if it is X.
No tax will be imposed under section 507(c) of the Code because the Internal Revenue Service will not be notified of the termination of X’s status as a private foundationprior to the transfer of all of X’s assets and liabilities to Y pursuant to the Joint Merger Agreement.
If X (through Y as the surviving entity under the applicable local state nonprofit corporation law) does give notice to the Manager, Exempt Organization Determinations (TE/GE) of its intent to terminate its status as a private foundation, the tax under section 507(c) of the Code applies on the date that the notice is given and if X (through Y as the surviving entity under the applicable local state nonprofit corporation law) provides such notice at least one day after it transfers its assets and liabilities to Y, the tax imposed by section 501(c) of the Code will be zero.
Y will be responsible for any of X’s liabilities under Chapter 42 to the extent that X does not satisfy such liabilities.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not give rise to any gross investment income or capital gain net income within the meaning of section 4940 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute self-dealing under section 4941 of the Code and such transfers will not subject X, Y, X’s Board of Trustees and Officers or Y’s Board of Trustees and Officers to tax under section 4941.
Because Y will be treated as if it were X for purposes of section 4942 of the Code, X will not be required to meet the qualifying distribution requirements of section 4942 for the taxable year of the merger, provided that Y’s distributable amount for the year of the merger is increased by X’s distributable amount for the year of the merger and X’s qualifying distributions made during the taxable year of the merger, if any, will be carried over to Y and be used by Y to meet its minimum distribution requirements under section 4942 for the year.
The transfer of assets and liabilities of X to Y pursuant to the Joint Merger Agreement will not result in the application of section 4943 of the Code with regard to excess business holdings because none of the assets will place Y in the position of having excess holdings.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a jeopardizing investment within the meaning of section 4944 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a taxable expenditure within the meaning of section 4945 of the Code and X will not be required to exercise expenditure responsibility with respect to the assets transferred to Y, and Y as successor to X in the merger, will be required to exercise expenditure responsibility with respect to any expenditure responsibility grants of X.
The legal, accounting and other expenses incurred by X and Y in connection with this Ruling Request and with effectuating the proposed transfer will be considered qualifying distributions under section 4942 of the Code and will not constitute taxable expenditures pursuant to section 4945.

Law :

Section 501(c)(3) of the Code provides for the exemption from federal income tax of nonprofit organizations that are organized and operated exclusively for charitable and/or other exempt purposes described within the section.

Section 507(a) of the Code states that except as provided in section 507(b), an exempt organization which is a private foundation can terminate its private foundationstatus only if it notifies the Service of its intent to terminate, or if it commits acts or failures to act giving rise to tax under Chapter 42 and if it pays the termination tax imposed by section 507(c) or has the tax abated.

Section 507(b)(2) of the Code provides that in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or the adjustment, organization or reorganization, the transferee foundation shall not be treated as a newly created organization.

Section 507(c) of the Code imposes an excise tax on each terminating private foundation equal to the lower of the aggregate tax benefit resulting from such termination or the value of its net assets.

Section 507(e) of the Code provides that for purposes of section 507(c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation.

Section 509(a) of the Code provides that certain organizations exempt from federal income tax under section 501(c)(3) are further classified as private foundations so that they are thus subject to the private foundation provisions of Chapter 42 of the Code.

Chapter 42 of the Code imposes excise taxes on private foundations for net investment income under section 4940(a), acts of self-dealing under section 4941, undistributed income under section 4942(a), excess business holdings under section 4943(a), jeopardizing investments under section 4944(a) and taxable expenditures under section 4945(a).

Section 4940 of the Code provides for the imposition of a tax on the net investment income of private foundations.

Section 4940(c)(1) of the Code defines “net investment income” as the amount by which (A) the sum of the gross investment income and the capital gain net income exceeds (B) the deductions allowed by section 4940(c)(3). Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A.

Section 4940(c)(2) of the Code defines “gross investment income” as the gross amount of income from interest, dividends, rents, payments with respect to securities loans (as defined in section 512(a)(5)), and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. Such term shall also include income from sources similar to those in the preceding sentence.

Section 4941(a) of the Code provides for the imposition of tax on each act of self-dealing between a disqualified person and a private foundation.

Section 4941(d)(1)(E) of the Code states that the term “self-dealing” means 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 4942 of the Code imposes 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.

Section 4942(d) of the Code defines “distributable amount”, with respect to any foundation 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 section 4940.

Section 4942(g)(1) of the Code defines “qualifying distributions” as (A) 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 one or more disqualified persons (as defined in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as provided in paragraph (3), or (B) any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in section 170(c)(2)(B).

Section 4942(g)(3) of the Code defines “qualifying distributions” to include a contribution to a section 501(c)(3) organization described in paragraph (1)(A)(i) or (ii) of this section if (A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such section 501(c)(3) organization were a private foundation which is not an operating foundation), and (B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such organization.

Section 4942(i) of the Code permits excess qualifying distributions paid out by a private foundation to be carried forward.

Section 4943(a) of the Code imposes on the excess business holdings of any private foundation in a business enterprise during any taxable year which ends during the taxable period a tax equal to 10 percent of the value of such holdings.

Section 4943(c) of the Code defines “excess business holdings” to mean, with respect to the holdings of any private foundation in any business enterprise, the amount of stock or other interest in the enterprise which the foundation would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the foundation in such enterprise to be 20 percent.

Section 4944(a) of the Code imposes a tax on a private foundation if it invests any amount in a manner as to jeopardize the carrying out of any of its exempt purposes.

Section 4944(c) of the Code provides that an exception to the jeopardizing investment rule are any transfers, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(B), and no significant purpose of which is the production of income or the appreciation of property, shall not be considered as investments which jeopardize the carrying out of exempt purposes.

Section 4945(a) of the Code imposes a tax on the taxable expenditures of a private foundation.

Section 4945(d)(4) of the Code provides that the term “taxable expenditure” means any amount paid or incurred by a private foundation as a grant to an organization unless such organization is described in paragraph (1), (2), or (3) of section 509(a) or is an exempt operating foundation, or the private foundation exercises expenditure responsibility with respect to such grant.

Section 4945(d)(5) of the Code provides that the term “taxable expenditure” does not include amounts paid or incurred by a private foundation as a grant to another organization for purposes specified in section 170(c)(2)(B).

Section 4945(h) of the Code provides that the expenditure responsibility referred to in section 4945(d)(4) means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose for which made, to obtain full and complete reports from the grantee on how the funds are spent, and to make full and detailed reports with respect to such expenditures to the Secretary.

Section 4946(a)(1) of the Code provides, in part, that the term disqualified person” shall not include any organization, which is described in section 501(c)(3) (other than an organization described in section 509(a)(4)).

Section 1.482-1A(a)(3) of the Income Tax Regulations (hereafter “regulations”) defines control for purposes of Section 482 of the Code as any kind of control, direct or indirect, whether legally enforceable or not, and however exercisable or exercised.

Section 1.507-1(a) of the regulations provides that except as provided in section 1.507-2, the status of any organization as a private foundation shall be terminated only if: (1) Such organization notifies the district director of its intent to accomplish such termination, or (2) (i) With respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax under Chapter 42, and (ii) The Commissioner notifies such organization that, by reason of subdivision (i) of this subparagraph, such organization is liable for the tax imposed by section 507(c) of the Code, and either such organization pays the tax imposed by section 507(c) (or any portion not abated under section 507(g)) or the entire amount of such tax is abated under section 507(g).

Section 1.507-1(b)(1) of the regulations provides that in order for a private foundation to terminate its private foundation status under section 1.507-1(a)(1), an organization must submit a statement to the district director of its intent to terminate its private foundation status under section 507(a)(1) of the Code. Such statement must set forth in detail the computation and amount of tax imposed under section 507(c). Unless the organization requests abatement of such tax pursuant to section 507(g), full payment of such tax must be made at the time the statement is filed under section 507(a)(1). An organization may request the abatement of all of the tax imposed under section 507(c), or may pay any part thereof and request abatement of the unpaid portion of the amount of tax assessed. If the organization requests abatement of the tax imposed under section 507(c) and such request is denied, the organization must pay such tax in full upon notification by the Internal Revenue Service that such tax will not be abated. For purposes of subtitle F of the Code, the statement described in this subparagraph, once filed, shall be treated as a return.

Section 1.507-1(b)(6) of the regulations provides that a transfer of all or part of a private foundation’s assets to one or more private foundations pursuant to a transfer described in section 507(b)(2) of the Code and section 1.507-3(c), such transferor foundation will not be deemed to have terminated its private foundation status under section 507(a)(1).

Section 1.507-1(b)(7) of the regulations provides that neither a transfer of ail the assets of a private foundation nor a significant disposition of assets by a private foundation shall be deemed to result in a termination of the transferor private foundation under section 507(a) of the Code unless the transferor private foundation elects to terminate pursuant to sections 507(a)(1) or 507(a)(2).

Section 1.507-3(a)(1) of the regulations provides that in case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee organization shall not be treated as a newly created organization. Thus, in the case of a significant disposition of assets to one or more private foundations within the meaning of 1.507-3(c), the transferee organization shall not be treated as a newly created organization. A transferee organization to which this paragraph applies shall be treated as possessing those attributes and characteristics of the transferor organization which are described in subparagraphs (2), (3), and (4) of this section.

Section 1.507-3(a)(2)(i) of the regulations provides that a transferee organization to which this paragraph applies shall succeed to the aggregate tax benefit of the transferor organization in an amount determined as follows: Such amount shall be an amount equal to the amount of such aggregate tax benefit multiplied by a fraction the numerator of which is the fair market value of the assets (less encumbrances) transferred to such transferee and the denominator of which is the fair market value of the assets of the transferor (less encumbrances) immediately before the transfer. Fair market value shall be determined as of the time of the transfer.

Section 1.507-3(a)(4) of the regulations provides that if a private foundation incurs liability for one or more of the taxes imposed under Chapter 42 (or any penalty resulting there from) prior to, or as a result of, making a transfer of assets described in section 507(b)(2) of the Code to one or more private foundations, in any case where transferee liability applies each transferee foundation shall be treated as receiving the transferred assets subject to such liability to the extent that the transferor foundation does not satisfy such liability.

Section 1.507-3(a)(5) of the regulations provides that except as provided in subparagraph (9) of section 1.507-3(a), a private foundation is required to meet the distribution requirements of section 4942 of the Code for any taxable year in which it makes a section 507(b)(2) transfer of all or part of its net assets to another private foundation.

Section 1.507-3(a)(8)(ii) of the regulations provides that the provisions enumerated in subparagraphs (a) through (g) of this subdivision shall apply to the transferee private foundation with respect to the assets transferred to the same extent and in the same manner that they would have applied to the transferor private foundation had the transfer described in section 507(b)(2) of the Code not been effected.

Section 1.507-3(a)(9)(i) of the regulations provides if a private foundation transfers all of its net assets to one or more private foundations which are effectively controlled (within the meaning of section 1.482-1A(a)(3)), directly or indirectly, by the same person or persons which effectively controlled the transferor private foundation, for purposes of Chapter 42 (section 4940 of the Code et seq.) and part II of subchapter F of chapter 1 of the Code (sections 507 through 509) such a transferee private foundationshall be treated as if it were the transferor. However, where proportionality is appropriate, such a transferee private foundation shall be treated as if it were the transferor in the proportion which the fair market value of the assets (less encumbrances) transferred to such transferee bears to the fair market value of the assets (less encumbrances) of the transferor immediately before the transfer.

Section 1.507-3(c)(1) of the regulations provides that a section 507(b)(2) of the Code transfer is a transfer of assets by a private foundation to another private foundationpursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization. This shall include any organization or reorganization described in subchapter C of Chapter 1. For purposes of section 507(b)(2), the terms other adjustment, organization, or reorganization shall include any partial liquidation or any other significant disposition of assets to one or more private foundations, other than transfers for full and adequate consideration or distributions out of current income.

Section 1.507-3(c)(2) of the regulations provides that the term “significant disposition of assets to one or more private foundations” shall include any disposition for a taxable year where the aggregate of the dispositions to one or more private foundations for the taxable year, is twenty-five percent (25%) or more of the fair market value of the net assets of the foundation at the beginning of the taxable year.

Section 1.507-3(d) of the regulations provides that unless a private foundation voluntarily gives notice pursuant to section 507(a)(1) of the Code, a transfer of assets described in section 507(b)(2) will not constitute a termination of the transferor’s private foundation status under section 507(a)(1). Section 1.507-3(d) provides that unless aprivate foundation gives notice pursuant to section 507(a)(1), a transfer of assets described in section 507(b)(2) will not constitute a termination of the transferor’s private foundation status under section 507(a)(1).

Section 1.507-4(b) of the regulations provides that private foundations that make transfers described in section 507(b)(1)(A) or (2) of the Code are not subject to the termination tax imposed under section 507(c) with respect to such transfers.

Section 53.4940-1(f)(1) Foundation and Similar Excise Tax Regulations (hereafter “foundation regulations”) provides that in determining capital gain net income (net capital gain for taxable years beginning before January 1, 1977) for purposes of the tax imposed by section 4940 of the Code, there shall be taken into account only capital gains and losses from the sale or other disposition of property held by a private foundation for investment purposes (other than program-related investments, as defined in section 4944(c)), and property used for the production of income included in computing the tax imposed by section 511 except to the extent gain or loss from the sale or other disposition of such property is taken into account for purposes of such tax. For taxable years beginning after December 31, 1972, property shall be treated as held for investment purposes even though such property is disposed of by the foundation immediately upon its receipt, if it is property of a type which generally produces interest, dividends, rents, royalties, or capital gains through appreciation (for example, rental real estate, stock, bonds, mineral interests, mortgages, and securities). Under this subparagraph, gains and losses from the sale or other disposition of property used for the exempt purposes of the private foundation are excluded.

Section 53.4942(a)-2(c)(3) of the foundation regulations defines assets used (or held for use) in carrying out the exempt purpose as an asset that is “used (or held for use) directly in carrying out the foundation’s exempt purpose” but only if the asset is actually used by the foundation in the carrying out of the charitable, educational, or other similar purpose which gives rise to the exempt status of the foundation, or if the foundation owns the asset and establishes to the satisfaction of the Commissioner that its immediate use for such exempt purpose is not practical (based on the facts and circumstances of the particular case) and that definite plans exist to commence such use within a reasonable period of time. Consequently, assets which are held for the production of income or for investment (for example, stocks, bonds, interest-bearing notes, endowment funds, or, generally, leased real estate) are not being used (or held for use) directly in carrying out the foundation’s exempt purpose, even though the income from such assets is used to carry out such exempt purpose. Whether an asset is held for the production of income or for investment rather than used (or held for use) directly by the foundation to carry out its exempt purpose is a question of fact.

Section 53.4942(a)-3(e)(1) of the foundation regulations provide that in any taxable year for which an organization is subject to the initial excise tax imposed by section 4942(a) of the Code there is created an excess of qualifying distributions (as determined under section 53.4942(a)-3(e)(2)), such excess may be used to reduce distributable amounts in any taxable year of the adjustment period (as defined in subparagraph (3) of this paragraph). For purposes of section 4942, including paragraph (d) of this section, the distributable amount for a taxable year in the adjustment period shall be reduced to the extent of the lesser of (i) the excess of qualifying distributions made in prior taxable years to which such adjustment period applies or (ii) the remaining undistributed income at the close of such taxable year after applying any qualifying distributions made in such taxable year to the distributable amount for such taxable year (determined without regard to this paragraph). If during any taxable year of the adjustment period there is created another excess of qualifying distributions, such excess shall not be taken into account until any earlier excess of qualifying distributions has been completely applied against distributable amounts during its adjustment period.

Section 53.4943-1 of the foundation regulations provides that under section 4943 of the Code, the combined holdings of a private foundation and all disqualified persons (as defined in section 4946(a)) in any corporation conducting a business which is not substantially related (aside from the need of the foundation for income or funds or the use it makes of the profits derived) to the exempt purposes of the foundation are limited to 20 percent of the voting stock in such corporation. In addition, the combined holdings of a private foundation and all disqualified persons in any unincorporated business (other than a sole proprietorship) which is not substantially related (aside from the need of the foundation for income or funds or the use it makes of the profits derived) to the exempt purposes of such foundation are limited to 20 percent of the beneficial or profits interest in such business. In the case of a sole proprietorship which is not substantially related (within the meaning of the preceding sentence), section 4943 provides that a private foundation shall have no permitted holdings. These general provisions are subject to a number of exceptions and special provisions which will be described in following sections.

Section 53.4945-5(c)(2) of the foundation regulations provides that if a private foundation makes a grant described in section 4945(d)(4) of the Code to a private foundation which is exempt from taxation under section 501(a) for endowment, for the purchase of capital equipment, or for other capital purposes, the grantor foundation shall require reports from the grantee on the use of the principal and the income (if any) from the grant funds. The grantee shall make such reports annually for its taxable year in which the grant was made and the immediately succeeding 2 taxable years. Only if it is reasonably apparent to the grantor that, before the end of such second succeeding taxable year, neither the principal, the income from the grant funds, nor the equipment purchased with the grant funds has been used for any purpose, which would result in liability for tax under section 4945(d), the grantor may then allow such reports to be discontinued.

Section 53.4945-6(b)(2) of the foundation regulations provides that any expenditures for unreasonable administrative expenses, including compensation, consultant fees, and other fees for services rendered, will ordinarily be taxable expenditures under section 4945(d)(5) of the Code unless 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 unreasonable shall depend upon the facts and circumstances of the particular case.

Section 53.4946-1(a)(8) of the foundation regulations provides that for purposes of section 4941 of the Code, only the term “disqualified person” shall not include any organization which is described in section 501(c)(3) (other than an organization described in section 509(a)(4)).

Rev. Rul. 78-387, 1978-2 C.B. 270, holds that when a transferee foundation is treated as the transferor under section 1.507-3(a)(9) of the regulations, the transferee is entitled to reduce its distributable amount under section 4942 of the Code by the amount of the transferor’s excess qualifying distribution carryover.

Rev. Rul. 2002-28, 2002-1 C.B. 941, holds that the transfer from one foundation to another foundation pursuant to a section 507(b)(2) of the Code transfer does not constitute a realizable event for purposes of determining net investment income under section 4940. It also holds that because a transferor private foundation transferred all of its assets to a private foundation effectively controlled by the same persons that effectively control the transferor, the transferee foundation is treated as though it were the transferor for purposes of section 4943 and 4946.

Analysis :

Ruling 1 :

The issue is whether the proposed merger of X’s assets and liabilities into Y will adversely affect either X’s or Y’s tax-exempt status under section 501(c)(3) of the Code.

Section 507(a) of the Code provides that an exempt organization which is a private foundation can terminate its private foundation status only if it notifies the Service of its intent to terminate or if it commits acts or failures to act giving rise to tax under Chapter 42, and subsequently pays the termination tax imposed by section 507(c) or has the tax abated. A transfer of assets from one private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization or reorganization is considered a section 507(b)(2) transfer. A section 507(b)(2) transfer will neither terminate the transferor’s private foundationstatus nor will it terminate the transferee’s private foundation status. See sections 1.507-1(b)(7) and 1.507-3(a)(1) of the regulations.

As described fully in the facts section, X and Y propose to engage in a statutory merger pursuant to local state law of X’s assets and liabilities into Y. Both X and Y are organizations described in sections 501(c)(3) and 509(a) of the Code and recognized as private foundations. The proposed merger of X into Y qualifies as a section 507(b)(2) transfer because it is a transfer from one private foundation to another private foundation pursuant to a “liquidation, merger, redemption…” See section 507(b)(2) and section 1.507-3(c)(1) of the regulations. As the merger is a section 507(b)(2) transfer, neither X’s nor Y’s private foundation status will be terminated as a result of the merger. Seesections 1.507-1(b)(7) and 1.507-3(a)(1). Rather, to terminate either X’s or Y’s tax-exempt status as private foundations, the terminating party must either notify the Service of its intent to terminate or it must commits acts or failures to act resulting in excise tax liability under Chapter 42. See section 507(a).

Y represents that after the merger Y will continue engaging in the same charitable activities for which its tax-exempt status under section 501(c)(3) of the Code was granted. Y also represents that it will take over the charitable grant-making activities formerly conducted by X. Furthermore, Y represents that neither it nor X have notified the Service of any intent to terminate private foundation status or committed acts or failures to act giving rise to a tax under Chapter 42. Therefore, the resulting merger of X’s assets and liabilities into Y will not adversely affect either X’s or Y’s tax-exempt status as private foundations under sections 501(c)(3) and 509(a).

Ruling 2 :

The issue is whether Y will continue to exist as an organization that is exempt from taxation under sections 501(c)(3) and 509(a) of the Code after the effective date of the merger and the amendment and restatement of its Articles of Incorporation.

Prior to the merger, X has been recognized as a tax-exempt private non-operating foundation under sections 501(c)(3) and 509(a) of the Code. Prior to the merger, Y has been recognized as a tax-exempt private operating foundation under sections 501(c)(3) and 509(a). As stated fully in Ruling 1, the proposed merger of X into Y qualifies as a section 507(b)(2) transfer. Absent either notifying the Service of any intent to terminate private foundation status, or committing acts or failures to act giving rise to an excise tax under Chapter 42, a section 507(b)(2) transfer will not result in the termination of either X’s or Y’s tax-exempt status. See sections 1.507-1(b)(7) and 1.507-3(a)(1) of the regulations. Y represents that after the merger, it will amend and restate its Articles of Incorporation to reflect both the transfer of assets and liabilities from X to Y and the assumption of X’s assets and liabilities by Y. Y also represents that after the merger it will continue to engage in direct charitable activities for which its tax-exempt status was granted and it will also undertake to perform the charitable grant-making activities for which X’s tax-exempt status was granted. Y also represents that post merger it will convert from a private operating foundation to a private non-operating foundation for its fiscal year ending Date 1. Private non-operating foundations are required to make certain minimum qualifying distributions. See sections 4941(a), and 4941(j). It is assumed for purposes of this Ruling that after the effective date of the merger Y will meet the qualifying distribution requirements of section 4942. Because Y will continue to engage in qualifying charitable activities after the effective date of the merger and the amendment and restatement of its Articles of Incorporation, Y’s tax-exempt status continues unchanged as an organization that is exempt from taxation under section 501(c)(3) and 509(a).

Ruling 3:

The issue is whether the merger of X into Y and the resulting transfer of X’s assets and liabilities to Y will: (a) terminate X’s status under section 507 of the Code; (b) qualify as a transfer under section 507(b)(2); and (c) cause Y to be treated as a newly created organization.

As to issue (a) listed above, under section 507(a) of the Code, an exempt organization which is a private foundation can terminate its private foundation status only if it notifies the Service of its intent to terminate or if it commits acts or failures to act giving rise to tax under Chapter 42, and if it pays the termination tax imposed by section 507(c) or has the tax abated. As representations have been made that X has neither notified the Service of any intent to terminate its private foundation status, nor has it committed acts or failures to act giving rise to a tax under Chapter 42, X’s disposition of assets and liabilities pursuant to a merger as a section 507(b)(2) transfer does not terminate its private foundation status. .

As to issue (b) listed above, and as described fully in Ruling 1, the transfer of assets and liabilities from X to Y pursuant to a statutory merger under local state law, qualifies as a section 507(b)(2) of the Code transfer because it is a transfer of assets pursuant to a merger from one private foundation to another.

As to issue (c) listed above, under section 507(b)(2) of the Code and section 1.507-3(a)(1) of the regulations, a transfer of assets by a private foundation to another private foundation pursuant to a section 507(b)(2) transfer will not result in the recipient foundation being treated as a newly created organization. Because X and Y are both private foundations, and the transfer qualifies under section 507(b)(2), Y will not be treated as a newly created organization post merger.

Ruling 4 :

The issue is whether X and Y are “effectively controlled” by the same persons for purposes of sections 507-509 of the Code, and whether Y will be treated as if it is X.

Pursuant to section 1.507-3(a)(9)(i) of the regulations, if a private foundation transfers all of its net assets to one or more private foundations which are effectively controlled (within the meaning of section 1.482-1A(a)(3)), directly or indirectly, by the same person or persons which effectively controlled the transferor private foundation, for purposes of sections 507 through 509 of the Code, such a transferee private foundation shall be treated as if it were the transferor. X and Y represented that the same 14 individuals who comprise X’s board of trustees are the same individuals who comprise the board of trustees of Y and that the same persons who serve as X’s officers also serve in the same positions as officers in Y. We are presuming for purposes of this Ruling that X is “effectively controlled” under section 1.482-1A(a)(3) by the same persons who “effectively control” Y. Therefore, after the merger Y shall be treated as if it is X for purposes of sections 507 through 509.

Ruling 5:

The issue is whether the termination tax described under section 507(c) of the Code will be imposed upon X as a result of the merger of X’s assets and liabilities into Y prior to X giving the Service any notice of its intent to terminate its private foundation status.

Section 507(a) of the Code provides that a private foundation can terminate its private foundation status only if it notifies the Service of its intent to terminate or if it commits acts or failures to act giving rise to tax under Chapter 42, and if it pays the termination tax imposed by section 507(c) or has the tax abated. A termination tax is imposed under section 507(c) on the value of the lower of the organization’s net assets or its aggregate tax benefit from its section 501(c)(3) status at the time the organization terminates its private foundation status. As described fully in Ruling 2, the merger of X into Y qualifies as a section 507(b)(2) transfer and said transfer will not terminate X’s private foundation status. See also sections 1.507-1(b)(7) and 1.507-3(a)(1) of the regulations. As X has represented that it has neither notified the Service of its intent to terminate its private foundation status, nor has it committed acts or failed to act giving rise to tax under Chapter 42, a section 507(c) termination tax will not be imposed on X prior to X giving the Service any Notice of its intent to terminate its private foundation status.

Ruling 6 :

The issue is whether the termination tax under section 507(c) of the Code will apply on the date that notice by Y, as the surviving entity of the statutory merger, is given to the Manager, Exempt Organization Determinations (TE/GE) of X’s intent to terminate its private foundation status, and whether the termination tax will be zero provided that Y gives such notice at least one day after the merger of X into Y.

A private foundation may voluntarily terminate its private foundation status upon giving appropriate notice to the Secretary of its intent to terminate. See section 507(a)(1) of the Code and sections 1.507-1(a), 1.507-1(b)(1) of the regulations. Under section 1.507-3(d), “[u]nless a private foundation voluntarily gives notice pursuant to section 507(a)(1) of the Code, a transfer of assets described in section 507(b)(2) will not constitute a termination of the transferor’s private foundation status under section 507(a)(1).” If a termination tax under section 507(c) applies to a private foundation, said tax is equal to the lower of either the aggregate tax benefit resulting from the section 501(c)(3) status of the foundation or the value of the net assets of the foundation. See section 507(c). Under section 507(e), the date of determining the value of a private foundation’s net assets for 507(c) termination tax purpose is made on either “(1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation,” which ever time such value is higher.

As described fully in Ruling 1, the complete merger of X into Y qualifies as a section 507(b)(2) of the Code transfer and X’s private foundation status is not terminated as a result of the merger. Y represents that subsequent to the merger, it will be the surviving entity of all of X’s rights and liabilities, with X’s net assets after the merger being zero. If Y tenders section 507(a)(1) notice after the merger and the value of X’s net assets are zero, then the termination tax imposed under section 507(c) will also be zero. See section 507(e). Therefore, X’s termination will be effective on the date Y tenders section 507(a)(1) notice, and if X’s net assets are zero on this date, X’s termination tax will also be zero.

Ruling 7 :

The issue is whether under Chapter 42 Y will be liable for any of X’s tax liabilities associated with the transferred assets to the extent that X has not satisfied such liabilities.

Under section 1.507-3(a)(4) of the regulations, the recipient of a transfer under section 507(b)(2) of the Code, will be treated as receiving the transferred assets subject to any outstanding tax liability incurred by the transferor under Chapter 42, in proportion to the assets received and to the extent the liability had not been previously satisfied. Here, Y is the recipient of a transfer under section 507(b)(2). Therefore, Y shall be treated as receiving the X’s assets subject to any outstanding tax liability not previously satisfied by X.

Ruling 8 :

The issue is whether the transfer of assets and liabilities by X to Y, pursuant to the merger, will give rise to gross investment income or capital gain net income within the meaning of 4940 of the Code.

Section 4940 of the Code imposes an excise tax upon the net investment income of a private foundation. Net investment income is defined as the sum of gross investment income and capital gain net income less applicable deductions. See section 4940(c)(1). In determining gross investment income, only the gross amount of income earned from interest, dividends, rent, payments with respect to securities loans, and royalties (but excluding any income subject to the tax on unrelated business income) is considered. Seesection 4940(c)(2). In determining capital gain net income, only capital gains and losses from the sale or other disposition of property used for the production of income subject to the investment income tax (e.g., interest, dividends, rents, payments with respect to securities loans and royalties) is considered. See section 53.4940-1(f)(1) of the regulations.

The transfer of X’s assets and liabilities into Y pursuant to a section 507(b)(2) of the Code transfer will not result in the application of the excise tax under section 4940. Because X and Y are deemed, pursuant to Ruling 4, to be “effectively controlled” by the same persons and the transferred assets, pursuant to section 1.507-3(a)(9)(i) of the regulations, maintain their same tax character after the transfer to Y, the transferred assets will not fall within the definition of gross investment income or capital gain net income under sections 4940(c)(1), (2), and will therefore will not give rise to tax under section 4940. See also Rev. Rul. 2002-28.

Ruling 9 :

The issue is whether the merger of X’s assets and liabilities into Y will result in excise tax liability as an act of self-dealing under section 4941 of the Code for X, Y , X’s Board of Trustees and Officers or Y’s Board of Trustees and Officers.

Under section 4941 of the Code, an act of self-dealing is defined as any prohibited sale or exchange or leasing of property between a private foundation and a disqualified person. Under section 4946 and section 53.4946-1(a)(8) of the foundation regulations, a “disqualified person” does not include an organization recognized under section 501(c)(3). Because both X and Y are organizations recognized under section 501(c)(3), the transfer of X’s assets and liabilities to Y pursuant to a statutory merger is not an act of self-dealing under section 4941(a)(1) for X, Y, X’s Board of Trustees and Officers or Y’s Board of Trustees and Officers.

Ruling 10 :

The issue is whether X, for the taxable year of the merger, will be required to meet the qualifying distribution requirements of section 4942 of the Code if Y is treated as X, Y’s distributable amount (as defined in 4942(d)) is increased by X’s distributable amount, and if X’s qualifying distributions (as defined in 4942(g)), if any, are carried over to Y and used by Y to meet the qualifying distribution requirements of section 4942.

Section 4942 of the Code imposes an excise tax on a private non-operating foundation’s failure to distribute its required amount of income/principal, therein defined as “distributable amount.” Under section 4942(g)(1), only “qualifying distributions” are considered in the determination of whether the amount distributed by the private foundation satisfies its “distributable amount” requirement. The definition of “qualifying distributions” includes any distributions paid to accomplish a purpose described in section 170(c)(2)(B), “other than any contribution to (i) an organization controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined in section 4946) with respect to the foundation, except as provided in paragraph (3)…” See section 4942(g)(1). Section 4942(g)(3) permits a private non-operating foundation to make “qualifying distributions” to a recipient organization described under section 501(c)(3), provided that the recipient organization in turn makes “qualifying distributions” equal to the amount received from the private foundation. Any excess “qualifying distributions” made by a private non-operating foundation are carried over to and usable in the next taxable year. See section 4942(i), section 53.4942(a)-3(e) of the foundation regulations. Under section 1.507-3(a)(9)(i) of the regulations, if a transferor private foundation transfers all of its net assets to a recipient private foundation that is “effectively controlled” (within the meaning of section 1.482-1A(a)(3)), by the same persons, the transferee shall be treated as the transferor for purposes of section 4940 through 4948 and 507 through 509. In Rev. Rul. 78-387, 1978-2 C.B. 270, the Service held that in a qualifying transfer under section 1.507-3(a)(9)(i), the recipient private foundation succeeded to the excess “qualifying distributions” of the transferor private foundation and was permitted to reduce its minimum distribution requirements under section 4942 by the carryover of the excess qualifying distributions of the transferor to the extent that the recipient is treated as the transferor under section 1.507-3(a)(9).

As described fully in Ruling 4, it is assumed that X and Y are “effectively controlled” by the same persons. As described fully in Ruling 1, the merger of X into Y qualifies as a section 507(b)(2) of the Code transfer. Under section 1.507-3(a)(9)(i) of the regulations, the complete transfer of assets from X (a private non-operating foundation) to Y (a private operating foundation) will result in Y being treated as X and X not having any “qualifying distribution” requirements in the year of the merger. Y represents that post merger, it will convert from a private operating foundation to a private non-operating foundation for its fiscal year ending Date 1. As such, post merger Y will have a distributable amount requirement under section 4942, and the amount Y is required to distribute will be increased by X’s distributable amount requirement. See section 4942(g). Because the merger results in Y being treated as X under section 1.507-3(a)(9)(i) of the regulations, Y may reduce its minimum distribution requirements under section 4942(g) by the amount of X’s excess qualifying distributions which carried over as a result of the merger under section 1.507-3(a)(9)(i) of the regulations. See also Rev. Rul. 78-387.

In conclusion, during the taxable year of the merger, X will not be required to meet the qualifying distribution requirements of section 4942 of the Code. The complete merger of X into Y will result in Y’s “qualifying distribution” requirements increased by any of X’s outstanding “qualifying distribution” requirements at the time of the merger. Furthermore, post merger, Y will be permitted to carry-over any excess qualifying distributions made by X, to be used by Y to meet its qualifying distribution requirements under section 4942.

Ruling 11 :

The issue is whether the transfer of assets and liabilities from X to Y, pursuant to the merger, will result in the application of Section 4943 of the Code with regard to excess business holdings, where none of the assets will place Y in the position of having excess business holdings.

Section 4943 of the Code imposes an excise tax on a private foundation maintaining business holdings in excess of the threshold limits enumerated in subsection (c). Under section 4943(c), the combined business holdings of a private foundation and all “disqualified persons”, as that term is defined in section 4946(a), in any corporation conducting a business which is not substantially related to the exempt purpose of the foundation are limited to 20% of the voting stock in such corporation. See section 53.4943-1 of the foundation regulations. In a section 507(b)(2) transfer where the transferor and recipient private foundations are effectively controlled by the same persons, the recipient foundation will be treated as if it was the transferor for purposes of sections 4943 and 4946. See section 1.507-3(a)(9)(i) of the regulations, Rev. Rul. 2002-28.

As described fully in Ruling 4, X and Y are presumed to be “effectively controlled” by the same persons. The merger of X into Y will result in Y being treated as if it was X for purposes of section 4943. See section 1.507-3(a)(9)(i) of the regulations. Because neither X nor Y report any excess business holdings before the merger in any entity conducting a business which is not substantially related to either X’s or Y’s exempt purpose, the merger of X into Y will not result in the application of section 4943.

Ruling 12 :

The issue is whether the transfer of X’s assets and liabilities to Y pursuant to the merger will constitute a jeopardizing investment within the meaning of section 4944 of the Code.

Section 4944 of the Code imposes a tax on investments by private foundations which jeopardize their charitable purposes. Under Section 4944(c), a transfer pursuant to section 507(b)(2) is not considered an investment for purposes of section 4944 if the transfer of assets was made for the purpose of accomplishing a charitable purpose. Because Y represents that X will transfer its assets and liabilities to Y with the goal of enabling Y to continue to engage in the various charitable activities described in the facts above, the transfer will not result in the imposition of tax for a jeopardizing investment under section 4944.

Ruling 13 :

The issues are whether the transfer of X’s assets and liabilities to Y pursuant to the merger will constitute a taxable expenditure under section 4945 of the Code, whether X will be required to exercise expenditure responsibility with respect to the assets transferred to Y, and whether Y as successor to X will be required to exercise expenditure responsibility with respect to any expenditure responsibility grants made by X.

Section 4945 of the Code imposes an excise tax upon any taxable expenditure, which is defined under subsection (d) as certain non-qualifying amounts paid or incurred by a private foundation. An exception to the taxable expenditure definition includes any transfer from a private foundation, in the form of a grant, to another organization other than a public charity, provided that the private foundation exercises expenditure responsibility with respect to such grant. See section 4945(d)(4). Under 1.507-3(a)(9)(i) of the regulations, a private foundation that transfers all of its net assets to a recipient private foundation which is effectively controlled (within the meaning of section 1.482-1A(a)(3)) by the same persons who effectively control the transferor for purposes of chapter 42, the transferee private foundation shall be treated as if it were the transferor private foundation. Because the recipient foundation will be treated as the transferor foundation in reference to the assets transferred under sections 4945(d)(4), (h), there are no expenditure responsibility requirements that must be exercised by the transferor private foundation. See also section 1.507-3(a)(9)(iii)(example 2).

The merger of all of X’s assets and liabilities into Y will not result in a taxable expenditure to X and will not result in X’s requirement to exercise expenditure responsibility over the transferred asset to Y because the merger is a qualifying section 507(b)(2) of the Code transfer within which Y will be treated as X. See section 1.507-3(a)(9)(i) of the regulations. Because Y will be treated as X, Y will be required to exercise expenditure responsibility over the grants made by X. See sections 1.507-3(a)(9)(i), (iii)(example 2). Furthermore, Y represent’s that post merger it will amend its Articles of Incorporation and Bylaws to reflect that it assumes all responsibility for all obligations and liabilities of X, including X’s obligation to exercise expenditure responsibility under section 4945(h) for grants made by X prior to the merger.

Therefore, X’s transfer of assets and liabilities to Y will not constitute a taxable expenditure under section 4945 of the Code, X will not be required to exercise expenditure responsibility with respect to assets transferred to Y in the merger, and Y as successor to X will be required to exercise expenditure responsibility with respect to any expenditure responsibility grants made by X.

Ruling 14 :

The issue is whether the legal, accounting and other expenses incurred by X and Y in connection with this Ruling Request and with effectuating the merger will be considered as qualifying distributions under Section 4942 of the Code and not considered taxable expenditures under Section 4945.

Section 4942 of the Code imposes an excise tax on a private foundation’s failure to distribute its required amount of income/principal, therein defined as “distributable amount.” Under section 4942(g), only “qualifying distributions” are considered in the determination of whether the amount distributed by the private foundation satisfies its distributable amount requirement. The definition of qualifying distributions includes “any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in section 170(c)(2)(B). See section 4942(g)(1)(B). An asset is deemed used or held for use “only if the asset is actually used by the foundation in carrying out the charitable, educational, or other similar purpose which gives rise to the exempt status of the foundation…” See section 53.4942(a)-2(c)(3) of the foundation regulations. Assets which are held for the production of income or for investment (such as stocks, bonds, and endowment funds) are not deemed to be used or held for use directly by the foundation in carrying out its charitable purpose. See section 53.4942(a)-2(c)(3). However, whether an asset is held for the production of income/ investment, or whether it is used directly by the foundation in carrying out its exempt purpose is a question of fact. The issue of whether the assets acquired by Y in the merger will be used by Y in carrying out its charitable purpose, as opposed to being held for the production of income as defined in section 53.4942(a)-2(c)(3), is extremely factual and beyond the facts presented in this ruling request; therefore, we decline to answer the question of whether the expenses related to the acquisition of these assets will be considered as qualifying distributions under Section 4942.

Under section 53.4945-6(b)(2) of the foundation regulations, legal, accounting, administrative and other expenses incurred by a private foundation in a good faith belief that they are reasonable and consistent with ordinary care and prudence, will not constitute taxable expenditures under section 4945 of the Code. Therefore, if the legal, accounting and other expenses incurred by X and Y pursuant to the merger were incurred in a good faith belief that they are reasonable and consistent with ordinary care and prudence, the expenditures will not constitute taxable expenditures under section 4945.

Accordingly, based on the information submitted in your ruling request, we rule as follows:

The merger and resulting transfer of X’s assets and liabilities to Y will not adversely affect the section 501(c)(3) of the Code tax-exempt status of either X or Y.
From the effective date of the merger and the amendment and restatement of Y’s Articles of Incorporation, Y will continue to exist as an organization that is exempt from taxation under section 501(c)(3) of the Code.
The merger of X into Y and the resulting transfer of X’s assets and liabilities to Y: (a) will not result in termination of X’s status under section 507 of the Code; (b) will qualify as a transfer under section 507(b)(2); and (c) will not cause Y to be treated as a newly created organization.
Assuming that both X and Y are effectively controlled by the same person within the meaning of section 1.482-1A(a)(3) of the regulations, then post merger Y will be treated as if it is X under sections 507 through 509 of the Code.
No tax will be imposed under section 507(c) of the Code because the Internal Revenue Service will not be notified of the termination of X’s status as a private foundationprior to the transfer of all of X’s assets and liabilities to Y pursuant to the Joint Merger Agreement.
If X (through Y as the surviving entity under the applicable local state nonprofit corporation law) does give notice to the Manager, Exempt Organization Determinations (TE/GE) of its intent to terminate its status as a private foundation, the tax under section 507(c) of the Code applies on the date that the notice is given and if X (through Y as the surviving entity under the applicable local state nonprofit corporation law) provides such notice at least one day after X transfers all of its assets and liabilities to Y, the tax imposed by section 501(c) will be zero if X’s net assets are also zero.
Y will be responsible for any of X’s liabilities under Chapter 42 to the extent that X does not satisfy such liabilities.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not give rise to any gross investment income or capital gain net income within the meaning of section 4940 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute self-dealing under section 4941 of the Code and such transfer will not subject X, Y, X’s Board of Trustees and Officers or Y’s Board of Trustees and Officers to tax under section 4941.
Because Y will be treated as if it were X for purposes of section 4942 of the Code, X will not be required to meet the qualifying distribution requirements of Section 4942 for the taxable year of the merger, provided that Y’s distributable amount for the year of the merger is increased by X’s distributable amount for the year of the merger and X’s qualifying distributions made during the taxable year of the merger, if any, will be carried over to Y and be used by Y to meet its minimum distribution requirements under section 4942 for the year.
The transfer of assets and liabilities of X to Y pursuant to the Joint Merger Agreement will not result in the application of section 4943 of the Code with regard to excess business holdings because none of the assets will place Y in the position of having excess holdings.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a jeopardizing investment within the meaning of section 4944 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a taxable expenditure within the meaning of section 4945 of the Code and X will not be required to exercise expenditure responsibility with respect to the assets transferred to Y, and Y as successor to X in the merger, will be required to exercise expenditure responsibility with respect to any expenditure responsibility grants of X.
The legal, accounting and other expenses incurred by X and Y in connection with this Ruling Request and with effectuating the proposed transfer will not constitute taxable expenditures pursuant to section 4945 of the Code provided that the incurred expenses are incurred in good faith and are reasonable.

For purposes of this Ruling, we are presuming that you are effectively controlled under section 482 of the Code and section 1.482-1A(a)(3) of the regulations. All parts of this Ruling that rely upon you being effectively controlled will no longer apply should it be determined that you are not effectively controlled by the same persons that “effectively control” X.

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

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

This ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts. This ruling does not address the applicability of any section of the Code or regulations to the facts submitted other than with respect to the sections described. Because it could help resolved questions concerning your federal income tax status, this ruling should be kept in your permanent records.

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

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Robert C. Harper, Jr.
Manager, Exempt Organizations
Technical Group 3

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

Number: 200843041

Release Date: 10/24/2008

Date: July 30, 2008

Contact Person:

Identification Number:

Telephone Number:

Employer Identification Number:

SE:T:EO:RA:T:3

UIL: 507.00-00

4941.00-00

4942.00-00

4943.00-00

4944.00-00

4945.00-00

Dear ********:

We have considered your ruling request dated September 6, 2007, and supplemental correspondences, concerning the federal income and excise tax consequences under sections 501(c)(3), 507, 508, 509, 4940, 4941, 4942, 4943, 4944, and 4945 of the internal Revenue Code of 1986, as amended (hereafter “Code”), related to a proposed merger in the manner and for the purposes described below. You are hereafter referred to as “Y”.

Facts :

Y proposes to amend and restate its Articles of Incorporation and Bylaws to reflect the following changes as a result of the merger:

Y and X will become one corporation, which shall be Y, and which shall survive the merger;
X’s separate existence shall cease;
Y shall possess all of its own and all of X’s rights, privileges and franchises;
All of X’s property and assets shall be transferred to and vest in Y; and
Y shall be responsible for all obligations and liabilities of X, including X’s obligation to exercise expenditure responsibility under section 4945(h) of the Code for grants made by X prior to the merger.

Y states that after the consummation of the merger of X into Y, Y will convert from a private operating foundation to a private non-operating foundation for its fiscal year ending on Date 1.

You have requested the following rulings:

The merger and resulting transfer of X’s assets and liabilities to Y will not adversely affect the section 501(c)(3) of the Code tax-exempt status of either X or Y.
From and after the effective date of the merger and the amendment and restatement of Y’s Articles of Incorporation, Y will continue to exist as an organization that is exempt from taxation under section 501(c)(3) of the Code.
The merger of X into Y and the resulting transfer of X’s assets and liabilities to Y: (a) will not result in termination of X’s status under section 507 of the Code; (b) will qualify as a transfer under section 507(b)(2); and (c) will not cause Y to be treated as a newly created organization.
X and Y are controlled by the same persons and for purposes of the excise taxes imposed in sections 507-509 of the Code, Y will be treated as if it is X.
No tax will be imposed under section 507(c) of the Code because the Internal Revenue Service will not be notified of the termination of X’s status as a private foundationprior to the transfer of all of X’s assets and liabilities to Y pursuant to the Joint Merger Agreement.
If X (through Y as the surviving entity under the applicable local state nonprofit corporation law) does give notice to the Manager, Exempt Organization Determinations (TE/GE) of its intent to terminate its status as a private foundation, the tax under section 507(c) of the Code applies on the date that the notice is given and if X (through Y as the surviving entity under the applicable local state nonprofit corporation law) provides such notice at least one day after it transfers its assets and liabilities to Y, the tax imposed by section 501(c) of the Code will be zero.
Y will be responsible for any of X’s liabilities under Chapter 42 to the extent that X does not satisfy such liabilities.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not give rise to any gross investment income or capital gain net income within the meaning of section 4940 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute self-dealing under section 4941 of the Code and such transfers will not subject X, Y, X’s Board of Trustees and Officers or Y’s Board of Trustees and Officers to tax under section 4941.
Because Y will be treated as if it were X for purposes of section 4942 of the Code, X will not be required to meet the qualifying distribution requirements of section 4942 for the taxable year of the merger, provided that Y’s distributable amount for the year of the merger is increased by X’s distributable amount for the year of the merger and X’s qualifying distributions made during the taxable year of the merger, if any, will be carried over to Y and be used by Y to meet its minimum distribution requirements under section 4942 for the year.
The transfer of assets and liabilities of X to Y pursuant to the Joint Merger Agreement will not result in the application of section 4943 of the Code with regard to excess business holdings because none of the assets will place Y in the position of having excess holdings.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a jeopardizing investment within the meaning of section 4944 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a taxable expenditure within the meaning of section 4945 of the Code and X will not be required to exercise expenditure responsibility with respect to the assets transferred to Y, and Y as successor to X in the merger, will be required to exercise expenditure responsibility with respect to any expenditure responsibility grants of X.
The legal, accounting and other expenses incurred by X and Y in connection with this Ruling Request and with effectuating the proposed transfer will be considered qualifying distributions under section 4942 of the Code and will not constitute taxable expenditures pursuant to section 4945.

Law :

Section 4940 of the Code provides for the imposition of a tax on the net investment income of private foundations.

Section 4941(a) of the Code provides for the imposition of tax on each act of self-dealing between a disqualified person and a private foundation.

Section 4942(i) of the Code permits excess qualifying distributions paid out by a private foundation to be carried forward.

Section 4943(c) of the Code defines “excess business holdings” to mean, with respect to the holdings of anyprivate foundation in any business enterprise, the amount of stock or other interest in the enterprise which the foundation would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the foundation in such enterprise to be 20 percent.

Section 4944(a) of the Code imposes a tax on a private foundation if it invests any amount in a manner as to jeopardize the carrying out of any of its exempt purposes.

Section 4945(a) of the Code imposes a tax on the taxable expenditures of a private foundation.

Section 4946(a)(1) of the Code provides, in part, that the term “disqualified person” shall not include any organization, which is described in section 501(c)(3) (other than an organization described in section 509(a)(4)).

Section 1.507-1(b)(7) of the regulations provides that neither a transfer of all the assets of a private foundation nor a significant disposition of assets by a private foundation shall be deemed to result in a termination of the transferor private foundation under section 507(a) of the Code unless the transferor private foundation elects to terminate pursuant to sections 507(a)(1) or 507(a)(2).

Analysis :

Ruling 1 :

The issue is whether the proposed merger of X’s assets and liabilities into Y will adversely affect either X’s or Y’s tax-exempt status under section 501(c)(3) of the Code.

Ruling 2 :

Ruling 3 :

Ruling 4 :

The issue is whether X and Y are “effectively controlled” by the same persons for purposes of sections 507-509 of the Code, and whether Y will be treated as if it is X.

Ruling 5 :

Ruling 6 :

Ruling 7 :

The issue is whether under Chapter 42 Y will be liable for any of X’s tax liabilities associated with the transferred assets to the extent that X has not satisfied such liabilities.

Ruling 8 :

Ruling 9 :

The issue is whether the merger of X’s assets and liabilities into Y will result in excise tax liability as an act of self-dealing under section 4941 of the Code for X, Y, X’s Board of Trustees and Officers or Y’s Board of Trustees and Officers.

Under section 4941 of the Code, an act of self-dealing is defined as any prohibited sale or exchange or leasing of property between a private foundation and a disqualified person. Under section 4946 and section 53.4946-1(a)(8) of the foundation regulations, a “disqualified person” does not include an organization recognized under section 501(c)(3). Because both X and Y are organizations recognized under section 501(c)(3), the transfer of X’s assets and liabilities to Y pursuant to a statutory merger is not an act of self-dealing under section 4941(a)(1) for X, Y , X’s Board of Trustees and Officers or Y’s Board of Trustees and Officers.

Ruling 10 :

Ruling 11 :

Ruling 12 :

The issue is whether the transfer of X’s assets and liabilities to Y pursuant to the merger will constitute a jeopardizing investment within the meaning of section 4944 of the Code.

Ruling 13 :

Ruling 14 :

Accordingly, based on the information submitted in your ruling request, we rule as follows:

The merger and resulting transfer of X’s assets and liabilities to Y will not adversely affect the section 501(c)(3) of the Code tax-exempt status of either X or Y.
From the effective date of the merger and the amendment and restatement of Y’s Articles of Incorporation, Y will continue to exist as an organization that is exempt from taxation under section 501(c)(3) of the Code.
The merger of X into Y and the resulting transfer of X’s assets and liabilities to Y: (a) will not result in termination of X’s status under section 507 of the Code; (b) will qualify as a transfer under section 507(b)(2); and (c) will not cause Y to be treated as a newly created organization.
Assuming that both X and Y are effectively controlled by the same person within the meaning of section 1.482-1A(a)(3) of the regulations, then post merger Y will be treated as if it is X under sections 507 through 509 of the Code.
No tax will be imposed under section 507(c) of the Code because the Internal Revenue Service will not be notified of the termination of X’s status as a private foundationprior to the transfer of all of X’s assets and liabilities to Y pursuant to the Joint Merger Agreement.
If X (through Y as the surviving entity under the applicable local state nonprofit corporation law) does give notice to the Manager, Exempt Organization Determinations (TE/GE) of its intent to terminate its status as a private foundation, the tax under section 507(c) of the Code applies on the date that the notice is given and if X (through Y as the surviving entity under the applicable local state nonprofit corporation law) provides such notice at least one day after X transfers all of its assets and liabilities to Y, the tax imposed by section 501(c) will be zero if X’s net assets are also zero.
Y will be responsible for any of X’s liabilities under Chapter 42 to the extent that X does not satisfy such liabilities.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not give rise to any gross investment income or capital gain net income within the meaning of section 4940 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute self-dealing under section 4941 of the Code and such transfer will not subject X, Y, X’s Board of Trustees and Officers or Y ‘s Board of Trustees and Officers to tax under section 4941.
Because Y will be treated as if it were X for purposes of section 4942 of the Code, X will not be required to meet the qualifying distribution requirements of Section 4942 for the taxable year of the merger, provided that Y’s distributable amount for the year of the merger is increased by X’s distributable amount for the year of the merger and X’s qualifying distributions made during the taxable year of the merger, if any, will be carried over to Y and be used by Y to meet its minimum distribution requirements under section 4942 for the year.
The transfer of assets and liabilities of X to Y pursuant to the Joint Merger Agreement will not result in the application of section 4943 of the Code with regard to excess business holdings because none of the assets will place Y in the position of having excess holdings.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a jeopardizing investment within the meaning of section 4944 of the Code.
The transfer of assets and liabilities by X to Y pursuant to the Joint Merger Agreement will not constitute a taxable expenditure within the meaning of section 4945 of the Code and X will not be required to exercise expenditure responsibility with respect to the assets transferred to Y, and Y as successor to X in the merger, will be required to exercise expenditure responsibility with respect to any expenditure responsibility grants of X.
The legal, accounting and other expenses incurred by X and Y in connection with this Ruling Request and with effectuating the proposed transfer will not constitute taxable expenditures pursuant to section 4945 of the Code provided that the incurred expenses are incurred in good faith and are reasonable.

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

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

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Robert C. Harper, Jr.
Manager, Exempt Organizations
Technical Group 3

Private Letter Ruling
Number: 201513005
Internal Revenue Service
December 31, 2014

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

Release Number: 201513005
Release Date: 3/27/2015
December 31, 2014
Uniform Issue List Numbers:
501.03-02
507.00-00
4941.04-00
4942.03-05
4944.05-00
4945.04-05
4945.04-06

Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:

Dear ********:

We have considered your letter of December 18, 2012 (as supplemented by your letter of October 23, 2013), in which you request rulings on the federal tax consequences of the transactions described below.

Facts

The Interested Parties

The parties interested in this request are M and R.

M was organized as a nonprofit corporation under state law prior to 1970. It is organized exclusively for religious, charitable, civic, educational, literary, and scientific purposes within the meaning of §§ 170(c)(2)(B) and 501(c)(3) of the Internal Revenue Code.

M is recognized as exempt from federal income tax under § 501(c)(3), and is classified as a private non-operating foundation under § 509(a). M accomplishes its purposes by making grants to other charitable and educational organizations in the United States and in foreign countries. The amount of M’s excess qualifying distributions carryover (within the meaning of § 53.4942(a)-3(e) of the Foundation and Similar Excise Taxes Regulations) from its 2011 tax year to its 2012 tax year was approximately $2,733x. M has been funded almost exclusively by contributions of cash and stock from N, a corporation. Thus N, as a substantial contributor to M (within the meaning of § 507(d)(2)), is a disqualified person (within the meaning of § 4946(a)(1)(A)) with respect to M.

N recently reorganized its business operations into two publicly-traded companies, resulting in a part of N’s business being conducted by P. In conjunction with the reorganization, N created R to carry out certain philanthropic activities formerly carried out by M.

R is organized exclusively for religious, charitable, civic, educational, literary, and scientific purposes within the meaning of §§ 170(c)(2)(B) and 501(c)(3). R is recognized as exempt from federal income tax under 501(c)(3) and is classified as a private non-operating foundation under § 509(a). R intends to provide grants to other organizations in the United States and in foreign countries to fund activities that are aligned with, and are in furtherance of, R’s charitable purposes.

The Transfer

To effectuate the philanthropic purposes of both M and R, M has assigned the following grant commitments to R (hereinafter, the “Assigned Grants”):

M’s rights and obligations under a grant agreement between M and S (“Grant 1”). S is an organization described in § 501(c)(3) and is classified as other than private foundation under § 509(a)(1). At the time of the assignment, M remained obligated to disburse $3x to S.
M’s rights and obligations under a grant agreement between M and T (“Grant 2”). T is an organization described in § 501(c)(3) and is classified as other than private foundation under § 509(a). At the time of the assignment, M remained obligated to disburse $11x to T.In addition, M has transferred the following assets to R subject to the terms and conditions set forth in an endowment grant agreement (the “Endowment Agreement”):
Cash in the amount of $168.8x (the “Cash”); and
Approximately 11x shares of N stock (the “Shares”).

The Cash and the Shares make up the “Grant Assets.” The transfer of the Grant Assets and the assignment of Grant 1 and Grant 2 to R make up the “Transfer.”

The Endowment Agreement

Pursuant to the Endowment Agreement, M and R agree that the transfer of the Grant Assets is intended as an endowment grant within the meaning of § 53.4945-5(c)(2). Before entering into the Endowment Agreement, M considered the identity, prior history, and experience of R and its managers. In light of that analysis, M asserts that it is reasonably assured that R will use the Grant Assets for proper charitable purposes.

In support of this ruling request, M and R provided a copy of the Endowment Agreement, executed by their respective corporate presidents. M declared that all documents submitted with the ruling request are true, complete, and correct.

Under the terms of the Endowment Agreement, R must maintain separate accounts and records for the Grant Assets and any income earned thereon. R must use the Grant Assets, and earnings thereon, only for religious, charitable, scientific, literary, or educational purposes within the meaning of § 170(c)(2)(B). Furthermore, R is prohibited from using any portion of the Grant Assets, including any income earned thereon, to purchase products or services from N or any of its affiliated entities, or from any employee, officer or director of N or any of its affiliated entities.

R shall return or repay to M any Grant Assets, including earnings on such assets, if M, in its sole discretion, determines that R has not performed in accordance with the Endowment Agreement, or if any portion of the Grant Assets is not used for the purposes permitted under the terms of the Endowment Agreement. Furthermore, R must return or repay any Grant Assets, including earnings on such assets, not expended in accordance with the terms of the Endowment Agreement within thirty days of the termination of the grant for any reason, or of a demand by M for return or repayment of any portion of the Grant Assets pursuant to the provisions of the Endowment Agreement.

R shall not use the Grant Assets, or any income earned thereon, to carry on propaganda, or otherwise to attempt, to influence legislation within the meaning of § 4945(d)(1), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive within the meaning of § 4945(d)(2), or to undertake any activity for any purpose other than charitable purposes described in § 170(c)(2)(B).

R may use the Grant Assets to make a grant (a “Secondary Grant”) to one or more individuals or organizations (each a “Secondary Grantee”). The Endowment Agreement provides that, except for the Assigned Grants, R is under no obligation to make any specific Secondary Grants, and there is no agreement, oral or written, whereby M may cause the selection of any Secondary Grantee by R. Although M and R anticipate that R will enter into Secondary Grants with a number of M’s current grantees, except for the Assigned Grants, R will exercise discretion and control over the Secondary Grantee selection process and will make such selections independently of M.

Before making any Secondary Grant:

R must enter into a written grant agreement memorializing the terms and conditions under which the grant is made and the grant funds are expended.
With respect to any Secondary Grant to an organization other than an organization described in § 4945(d)(4)(A), R agrees to exercise expenditure responsibility with respect to such Secondary Grantee within the meaning of § 4945(h) and § 53.4945-5, including making such reports to the IRS on its annual information return as are required by § 4945(h)(3) and § 53.4945-5(d).
With respect to any Secondary Grant to an individual for travel, study, or similar purposes, R shall comply with the requirements of § 4945(g) and § 53.4945-4.

R must submit an annual report to M at the close of each taxable year until the Grant Assets are expended in full, the Endowment Grant is otherwise terminated, or M gives R written notice that it may discontinue the reports. M will evaluate R’s performance under the Grant Agreement prior to the end of the second succeeding taxable year following the taxable year in which the Endowment Grant is made, and, pursuant to § 53.4945-5(c)(2), give written notice to R only after ascertaining that neither the principal, the income from the Grant Assets, nor any equipment purchased with the Grant Assets, has been used for any purpose that would result in liability for tax under § 4945(d).

R agrees to keep a systematic accounting record of the receipt and disbursement of the Grant Assets so that such receipts and expenditures are shown separately on R’s books and records in an easily verifiable form. R must keep such records, as well as copies of the reports submitted to M and supporting documentation, for at least four years after the completion of the use of any portion of the Grant Assets, or M provides notice to R that it may discontinue the reports, whichever is earlier. M reserves the right to audit R’s books and records relating to the expenditure of any of the Grant Assets for no less than four years following the close of R’s annual accounting period during which the use of the Grant Assets is completed, or M provides notice that R may discontinue submitting annual reports, whichever is earlier.

Representations

M has not, and will not, notify the Internal Revenue Service (the “Service”) of its intention to terminate its private foundation status prior to, or immediately after, the Transfer. M represents that, to the best of its knowledge and belief, it has not committed willful repeated acts (or failures to act), nor has it committed any willful or flagrant act (or failure to act) that would give rise to liability for tax under Chapter 42 of the Internal Revenue Code. The Service has not notified M that it is liable for the tax imposed under § 507(c) as a result of any such acts (or failures to act).

At the time of the Transfer, both M and R were governed by a three-member board of directors and shared a common director. This shared director, who also served as the president and principal executive officer of both M and R, was an employee of N at the time of the Transfer. In addition, all of the other officers and directors of M and R at the time of the Transfer were either employed by N or employed by P, a wholly-owned subsidiary of N. Consequently, M and R maintain that, at the time of the Transfer, R was effectively controlled (within the meaning of § 1.482-1A(a)(3)) by the same person, N, that effectively controlled M.

Rulings Requested

The following rulings have been requested:

The Transfer will not adversely affect the tax exempt status of either M or R as an organization described in § 501(c)(3).
The Transfer qualifies as a transfer of assets described in § 507(b)(2), and will neither result in the termination of M’s private foundation status under § 507(a) nor subject M to the tax imposed by § 507(c).
R will succeed to M’s attributes and characteristics described in subparagraphs (2), (3) and (4) of § 1.507-3(a) of the Income Tax Regulations.
Effectuating the Transfer and engaging in such actions as are necessary to effectuate the Transfer will not constitute an act of self-dealing within the meaning of § 4941.
M may not treat the distribution of the Grant Assets as a qualifying distribution described in § 4942(g).
R will not succeed to any of M’s excess qualifying distributions under § 53.4942(a)-3(e).
The Transfer will not constitute an investment that jeopardizes the carrying out of M’s exempt purposes within the meaning of § 4944(a).
M has met its pregrant inquiry requirements as to R under § 53.4945-5(b)(2).
M has met the “written commitment” requirement under § 53.4945-5(b)(3) by requiring R to enter into the Endowment Agreement, so long as M takes all reasonable actions to enforce the terms of the Endowment Agreement.
The Transfer will not be a taxable expenditure under § 4945 because M will exercise capital endowment grant expenditure responsibility over the Grant Assets transferred to R; however, M will not be required to exercise expenditure responsibility with respect to the Assigned Grants or any Secondary Grants made by R to Secondary Grantees.
The legal, accounting, and other expenses paid by M and R to obtain this ruling and to effectuate the Transfer, if reasonable in amount, will not constitute taxable expenditures under § 4945(d)(5).
R will receive the benefit of any transitional rules that were applicable to M as a foundation in existence before January 1, 1970.
The Transfer will not constitute a willful and flagrant act (or failure to act), and will not constitute one in a series of acts (or failures to act) that would cause M to incur any taxes under Chapter 42 of the Internal Revenue Code.

Law

I.R.C. § 501(a) exempts from federal income taxation organizations described in § 501(c).

I.R.C. § 501(c)(3) describes organizations organized and operated exclusively for charitable and other designated exempt purposes.

I.R.C. § 507(a) provides 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 termination, or (2) with respect to such organization, there have been either willful repeated acts (or failures to act), 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 subsection (c), and either such organization pays the tax (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g).

I.R.C. § 507(b)(2) provides that in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization.

I.R.C. § 507(c) imposes a tax on the termination of a private foundation under the circumstances described in § 507(a). The tax is equal to the lesser of the aggregate tax benefit resulting from the tax exempt status of the private foundation and the value of the net assets of such foundation.

I.R.C. § 507(d)(1) defines “aggregate tax benefit” as the sum of the following amounts:

(i) the aggregate increases in tax under chapters 1, 11 and 12 of the Internal Revenue Code that would have been imposed on the substantial contributors to the private foundation if the charitable income, estate and gift tax deductions were disallowed for contributions made after February 28, 1913;

(ii) the aggregate increases in tax under chapter 1 that would have been imposed on the private foundation’s income for taxable years beginning after December 31, 1912 if the foundation had not been exempt under § 501(c)(3) or if deductions under § 642(c) had been limited to 20 percent of taxable income (in the case of a trust); and

(iii) interest on the amounts described in items (i) and (ii) above from the first date each amount would have been due and payable until the date when the organization ceases to be a private foundation.

I.R.C. § 509(a) defines the term “private foundation” to mean any domestic or foreign organization described in 501(c)(3) other than an organization described in § 509(a)(1), (2), (3), or (4).

I.R.C. § 4941(a)(1) imposes a tax on each act of self-dealing between a disqualified person and a private foundation.

I.R.C. § 4941(d)(1)(E) 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.

I.R.C. § 4942(a) imposes a tax on the undistributed income of a private foundation for any taxable year which has not been distributed by the first day of the second (or any succeeding) taxable year following such taxable year.

I.R.C. § 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 before such time out of such distributable amount.

I.R.C. § 4942(d) defines “distributable amount” as an amount equal to the sum of the minimum investment return, plus certain other amounts, reduced by the sum of the taxes imposed for the taxable year under subtitle A and 4940.

I.R.C. § 4942(g)(1)(A) defines “qualifying distribution” as any amount (including that portion of reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in 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, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as described in subsection (j)(3)), except as provided in paragraph (3).

I.R.C. § 4942(g)(3) provides that the term “qualifying distribution” includes a contribution to a 501(c)(3) organization described in paragraph (1)(A)(i) or (ii) if—

(A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such § 501(c)(3) organization were a private foundation which is not an operating foundation), and

(B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such foundation.

I.R.C. § 4942(i) provides for a carry-over of the amount by which qualifying distributions during the five preceding taxable years (other than amounts required to be distributed out of corpus under § 4942(g)(3)) have exceeded the distributable amounts for such years.

I.R.C. § 4944(a)(1) imposes a tax on any amount invested by a private foundation in a manner that jeopardizes the carrying out of any of the foundation’s exempt purposes.

I.R.C.§ 4945(a) imposes a tax on each taxable expenditure of a private foundation.

I.R.C. § 4945(d)(4) provides that the term “taxable expenditure” includes any amount paid or incurred by a private foundation as a grant to a private non-operating foundation unless the grantor foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h).

I.R.C. § 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 170(c)(2)(B).

I.R.C. § 4945(h) provides that the expenditure responsibility referred to in subsection (d)(4) means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures—

(1) to see that the grant is spent solely for the purpose for which made,

(2) to obtain full and complete reports from the grantee on how the funds are spent, and (3) to make full and detailed reports with respect to such expenditures to the Secretary.

Treas. Reg. § 1.501(c)(3)-1(a)(1) provides that for an organization to be exempt as an organization described in 501(c)(3), it must be both organized and operated exclusively for one or more of the purposes specified in such section.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated exclusively” for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in 501(c)(3).

Treas. Reg.§ 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized and operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

Treas. Reg.§ 1.507-1(b)(1) provides that in order for a private foundation to terminate its private foundation status under § 507(a)(1), an organization must submit a statement to the Service of its intent to terminate its private foundation status under § 507(a)(1). Such statement must set forth in detail the computation and amount of tax imposed under § 507(c). Unless the organization requests abatement of such tax pursuant to § 507(g), full payment of such tax must be made at the time the statement is filed under § 507(a)(1).

Treas. Reg. § 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 § 507(b)(2) and § 1.507-3(c), such transferor foundation will not have terminated its private foundation status under § 507(a)(1).

Treas. Reg. § 1.507-3(a)(1) provides that in the case of a transfer of assets from one private foundation to another private foundation pursuant to a liquidation, merger, redemption, recapitalization or other adjustment, organization or reorganization, including a significant disposition of assets to one or more private foundations within the meaning of paragraph (c), the transferee organization shall not be treated as a newly created organization. Rather, the transferee organization shall be treated as possessing those attributes and characteristics of the transferor organization that are described in subparagraphs (2), (3), and (4) of this paragraph.

Treas. Reg. § 1.507-3(a)(2)(i) provides that (except as provided in subdivision (ii)) a transferee organization to which this paragraph (a) applies will succeed to the aggregate tax benefit of the transferor organization in an amount equal to the amount of such aggregate tax benefit multiplied by a fraction the numerator of which is the fair market value of the assets (less encumbrances) transferred to such transferee and the denominator of which is the fair market value of the assets of the transferor (less encumbrances) immediately before the transfer. Fair market value shall be determined as of the time of the transfer. The transferor foundation retains that portion of the aggregate tax benefit not allocated to the transferee foundation.

Treas. Reg. § 1.507-3(a)(2)(ii) provides that, notwithstanding subdivision (i) of this subparagraph, a transferee organization which is not effectively controlled (within the meaning of § 1.482-1(a)(3)) [i.e., § 1.482-1A(a)(3)], directly or indirectly, by the same person or persons who effectively control the transferor organization shall not succeed to an aggregate tax benefit in excess of the fair market value of the assets transferred at the time of the transfer. Treas. Reg.§ 1.482-1A(a)(3) provides that the term “controlled” includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise.

Treas. Reg.§ 1.507-3(a)(2)(iii) provides examples to illustrate the provisions of subparagraph (2), including—

Example (2). Pursuant to a transfer described in § 507(b)(2), M, a private foundation, transfers all of its assets, which immediately prior to the transfers have a fair market value of $100,000. The assets were transferred to the following organizations at the following fair market values (determined at the time of the transfer) $40,000 to N, a private foundation, $30,000 to O, a private foundation, and $30,000 to P, an organization described in § 170(b)(1)(A)(vi). Immediately before the transfer M’s aggregate tax benefit was $50,000. Therefore, N succeeds to M’s aggregate tax benefit to the extent of $20,000 ($50,000 x $40,000/$100,000) and O succeeds to M’s aggregate tax benefit to the extent of $15,000 ($50,000 x $30,000/$100,000). The remaining $15,000 of M’s aggregate tax benefit is maintained by M as M has not terminated under section 507.

Example (3). Assume the same facts as in Example (2) except that the transfers were made as follows: M transferred $30,000 to N on January 1, 1972, $40,000 to P on July 1, 1972, and $30,000 to O on December 31, 1972. Further, assume that the fair market value of the assets and the aggregate tax benefit do not change during 1972 and that O is not effectively controlled (directly or indirectly) by the same person or persons who effectively control M. N succeeds to M’s aggregate tax benefit to the extent of $15,000 ($50,000 x $30,000/$100,000). However, since $40,000 of the remaining $70,000 ($100,000 – $30,000) of assets of M was transferred to P on July 1, 1972, immediately before the transfer to O, the fair market value of the assets held by M is $30,000 ($70,000 – $40,000). On the other hand, because P is not a private foundation, M’s aggregate tax benefit immediately before the transfer to O remains $35,000 ($50,000 – $15,000). Therefore, before applying subdivision (ii) of this subparagraph, O would succeed to $35,000 ($35,000 x $30,000/$30,000) of M’s aggregate tax benefit. However, applying subdivision (ii) of this subparagraph since M transferred only $30,000 to O, O shall succeed to only $30,000 of M’s aggregate tax benefit. The remaining $5,000 ($35,000 – $30,000) of M’s aggregate tax benefit is retained by M as M has not terminated under § 507.

Treas. Reg.§ 1.507-3(a)(3) provides that in the event of a transfer of assets described in § 507(b)(2), any person who is a “substantial contributor” (within the meaning of § 507(d)(2)) with respect to the transferor foundation shall be treated as a “substantial contributor” with respect to the transferee foundation, regardless of whether such person meets the $5,000-two percent test with respect to the transferee organization at any time.

Treas. Reg. § 1.507-3(a)(4) provides that if a private foundation incurs liability for one or more of the taxes imposed under Chapter 42 (or any penalty resulting therefrom) prior to, or as a result of, making a transfer of assets described in § 507(b)(2) to one or more private foundations, in any case where transferee liability applies, each transferee foundation is treated as receiving the transferred assets subject to such liability to the extent that the transferor foundation does not satisfy such liability.

Treas. Reg. § 1.507-3(a)(5) provides that, except as provided in subparagraph (9) of this paragraph, a private foundation is required to meet the distribution requirements of § 4942 for any taxable year in which it makes a § 507(b)(2) transfer of all or part of its net assets to another private foundation. Such transfer shall itself be counted toward satisfaction of such requirements to the extent the amount transferred meets the requirements of § 4942(g).

Treas. Reg.§ 1.507-3(a)(6) provides that, for purposes of § 4943(c)(4), (5), and (6), whenever a private foundation makes a § 507(b)(2) transfer of all or part of its net assets to another private foundation, the applicable period of time described in § 4943(c)(4), (5), or (6) shall include both the period during which the transferor foundation held such assets and the period during which the transferee foundation holds such assets.

Treas. Reg.§ 1.507-3(a)(8)(i) provides that, except as provided in subdivision (ii) of this subparagraph or subparagraph (6) or (9) of this paragraph, whenever a private foundation makes a transfer of assets described in § 507(b)(2) to one or more private foundations, the transferee foundation:

(a) Will not be treated as being in existence prior to January 1, 1970, with respect to any transferred assets;

(b) Will not be treated as holding the transferred assets prior to January 1, 1970; and

(c) Will not be treated as having engaged in, or become subject to, any transaction, lease contract, or other obligation with respect to the transferred assets prior to January 1, 1970.

Treas. Reg.§ 1.507-3(a)(8)(ii) provides that, notwithstanding subdivision (i) of this subparagraph, the provisions enumerated in (a) through (g) of this subdivision shall apply to the transferee foundation with respect to the assets transferred to the same extent and in the same manner that they would have applied to the transferor foundation had the transfer described in § 507(b)(2) not been effected:

(a) I.R.C.§ 4940(c)(4)(B) and the regulations thereunder with respect to basis of property,

(b) I.R.C.§ 4942(0(4) and the regulations thereunder with respect to distributions of income,

(c) Section 101(1)(2) of the Tax Reform Act of 1969 (83 Stat. 533), as amended by section 1301 and 1309 of the Tax Reform Act of 1976 (90 Stat. 1713, 1729), with respect to the provisions of section 4941,

(d) Section 101(1)(3)(A) of the Tax Reform Act of 1969 (83 Stat. 534) with respect to the provisions of 4942, but only if the transferor qualified for the application of such section immediately before the transfer, and at least 85 percent of the fair market value of the net assets of the transferee immediately after the transfer was received pursuant to the transfer,

(e) Section 101(1)(3)(B) through (E) of the Tax Reform Act of 1969 (83 Stat. 534) with respect to the provisions of §4942,

(f) Section 101(1)(5) of the Tax Reform Act of 1969 (83 Stat. 535) with respect to the provisions of §4945, and

(g) Section 101(1)(6) of the Tax Reform Act of 1969 (83 Stat. 535) with respect to the provisions of § 508(e).

Treas. Reg.§ 1.507-3(a)(9)(i) provides that if a private foundation transfers all if its net assets to one or more private foundations which are effectively controlled (within the meaning of § 1.482-1(a)(3) [i.e., § 1.482-1A(a)(3)]), directly or indirectly, by the same person or persons which effectively controlled the transferor private foundation, for purposes of §§ 4940 through 4948 and §§ 507 through 509, such a transferee foundation shall be treated as if it were the transferor. However, where proportionality is appropriate, such a transferee private foundation shall be treated as if it were the transferor in the proportion which the fair market value of the assets (less encumbrances) transferred to such transferee bears to the fair market value of the assets (less encumbrances) of the transferor immediately before the transfer.

Treas. Reg.§ 1.507-3(a)(9)(iii) includes the following example:

Example (2), A and B are the trustees of the P charitable trust, a private foundation, and are the only substantial contributors to P. On July 1, 1973, in order to facilitate accomplishment of diverse charitable purposes, A and B create and control the R Foundation, the S Foundation and the T Foundation and transfer the net assets of P to R, S, and T. As of the end of 1973, P has an outstanding grant to Foundation W and has been required to exercise expenditure responsibility with respect to this grant under sections 4945(d)(4) and (h). Under these circumstances, R, S, and T shall each be treated as if they are P in the proportion the fair market value of the assets transferred to each bears to the fair market value of the assets of P immediately before the transfer.

Treas. Reg.§ 1.507-3(c)(1) provides that a transfer of assets is described in § 507(b)(2) if it is made by a private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization. This shall include any organization or reorganization described in subchapter C of chapter 1. For purposes of § 507(b)(2), the terms “other adjustment, organization, or reorganization” shall include any partial liquidation or any other significant disposition of assets to one or more private foundations, other than transfers for full and adequate consideration or distributions out of current income.

Treas. Reg.§ 1.507-3(d) provides that, unless a private foundation gives notice pursuant to 507(a)(1), a transfer of assets described in § 507(b)(2) will not constitute a termination of the transferor’s private foundation status under § 507(a)(1).

Treas. Reg.§ 1.507-4(b) provides that private foundations that make transfers described in § 507(b)(1)(A) or (2) are not subject to the termination tax imposed under § 507(c) with respect to such transfers unless the provisions of § 507(a) become applicable.

Treas. Reg.§ 53.4941(d)-2(f)(1) provides that the transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation constitutes an act of self-dealing.

Treas. Reg.§ 53.4942(a)-3(a)(2)(i) defines the term “qualifying distribution” as any amount (including reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in 170(c)(1) or (2)(B), other than a contribution to: (a) a private foundation which is not an operating foundation, except as provided in paragraph (c) of this section, or (b) an organization controlled (directly or indirectly) by the contributing private foundation, except as provided in paragraph (c) of this section.

Treas. Reg.§ 53.4942(a)-3(e)(1) provides that if in any taxable year for which an organization is subject to the initial excise tax imposed by § 4942(a) there is created an excess of qualifying distributions (as determined under subparagraph (2) of this paragraph), such excess may be used to reduce distributable amounts in any taxable year of the adjustment period (as defined in subparagraph (3) of this paragraph).

Treas. Reg.§ 53.4942(a)-3(e)(2) provides that an excess of qualifying distributions is created for any taxable year if: (i) the total qualifying distributions treated as made out of the undistributed income for such taxable year or as made out of corpus with respect to such taxable year exceeds (ii) the distributable amount for such taxable year.

Treas. Reg.§ 53.4942(a)-3(e)(3) provides that the taxable years in the adjustment period are the five taxable years immediately following the taxable year in which the excess of qualifying distributions is created.

Treas. Reg.§53.4945-5(a)(1) provides that, under § 4945(d)(4), the term “taxable expenditure” includes any amount paid or incurred by a private foundation as a grant to an organization (other than an organization described in § 509(a)(1), (2), or (3)), unless the private foundation exercises expenditure responsibility with respect to such grant in accordance with § 4945(h).

Treas. Reg.§ 53.4945-5(a)(6)(i) provides that a grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (the secondary grantee) shall not be regarded as a grant by the private foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement, oral or written, whereby such grantor foundation may cause the selection of the secondary grantee by the organization to which it has given the grant. For purposes of this subdivision, a grant described herein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control, in fact, over the selection process and actually makes the selection completely independently of the private foundation.

Treas. Reg.§ 53.4945-5(b)(1) provides that a private foundation is not an insurer of the activity of the organization to which it makes a grant. Thus, satisfaction of the requirements of § 4945(d)(4) and (h) will ordinarily mean that the grantor foundation will not have violated § 4945(d)(1) or (2). A private foundation will be considered to be exercising “expenditure responsibility” under § 4945(h) as long as it exerts all reasonable efforts and establishes adequate procedures—

(i) To see that the grant is spent solely for the purpose for which made,

(ii) To obtain full and complete reports from the grantee on how the funds are spent, and

(iii) To make full and detailed reports with respect to such expenditures to the Commissioner.

Treas. Reg.§ 53.4945-5(b)(2)(i) provides that before making a grant to an organization with respect to which expenditure responsibility must be exercised under this section, a private foundation should conduct a limited inquiry concerning the potential grantee. Such inquiry should be complete enough to give a reasonable man assurance that the grantee will use the grant for the proper purposes. The inquiry should concern itself with matters such as: (a) the identity, prior history, and experience (if any) of the grantee organization and its managers; and (b) any knowledge which the private foundation has (based on prior experience or otherwise) of, or other information which is readily available concerning, the management, activities, and practices of the grantee organization.

Treas. Reg.§ 53.4945-5(b)(3) provides that, except as provided in subparagraph (4) of paragraph (b), in order to meet the expenditure responsibility requirements of § 4945(h), a private foundation must require that each grant to an organization with respect to which expenditure responsibility must be exercised be made subject to a written commitment signed by an appropriate officer, director, or trustee of the grantee organization. Such commitment must include an agreement by the grantee—

(i) To repay any portion of the amount granted which is not used for the purposes of the grant,

(ii) To submit full and complete annual reports on the manner in which the funds are spent and progress made in accomplishing the purposes of the grant, except as provided in paragraph (c)(2) of this section,

(iii) To maintain records of receipts and expenditures and to make its books and records available to the grantor at reasonable times, and

(iv) Not to use any of the funds—

(a) To carry on propaganda, or otherwise to attempt, to influence legislation,

(b) To influence the outcome of any specific public election, or to carry on any voter registration drive,

(d) To undertake any activity for any purpose other than one specified in § 170(c)(2)(B).

The agreement must also clearly specify the purposes of the grant. Such purposes may include contributing for capital endowment, for the purchase of capital equipment, or for general support provided that neither the grants nor the income therefrom may be used for purposes other than those described in § 170(c)(2)(B).

Treas. Reg.§ 53.4945-5(c)(2) provides that if a private foundation makes a grant described in section 4945(d)(4) to a private foundation which is exempt from taxation under § 501(a) for endowment, for the purchase of capital equipment, or for other capital purposes, the grantor foundation shall require reports from the grantee on the use of the principal and the income (if any) from the grant funds. The grantee shall make such reports annually for its taxable year in which the grant was made and the immediately succeeding two taxable years. Only if it is reasonably apparent to the grantor that, before the end of such second succeeding taxable year, neither the principal, the income from the grant funds, nor the equipment purchased with the grant funds has been used for any purpose which would result in liability for tax under § 4945(d), may the grantor then allow such reports to be discontinued.

Treas. Reg.§ 53.4945-5(d)(1) provides that to satisfy the report making requirements of § 4945(h)(3), a granting foundation must provide the required information on its annual information return, required to be filed by § 6033, for each taxable year with respect to each grant made during the taxable year which is subject to the expenditure responsibility requirements of § 4945(h). Such information must also be provided on such return with respect to each grant subject to such requirements upon which any amount or any report is outstanding at any time during the taxable year. However, with respect to any grant made for endowment or other capital purposes, the grantor must provide the required information only for any taxable year for which the grantor must require a report from the grantee under paragraph (c)(2) of this section.

Treas. Reg.§ 53.4945-5(e)(1)(i) provides that any diversion of grant funds (including the income therefrom in the case of an endowment grant) by the grantee to any use not in furtherance of a purpose specified in the grant may result in the diverted portion of such grant being treated as a taxable expenditure of the grantor under § 4945(d)(4).

Treas. Reg.§ 53.4945-5(e)(1)(ii) provides that, in any event, a grantor will not be treated as having made a taxable expenditure under § 4945(d)(4) solely by reason of a diversion by the grantee, if the grantor has complied with subdivision (iii)(a) and (b) or (iv)(a) and (b) of this subparagraph, whichever is applicable.

Treas. Reg.§ 53.4945-5(e)(1)(iii) provides that in cases in which the grantor foundation determines that any part of a grant has been used for improper purposes and the grantee has not previously diverted grant funds, the foundation will not be treated as having made a taxable expenditure solely by reason of the diversion so long as the foundation:

(a) Is taking all reasonable and appropriate steps either to recover the grant funds or to insure the restoration of the diverted funds and the dedication (consistent with the requirements of (b)(1) and (2) of this subdivision) of the other grant funds held by the grantee to the purposes being financed by the grant, and

(b) Withholds any further payments to the grantee after the grantor becomes aware that a diversion may have taken place (hereinafter referred to as “further payments”) until it has:

(1) Received the grantee’s assurances that future diversions will not occur, and

(2) Required the grantee to take extraordinary precautions to prevent future diversions from occurring.

Treas. Reg.§ 53.4945-5(e)(1)(iv) provides that in cases where a grantee has previously diverted funds received from a grantor foundation, and the grantor foundation determines that any part of a grant has again been used for improper purposes, the foundation will not be treated as having made a taxable expenditure solely by reason of such diversion so long as the foundation:

(a) Is taking all reasonable and appropriate steps to recover the grant funds or to insure the restoration of the diverted funds and the dedication (consistent with the requirements of (b)(2) and (3) of this subdivision) of other grant funds held by the grantee to the purposes being financed by the grant, except that if, in fact, some or all of the diverted funds are not so restored or recovered, then the foundation must take all reasonable and appropriate steps to recover all of the grant funds, and

(b) Withholds further payments until:

(1) Such funds are in fact so recovered or restored,

(2) It has received the grantee’s assurances that future diversions will not occur, and

(3) It requires the grantee to take extraordinary precautions to prevent future diversions from occurring.

Treas. Reg.§ 53.4945-5(e)(1)(v) provides that the phrase “all reasonable and appropriate steps” (as used in subdivisions (iii) and (iv) of this subparagraph) includes legal action where appropriate, but need not include legal action if such action would in all probability not result in the satisfaction of execution on a judgment.

Treas. Reg.§ 53.4945-5(e)(2) provides that a failure by the grantee to make the reports required by paragraph (c) of this section (or the making of inadequate reports) shall result in the grant’s being treated as a taxable expenditure by the grantor unless the grantor:

(i) Has made the grant in accordance with paragraph (b) of this section,

(ii) Has complied with the reporting requirements contained in paragraph (d) of this section,

(iii) Makes a reasonable effort to obtain the required report, and

(iv) Withholds all future payments on this grant and on any other grant to the same grantee until such report is furnished.

Treas. Reg.§ 53.4945-6(b)(1) includes among the types of expenditures that ordinarily will not be treated as taxable expenditures under 4945(d)(5), expenditures to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in § 170(c)(2)(B), reasonable expenses with respect to such investments, and any payment that constitutes a qualifying distribution under § 4942(g).

Treas. Reg.§ 53.4946-1(a)(8) provides that, for purposes of § 4941 only, the term “disqualified person” shall not include any organization that is described in 501(c)(3) (other than an organization described in § 509(a)(4)).

Rev. Rul. 78-387, 1978-2 C.B. 270, concerns a private foundation, M, which has a carryover of excess qualifying distributions as described in § 4942(i) and § 53.4942(a)-3(e). M transferred all of its net assets to another private foundation, N, in a transfer qualifying under 507(b)(2). M is controlled, within the meaning of § 1.482-1A(a)(3), by the same persons who control N. Because the transferee foundation, N, is treated as if it were the transferor foundation, M, pursuant to § 1.507-3(a)(9)(i), it is held that, for purposes of determining its distribution requirements under § 4942, N may reduce its distributable amount by the excess qualifying distributions carryover of M.

Rev. Rul. 2002-28, 2002-1 C.B. 941, posits various situations in which a transferor private foundation transfers all of its assets to one or more private foundations that are effectively controlled by the same persons that effectively control the transferor. In the context of § 4942, it is concluded that the transfers to the transferee foundations are not treated as qualifying distributions of the transferor foundation. Where a private foundation transfers all of its assets to one private foundation, the transferee foundation assumes all obligation with respects to the transferor’s “undistributed income” within the meaning of § 4942(c), if any, and reduces its own distributable amount by the transferor foundation’s excess qualifying distributions under § 4941(i).

Analysis

Issue 1: Whether the transfer of the Grant Assets would adversely affect the status of either M or R as a tax-exempt organization described in § 501(c)(3) .

To be described in § 501(c)(3), each of M and R must be operated exclusively for exempt purposes within the meaning of § 1.501(c)(3)-1(c)(1) by engaging primarily in activities that accomplish exempt purposes. To that end, neither M nor R may allow its net earnings to inure to the benefit of private shareholders or individuals within the meaning of § 1.501(c)(3)-1(c)(2), and neither may serve private interests within the meaning of § 1.501(c)(3)-1(d)(1)(ii).

Each of M and R is currently recognized by the Service as an organization described in § 501(c)(3). As private non-operating foundations, M and R accomplish their respective missions by making grants to other charitable and educational organizations. M states that it determined that the transfer of the Grant Assets to R under the terms of the Endowment Agreement would further M’s charitable purposes. Such terms require R to use the Grant Assets solely for charitable purposes described in § 170(c)(2)(B), or to return such assets to M. Furthermore, R is forbidden from using the Grant Assets to purchase products or services from N, its affiliates or subsidiaries, or any employees, officers, or directors thereof. Under these circumstances, we do not find that the transfer of the Grant Assets would result in the inurement of M’s net earnings to the benefit of private shareholders or individuals within the meaning of 1.501(c)(3)-1(c)(2), cause either M or R to be operated for the benefit of private interests within the meaning of § 1.501(c)(3)-1(d)(1)(ii), or result in either M or R engaging in activities other than activities in furtherance of an exempt purpose within the meaning of § 1.501(c)(3)-1(c)(1). Accordingly, we conclude that the transfer of the Grant Assets from M to R under the terms of the Endowment Agreement will not adversely affect the status of either M or R as a tax-exempt organization described in § 501(c)(3).

Issue 2: Whether the transfer of the Grant Assets qualifies as a transfer of assets described in § 507(b)(2), whether the transfer will result in the termination of M’s private foundation status under § 507(a), and whether the transfer will subject M to the tax imposed under § 507(c).

Under § 1.507-3(c)(1), a transfer of assets is described in § 507(b)(2) if it is a transfer from one private foundation to another private foundation pursuant to a liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, including any organization or reorganization described in subchapter C of Chapter 1 of the Internal Revenue Code (concerning corporate distributions and adjustments). N reorganized by forming P and transferring to P some of the business activities formerly conducted by N. In conjunction with the reorganization of its business activities, N created R in order to transfer to R some of the activities currently conducted by M. The transfer of the Grant Assets from M, a private foundation, to R, a private foundation, was meant to provide R with funds with which to carry out its activities. Accordingly, the transfer of the Grant Assets is a transfer by a private foundation to another private foundation pursuant to an organization or reorganization described in subchapter C and is, therefore, a transfer of assets described in § 507(b)(2).

Treas. Reg.§ 1.507-1(b)(6) provides that when a private foundation transfers all or part of its assets to one or more other private foundations pursuant to a transfer described in § 507(b)(2), such transferor foundation will not have terminated its private foundation status under § 507(a)(1). In addition,§ 1.507-3(d) provides that unless a private foundation voluntarily gives notice pursuant to § 507(a)(1), a transfer of assets described in § 507(b)(2) will not constitute termination of the transferor’s private foundationstatus under § 507(a)(1).

M specifically states that it has not given notice, nor will it give notice, to the Service of an intention to terminate its private foundation status in accordance with § 507(a)(1). Accordingly, M has not voluntarily terminated its private foundation status.

M represents that it has not engaged in acts (or failures to act) that would give rise to liability under Chapter 42 of the Internal Revenue Code. Based upon M’s representation, M’s private foundation status has not been terminated involuntarily.

As M’s status as a private foundation has not been terminated voluntarily or involuntarily, and as M’s status as a private foundation will not be terminated as a result of the transfer of the Grant Assets, M will not be subject to the tax imposed upon such terminations under § 507(c).

Issue 3: Whether R will succeed to M’s attributes and characteristics described in § 1.507-3(a)(2), (3) and (4) .

Under Treas. Reg.§ 1.507-3(a)(1), in the case of a transfer of assets from one private foundation to another private foundation described in § 507(b)(2), the transferee organization is treated as possessing those attributes and characteristics of the transferor organization that are described in § 1.507-3(a)(2), (3), and (4). As discussed above, the transfer of the Grant Assets is a transfer described in § 507(b)(2). Therefore,§ 1.507-3(a)(1) applies.

Treas. Reg.§ 1.507-3(a)(2)(i) provides that when the transferee and transferor organizations are effectively controlled (within the meaning of § 1.482-1A(a)(3)) by the same persons, the transferee organization succeeds to the aggregate tax benefit of the transferor in an amount equal to the amount of such aggregate tax benefit (within the meaning of § 507(d)(1)), multiplied by a fraction the numerator of which is the fair market value of the assets (less encumbrances) transferred and the denominator of which is the fair market value of the assets of the transferor (less encumbrances) immediately before the transfer. At the time of the Transfer, R and M were controlled by the same persons. Therefore, R will succeed to a fraction of M’s aggregate tax benefit, calculated as described above. As M is not terminating under § 507 and will continue as a private non-operating foundation after the Transfer, M will retain the portion of its aggregate tax benefit that is not passing to R. See Treas. Reg.§ 1.507-3(a)(2)(iii), Examples (2) and (3).

Furthermore, in the event of a transfer of assets described in § 507(b)(2),§ 1.507-3(a)(3) provides that any person who is a “substantial contributor” (within the meaning of § 507(d)(2)) with respect to the transferor foundation will be treated as a “substantial contributor” with respect to the transferee foundation. Therefore, any person who is a disqualified person with respect M at the time of the Transfer will be considered a “substantial contributor” with respect to R as a result of the Transfer.

Finally, if a private foundation incurs liability for one or more of the taxes imposed under Chapter 42 (or any penalty resulting therefrom) prior to, or as a result of, making a transfer of assets described in § 507(b)(2), in any case where transferee liability applies § 1.507-3(a)(4) provides that the transferee foundation will be treated as receiving the transferred assets subject to such liability to the extent the transferor foundation does not satisfy such liability. Therefore, should M have incurred liability for any Chapter 42 tax prior to, or as a result of, the Transfer, R will be treated as receiving the Grant Assets subject to such liability to the extent that M does not satisfy the liability where transferee liability applies.

Issue 4: Whether effectuating the Transfer and engaging in such actions as are necessary to effectuate the Transfer would constitute an act of self-dealing within the meaning of § 4941 .

I.R.C.§ 4941(a) imposes a tax on each act of self-dealing between a disqualified person and a private foundation. Under § 53.4941(d)-2(f)(1), the transfer of the assets of a private foundation to a disqualified person, or the use of such assets by or for the benefit of a disqualified person, constitutes an act of self-dealing. However, under § 53.4946-1(a)(8), for purposes of 4941, the term “disqualified person” does not include an organization described in § 501(c)(3) (aside from an organization described in § 509(a)(4)).

The Transfer resulted in the transfer of the assets of M, a private foundation, to R, an organization described in § 501(c)(3). As an organization described in § 501(c)(3), R is not a disqualified person with respect to M for purposes of § 4941. Therefore the Transfer does not constitute a transfer of the assets of a private foundation to a disqualified person. Accordingly, the Transfer does not constitute an act of self-dealing within the meaning of § 4941.

Issue 5: Whether M may treat the distribution of the Grant Assets as a qualifying distribution under § 4942(g) .

M and R are private non-operating foundations. I.R.C. § 4942 requires private non-operating foundations to make a certain amount of “qualifying distributions” each year or incur a tax. “Qualifying distributions,” generally, include grants to public charities and private operating foundations that are not controlled by the grantor private foundationand direct expenditures for charitable purposes.

Treas. Reg.§ 1.507-3(a)(5) provides, generally, that a private foundation making a transfer described in § 507(b)(2) must satisfy its distribution requirements under § 4942 for the taxable year in which the transfer is made. It further provides that the transfer will count as a distribution in satisfaction of the transferor foundation’s distribution requirement under § 4942 subject to the provisions of § 4942(g). Under § 4942(g)(3) and § 53.4942(a)-3(c)(1), a grant by a private non-operating foundation to another private non-operating foundation (or to another organization controlled by disqualified persons with respect to the transferor) is not treated as a qualifying distribution by the transferor foundation for purposes of § 4942 except to the extent that the transferee makes one or more distributions that would be qualifying distributions under § 4942(g) prior to the close of the transferee’s first taxable year following the taxable year in which it received the transfer and the distributions are treated as being made out of corpus. Since the transfer of the Grant Assets to R is intended as an endowment grant, M does not anticipate that R will redistribute the full amount of the assets received from M within the time period, and in the manner, required by § 4942(g)(3). Therefore, M may not treat the transfer of the Grant Assets as a qualifying distribution under § 4942(g).

Issue 6: Whether R may use any of M’s excess qualifying distributions carryover to reduce its distributable amount.

M had an excess qualifying distributions carryover from its 2011 tax year to its 2012 tax year. Where a private foundation that has excess qualifying distributions distributes all of its net assets to one or more private foundations controlled by the same persons who control the transferor foundation, the transferee foundation(s) may make use of the transferor’s carryover. See Rev. Rul. 78-387; Rev. Rul. 2002-28; and § 1.507-3(a)(9)(i). While M and R were both controlled by N at the time of the Transfer, M did not distribute all of its net assets in a transfer qualifying under § 507(b)(2), but only a part of its net assets. Therefore, because M did not distribute all of its net assets to R, R may not use any of M’s excess qualifying distributions carryover to reduce its distributable amount under § 4942(d). Proportionality is appropriate where all the net assets are transferred to two or more private foundations, but not where only part of the net assets is transferred.

Issue 7: Whether the Transfer will constitute an investment that jeopardizes the carrying out of exempt purposes within the meaning of § 4944 .

I.R.C.§ 4944(a)(1) imposes an excise tax on any amount invested by a private foundation in a manner that jeopardizes the carrying out of the foundation’s exempt purposes. Pursuant to the Transfer, M made an outright assignment of its rights and obligations under Grant 1 and Grant 2 to R. In addition, M made a direct grant of the Grant Assets to R in the form of an endowment grant. The transfers were made to accomplish M’s exempt mission in the aftermath of the reorganization of N’s business operations and to endow R so that it can pursue its exempt mission. Except for a contingent right to recover a portion of the Grant Assets if R were to violate the terms of the Endowment Agreement, M retained no interest in the Grant Assets, the income therefrom, or any assets that R may acquire with the Grant Assets. Because M made the Transfer without consideration and without any expectation of repayment, the production of income, or the appreciation of property, the Transfer does not constitute an investment of an amount in a manner to jeopardize the carrying out of exempt purposes within the meaning of § 4944(a)(1).

Issue 8: Whether M has met its pregrant inquiry requirements as to R under § 53.4945-5(b)(2).

Treas. Reg.§ 53.4945-5(b)(2)(i) describes the limited inquiry that a private foundation must conduct concerning the potential grantee before making a grant to an organization with respect to which expenditure responsibility must be exercised. Such inquiry should concern itself with matters such as: (a) the identity, prior history, and experience (if any) of the grantee organization and its managers, and (b) any knowledge which the private foundation has (based on prior experience or otherwise) of, or other information which is already available concerning, the management, activities, and practices of the grantee organization, and should be complete enough to give a reasonable person assurance that the grantee will use the grant assets for the proper purposes.

M represents that it conducted a pregrant inquiry into the identity, prior history, and experience of R and its managers based on a review of all information that was readily available to M concerning the management, activities, and practices of R. At the time of the Transfer, all of the officers and directors M and R were either employees of N or of P, a wholly owned subsidiary of N. Thus, provided that the findings of M’s inquiry would cause a reasonable person to conclude that R will use the Grant Assets for the proper purposes, M will have met its obligation to conduct a pregrant inquiry under § 53.4945-5(b)(2)(i).

Issue 9: Whether M has met the “written commitment” requirement under § 53.4945-5(b)(3) by requiring R to enter into the Endowment Agreement.

Treas. Reg.§ 53.4945-5(b)(3) provides that in order to meet the expenditure responsibility requirements of § 4945(h), a private foundation must require that each grant to an organization with respect to which expenditure responsibility must be exercised be made subject to a written commitment that clearly specifies the purposes of the grant and that includes an agreement by the grantee—

(i) To repay any portion of the amount granted which is not used for the purposes of the grant,

(ii) To submit full and complete annual reports on the manner in which the funds are spent and progress made in accomplishing the purposes of the grant,

(iii) To maintain records of receipts and expenditures and to make its books and records available to the grantor at reasonable times, and

(iv) Not to use any of the funds—

(a) To carry on propaganda or otherwise to attempt to influence legislation,

(b) To influence the outcome of any specific public election, or to carry on any voter registration drive,

(d) To undertake any activity for any purpose other than one specified in § 170(c)(2)(B).

The written commitment must be signed by an appropriate officer, director, or trustee of the grantee foundation.

As the copy of the Endowment Agreement includes the provisions described in § 53.4945-5(b)(3), and provided that R’s president, as signer on behalf of R, qualifies as an “appropriate officer, director, or trustee,” M has met the “written commitment” requirement under § 53.4945-5(b)(3).

Issue 10: Whether the Transfer is a taxable expenditure under § 4945 if M exercises capital endowment grant expenditure responsibility over the assets transferred to R under the Endowment Agreement, but does not exercise expenditure responsibility with respect to the Assigned Grants or with respect to any Secondary Grants made by R to Secondary Grantees using the Grant Assets.

I.R.C. § 4945(a)(1) imposes a tax on each taxable expenditure of a private foundation. Under § 4945(d)(4), the term “taxable expenditure” includes any amount paid or incurred by a private foundation as a grant to an organization (other than a public charity or exempt operating foundation) unless the private foundation exercises expenditure responsibility with respect to such grant in accordance with § 4945(h).

Under § 4945(h), a private foundation will be considered to be exercising expenditure responsibility as long as it exerts all reasonable efforts and establishes adequate procedures—(1) to see that the grant is spent solely for the purpose for which made; (2) to obtain full and complete reports from the grantee on how the funds are spent; and (3) to make full and detailed reports with respect to such expenditures to the Commissioner.

The transfer of the Grant Assets from M, a private foundation, to R, a private foundation, would be considered a taxable expenditure described in § 4945(d)(4) unless M exercises expenditure responsibility with respect to the Grant Assets in accordance with § 4945(h). M will be considered to have exercised expenditure responsibility in accordance with § 4945(h) if, first, it has made the pregrant inquiry described in § 53.4945-5(b)(2), second, it has entered into a written grant agreement meeting the requirements of § 53.4945-5(b)(3), third, it requires reports from R on its use of the Grant Assets that meet the grantee reporting requirements of § 53.4945-5(c), fourth, it makes reports to the Service meeting the requirements of § 53.4945-5(d), and, fifth, in the event R diverts any of the Grant Assets (including the income therefrom) to any use not in furtherance of a purpose specified in the Endowment Agreement, or fails to make the reports required by § 53.4945-5(c), takes reasonable action in accordance with § 53.4945-5(e).

Issue 8, above, addresses the pregrant inquiry requirement under § 53.4945-5(b)(2).

Issue 9, above, addresses the written commitment requirement under § 53.4945-5(b)(3).

Under § 53.4945-5(c)(2), if a private foundation makes a grant described in § 4945(d)(4) to another private foundation, and the purpose of the grant is to increase the grantee’s endowment, the grantor foundation must require reports from the grantee concerning the use of the principal and any income derived from the grant funds. The grantee must make such reports annually for its taxable year in which the grant was made and for the immediately succeeding two taxable years. Thereafter, the grantor may cease requiring such reports if it is reasonably apparent to the grantor that, before the end of such second succeeding taxable year, neither the principal, the income from the grant funds, nor the equipment purchased with the grant funds has been used for any purpose which would result in liability for tax under § 4945(d).

The Endowment Agreement requires R, as grantee, to submit an annual report to M as of the close of its taxable year in which the grant is made and all such subsequent periods until the grant assets are expended in full, the grant is otherwise terminated, or M has provided R with written notice that R may discontinue such reports under the conditions described in § 53.4945-5(c)(2).

M represents that it will make the required reports to the Service with respect to the transfer of the Grant Assets as required by § 53.4945-5(d).

Therefore, in light of the above, we conclude that the transfer of the Grant Assets to R would not be a taxable expenditure within the meaning of § 4945(d)(4) so long as M obtains reports from R on its use of the Grant Assets in accordance with § 53.4945-5(c)(2), submits annual reports to the Service in accordance with § 53.4945-5(d), and takes reasonable action regarding any noncompliance with the Endowment Agreement in accordance with § 53.4945-5(e).

Under § 53.4945-5(a)(6), a grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (a secondary grantee) is not regarded as a grant by the grantor foundation to the secondary grantee if the grantor foundation does not earmark the use of the grant for any named secondary grantee and there exists no agreement whereby such grantor foundation may cause the selection of the secondary grantee by the grantee organization.

M represents that it has not earmarked the use of the Grant Assets for any named Secondary Grantee, and there exists no agreement, oral or written, whereby M may cause the selection of a Secondary Grantee by R. Rather, the Endowment Agreement assigns the duty to exercise discretion and control over the Secondary Grantee selection process to R, and requires R to enter into a grant agreement with each Secondary Grantee and to exercise expenditure responsibility with respect to any Secondary Grant. Therefore, M will not be treated as making a grant to any Secondary Grantee and need not exercise expenditure responsibility with respect to any Secondary Grant made by R.

While a private foundation cannot assign away its expenditure responsibility required under § 4945(d)(4), the recipients under Grant 1 and Grant 2 are both organizations described in § 501(c)(3) and are classified as public charities under § 509(a)(1). Accordingly, neither Grant 1 nor Grant 2 imposed upon M an obligation to exercise expenditure responsibility. M assigned all of its obligations, responsibilities, and duties with respect to the Assigned Grants to R. M and R have not presented any facts that would support the conclusion that Grant 1 or Grant 2 should become subject to expenditure responsibility by M where no such responsibility existed prior to the assignment of those grants to R. Accordingly, M is not required to exercise expenditure responsibility with respect to the Assigned Grants.

Issue 11: Whether the legal, accounting, and other expenses paid by M and R to obtain this ruling and to effectuate the Transfer, if reasonable in amount, will constitute taxable expenditures under § 4945(d)(5) .

Under § 5945(d)(5), any amount paid or incurred by a private foundation for any purpose other than one specified in §170(c)(2)(B) is a taxable expenditure subject to tax under § 4945(a). Under § 53.4945-6(b)(1), reasonable expenses with respect to program-related investments and other investments, and qualifying distributions under § 4942(g), are not treated as taxable expenditures under § 4945(d)(5). Conversely, under § 53.4945-6(b)(2), any expenditures for unreasonable administrative expenses, including compensation, consultant fees, and other fees for services rendered, will ordinarily be taxable expenditures under § 4945(d)(5).

The facts indicate that the Transfer is a reasonable transaction for legitimate stated purposes. Therefore, the administrative expenses to obtain the ruling and effectuate the Transfer, to the extent the amounts are reasonable, will not constitute taxable expenditures under § 4945(d)(5).

Issue 12: Whether R will receive the benefit of any transitional rules that are applicable to M as a foundation in existence before January 1, 1970 .

M was organized prior to 1970, and funded, in part, with shares of N stock. The Grant Assets that M transferred to R include shares of N stock.

Under § 1.507-3(a)(8)(i), the general rule with respect to the Chapter 42 consequences of a § 507(b)(2) transfer is that the transferee foundation: (1) will not be treated as having been in existence before January 1, 1970, with respect to the transferred assets; (2) will not be treated as having held the transferred assets before January 1, 1970; and (3) will not be treated as having engaged in, or become subject to, any transaction, lease, contract, or other obligation with respect to the transferred assets before January 1, 1970.

However, § 1.507-3(a)(8)(ii) provides that this general rule does not apply to the special rules or saving provisions contained in § 4940(c)(4)(B) (relating to basis of property),§ 4942(f)(4) (relating to distributions of income), and section 101(1) of the Tax Reform Act of 1969.

Under Issue 2, above, we concluded that the transfer of the Grant Assets from M to R is a transfer of assets described in § 507(b)(2). Therefore R will receive the benefits of the saving provisions or provisional rules described in § 1.507-3(a)(8)(ii) that would have applied to M with respect to the transferred assets had the Transfer not been effected.

Issue 13: Whether the Transfer will not constitute a willful and flagrant act (or failure to act) or one in a series of acts (or failures to act) that would cause M to incur any taxes under Chapter 42 of the Internal Revenue Code .

The status of an organization as a private foundation may be involuntarily terminated under § 507(a)(2) if, with respect to the organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act) giving rise to liability for tax under Chapter 42.

Issue 4 addresses the application of § 4941 to the Transfer. Issue 7 addresses the application of § 4944 to the Transfer. Issue 10 addresses the application of § 4945 in connection with M’s obligations under §§ 53.4945-5(c)(2), 53.4945-5(d), and 53.4945-5(e).

Furthermore, M represents that, to the best of its knowledge and belief, it has not committed willful repeated acts (or failures to act), nor has it committed any willful or flagrant act (or failure to act) that would give rise to liability for tax under Chapter 42 of the Internal Revenue Code. The Service has not notified M that it is liable for the tax imposed under § 507(c) as a result of any such acts (or failures to act).

Consequently, with respect to the issues discussed above, the Transfer will not constitute either a willful repeated act (or failure to act) or a willful and flagrant act (or failure to act) within the meaning of § 507(a)(2)(A).

Conclusions

In light of the foregoing, we rule as follows:

The Transfer will not adversely affect the tax exempt status of either M or R as an organization described in § 501(c)(3).
The Transfer qualifies as a transfer of assets described in § 507(b)(2). Accordingly, the Transfer will neither result in the termination of M’s private foundation status under § 507(a) nor cause M to be subject to the tax imposed under § 507(c).
R will succeed to M’s attributes and characteristics described in § 1.507-3(a)(2), (3) and (4), including a fraction of M’s aggregate tax benefit as determined under § 1.507-3(a)(2)(i).
Effectuating the Transfer and engaging in such actions as are necessary to effectuate the Transfer will not constitute an act of self-dealing within the meaning of § 4941.
M may not treat the Transfer as a qualifying distribution within the meaning of § 4942(g).
R may not use M’s excess qualifying distributions as defined in § 53.4942(a)-3(e) to reduce its distributable amount under 4942(d).
The Transfer will not constitute the investment of an amount in a manner as to jeopardize the carrying out of exempt purposes within the meaning of § 4944(a)(1).
M has met its pregrant inquiry requirement under § 53.4945-5(b)(2) so long as the findings of such inquiry would have caused a reasonable person to conclude that R will use the Grant Assets for the proper purposes.
M has met the “written commitment” requirement under § 53.4945-5(b)(3) by requiring R to enter into the Endowment Agreement
The Transfer will not be a taxable expenditure within the meaning of § 4945(d) so long as M obtains reports from R on its use of the Grant Assets in accordance with § 53.4945-5(c)(2), submits annual reports to the Service in accordance with § 53.4945-5(d), and takes reasonable action regarding any noncompliance with the Endowment Agreement in accordance with § 53.4945-5(e). However, M need not exercise expenditure responsibility over the Assigned Grants or over any Secondary Grant made by R using the Grant Assets.
The legal, accounting, and other expenses paid by M and R to obtain this ruling and to effectuate the Transfer, if reasonable in amount, will not constitute taxable expenditures within the meaning of § 4945(d).
With respect to the Grant Assets, R will receive the benefit of any transitional rules as provided under § 1.507-3(a)(8)(ii) that may be applicable to M as a foundation in existence before January 1, 1970.
With respect to the Internal Revenue Code provisions and Regulations promulgated thereunder, as addressed in this letter, the Transfer will not constitute either a willful repeated act (or failure to act) or a willful and flagrant act (or failure to act) within the meaning of § 507(a)(2)(A).

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

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

This ruling is based on the facts as they were presented, and on the understanding that there will be no material changes in these facts. This ruling does not address the applicability of any section of the Code or regulations to the facts submitted other than with respect to the sections described. Because it could help resolve questions concerning your federal income tax status, this ruling should be kept in your permanent records.

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

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representatives.

Sincerely,

Mary Jo Salins
Acting Manager, EO Technical

Private Letter Ruling
Number: 201418060
Internal Revenue Service
February 5, 2014

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

February 5, 2014

Number: 201418060
Release Date: 5/2/2014

Uniform Issues List Numbers:
507.00-00
4940.02-00
4941.04-00
4942.03-02
4944.05-00
4945.04-00

Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:

Dear :

This responds to your letter in which you request rulings on the application of Part II of Subchapter F of Chapter 1, Subtitle A (IRC §§ 507-509) and Subchapter A of Chapter 42, Subtitle D (§§ 4940-4948) to the transaction described below

Facts

You and the Fund are two philanthropic entities maintained by the family of B. B was involved in many philanthropic projects during his lifetime, a legacy which B’s lineal descendants and their families (the “B Family”) have adopted and continue. You are a State nonprofit corporation that has been determined by the Internal Revenue Service (the “Service”) to be exempt from federal income tax as an organization described in § 501(c)(3) and to be classified as a private foundation under § 509(a). You have 19 members, all of whom are lineal descendants of B. You have ten Trustees, each of whom is either a lineal descendant of B or a spouse of such lineal descendant.

The Fund was created under, and is governed by, State law. The Fund is a charitable trust that is not exempt from taxation under § 501(a), but that, pursuant to § 4947(a)(1), is treated as an organization described in § 501(c)(3) for purposes of §§ 507 through 509 and for purposes of Chapter 42 (§ 4940 et seq .). Currently, the two Trustees of the Fund are C (a member of the B Family and a member of your Board of Trustees) and M. The Fund’s Trust Agreement provides, in part, that the income and principal of the Fund are to be used solely and exclusively for certain enumerated charitable purposes, and that those purposes are to be carried on, in whole or in substantial part, within the state of State.

The Trust Agreement provides that the Trustees of the Fund shall use the trust assets, and the income therefrom, or make available to others for the specified charitable purposes, such amounts of income from or principal of the Fund as they shall be directed by a Distribution Committee of four persons to be appointed annually, two by you and two by the trustee(s) of the Fund. All of the members of the Distribution Committee are lineal descendants of B.

As of Date 1, the Fund had an excess qualifying distribution carryover (within the meaning of § 4942(i) and § 53.4942(a)-3(e)) of approximately $x.

You and the Fund have determined that the charitable objectives of both would be better served by combining the two entities, and that the Fund should transfer its assets to you in the transaction described below (the “Transaction”). The business objectives of the Transaction are:

To establish for current and future B Family members a uniform governance structure to coordinate oversight and decision making over charitable grant making activities of the Fund and you;
To define the portion of the assets of the Fund to be permanently restricted for charitable purposes that are carried on within State as permitted by State law;

iii. To improve access to investment opportunities, achieve greater diversification, and coordinate the investment policy and process to monitor investment results for the combined assets of the Fund and you; and

To achieve operational efficiencies for tax reporting, accounting, grant applications and grant making, and coordination of staff activities.

To implement the Transaction, you and the Fund have entered into an Agreement of Transfer dated Date 2 to provide for the transfer of all of the assets of the Fund to you. Pursuant to this Agreement, the transfer of the Fund’s assets to you is conditioned upon the satisfaction of the following three Transfer Conditions:

That you shall have amended your Articles of Incorporation to clarify that you are legally permitted to use the assets that the Fund intends to transfer to you for the charitable purposes set out in the Trust Agreement;
That you shall have amended your Code of Regulations to provide for two separate distribution committees to advise your Board of Trustees concerning the use of the assets to be transferred by the Fund to you; and

iii. That you shall have received a ruling from the Service with respect to the Transaction to the effect that you will be treated under § 507(b)(2) and § 1.507-3(a)(9)(i) as the continuation of the Fund for purposes of Chapter 42 of the Code and §§ 507-509.

Under the Agreement of Transfer, you are obligated to provide written notice to the Fund of the completion of the Transfer Conditions (the “Notice of Completion”).

The Agreement of Transfer provides that, upon the later of Date 3 or your delivery to the Fund of the Notice of Completion (the “Effective Time of Transfer”), the Fund will transfer all of its assets (the “Transferred Assets”) to you, and you shall assume all of the obligations (the “Continuing Obligations”) of the Fund, which shall include, but not be limited to, any outstanding pledge, commitment, or other obligation arising as the result of an authorized act of the Fund, including, but not limited to, fees payable to the Trustees of the Fund.

Pursuant to the Agreement of Transfer, you agree to indemnify, defend, and hold harmless each of C and M, in their respective capacity as a Trustee of the Fund, to the greatest extent permitted by applicable law (including, but not limited to, Chapter 42 of the Code and the Treasury Regulations promulgated thereunder), from and against all expenses, including reasonable attorney’s fees, judgments, and amounts paid in settlement that are actually and reasonably incurred by the indemnified party that arise out of, or are attributable to, the execution or the performance of the Agreement (the “Indemnification Obligations”).

Your obligation to satisfy the Continuing Obligations and the Indemnification Obligations shall not exceed, in the aggregate, the sum of the value of the Transferred Assets at the Effective Time of Transfer, less the value of any Transferred Assets that are transferred to the Fund after the Effective Time of Transfer, and less any costs, fees (including reasonable attorneys’ fees), and expenses incurred by you which are directly attributable to the Continuing Obligations or the Indemnification Obligations, provided that your obligation to satisfy an Indemnification Obligation at any time, and from time to time, shall be subordinate to your obligations to satisfy the Continuing Obligations that are known or may be reasonably estimated at such time.

The Agreement of Transfer further provides that, subject to any Continuing Obligation, you shall account for the Transferred Assets as two separate funds, initially equal in value, to be known as S and T. The charitable purposes of the Fund, and the amendments to your Articles of Incorporation and Code of Regulations shall constitute permanent restrictions on the use and governance of S and T. In addition, S will be permanently restricted to charitable purposes that are carried on within State. However, these permanent restrictions shall not require you to maintain the Transferred Assets as an endowment fund under State law, and you shall be free to use as much or all of the income and principal of S or T, subject to the restrictions stated in the Agreement of Transfer, as you shall determine.

Pursuant to the Agreement of Transfer, within ten days after the Effective Time of Transfer, you and the Fund shall provide written notice to the State Attorney General that the Fund has transferred the Transferred Assets to you. The Agreement of Transfer provides that you will not distribute funds from T for charitable purposes that are carried on outside of State until the earlier of (i) receipt by the Fund and you of a written approval of the terms of the Agreement of Transfer from the State Attorney General, or (ii) in the absence of such approval, then the latter of (A) the expiration of such two-year (or extended) period provided above, or (B) if a proceeding is filed by the State Attorney General with respect to the Transaction prior to the expiration of such period, then the date of the final resolution of such proceeding by written agreement of you and the Fund and the State Attorney General or a non-appealable order of a State court pursuant to a proceeding initiated by the State Attorney General (the “Review Period”).

The Agreement of Transfer also provides that the Fund shall provide the Service with written notice of intent to terminate its status as a private foundation promptly after the expiration of the Review Period unless otherwise provided by the written agreement of the Fund, you, and the State Attorney General or an order of court pursuant to an action initiated by the State Attorney General during the Review Period.

In the Agreement of Transfer, the Fund has represented to you that there is no grant made by the Fund for which you will be required to exercise expenditure responsibility under § 4945.

Finally, you represent that, as of the date of the Agreement of Transfer, and at the Effective Time of Transfer:

All of your members and all of the members of your Board of Trustees are, and will be, members of the B Family; one of the Trustees of the Fund is, and will be, a member of the B Family and a member of your Board of Trustees; and all of the members of the Fund’s Distribution Committee are, and will be, members of the B Family, members of yours, and members of your Board of Trustees.
The Fund and you are, and will be, effectively controlled (within the meaning of §§ 1.507-3(a)(9)(i) and § 1.482-1A(a)(3)), directly or indirectly by the same persons.

Rulings Requested

You have requested the following rulings:

The transfer of the assets of the Fund to you in the Transaction will constitute a significant disposition of assets to a private foundationas described in § 1.507-3(c), and will constitute a transfer of assets by a private foundationto another private foundation described in § 507(b)(2).
The transfer of the assets of the Fund to you in the Transaction will not result in the termination of the Fund’s treatment as a private foundationand will not result in the Fund being subject to the tax imposed by § 507(c).
Pursuant to § 507(b)(2), you will not be treated as a newly-created organization.
You will succeed to all of the tax attributes and characteristics of the Fund described in § 1.507-3(a)(2), (3), and (4).
Assuming that the Fund and you are effectively controlled (within the meaning of § 1.482-1A(a)(3)), directly or indirectly, by the same persons, you will be treated as if you were the Fund for purposes of Chapter 42 and §§ 507 through 509.
Pursuant to § 1.507-3(a)(9)(i) and Rev. Rul. 78-387, you may reduce the amount of your required distributions under § 4942 by the amount of the Fund’s excess qualifying distribution carryover.
The transfer of the assets of the Fund to you in the Transaction will not give rise to any net investment income under § 4940.
The transfer of the assets of the Fund to you in the Transaction will not constitute an act of self-dealing under § 4941 by the Fund, you, or any foundation managers (as defined in § 4946(b)) of you or the Fund.
The transfer of the assets of the Fund to you in the Transaction will not constitute a jeopardizing investment within the meaning of § 4944.
The transfer of the assets of the Fund to you in the Transaction will not constitute a taxable expenditure under § 4945, and the Fund will not be required to exercise any expenditure responsibility under § 4945(h) with respect to any assets transferred by the Fund to you.
Any transfer of your assets to a Trustee of the Fund in satisfaction of the Indemnification Obligations will not constitute an act of self-dealing under § 4941 or a taxable expenditure under § 4945.

Law

I.R.C.§ 501(a) exempts from taxation under subtitle A an organization described in subsection (c).

I.R.C.§ 501(c)(3) describes organizations that are organized and operated exclusively for charitable and other specified exempt purposes.

I.R.C.§ 507(a) provides 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 termination, or (2) with respect to such organization, there have been either willful repeated acts (or failures to act), 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 subsection (c), and either such organization pays the tax (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g).

I.R.C.§ 507(b)(2) provides that in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization or reorganization, the transferee foundation shall not be treated as a newly created organization.

I.R.C.§ 507(c) imposes a tax on each terminating private foundation equal to the lesser of the aggregate tax benefit resulting from the § 501(c)(3) status of such foundation and the value of the net assets of such foundation.

I.R.C.§ 509(a) provides that the term “private foundation” means a domestic or foreign organization described in § 501(c)(3) other than an organization described in paragraphs (1) through (4).

I.R.C.§ 4940(a) imposes on each private foundation which is exempt from taxation under § 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to two percent of the net investment income of the foundation for the taxable year.

I.R.C.§ 4940(b) imposes on each private foundation which is not exempt from taxation under § 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to—

(1) the amount (if any) by which the sum of (A) the tax imposed under subsection (a) (computed as if such subsection applied to such private foundation for the taxable year), plus (B) the amount of the tax which would have been imposed under section 511 for the taxable year if such private foundation had been exempt from taxation under § 501(a), exceeds

(2) the tax imposed under subtitle A on such private foundation for the taxable year.

I.R.C.§ 4941(a)(1) imposes a tax on each act of self-dealing between a disqualified person and a private foundation.

I.R.C.§ 4941(d)(1)(A) provides that the term “self-dealing” means any direct or indirect sale or exchange, or leasing, of property between a private foundation and a disqualified person.

I.R.C.§ 4941(d)(1)(E) provides that the term “self-dealing” means 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.

I.R.C.§ 4941(d)(2)(A) provides that the transfer of real or personal property by a disqualified person to a private foundation shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the foundation assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer.

I.R.C.§ 4942(a) imposes a tax 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.

I.R.C.§ 4942(c) provides that the term “undistributed income” means, with respect to any private foundation for any taxable year as of any time, the amount by which the distributable amount for such taxable year exceeds the qualifying distributions made before such time out of such distributable amount.

I.R.C.§ 4942(g)(1)(A) provides that the term “qualifying distribution” means any amount (including that portion of reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in § 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, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as described in subsection (j)(3)), except as provided in paragraph (3).

I.R.C.§ 4942(g)(3) provides that the term “qualifying distribution” includes a contribution to a § 501(c)(3) organization described in paragraph (1)(A)(i) or (ii) if—

(A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such § 501(c)(3) organization were a private foundation which is not an operating foundation), and

(B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such organization.

I.R.C.§ 4942(i)(1) provides that if, for the taxable years in the adjustment period for which an organization is a private foundation—

(A) the aggregate qualifying distributions treated (under subsection (h)) as made out of the undistributed income for such taxable year or as made out of corpus (except to the extent subsection (g)(3) with respect to the recipient private foundation or § 170(b)(1)(D)(ii) applies) during such taxable years, exceed

(B) the distributable amounts for such taxable years (determined without regard to this subsection),

then, for purposes of this section (other than subsection (h)), the distributable amount for the taxable year shall be reduced by an amount equal to such excess.

I.R.C.§ 4942(i)(2) provides that, for purposes of paragraph (1), with respect to any taxable year of a private foundation, the taxable years in the adjustment period are the taxable years (not exceeding five) preceding the taxable year.

I.R.C.§ 4944(a)(1) imposes a tax on any amount invested by a private foundation in a manner that jeopardizes the carrying out of any of the foundation’s charitable purposes.

I.R.C.§ 4945(a) imposes a tax on each taxable expenditure of a private foundation (as defined in subsection (d)).

I.R.C.§ 4945(d)(4) provides that the term “taxable expenditure” includes any amount paid or incurred by a private foundation as a grant to a private non-operating foundation unless the grantor foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h).

I.R.C.§ 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 § 170(c)(2)(B).

I.R.C.§ 4945(h) provides that the expenditure responsibility referred to in subsection (d)(4) means that the private foundation is responsible to exert all reasonable efforts to establish adequate procedures: (1) to see that the grant is spent solely for the purpose for which made, (2) to obtain full and complete reports from the grantee on how the funds are spent, and (3) to make full and detailed reports with respect to such expenditures to the Secretary.

I.R.C.§ 4946(a)(1)(B) provides that for purposes of subchapter A of Chapter 42 (§§ 4940 through 4948), the term “disqualified person” means, with respect to a private foundation, a person who is a foundation manager within the meaning of subsection (b)(1).

I.R.C.§ 4946(b)(1) provides that the term “foundation manager” means, with respect to any private foundation, an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation).

I.R.C.§ 4947(a)(1) provides that for purposes of part II of subchapter F of chapter 1 (other than § 508(a), (b), and (c)) and for purposes of Chapter 42, a trust which is not exempt from taxation under 501(a), all of the unexpired interests in which are devoted to one or more of the purposes described in § 170(c)(2)(B), and for which a deduction was allowed under § 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 (or the corresponding provisions of prior law) shall be treated as an organization described in § 501(c)(3).

Treas. Reg.§ 1.482-1A(a)(3) provides that the term “controlled” includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise.

Treas. Reg. § 1.507-1(b)(1) provides that in order to terminate its private foundation status under § 507(a)(1), an organization must submit a statement to the Service of its intent to terminate its private foundation status under 507(a)(1). Such statement must set forth in detail the computation and amount of tax imposed under 507(c). Unless the organization requests abatement of such tax pursuant to 507(g), full payment of such tax must be made at the time the statement is filed under 507(a)(1).

Treas. Reg.§ 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 § 507(b)(2) and § 1.507-3(c), such transferor foundation will not have terminated its private foundation status under § 507(a)(1).

Treas. Reg.§ 1.507-1(b)(7) provides that neither a transfer of all the assets of a private foundation nor a significant disposition of assets (as defined in § 1.507-3(c)(2) by a private foundation shall be deemed to result in a termination of the transferor private foundation under § 507(a) unless the transferor private foundation elects to terminate pursuant to § 507(a)(1) or § 507(a)(2) is applicable.

Treas. Reg.§ 1.507-3(a)(1) provides that in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, including a significant disposition of assets to one or more private foundations within the meaning of paragraph (c), the transferee organization shall not be treated as a newly created organization. Rather, the transferee organization shall be treated as possessing those attributes and characteristics of the transferor organization which are described in subparagraphs (2), (3), and (4) of this paragraph.

Treas. Reg.§ 1.507-3(a)(2)(i) provides that a transferee organization to which this paragraph (a) applies shall succeed to the aggregate tax benefit of the transferor organization in an amount equal to the amount of such aggregate tax benefit multiplied by a fraction the numerator of which is the fair market value of the assets (less encumbrances) transferred to such transferee and the denominator of which is the fair market value of the assets of the transferor (less encumbrances) immediately before the transfer. Fair market value shall be determined as of the time of the transfer.

Treas. Reg.§ 1.507-3(a)(3) provides that, for purposes of § 507(d)(2), in the event of a transfer of assets described in § 507(b)(2), any person who is a “substantial contributor” (within the meaning of § 507(d)(2)) with respect to the transferor foundation shall be treated as a “substantial contributor” with respect to the transferee foundation, regardless of whether such person meets the $5,000-two percent test with respect to the transferee organization at any time.

Treas. Reg.§ 1.507-3(a)(4) provides that if a private foundation incurs liability for one or more of the taxes imposed under Chapter 42 (or any penalty resulting therefrom) prior to, or as a result of, making a transfer of assets described in § 507(b)(2) to one or more private foundations, in any case where transferee liability applies each transferee foundation shall be treated as receiving the transferred assets subject to such liability to the extent that the transferor foundation does not satisfy such liability.

Treas. Reg.§ 1.507-3(a)(5) provides that, except as provided in subparagraph (9) of this paragraph, a private foundation is required to meet the distribution requirements of § 4942 for any taxable year in which it makes a § 507(b)(2) transfer of all or part of its net assets to another private foundation. Such transfer shall itself be counted toward satisfaction of such requirements to the extent the amount transferred meets the requirements of 4942(g). However, where the transferor has disposed of all of its assets, the recordkeeping requirements of §4942(g)(3)(B) shall not apply during any period in which it has no assets. Such requirements are applicable for any taxable year other than a taxable year during which the transferor has no assets.

Treas. Reg.§ 1.507-3(a)(9)(i) provides that if a private foundation transfers all of its net assets to one or more private foundations that are effectively controlled (within the meaning of 1.482-1A(a)(3)), directly or indirectly, by the same person or persons that effectively controlled the transferor private foundation, for purposes of Chapter 42 (§ 4940 et seq .) and part II of subchapter F of chapter 1 of the Code (§§ 507 through 509), such a transferee private foundation shall be treated as if it were the transferor.

Treas. Reg.§ 1.507-3(c)(1) provides that a transfer of assets is described in § 507(b)(2) if it is made by a private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization. For purposes of § 507(b)(2), the terms “other adjustment, organization or reorganization” shall include any partial liquidation or any other significant disposition of assets to one or more private foundations, other than transfers for full and adequate consideration or distributions out of current income.

Treas. Reg.§ 1.507-3(c)(2) provides that the term “significant disposition of assets to one or more private foundations” includes any disposition (or series of related dispositions) by a private foundation to one or more private foundations of 25 percent or more of the fair market value of the net assets of the transferor foundation at the beginning of the taxable year in which the transfers occur.

Treas. Reg.§ 1.507-3(d) provides that unless a private foundation voluntarily gives notice pursuant to 507(a)(1), a transfer of assets described in § 507(b)(2) will not constitute a termination of the transferor’s private foundation status under § 507(a)(1).

Treas. Reg.§ 1.507-4(b) provides that private foundations which make transfers described in § 507(b)(2) are not subject to the tax imposed under § 507(c) with respect to such transfers unless the provisions of § 507(a) become applicable.

Treas. Reg.§ 53.4940-1(b)(1) provides that the excise tax imposed under § 4940 on private foundations which are not exempt from taxation under § 501(a) is equal to:

(i) The amount (if any) by which the sum of

(A) The tax on net investment income imposed under § 4940(a), computed as if such private foundation were exempt from taxation under section 501(a) and described in § 501(c)(3) for the taxable year, plus

(B) The amount of the tax which would have been imposed under section 511 for such taxable year if such private foundation had been exempt from taxation under § 501(a), exceeds,

(ii) The tax imposed under subtitle A on such private foundation for the taxable year.

Treas. Reg.§ 53.4941(d)-2(a)(2) provides that a “mortgage or similar lien” shall include, but is not limited to, deeds of trust and vendor’s liens, but shall not include any other lien if such lien is insignificant in relation to the fair market value of the property transferred.

Treas. Reg.§ 53.4941(d)-2(f)(1) provides that the transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation shall constitute an act of self-dealing. If a private foundation makes a grant or other payment which satisfies the legal obligation of a disqualified person, such grant or payment shall ordinarily constitute an act of self-dealing.

Treas. Reg.§ 53.4941(d)-3(c)(1) provides, generally, that, under § 4941(d)(2)(E), the payment of compensation (and the payment or reimbursement of expenses, including reasonable advances for expenses anticipated in the immediate future) by a private foundation to a disqualified person for the performance of personal services which are reasonable and necessary to carry out the exempt purpose of the private foundation shall not be an act of self-dealing if such compensation (or payment or reimbursement) is not excessive. For the determination of whether compensation is excessive, see § 1.162-7.

Treas. Reg.§ 53.4942(a)-3(e)(2) provides, generally, that an excess of qualifying distributions is created if (i) the total qualifying distributions treated as made out of the undistributed income for such taxable year or as made out of corpus with respect to such taxable year exceeds (ii) the distributable amount for such taxable year.

Treas. Reg.§ 53.4942(a)-3(e)(3) provides that the taxable years of the adjustment period are the five taxable years immediately following the taxable year in which the excess of qualifying distributions is created.

Treas. Reg.§ 53,4945-6(b) provides that reasonable expenses to carry out charitable purposes ordinarily will not be treated as taxable expenditures.

Treas. Reg.§ 53.4946-1(a)(8) provides that, for purposes of § 4941 only, the term “disqualified person” shall not include any organization which is described in § 501(c)(3) (other than an organization described in § 509(a)(4)).

Treas. Reg.§ 53.4947-1(a) provides that 4947 subjects trusts which are not exempt from taxation under § 501(a), all or part of the unexpired interests in which are devoted to one or more of the purposes described in § 170(c)(2)(B), and which have amounts in trust for which a deduction was allowed under § 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 to the same requirements and restrictions as are imposed on private foundations. The basic purpose of § 4947 is to prevent these trusts from being used to avoid the requirements and restrictions applicable to private foundations.

Treas. Reg.§ 53.4947-1(b)(1) provides that a “charitable trust”, within the meaning of § 4947(a)(1), is a trust which is not exempt from taxation under 501(a), all of the unexpired interests in which are devoted to one or more of the purposes described in § 170(c)(2)(B), and for which a deduction was allowed under § 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522. A charitable trust (as defined in this paragraph) shall be treated as an organization described in § 501(c)(3) and, if it is determined under 509 that the trust is a private foundation, then Part II of Subchapter F of Chapter 1 of the Code (other than 508(a), (b), and (c)) and Chapter 42 shall apply to the trust. However, the charitable trust is not treated as an organization described in 501(c)(3) for purposes of exemption from taxation under § 501(a). Thus, the trust is subject to the excise tax on its investment income under § 4940(b) rather than the tax imposed by § 4940(a).

Rev. Rul. 78-387, 1978-2 C.B. 270, concerns a private foundation, M, that has a carryover of excess qualifying distributions as described in § 4942(i) and § 53.4942(a)-3(e). M transfers all of its net assets to private foundation N in a transfer qualifying under § 507(b)(2). M is controlled (within the meaning of § 1.482-1A(a)(3)) by the same persons who control N. Because M and N are controlled by the same persons, N is treated as if it were M pursuant to § 1.507-3(a)(9)(i). Accordingly, for purposes of determining N’s distribution requirements under § 4942, it is held that N may reduce its distributable amount by the excess qualifying distributions carryover of M.

Rev. Rul. 2002-28, 2002-1 C.B. 941, holds:

When a private foundationtransfers all of its assets to one or more private foundations in a transfer described in § 507(b)(2), the transfers do not give rise to net investment income and are not subject to tax under § 4940(a). The transferee foundations may use their proportionate share of any excess § 4940 tax paid by the transferor to offset the transferees’ § 4940 tax liability.
When a private foundationtransfers all of its assets to one or more private foundations in a transfer described in § 507(b)(2), the transfers do not constitute qualifying distributions of the transferor foundation under § 4942. The transferee foundations assume their proportionate share of the transferor foundation’s undistributed income under § 4942 and reduce their own distributable amount for purposes of § 4942 by their proportionate share of the transferor’s excess qualifying distributions under § 4942(i).
When a private foundationtransfers all of its assets to one or more private foundations in a transfer described in 507(b)(2), the transfers do not constitute investments for purposes of 4944 and, consequently, do not constitute investments jeopardizing the transferor foundation’s exempt purposes and are not subject to tax under 4944(a)(1).
When a private foundationtransfers all of its assets to one or more private foundations effectively controlled by the same persons that effectively control the transferor, the transferee foundation is treated as the transferor foundation rather than as a recipient of an expenditure responsibility grant. Therefore, there are no expenditure responsibility requirements that must be exercised under § 4945(d)(4) or (h) with respect to the transfers to the transferee foundation. The transferor foundation is required to exercise expenditure responsibility over the transferor’s outstanding grants until it disposes of all of its assets. Thereafter, during any period in which the transferor foundation has no assets, the transferor foundation is not required to exercise expenditure responsibility over any outstanding grants. However, the transferor foundation must still meet the § 4945(h) reporting requirements for the outstanding grants for the year in which the transfer was made.

Analysis

Issue 1

Whether the transfer of assets of the Fund to you in the Transaction will constitute a significant disposition of assets to a private foundation as described in § 1.507-3(c), and will constitute a transfer of assets by a private foundation to another private foundation described in § 507(b)(2) .

By reason of § 4947(a)(1) and § 53.4947-1(b)(1), the Fund is treated as an organization described in § 501(c)(3) for purposes of §§ 507 and 509. As determined under § 509, the Fund is a private foundation. Consequently, Part II of Subchapter F of Chapter 1 of the Code (other than § 508(a), (b), and (c)), and Chapter 42 shall apply to the Fund, including the provisions of § 507.

I.R.C. § 507(b)(2) applies to the transfer of the assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization. Treas. Reg.§ 1.507-3(c)(1) provides that the terms “other adjustment, organization, or reorganization” shall include any partial liquidation or any other significant disposition 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 § 1.507-3(c)(2) as any disposition or series of dispositions where the aggregate value transferred is 25 percent or more of the fair market value of the net assets of the foundation at the beginning of the taxable year.

The Transaction will result in the Fund transferring 100 percent of its assets to you, a private foundation, for no consideration. Hence, the Transfer is a significant disposition of assets that qualifies as a transfer described in § 507(b)(2).

Issue 2

Whether the transfer of the assets of the Fund to you in the Transaction would result in the termination of the Fund’s treatment as a private foundation or would result in the Fund being subject to the tax imposed by § 507(c) .

Treas.§ Reg. 1.507-1(b)(1) provides that in order for a private foundation to terminate its private foundation status under § 507(a)(1), it must submit a statement to the Service of its intent to terminate its private foundation status under 507(a)(1). Treas. Reg. 1.507-1(b)(6) provides that when a private foundation transfers all or part of its assets to one or more other private foundations pursuant to a transfer described in § 507(b)(2), such transferor foundation will not have terminated its private foundation status under § 507(a)(1). In addition, § 1.507-1(b)(7) provides that neither a transfer of all the assets of a private foundation nor a significant disposition of assets by a private foundation shall be deemed to result in a termination of the transferor private foundation under § 507(a) unless the transferor private foundation elects to terminate pursuant to § 507(a)(1). Furthermore,§ 1.507-3(d) provides that unless a private foundation voluntarily gives notice pursuant to § 507(a)(1), a transfer of assets described in § 507(b)(2) will not constitute termination of the transferor’s private foundation status under § 507(a)(1). Finally,§ 1.507-4(b) provides that a private foundation that makes a transfer described in 507(b)(2) is not subject to the tax imposed under § 507(c) with respect to such transfer unless the provisions of § 507(a) become applicable.

As explained under Issue 1, above, the Transfer will constitute a significant disposition of assets described in § 507(b)(2). The Fund will not provide the Service with written notice of intent to terminate its status as a private foundation until the expiration of the Review Period described in the Agreement of Transfer which is after the Effective Time of Transfer. Therefore, the Transfer would not terminate the Fund’s private foundation status under § 507(a) or subject the Fund to the tax imposed under § 507(c).

Issues 3 and 4

Whether, pursuant to § 507(b)(2), you will not be treated as a newly-created organization.

Whether you will succeed to the all of the tax attributes and characteristics of the Fund described in § 1.507-3(a)(2), (3), and (4) .

When a private foundation makes a transfer described in § 507(b)(2), the transferee foundation is not treated as a newly created organization under § 1.507-3(a)(1). Since the Transfer is a transfer described in § 507(b)(2), you will not be treated as a newly created organization.

In the case of a significant disposition of assets from one or more private foundations within the meaning of § 507(b)(2), the transferee organization shall be treated as possessing those attributes and characteristics of the transferor organization which are described in subparagraphs (2), (3), and (4) of § 1.507-3(a). Accordingly, you will be treated as possessing those attributes and characteristics of the Fund that are described in § 1.507-3(a)(2), (3), and (4).

Issue 5

Assuming the Fund and you are effectively controlled (within the meaning of § 1.482-1A(a)(3)), directly or indirectly, by the same persons, whether you will be treated as if you were the Fund for purposes of Chapter 42 and §§ 507-509 .

Treas. Reg.§ 1.507-3(a)(9)(i) provides that if a private foundation transfers all of its net assets to one or more private foundations which are effectively controlled (within the meaning of § 1.482-1A(a)(3)), directly or indirectly, by the same person or persons which effectively controlled the transferor private foundation, for purposes of Chapter 42 (§ 4940 et seq .) and 507 through 509, such a transferee private foundation shall be treated as if it were the transferor. You represent that at the Effective Time of Transfer the Fund and you will be effectively controlled (within the meaning of § 1.482-1A(a)(3)), directly or indirectly, by the same persons. Therefore, after the Transfer, you will be treated as if you were the Fund for purposes of Chapter 42 and §§ 507 through 509.

Issue 6

Whether, pursuant to § 1.507-3(a)(9)(i), you may reduce the amount of your required distributions under § 4942 by the amount of the Fund’s excess qualifying distribution carryover .

I.R.C. § 4942(a) generally imposes a tax 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. I.R.C.§ 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. I.R.C.§ 4942(g)(1)(A) defines “qualifying distribution” generally as any amount (including that portion of reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in § 170(c)(2)(B), but a qualifying distribution does not include a contribution to an organization controlled directly or indirectly by the foundation or by one or more disqualified persons with respect to the foundation.

Treas. Reg.§ 1.507-3(a)(5) provides that, except as provided in § 1.507-3(a)(9), a private foundation making a transfer described in § 507(b)(2) must satisfy its distribution requirements under 4942 for the taxable year in which the transfer is made. It further provides that the transfer will count as a distribution in satisfaction of the transferor foundation’s distribution requirement under § 4942 subject to the provisions of § 4942(g). I.R.C. 4942(g) provides that a distribution from one private foundation to another private foundation, where both foundations are effectively controlled by the same persons, will not be treated as a qualifying distribution of the transferor foundation for purposes of § 4942 except to the extent that the transferee foundation makes one or more distributions that would be qualifying distributions under § 4942(g) prior to the close of the transferee’s first tax year following the tax year in which it received the transfer and the distributions are treated as being made out of corpus.

Rev. Rul.78-387 and Rev. Rul. 2002-28 hold that where, by reason of 1.507-3(a)(9)(i), a transferee private foundation is treated as though it were the transferor for purposes of 4942, a transfer to the transferee foundation is not treated as a qualifying distribution of the transferor foundation. Rather, the transferee foundation assumes all obligations with respect to the transferor’s “undistributed income” within the meaning of 4942(c), if any, and reduces its own distributable amount under 4942(d) by the transferor foundation’s excess qualifying distributions under 4942(i).

As explained under Issue 5, above, by reason of § 1.507-3(a)(9)(i) you would be treated as if you were the Fund for purposes of Chapter 42, including § 4942. Accordingly, the Transfer would not be treated as a qualifying distribution of the Fund. Rather, you would assume the Fund’s obligations with respect to its undistributed income within the meaning of § 4942(c), if any, and you would reduce your own distributable amount under § 4942 by the Fund’s excess qualifying distribution carryover under § 4942(i).

Issue 7

Whether the transfer of the assets of the Fund to you in the Transaction would give rise to any net investment income under 4940 .

By reason of § 4947(a)(1) and § 53.4947-1(b)(1), the Fund is treated as an organization described in § 501(c)(3) for purposes of 507 and 509. As determined under § 509, the Fund is a private foundation and, thus, subject to the provisions of Chapter 42, including § 4940.

I.R.C.§ 4940(a) imposes a tax on a private foundation’s net investment income for the taxable year. Treas. Reg.§ 53.4947-1(b)(1) provides that a charitable trust defined in § 4947(a)(1) is not treated as an organization described in § 501(c)(3) for purposes of exemption from taxation under § 501(a) and, thus, is subject to the excise tax on its investment income under § 4940(b) rather than the tax imposed by § 4940(a).

I.R.C.§ 4940(b) imposes a tax on private foundations which are not exempt from taxation under § 501(a), including charitable trusts described in § 4947(a)(1). The amount of tax is equal to the amount, if any, by which the sum of (1) the tax imposed under § 4940(a) (computed as if the foundation were exempt) plus (2) the amount of tax which would have been imposed under 511 if the foundation were exempt exceeds (3) the tax imposed on the organization under subtitle A. The foundation must therefore compute the amount of tax for which it would have been liable had it been an exempt foundation.

Rev. Rul. 2002-28 holds that when a private foundation transfers all of its assets to one or more private foundations in a transfer described in § 507(b)(2), the transfers do not constitute investments of the transferor and, therefore, do not give rise to net investment income subject to tax under § 4940(a).

As explained under Issue 1, above, the Transfer of all of the Fund’s net assets to you is a transfer described in § 507(b)(2). Therefore, such Transfer would not constitute an investment of the Fund, and would not give rise to net investment income subject to tax under § 4940(a) or (b).

Issue 8

Whether the transfer of the assets of the Fund to you in the Transaction would constitute an act of self-dealing under § 4941 of the Code by the Fund, you, or any foundations managers (as defined in § 4946) of you or the Fund .

By reason of § 4947(a)(1) and § 53.4947-1(b)(1), the Fund is treated as an organization described in § 501(c)(3) for purposes of §§ 507 and 509. As determined under § 509, the Fund is a private foundation and, thus, subject to the provisions of Chapter 42, including § 4941.

I.R.C.§ 4941(a) imposes an excise tax on each act of self-dealing between a disqualified person and a private foundation. I.R.C.§ 4941 and Treas. Reg.§ 1.507-3(a) determine whether the Transfer will constitute an act of self-dealing between a private foundation and its disqualified persons, as defined in § 4946. Under § 53.4946-1(a)(8), a “disqualified person,” for purposes of § 4941, does not include organizations that are exempt under § 501(c)(3). Since the assets of the Fund will be transferred to you, an organization exempt under § 501(c)(3), by reason of § 53.4946-1(a)(8) the Transfer would not be a transfer to a disqualified person for purposes of § 4941. Hence, the Transfer will not constitute an act of self-dealing under § 4941.

Issue 9

Whether the transfer of the assets of the Fund to you in the Transaction would constitute a jeopardizing investment within the meaning of § 4944 .

By reason of § 4947(a)(1) and § 53.4947-1(b)(1), the Fund is treated as an organization described in § 501(c)(3) for purposes of §§ 507 and 509. As determined under § 509, the Fund is a private foundation and, thus, subject to the provisions of Chapter 42, including § 4944.

I.R.C.§ 4944 imposes an excise tax on any amount invested by a private foundation in a manner that jeopardizes the carrying out of the foundation’s exempt purposes. Rev. Rul. 2002-28 holds that where a private foundation transfers all of its assets and liabilities to another private foundation, the transfer does not constitute an investment for purposes of § 4944.

Since the Fund, an organization treated as a private foundation for purposes of § 4944, will transfer all of its assets and liabilities to you, a private foundation, the Transfer will not constitute an investment for purposes of § 4944 and, thus, will not be subject to tax under § 4944(a)(1). Therefore, the Transfer would not constitute a jeopardizing investment within the meaning of § 4944.

Issue 10

Whether the transfer of the assets of the Fund to you in the Transaction would constitute a taxable expenditure under 4945, and whether the Fund would be required to exercise any expenditure responsibility under 4945(h) with respect to any assets transfer by the Fund to you .

By reason of § 4947(a)(1) and § 53.4947-1(b)(1), the Fund is treated as an organization described in § 501(c)(3) for purposes of §§ 507 and 509. As determined under § 509, the Fund is a private foundation and, thus, subject to the provisions of Chapter 42, including § 4945.

I.R.C.§ 4945(a) imposes a tax on any “taxable expenditure.” I.R.C. § 4945(d)(4) provides that the term ”taxable expenditure” includes any amount paid or incurred as a grant to a private non-operating foundation unless the grantor foundation exercises expenditure responsibility with respect to such grant in accordance with § 4945(h).

Rev. Rul. 2002-28 holds that where, by reason of § 1.507-3(a)(9)(i), a transferee foundation is treated as though it were the transferor foundation for purposes of 4945, the transferee foundation is not treated as the recipient of an expenditure responsibility grant, and no expenditure responsibility requirements must be exercised under 4945(d)(4) or (h) with respect to the transfer to the transferee foundation.

As explained under Issue 5, above, by reason of § 1.507-3(a)(9)(i), you would be treated as if you were the Fund for purposes of Chapter 42, including § 4945. Consequently, the Transfer would not be considered a taxable expenditure under § 4945 and there would be no expenditure responsibility requirements to be exercised by the Fund under § 4945(d)(4) or (h) with respect to the Transfer.

Issue 11

Whether any transfer of your assets to a Trustee of the Fund in satisfaction of the Indemnification Obligations would constitute an act of self-dealing under § 4941 or a taxable expenditure under § 4945 .

Pursuant to the Agreement of Transfer, you have agreed to the Indemnification Obligations, which consist of obligations to indemnify, defend, and hold harmless each of the Trustees of the Fund, i.e., C and M, to the greatest extent permitted by applicable law, including the provisions of Chapter 42 of the Code and the Treasury Regulations promulgated thereunder, from and against all expenses (including reasonable attorney’s fees), judgments, and amounts paid in settlement that are actually and reasonably incurred by the Trustees that arise out of, or are attributable to, the execution or the performance of the Agreement of Transfer.

While M is a Trustee of the Fund, it is not a Trustee of yours, and is not, otherwise, a foundation manager or disqualified person with respect to you. Consequently, the transfer of your assets to M in satisfaction of the Indemnification Obligations would not be an act of self-dealing between a private foundation and a disqualified person within the meaning of § 4941. On the other hand, C, as one of your Trustees and, hence, a “foundation manager” within the meaning of § 4946(b)(1), is a disqualified person with respect to you. Thus, unless an exception applies, a transfer of your assets to C would constitute self-dealing under § 4941(d)(1)(E) and § 53.4941(d)-2(f)(1).

You represent that, under both State statutes and case law, the Trustees of the Fund are entitled to repayment out of Fund property for expenses (including reasonable attorney’s fees), judgments, and amounts paid in settlement that are actually and reasonably incurred in the execution or performance of the Agreement of Transfer. Further, you represent that, under State law, the Trustees of the Fund would have an equitable lien on Fund property as against the Fund’s beneficiaries for expenses (including reasonable attorney’s fees, judgments, and amounts paid in settlement) that are actually and reasonably incurred in the execution or performance of the Agreement of Transfer. By entering into the Agreement of Transfer, you have notice of, and have agreed to, as a matter of contract law, an equitable lien on the Transferred Assets. You have also represented that any indemnification by you of a Trustee of the Fund in satisfaction of the Indemnification Obligations will be made only in compliance with applicable law, including the provisions of Chapter 42.

Since the Agreement of Transfer merely restates and clarifies the terms of the Trustees’ equitable lien, any payment made in satisfaction of the Indemnification Obligations will not involve a “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation” within the meaning of § 4941(d)(1)(E) and § 53.4941(d)-2(f)(1). Moreover, the Indemnification Obligations do not constitute a “mortgage or similar lien” on the Transferred Assets within the meaning of § 4941(d)(2)(A). Although the Indemnification Obligations constitute a “lien” on the Transferred Assets in the ordinary sense of the term, the term “mortgage or similar lien” generally involves a volitional act by a disqualified person in placing the lien on the property, whereas the equitable lien arises by operation of law. In addition, § 53.4941(d)-2(a)(2) provides that the term “similar lien” shall not include a lien that is insignificant in relation to the fair market value of the property transferred. In this case, the lien has no monetary value associated with it other than a speculative or negligible actuarial value.

Similarly, any payments made in satisfaction of the Indemnification Obligations will not constitute expenditures of charitable purposes within the meaning of § 4945(d)(5). They will instead be considered necessary administrative expenses to carry out charitable purposes within the meaning of § 53.4945-6(b).

Conclusion

In light of the foregoing, we rule as follows:

The transfer of the assets of the Fund to you in the Transaction will constitute a significant disposition of assets to one or more private foundations within the meaning of § 1.507-3(c), and will constitute a transfer of assets by a private foundationto another private foundationdescribed in § 507(b)(2).
The transfer of the assets of the Fund to you in the Transaction will not result in the termination of the Fund’s treatment as a private foundationand will not result in the Fund being subject to the tax imposed by § 507(c).
Pursuant to § 507(b)(2), you will not be treated as a newly-created organization.
You will succeed to all of the tax attributes and characteristics of the Fund described in § 1.507-3(a)(2), (3), and (4).
Assuming that the Fund and you are effectively controlled (within the meaning of § 1.482-1A(a)(3)) by the same persons at the Effective Time of Transfer, you will be treated as if you were the Fund for purposes of Chapter 42 and §§ 507 through 509.
Pursuant to § 1.507-3(a)(9)(i) and Revenue Ruling 78-387, you may reduce the amount of your required distributions under § 4942 by the amount of the Fund’s excess qualifying distribution carryover.
The transfer of the assets of the Fund to you in the Transaction will not give rise to any net investment income under § 4940.
The transfer of the assets of the Fund to you in the Transaction will not constitute an act of self-dealing under § 4941 by the Fund, you, or any foundation managers (as defined in § 4946(b)) of you or the Fund.
The transfer of the assets of the Fund to you in the Transaction will not constitute a jeopardizing investment within the meaning of § 4944.
The transfer of the assets of the Fund to you in the Transaction will not constitute a taxable expenditure under § 4945 and the Fund will not be required to exercise any expenditure responsibility under § 4945(h) with respect to any assets transferred by the Fund to you.
Any transfer of your assets to a Trustee of the Fund in satisfaction of the Indemnification Obligations will not constitute an act of self-dealing under § 4941 or a taxable expenditure under § 4945.

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

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

This ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts. This ruling does not address the applicability of any section of the Code or regulations to the facts submitted other than with respect to the sections described. Because it could help resolve questions concerning your federal income tax status, this ruling should be kept in your permanent records.

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

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Steven B. Grodnitzky
Manager, Exempt Organizations
Technical Group 1

Private Letter Ruling
Number: 201514016
Internal Revenue Service

January 6, 2015

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

January 6, 2015

Number: 201514016
Release Date: 4/3/2015

Uniform Issue List Numbers:
501.03-02
507.00-00
4941.04-00
4942.03-05
4944.05-00
4945.04-05
4945.04-06

Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:

Dear *******:

Facts

The Interested Parties

The parties interested in this request are M and R.

R is organized exclusively for religious, charitable, civic, educational, literary, and scientific purposes within the meaning of §§ 170(c)(2)(B) and 501(c)(3). R is recognized as exempt from federal income tax under § 501(c)(3) and is classified as a private non-operating foundation under § 509(a). R intends to provide grants to other organizations in the United States and in foreign countries to fund activities that are aligned with, and are in furtherance of, R’s charitable purposes.

The Transfer

To effectuate the philanthropic purposes of both M and R, M has assigned the following grant commitments to R (hereinafter, the “Assigned Grants”):

M’s rights and obligations under a grant agreement between M and S (“Grant 1”). S is an organization described in § 501(c)(3) and is classified as other than private foundationunder § 509(a)(1). At the time of the assignment, M remained obligated to disburse $3x to S.
M’s rights and obligations under a grant agreement between M and T (“Grant 2”). T is an organization described in § 501(c)(3) and is classified as other than private foundationunder § 509(a). At the time of the assignment, M remained obligated to disburse $11x to T.

In addition, M has transferred the following assets to R subject to the terms and conditions set forth in an endowment grant agreement (the “Endowment Agreement”):

Cash in the amount of $168.8x (the “Cash”); and
Approximately 11x shares of N stock (the “Shares”).

The Cash and the Shares make up the “Grant Assets.” The transfer of the Grant Assets and the assignment of Grant 1 and Grant 2 to R make up the “Transfer.”

The Endowment Agreement

Before making any Secondary Grant:

R must enter into a written grant agreement memorializing the terms and conditions under which the grant is made and the grant funds are expended.
With respect to any Secondary Grant to an organization other than an organization described in § 4945(d)(4)(A), R agrees to exercise expenditure responsibility with respect to such Secondary Grantee within the meaning of § 4945(h) and § 53.4945-5, including making such reports to the IRS on its annual information return as are required by § 4945(h)(3) and § 53.4945-5(d).
With respect to any Secondary Grant to an individual for travel, study, or similar purposes, R shall comply with the requirements of § 4945(g) and § 53.4945-4.

Representations

M has not, and will not, notify the Internal Revenue Service (the “Service”) of its intention to terminate its private foundation status prior to, or immediately after, the Transfer. M represents that, to the best of its knowledge and belief, it has not committed willful repeated acts (or failures to act), nor has it committed any willful or flagrant act (or failure to act) that would give rise to liability for tax under Chapter 42 of the Internal Revenue Code. The Service has not notified M that it is liable for the tax imposed under § 507(c) as a result of any such acts (or failures to act).

Rulings Requested

The following rulings have been requested:

The Transfer will not adversely affect the tax exempt status of either M or R as an organization described in § 501(c)(3).
The Transfer qualifies as a transfer of assets described in § 507(b)(2), and will neither result in the termination of M’s private foundationstatus under § 507(a) nor subject M to the tax imposed by § 507(c).
R will succeed to M’s attributes and characteristics described in subparagraphs (2), (3) and (4) of § 1.507-3(a) of the Income Tax Regulations.
Effectuating the Transfer and engaging in such actions as are necessary to effectuate the Transfer will not constitute an act of self-dealing within the meaning of § 4941.
M may not treat the distribution of the Grant Assets as a qualifying distribution described in § 4942(g).
R will not succeed to any of M’s excess qualifying distributions under § 53.4942(a)-3(e).
The Transfer will not constitute an investment that jeopardizes the carrying out of M’s exempt purposes within the meaning of § 4944(a).
M has met its pregrant inquiry requirements as to R under § 53.4945-5(b)(2).
M has met the “written commitment” requirement under § 53.4945-5(b)(3) by requiring R to enter into the Endowment Agreement, so long as M takes all reasonable actions to enforce the terms of the Endowment Agreement.
The Transfer will not be a taxable expenditure under § 4945 because M will exercise capital endowment grant expenditure responsibility over the Grant Assets transferred to R; however, M will not be required to exercise expenditure responsibility with respect to the Assigned Grants or any Secondary Grants made by R to Secondary Grantees.
The legal, accounting, and other expenses paid by M and R to obtain this ruling and to effectuate the Transfer, if reasonable in amount, will not constitute taxable expenditures under § 4945(d)(5).
R will receive the benefit of any transitional rules that were applicable to M as a foundation in existence before January 1, 1970.
The Transfer will not constitute a willful and flagrant act (or failure to act), and will not constitute one in a series of acts (or failures to act) that would cause M to incur any taxes under Chapter 42 of the Internal Revenue Code.

Law

I.R.C. § 501(a) exempts from federal income taxation organizations described in § 501(c).

I.R.C. § 501(c)(3) describes organizations organized and operated exclusively for charitable and other designated exempt purposes.

I.R.C. § 507(a) provides 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 termination, or (2) with respect to such organization, there have been either willful repeated acts (or failures to act), 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 subsection (c), and either such organization pays the tax (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g).

I.R.C. § 507(b)(2) provides that in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization.

I.R.C. § 507(c) imposes a tax on the termination of a private foundation under the circumstances described in § 507(a). The tax is equal to the lesser of the aggregate tax benefit resulting from the tax exempt status of the private foundation and the value of the net assets of such foundation.

I.R.C. § 507(d)(1) defines “aggregate tax benefit” as the sum of the following amounts:

(i) the aggregate increases in tax under chapters 1, 11 and 12 of the Internal Revenue Code that would have been imposed on the substantial contributors to the private foundation if the charitable income, estate and gift tax deductions were disallowed for contributions made after February 28, 1913;

I.R.C. § 509(a) defines the term “private foundation” to mean any domestic or foreign organization described in § 501(c)(3) other than an organization described in § 509(a)(1), (2), (3), or (4).

I.R.C. § 4941(a)(1) imposes a tax on each act of self-dealing between a disqualified person and a private foundation.

I.R.C. § 4942(a) imposes a tax on the undistributed income of a private foundation for any taxable year which has not been distributed by the first day of the second (or any succeeding) taxable year following such taxable year.

I.R.C. § 4942(g)(1)(A) defines “qualifying distribution” as any amount (including that portion of reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in § 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, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as described in subsection (j)(3)), except as provided in paragraph (3).

I.R.C. § 4942(g)(3) provides that the term “qualifying distribution” includes a contribution to a § 501(c)(3) organization described in paragraph (1)(A)(i) or (ii) if—

(A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such § 501(c)(3) organization were a private foundation which is not an operating foundation), and

I.R.C. § 4944(a)(1) imposes a tax on any amount invested by a private foundation in a manner that jeopardizes the carrying out of any of the foundation’s exempt purposes.

I.R.C. § 4945(a) imposes a tax on each taxable expenditure of a private foundation.

I.R.C. § 4945(d)(4) provides that the term “taxable expenditure” includes any amount paid or incurred by a private foundation as a grant to a private non-operating foundation unless the grantor foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h).

I.R.C. § 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 § 170(c)(2)(13).

(1) to see that the grant is spent solely for the purpose for which made,

(2) to obtain full and complete reports from the grantee on how the funds are spent, and

(3) to make full and detailed reports with respect to such expenditures to the Secretary.

Treas. Reg. § 1.501(c)(3)-1(a)(1) provides that for an organization to be exempt as an organization described in § 501(c)(3), it must be both organized and operated exclusively for one or more of the purposes specified in such section.

Treas. Reg. § 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Treas. Reg. § 1.507-1(b)(1) provides that in order for a private foundation to terminate its private foundation status under § 507(a)(1), an organization must submit a statement to the Service of its intent to terminate its private foundation status under § 507(a)(1). Such statement must set forth in detail the computation and amount of tax imposed under § 507(c). Unless the organization requests abatement of such tax pursuant to § 507(g), full payment of such tax must be made at the time the statement is filed under § 507(a)(1).

Treas. Reg. § 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 § 507(b)(2) and § 1.507-3(c), such transferor foundation will not have terminated its private foundation status under § 507(a)(1).

Treas. Reg. § 1.507-3(a)(1) provides that in the case of a transfer of assets from one private foundation to another private foundation pursuant to a liquidation, merger, redemption, recapitalization or other adjustment, organization or reorganization, including a significant disposition of assets to one or more private foundations within the meaning of paragraph (c), the transferee organization shall not be treated as a newly created organization. Rather, the transferee organization shall be treated as possessing those attributes and characteristics of the transferor organization that are described in subparagraphs (2), (3), and (4) of this paragraph.

Treas. Reg. § 1.507-3(a)(2)(ii) provides that, notwithstanding subdivision (i) of this subparagraph, a transferee organization which is not effectively controlled (within the meaning of § 1.482-1(a)(3)) [i.e., § 1.482-1A(a)(3)], directly or indirectly, by the same person or persons who effectively control the transferor organization shall not succeed to an aggregate tax benefit in excess of the fair market value of the assets transferred at the time of the transfer. Treas. Reg. § 1.482-1A(a)(3) provides that the term “controlled” includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise.

Treas. Reg. § 1.507-3(a)(2)(iii) provides examples to illustrate the provisions of subparagraph (2), including—

Example (2). Pursuant to a transfer described in § 507(b)(2), M, a private foundation, transfers all of its assets, which immediately prior to the transfers have a fair market value of $100,000. The assets were transferred to the following organizations at the following fair market values (determined at the time of the transfer) $40,000 to N, a private foundation, $30,000 to O, a private foundation, and $30,000 to P, an organization described in § 170(b)(1)(A)(vi). Immediately before the transfer M’s aggregate tax benefit was $50,000. Therefore, N succeeds to M’s aggregate tax benefit to the extent of $20,000 ($50,000 x $40,000/$100,000) and 0 succeeds to M’s aggregate tax benefit to the extent of $15,000 ($50,000 x $30,000/$100,000). The remaining $15,000 of M’s aggregate tax benefit is maintained by M as M has not terminated under section 507.

Example (3). Assume the same facts as in Example (2) except that the transfers were made as follows: M transferred $30,000 to N on January 1, 1972, $40,000 to P on July 1, 1972, and $30,000 to O on December 31, 1972. Further, assume that the fair market value of the assets and the aggregate tax benefit do not change during 1972 and that O is not effectively controlled (directly or indirectly) by the same person or persons who effectively control M. N succeeds to M’s aggregate tax benefit to the extent of $15,000 ($50,000 x $30,000/$100,000). However, since $40,000 of the remaining $70,000 ($100,000 – $30,000) of assets of M was transferred to P on July 1, 1972, immediately before the transfer to O, the fair market value of the assets held by M is $30,000 ($70,000 – $40,000). On the other hand, because P is not a private foundation, M’s aggregate tax benefit immediately before the transfer to O remains $35,000 ($50,000 – $15,000). Therefore, before applying subdivision (ii) of this subparagraph, O would succeed to $35,000 ($35,000 x $30,000/$30,000) of M’s aggregate tax benefit. However, applying subdivision (ii) of this subparagraph since M transferred only $30,000 to O, O shall succeed to only $30,000 of M’s aggregate tax benefit. The remaining $5,000 ($35,000 -$30,000) of M’s aggregate tax benefit is retained by M as M has not terminated under § 507.

Treas. Reg. § 1.507-3(a)(3) provides that in the event of a transfer of assets described in § 507(b)(2), any person who is a “substantial contributor” (within the meaning of § 507(d)(2)) with respect to the transferor foundation shall be treated as a “substantial contributor” with respect to the transferee foundation, regardless of whether such person meets the $5,000-two percent test with respect to the transferee organization at any time.

Treas. Reg. § 1.507-3(a)(4) provides that if a private foundation incurs liability for one or more of the taxes imposed under Chapter 42 (or any penalty resulting therefrom) prior to, or as a result of, making a transfer of assets described in § 507(b)(2) to one or more private foundations, in any case where transferee liability applies, each transferee foundation is treated as receiving the transferred assets subject to such liability to the extent that the transferor foundation does not satisfy such liability.

Treas. Reg. § 1.507-3(a)(6) provides that, for purposes of § 4943(c)(4), (5), and (6), whenever a private foundation makes a § 507(b)(2) transfer of all or part of its net assets to another private foundation, the applicable period of time described in § 4943(c)(4), (5), or (6) shall include both the period during which the transferor foundation held such assets and the period during which the transferee foundation holds such assets.

Treas. Reg. § 1.507-3(a)(8)(i) provides that, except as provided in subdivision (ii) of this subparagraph or subparagraph (6) or (9) of this paragraph, whenever a private foundation makes a transfer of assets described in § 507(b)(2) to one or more private foundations, the transferee foundation:

(a) Will not be treated as being in existence prior to January 1, 1970, with respect to any transferred assets;

(b) Will not be treated as holding the transferred assets prior to January 1, 1970; and

(c) Will not be treated as having engaged in, or become subject to, any transaction, lease contract, or other obligation with respect to the transferred assets prior to January 1, 1970.

Treas. Reg. § 1.507-3(a)(8)(ii) provides that, notwithstanding subdivision (i) of this subparagraph, the provisions enumerated in (a) through (g) of this subdivision shall apply to the transferee foundation with respect to the assets transferred to the same extent and in the same manner that they would have applied to the transferor foundation had the transfer described in § 507(b)(2) not been effected:

(a) I.R.C. § 4940(c)(4)(B) and the regulations thereunder with respect to basis of property,

(b) I.R.C. § 4942(f)(4) and the regulations thereunder with respect to distributions of income,

(d) Section 101(1)(3)(A) of the Tax Reform Act of 1969 (83 Stat. 534) with respect to the provisions of § 4942, but only if the transferor qualified for the application of such section immediately before the transfer, and at least 85 percent of the fair market value of the net assets of the transferee immediately after the transfer was received pursuant to the transfer,

(e) Section 101(1)(3)(B) through (E) of the Tax Reform Act of 1969 (83 Stat. 534) with respect to the provisions of § 4942,

(f) Section 101(1)(5) of the Tax Reform Act of 1969 (83 Stat. 535) with respect to the provisions of § 4945, and

(g) Section 101(1)(6) of the Tax Reform Act of 1969 (83 Stat. 535) with respect to the provisions of § 508(e).

Treas. Reg. § 1.507-3(a)(9)(i) provides that if a private foundation transfers all if its net assets to one or more private foundations which are effectively controlled (within the meaning of § 1.482-1(a)(3) [i.e., § 1.482-1A(a)(3)]), directly or indirectly, by the same person or persons which effectively controlled the transferor private foundation, for purposes of §§ 4940 through 4948 and §§ 507 through 509, such a transferee foundation shall be treated as if it were the transferor. However, where proportionality is appropriate, such a transferee private foundation shall be treated as if it were the transferor in the proportion which the fair market value of the assets (less encumbrances) transferred to such transferee bears to the fair market value of the assets (less encumbrances) of the transferor immediately before the transfer.

Treas. Reg. § 1.507-3(a)(9)(iii) includes the following example:

Example (2), A and B are the trustees of the P charitable trust, a private foundation, and are the only substantial contributors to P. On July 1, 1973, in order to facilitate accomplishment of diverse charitable purposes, A and B create and control the R Foundation, the S Foundation and the T Foundation and transfer the net assets of P to R, S, and T. As of the end of 1973, P has an outstanding grant to Foundation W and has been required to exercise expenditure responsibility with respect to this grant under sections 4945(d)(4) and (h). Under these circumstances, R, S, and T shall each be treated as if they are P in the proportion the fair market value of the assets transferred to each bears to the fair market value of the assets of P immediately before the transfer.

Treas. Reg. § 1.507-3(c)(1) provides that a transfer of assets is described in § 507(b)(2) if it is made by a private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization. This shall include any organization or reorganization described in subchapter C of chapter 1. For purposes of § 507(b)(2), the terms “other adjustment, organization, or reorganization” shall include any partial liquidation or any other significant disposition of assets to one or more private foundations, other than transfers for full and adequate consideration or distributions out of current income.

Treas. Reg. § 1.507-3(d) provides that, unless a private foundation gives notice pursuant to § 507(a)(1), a transfer of assets described in § 507(b)(2) will not constitute a termination of the transferor’s private foundation status under § 507(a)(1).

Treas. Reg. § 1.507-4(b) provides that private foundations that make transfers described in § 507(b)(1)(A) or (2) are not subject to the termination tax imposed under § 507(c) with respect to such transfers unless the provisions of § 507(a) become applicable.

Treas. Reg. § 53.4941(d)-2(f)(1) provides that the transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation constitutes an act of self-dealing.

Treas. Reg. § 53.4942(a)-3(a)(2)(i) defines the term “qualifying distribution” as any amount (including reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in § 170(c)(1) or (2)(B), other than a contribution to: (a) a private foundation which is not an operating foundation, except as provided in paragraph (c) of this section, or (b) an organization controlled (directly or indirectly) by the contributing private foundation, except as provided in paragraph (c) of this section.

Treas. Reg. § 53.4942(a)-3(e)(1) provides that if in any taxable year for which an organization is subject to the initial excise tax imposed by § 4942(a) there is created an excess of qualifying distributions (as determined under subparagraph (2) of this paragraph), such excess may be used to reduce distributable amounts in any taxable year of the adjustment period (as defined in subparagraph (3) of this paragraph).

Treas. Reg. § 53.4942(a)-3(e)(2) provides that an excess of qualifying distributions is created for any taxable year if: (i) the total qualifying distributions treated as made out of the undistributed income for such taxable year or as made out of corpus with respect to such taxable year exceeds (ii) the distributable amount for such taxable year.

Treas. Reg. § 53.4942(a)-3(e)(3) provides that the taxable years in the adjustment period are the five taxable years immediately following the taxable year in which the excess of qualifying distributions is created.

Treas. Reg. § 53.4945-5(a)(1) provides that, under § 4945(d)(4), the term “taxable expenditure” includes any amount paid or incurred by a private foundation as a grant to an organization (other than an organization described in § 509(a)(1), (2), or (3)), unless the private foundation exercises expenditure responsibility with respect to such grant in accordance with § 4945(h).

Treas. Reg. § 53.4945-5(a)(6)(i) provides that a grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (the secondary grantee) shall not be regarded as a grant by the private foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement, oral or written, whereby such grantor foundation may cause the selection of the secondary grantee by the organization to which it has given the grant. For purposes of this subdivision, a grant described herein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control, in fact, over the selection process and actually makes the selection completely independently of the private foundation.

Treas. Reg. § 53.4945-5(b)(1) provides that a private foundation is not an insurer of the activity of the organization to which it makes a grant. Thus, satisfaction of the requirements of § 4945(d)(4) and (h) will ordinarily mean that the grantor foundation will not have violated § 4945(d)(1) or (2). A private foundation will be considered to be exercising “expenditure responsibility” under § 4945(h) as long as it exerts all reasonable efforts and establishes adequate procedures-

(i) To see that the grant is spent solely for the purpose for which made,

(ii) To obtain full and complete reports from the grantee on how the funds are spent, and

(iii) To make full and detailed reports with respect to such expenditures to the Commissioner.

Treas. Reg. § 53.4945-5(b)(2)(i) provides that before making a grant to an organization with respect to which expenditure responsibility must be exercised under this section, a private foundation should conduct a limited inquiry concerning the potential grantee. Such inquiry should be complete enough to give a reasonable man assurance that the grantee will use the grant for the proper purposes. The inquiry should concern itself with matters such as: (a) the identity, prior history, and experience (if any) of the grantee organization and its managers; and (b) any knowledge which the private foundation has (based on prior experience or otherwise) of, or other information which is readily available concerning, the management, activities, and practices of the grantee organization.

Treas. Reg. § 53.4945-5(b)(3) provides that, except as provided in subparagraph (4) of paragraph (b), in order to meet the expenditure responsibility requirements of § 4945(h), a private foundation must require that each grant to an organization with respect to which expenditure responsibility must be exercised be made subject to a written commitment signed by an appropriate officer, director, or trustee of the grantee organization. Such commitment must include an agreement by the grantee—

(i) To repay any portion of the amount granted which is not used for the purposes of the grant,

(iii) To maintain records of receipts and expenditures and to make its books and records available to the grantor at reasonable times, and

(iv) Not to use any of the funds—

(a) To carry on propaganda, or otherwise to attempt, to influence legislation,

(b) To influence the outcome of any specific public election, or to carry on any voter registration drive,

(d) To undertake any activity for any purpose other than one specified in § 170(c)(2)(B).

Treas. Reg. § 53.4945-5(c)(2) provides that if a private foundation makes a grant described in section 4945(d)(4) to a private foundation which is exempt from taxation under § 501(a) for endowment, for the purchase of capital equipment, or for other capital purposes, the grantor foundation shall require reports from the grantee on the use of the principal and the income (if any) from the grant funds. The grantee shall make such reports annually for its taxable year in which the grant was made and the immediately succeeding two taxable years. Only if it is reasonably apparent to the grantor that, before the end of such second succeeding taxable year, neither the principal, the income from the grant funds, nor the equipment purchased with the grant funds has been used for any purpose which would result in liability for tax under § 4945(d), may the grantor then allow such reports to be discontinued.

Treas. Reg. § 53.4945-5(d)(1) provides that to satisfy the report making requirements of § 4945(h)(3), a granting foundation must provide the required information on its annual information return, required to be filed by § 6033, for each taxable year with respect to each grant made during the taxable year which is subject to the expenditure responsibility requirements of § 4945(h). Such information must also be provided on such return with respect to each grant subject to such requirements upon which any amount or any report is outstanding at any time during the taxable year. However, with respect to any grant made for endowment or other capital purposes, the grantor must provide the required information only for any taxable year for which the grantor must require a report from the grantee under paragraph (c)(2) of this section.

Treas. Reg. § 53.4945-5(e)(1)(i) provides that any diversion of grant funds (including the income therefrom in the case of an endowment grant) by the grantee to any use not in furtherance of a purpose specified in the grant may result in the diverted portion of such grant being treated as a taxable expenditure of the grantor under § 4945(d)(4).

Treas. Reg. § 53.4945-5(e)(1)(ii) provides that, in any event, a grantor will not be treated as having made a taxable expenditure under § 4945(d)(4) solely by reason of a diversion by the grantee, if the grantor has complied with subdivision (iii)(a) and (b) or (iv)(a) and (b) of this subparagraph, whichever is applicable.

Treas. Reg. § 53.4945-5(e)(1)(iii) provides that in cases in which the grantor foundation determines that any part of a grant has been used for improper purposes and the grantee has not previously diverted grant funds, the foundation will not be treated as having made a taxable expenditure solely by reason of the diversion so long as the foundation:

(b) Withholds any further payments to the grantee after the grantor becomes aware that a diversion may have taken place (hereinafter referred to as “further payments”) until it has:

(1) Received the grantee’s assurances that future diversions will not occur, and

(2) Required the grantee to take extraordinary precautions to prevent future diversions from occurring.

Treas. Reg. § 53.4945-5(e)(1)(iv) provides that in cases where a grantee has previously diverted funds received from a grantor foundation, and the grantor foundation determines that any part of a grant has again been used for improper purposes, the foundation will not be treated as having made a taxable expenditure solely by reason of such diversion so long as the foundation:

(b) Withholds further payments until:

(1) Such funds are in fact so recovered or restored,

(2) It has received the grantee’s assurances that future diversions will not occur, and

(3) It requires the grantee to take extraordinary precautions to prevent future diversions from occurring.

Treas. Reg. § 53.4945-5(e)(1)(v) provides that the phrase “all reasonable and appropriate steps” (as used in subdivisions (iii) and (iv) of this subparagraph) includes legal action where appropriate, but need not include legal action if such action would in all probability not result in the satisfaction of execution on a judgment.

Treas. Reg. § 53.4945-5(e)(2) provides that a failure by the grantee to make the reports required by paragraph (c) of this section (or the making of inadequate reports) shall result in the grant’s being treated as a taxable expenditure by the grantor unless the grantor:

(i) Has made the grant in accordance with paragraph (b) of this section,

(ii) Has complied with the reporting requirements contained in paragraph (d) of this section,

(iii) Makes a reasonable effort to obtain the required report, and

(iv) Withholds all future payments on this grant and on any other grant to the same grantee until such report is furnished.

Treas. Reg. § 53.4945-6(b)(1) includes among the types of expenditures that ordinarily will not be treated as taxable expenditures under § 4945(d)(5), expenditures to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in § 170(c)(2)(B), reasonable expenses with respect to such investments, and any payment that constitutes a qualifying distribution under § 4942(g).

Treas. Reg. § 53.4946-1(a)(8) provides that, for purposes of § 4941 only, the term “disqualified person” shall not include any organization that is described in § 501(c)(3) (other than an organization described in § 509(a)(4)).

Rev. Rul. 78-387, 1978-2 C.B. 270, concerns a private foundation, M, which has a carryover of excess qualifying distributions as described in § 4942(i) and § 53.4942(a)-3(e). M transferred all of its net assets to another private foundation, N, in a transfer qualifying under § 507(b)(2). M is controlled, within the meaning of § 1.482-1A(a)(3), by the same persons who control N. Because the transferee foundation, N, is treated as if it were the transferor foundation, M, pursuant to § 1.507-3(a)(9)(i), it is held that, for purposes of determining its distribution requirements under § 4942, N may reduce its distributable amount by the excess qualifying distributions carryover of M.

Rev. Rul. 2002-28, 2002-1 C.B. 941, posits various situations in which a transferor private foundation transfers all of its assets to one or more private foundations that are effectively controlled by the same persons that effectively control the transferor. In the context of § 4942, it is concluded that the transfers to the transferee foundations are not treated as qualifying distributions of the transferor foundation. Where a private foundation transfers all of its assets to one private foundation, the transferee foundation assumes all obligation with respects to the transferor’s “undistributed income” within the meaning of § 4942(c), if any, and reduces its own distributable amount by the transferor foundation’s excess qualifying distributions under § 4941(i).

Analysis

Issue 1: Whether the transfer of the Grant Assets would adversely affect the status of either M or R as a tax-exempt organization described in § 501(c)(3) .

Each of M and R is currently recognized by the Service as an organization described in § 501(c)(3). As private non-operating foundations, M and R accomplish their respective missions by making grants to other charitable and educational organizations. M states that it determined that the transfer of the Grant Assets to R under the terms of the Endowment Agreement would further M’s charitable purposes. Such terms require R to use the Grant Assets solely for charitable purposes described in § 170(c)(2)(B), or to return such assets to M. Furthermore, R is forbidden from using the Grant Assets to purchase products or services from N, its affiliates or subsidiaries, or any employees, officers, or directors thereof. Under these circumstances, we do not find that the transfer of the Grant Assets would result in the inurement of M’s net earnings to the benefit of private shareholders or individuals within the meaning of § 1.501(c)(3)-1(c)(2), cause either M or R to be operated for the benefit of private interests within the meaning of § 1.501(c)(3)-1(d)(1)(ii), or result in either M or R engaging in activities other than activities in furtherance of an exempt purpose within the meaning of § 1.501(c)(3)-1(c)(1). Accordingly, we conclude that the transfer of the Grant Assets from M to R under the terms of the Endowment Agreement will not adversely affect the status of either M or R as a tax-exempt organization described in § 501(c)(3).

Issue 2: Whether the transfer of the Grant Assets qualifies as a transfer of assets described in § 507(b)(2), whether the transfer will result in the termination of M’s private foundation status under § 507(a), and whether the transfer will subject M to the tax imposed under § 507(c) .

Under § 1.507-3(c)(1), a transfer of assets is described in § 507(b)(2) if it is a transfer from one private foundation to another private foundation pursuant to a liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, including any organization or reorganization described in subchapter C of Chapter 1 of the Internal Revenue Code (concerning corporate distributions and adjustments). N reorganized by forming P and transferring to P some of the business activities formerly conducted by N. In conjunction with the reorganization of its business activities, N created R in order to transfer to R some of the activities currently conducted by M. The transfer of the Grant Assets from M, a private foundation, to R, a private foundation, was meant to provide R with funds with which to carry out its activities. Accordingly, the transfer of the Grant Assets is a transfer by a private foundation to another private foundation pursuant to an organization or reorganization described in subchapter C and is, therefore, a transfer of assets described in §507(b)(2).

Treas. Reg. § 1.507-1(b)(6) provides that when a private foundation transfers all or part of its assets to one or more other private foundations pursuant to a transfer described in § 507(b)(2), such transferor foundation will not have terminated its private foundation status under § 507(a)(1). In addition, § 1.507-3(d) provides that unless a private foundation voluntarily gives notice pursuant to § 507(a)(1), a transfer of assets described in § 507(b)(2) will not constitute termination of the transferor’s private foundationstatus under § 507(a)(1).

M specifically states that it has not given notice, nor will it give notice, to the Service of an intention to terminate its private foundation status in accordance with § 507(a)(1). Accordingly, M has not voluntarily terminated its private foundation status.

M represents that it has not engaged in acts (or failures to act) that would give rise to liability under Chapter 42 of the Internal Revenue Code. Based upon M’s representation, M’s private foundation status has not been terminated involuntarily.

As M’s status as a private foundation has not been terminated voluntarily or involuntarily, and as M’s status as a private foundation will not be terminated as a result of the transfer of the Grant Assets, M will not be subject to the tax imposed upon such terminations under § 507(c).

Issue 3: Whether R will succeed to M’s attributes and characteristics described in §1.507-3(a)(2), (3) and (4) .

Under Treas. Reg. § 1.507-3(a)(1), in the case of a transfer of assets from one private foundation to another private foundation described in § 507(b)(2), the transferee organization is treated as possessing those attributes and characteristics of the transferor organization that are described in §1.507-3(a)(2), (3), and (4). As discussed above, the transfer of the Grant Assets is a transfer described in § 507(b)(2). Therefore, § 1.507-3(a)(1) applies.

Treas. Reg. § 1.507-3(a)(2)(i) provides that when the transferee and transferor organizations are effectively controlled (within the meaning of § 1.482-1A(a)(3)) by the same persons, the transferee organization succeeds to the aggregate tax benefit of the transferor in an amount equal to the amount of such aggregate tax benefit (within the meaning of § 507(d)(1)), multiplied by a fraction the numerator of which is the fair market value of the assets (less encumbrances) transferred and the denominator of which is the fair market value of the assets of the transferor (less encumbrances) immediately before the transfer. At the time of the Transfer, R and M were controlled by the same persons. Therefore, R will succeed to a fraction of M’s aggregate tax benefit, calculated as described above. As M is not terminating under § 507 and will continue as a private non-operating foundation after the Transfer, M will retain the portion of its aggregate tax benefit that is not passing to R. See Treas. Reg. § 1.507-3(a)(2)(iii), Examples (2) and (3).

Furthermore, in the event of a transfer of assets described in § 507(b)(2), § 1.507-3(a)(3) provides that any person who is a “substantial contributor” (within the meaning of § 507(d)(2)) with respect to the transferor foundation will be treated as a “substantial contributor” with respect to the transferee foundation. Therefore, any person who is a disqualified person with respect M at the time of the Transfer will be considered a “substantial contributor” with respect to R as a result of the Transfer.

Finally, if a private foundation incurs liability for one or more of the taxes imposed under Chapter 42 (or any penalty resulting therefrom) prior to, or as a result of, making a transfer of assets described in § 507(b)(2), in any case where transferee liability applies § 1.507-3(a)(4) provides that the transferee foundation will be treated as receiving the transferred assets subject to such liability to the extent the transferor foundation does not satisfy such liability. Therefore, should M have incurred liability for any Chapter 42 tax prior to, or as a result of, the Transfer, R will be treated as receiving the Grant Assets subject to such liability to the extent that M does not satisfy the liability where transferee liability applies.

Issue 4: Whether effectuating the Transfer and engaging in such actions as are necessary to effectuate the Transfer would constitute an act of self-dealing within the meaning of § 4941 .

I.R.C. § 4941(a) imposes a tax on each act of self-dealing between a disqualified person and a private foundation. Under § 53.4941(d)-2(f)(1), the transfer of the assets of a private foundation to a disqualified person, or the use of such assets by or for the benefit of a disqualified person, constitutes an act of self-dealing. However, under § 53.4946-1(a)(8), for purposes of § 4941, the term “disqualified person” does not include an organization described in § 501(c)(3) (aside from an organization described in § 509(a)(4)).

The Transfer resulted in the transfer of the assets of M, a private foundation, to R, an organization described in § 501(c)(3). As an organization described in § 501(c)(3), R is not a disqualified person with respect to M for purposes of § 4941. Therefore the Transfer does not constitute a transfer of the assets of a private foundation to a disqualified person. Accordingly, the Transfer does not constitute an act of self-dealing within the meaning of § 4941.

Issue 5: Whether M may treat the distribution of the Grant Assets as a qualifying distribution under § 4942(g) .

M and R are private non-operating foundations. I.R.C. § 4942 requires private non-operating foundations to make a certain amount of “qualifying distributions” each year or incur a tax. “Qualifying distributions,” generally, include grants to public charities and private operating foundations that are not controlled by the grantor private foundationand direct expenditures for charitable purposes.

Treas. Reg. § 1.507-3(a)(5) provides, generally, that a private foundation making a transfer described in § 507(b)(2) must satisfy its distribution requirements under § 4942 for the taxable year in which the transfer is made. It further provides that the transfer will count as a distribution in satisfaction of the transferor foundation’s distribution requirement under § 4942 subject to the provisions of § 4942(g). Under § 4942(g)(3) and § 53.4942(a)-3(c)(1), a grant by a private non-operating foundation to another private non-operating foundation (or to another organization controlled by disqualified persons with respect to the transferor) is not treated as a qualifying distribution by the transferor foundation for purposes of § 4942 except to the extent that the transferee makes one or more distributions that would be qualifying distributions under § 4942(g) prior to the close of the transferee’s first taxable year following the taxable year in which it received the transfer and the distributions are treated as being made out of corpus. Since the transfer of the Grant Assets to R is intended as an endowment grant, M does not anticipate that R will redistribute the full amount of the assets received from M within the time period, and in the manner, required by § 4942(g)(3). Therefore, M may not treat the transfer of the Grant Assets as a qualifying distribution under § 4942(g).

Issue 6: Whether R may use any of M’s excess qualifying distributions carryover to reduce its distributable amount.

M had an excess qualifying distributions carryover from its 2011 tax year to its 2012 tax year. Where a private foundation that has excess qualifying distributions distributes all of its net assets to one or more private foundations controlled by the same persons who control the transferor foundation, the transferee foundation(s) may make use of the transferor’s carryover. See Rev. Rul. 78-387; Rev. Rul. 2002-28; and § 1.507-3(a)(9)(i). While M and R were both controlled by N at the time of the Transfer, M did not distribute all of its net assets in a transfer qualifying under § 507(b)(2), but only a part of its net assets. Therefore, because M did not distribute all of its net assets to R, R may not use any of M’s excess qualifying distributions carryover to reduce its distributable amount under § 4942(d). Proportionality is appropriate where all the net assets are transferred to two or more private foundations, but not where only part of the net assets is transferred.

Issue 7: Whether the Transfer will constitute an investment that jeopardizes the carrying out of exempt purposes within the meaning of § 4944 .

I.R.C. § 4944(a)(1) imposes an excise tax on any amount invested by a private foundation in a manner that jeopardizes the carrying out of the foundation’s exempt purposes. Pursuant to the Transfer, M made an outright assignment of its rights and obligations under Grant 1 and Grant 2 to R. In addition, M made a direct grant of the Grant Assets to R in the form of an endowment grant. The transfers were made to accomplish M’s exempt mission in the aftermath of the reorganization of N’s business operations and to endow R so that it can pursue its exempt mission. Except for a contingent right to recover a portion of the Grant Assets if R were to violate the terms of the Endowment Agreement, M retained no interest in the Grant Assets, the income therefrom, or any assets that R may acquire with the Grant Assets. Because M made the Transfer without consideration and without any expectation of repayment, the production of income, or the appreciation of property, the Transfer does not constitute an investment of an amount in a manner to jeopardize the carrying out of exempt purposes within the meaning of § 4944(a)(1).

Issue 8: Whether M has met its pregrant inquiry requirements as to R under § 53.4945-5(b)(2).

Treas. Reg. § 53.4945-5(b)(2)(i) describes the limited inquiry that a private foundation must conduct concerning the potential grantee before making a grant to an organization with respect to which expenditure responsibility must be exercised. Such inquiry should concern itself with matters such as: (a) the identity, prior history, and experience (if any) of the grantee organization and its managers, and (b) any knowledge which the private foundation has (based on prior experience or otherwise) of, or other information which is already available concerning, the management, activities, and practices of the grantee organization, and should be complete enough to give a reasonable person assurance that the grantee will use the grant assets for the proper purposes.

Issue 9: Whether M has met the “written commitment” requirement under § 53.4945-5(b)(3) by requiring R to enter into the Endowment Agreement .

Treas. Reg. § 53.4945-5(b)(3) provides that in order to meet the expenditure responsibility requirements of § 4945(h), a private foundation must require that each grant to an organization with respect to which expenditure responsibility must be exercised be made subject to a written commitment that clearly specifies the purposes of the grant and that includes an agreement by the grantee—

(i) To repay any portion of the amount granted which is not used for the purposes of the grant,

(ii) To submit full and complete annual reports on the manner in which the funds are spent and progress made in accomplishing the purposes of the grant,

(iii) To maintain records of receipts and expenditures and to make its books and records available to the grantor at reasonable times, and

(iv) Not to use any of the funds—

(a) To carry on propaganda or otherwise to attempt to influence legislation,

(b) To influence the outcome of any specific public election, or to carry on any voter registration drive,

(d) To undertake any activity for any purpose other than one specified in § 170(c)(2)(B).

The written commitment must be signed by an appropriate officer, director, or trustee of the grantee foundation.

I.R.C. § 4945(a)(1) imposes a tax on each taxable expenditure of a private foundation. Under § 4945(d)(4), the term “taxable expenditure” includes any amount paid or incurred by a private foundation as a grant to an organization (other than a public charity or exempt operating foundation) unless the private foundation exercises expenditure responsibility with respect to such grant in accordance with § 4945(h).

Under § 4945(h), a private foundation will be considered to be exercising expenditure responsibility as long as it exerts all reasonable efforts and establishes adequate procedures—(1) to see that the grant is spent solely for the purpose for which made; (2) to obtain full and complete reports from the grantee on how the funds are spent; and (3) to make full and detailed reports with respect to such expenditures to the Commissioner.

The transfer of the Grant Assets from M, a private foundation, to R, a private foundation, would be considered a taxable expenditure described in § 4945(d)(4) unless M exercises expenditure responsibility with respect to the Grant Assets in accordance with § 4945(h). M will be considered to have exercised expenditure responsibility in accordance with § 4945(h) if, first, it has made the pregrant inquiry described in § 53.4945-5(b)(2), second, it has entered into a written grant agreement meeting the requirements of § 53.4945-5(b)(3), third, it requires reports from R on its use of the Grant Assets that meet the grantee reporting requirements of § 53.4945-5(c), fourth, it makes reports to the Service meeting the requirements of § 53.4945-5(d), and, fifth, in the event R diverts any of the Grant Assets (including the income therefrom) to any use not in furtherance of a purpose specified in the Endowment Agreement, or fails to make the reports required by § 53.4945-5(c), takes reasonable action in accordance with § 53.4945-5(e).

Issue 8, above, addresses the pregrant inquiry requirement under § 53.4945-5(b)(2).

Issue 9, above, addresses the written commitment requirement under § 53.4945-5(b)(3).

Under § 53.4945-5(c)(2), if a private foundation makes a grant described in § 4945(d)(4) to another private foundation, and the purpose of the grant is to increase the grantee’s endowment, the grantor foundation must require reports from the grantee concerning the use of the principal and any income derived from the grant funds. The grantee must make such reports annually for its taxable year in which the grant was made and for the immediately succeeding two taxable years. Thereafter, the grantor may cease requiring such reports if it is reasonably apparent to the grantor that, before the end of such second succeeding taxable year, neither the principal, the income from the grant funds, nor the equipment purchased with the grant funds has been used for any purpose which would result in liability for tax under § 4945(d).

M represents that it will make the required reports to the Service with respect to the transfer of the Grant Assets as required by § 53.4945-5(d).

Under § 53.4945-5(a)(6), a grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (a secondary grantee) is not regarded as a grant by the grantor foundation to the secondary grantee if the grantor foundation does not earmark the use of the grant for any named secondary grantee and there exists no agreement whereby such grantor foundation may cause the selection of the secondary grantee by the grantee organization.

While a private foundation cannot assign away its expenditure responsibility required under § 4945(d)(4), the recipients under Grant 1 and Grant 2 are both organizations described in § 501(c)(3) and are classified as public charities under § 509(a)(1). Accordingly, neither Grant 1 nor Grant 2 imposed upon M an obligation to exercise expenditure responsibility. M assigned all of its obligations, responsibilities, and duties with respect to the Assigned Grants to R. M and R have not presented any facts that would support the conclusion that Grant 1 or Grant 2 should become subject to expenditure responsibility by M where no such responsibility existed prior to the assignment of those grants to R. Accordingly, M is not required to exercise expenditure responsibility with respect to the Assigned Grants.

Under § 5945(d)(5), any amount paid or incurred by a private foundation for any purpose other than one specified in § 170(c)(2)(B) is a taxable expenditure subject to tax under § 4945(a). Under § 53.4945-6(b)(1), reasonable expenses with respect to program-related investments and other investments, and qualifying distributions under § 4942(g), are not treated as taxable expenditures under § 4945(d)(5). Conversely, under § 53.4945-6(b)(2), any expenditures for unreasonable administrative expenses, including compensation, consultant fees, and other fees for services rendered, will ordinarily be taxable expenditures under § 4945(d)(5).

Issue 12: Whether R will receive the benefit of any transitional rules that are applicable to M as a foundation in existence before January 1, 1970 .

M was organized prior to 1970, and funded, in part, with shares of N stock. The Grant Assets that M transferred to R include shares of N stock.

However, § 1.507-3(a)(8)(ii) provides that this general rule does not apply to the special rules or saving provisions contained in § 4940(c)(4)(B) (relating to basis of property), § 4942(f)(4) (relating to distributions of income), and section 101(1) of the Tax Reform Act of 1969.

The status of an organization as a private foundation may be involuntarily terminated under § 507(a)(2) if, with respect to the organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act) giving rise to liability for tax under Chapter 42.

Conclusions

In light of the foregoing, we rule as follows:

The Transfer will not adversely affect the tax exempt status of either M or R as an organization described in § 501(c)(3).
The Transfer qualifies as a transfer of assets described in § 507(b)(2). Accordingly, the Transfer will neither result in the termination of M’s private foundationstatus under § 507(a) nor cause M to be subject to the tax imposed under § 507(c).
R will succeed to M’s attributes and characteristics described in §1.507-3(a)(2), (3) and (4), including a fraction of M’s aggregate tax benefit as determined under § 1.507-3(a)(2)(i).
Effectuating the Transfer and engaging in such actions as are necessary to effectuate the Transfer will not constitute an act of self-dealing within the meaning of § 4941.
M may not treat the Transfer as a qualifying distribution within the meaning of § 4942(g).
R may not use M’s excess qualifying distributions as defined in § 53.4942(a)-3(e) to reduce its distributable amount under § 4942(d).
The Transfer will not constitute the investment of an amount in a manner as to jeopardize the carrying out of exempt purposes within the meaning of § 4944(a)(1).
M has met its pregrant inquiry requirement under § 53.4945-5(b)(2) so long as the findings of such inquiry would have caused a reasonable person to conclude that R will use the Grant Assets for the proper purposes.
M has met the “written commitment” requirement under § 53.4945-5(b)(3) by requiring R to enter into the Endowment Agreement.
The Transfer will not be a taxable expenditure within the meaning of § 4945(d) so long as M obtains reports from R on its use of the Grant Assets in accordance with § 53.4945-5(c)(2), submits annual reports to the Service in accordance with § 53.4945-5(d), and takes reasonable action regarding any noncompliance with the Endowment Agreement in accordance with § 53.4945-5(e). However, M need not exercise expenditure responsibility over the Assigned Grants or over any Secondary Grant made by R using the Grant Assets.
The legal, accounting, and other expenses paid by M and R to obtain this ruling and to effectuate the Transfer, if reasonable in amount, will not constitute taxable expenditures within the meaning of § 4945(d).
With respect to the Grant Assets, R will receive the benefit of any transitional rules as provided under § 1.507-3(a)(8)(ii) that may be applicable to M as a foundation in existence before January 1, 1970.
With respect to the Internal Revenue Code provisions and Regulations promulgated thereunder, as addressed in this letter, the Transfer will not constitute either a willful repeated act (or failure to act) or a willful and flagrant act (or failure to act) within the meaning of § 507(a)(2)(A).

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

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

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

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representatives.

Sincerely,

Mary Jo Salins
Acting Manager, EO Technical