IRS written determination 201436051

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201436051
Release Date: 9/5/2014
Date: June 12, 2014
Legend:
Company
=
Parent Company
=
Charity
=
Project
=
Commission
=
Year A
=
Year B
=
YearC
=
Year D
=
Year E
=
State 1
=
State 2
=
Joint Agreement
=
Monitoring Committee
=
Dear
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
UIL: 501.03-02; 4941.04-00
4942.03-05; 4945.04-00
We have considered your ruling request on the proper treatment of certain distributions from
you under
I.R.C. §§
501 (c)(3), 4941 (d), 4942(g) and 4945.
FACTS
You are a trust fund established by Company and recognized as a private foundation exempt
under§ 501 (c)(3). Your purpose is to allocate and distribute your income to Project, a program
of Charity, which is a publicly supported charity exempt
under§ 501 (c)(3).
Company
is a regulated energy utility serving customers in State 1 and State 2. In Year C,
Company was acquired by and became a wholly owned subsidiary of Parent Company, also a
regulated energy utility serving customers in State 1 and State 2. Company and Parent
Company are
traditional rate-regulated utilities. You have provided substantial documentation
that Company and Parent Company are subject to extensive regulation by
Commission and
other state and
federal regulatory agencies. The rates these companies may charge customers
are set by the Commission based on historical operating costs and a fair return on capital

2
invested in utility assets. The Commission permits the utility's rates to reflect the cost of bad
debt, including the uncollectible revenue remaining after diligent efforts to collect on customer
bills.
Project is a program established jointly by Company and Charity
in Year A in order to provide
elderly, severely disabled, and income-eligible residents of State 1 and State 2 with financial
assistance for emergency energy related needs.
In addition to funding from you, Project is also
funded by contributions from the customers and employees of Company and Parent Company.
Customers of Company and Parent Company may contribute to Project when paying their
bills
and employees may make contributions by payroll deductions.
In Year
D, Parent Company and Charity entered into Joint Agreement for the administration of
the Project. Joint Agreement provides that Project
is overseen by Monitoring Committee, which
is charged with the authority to conduct independent audits, to advise staff on eligibility criteria,
and to establish policies concerning the amount of monetary reserves, limits on grants and
similar matters. No officer, director, or employee and no one related to
an officer, director or
employee of Parent Company or Charity may serve on the Monitoring Committee.
You were established
in Year Bin order to place into trust certain funds that had previously
been accumulated from customers of Company for an energy project which was later
terminated. The trust agreement was entered into as a condition of Commission's approval of
the distribution of the accumulated funds. Your purpose is to secure income from the trust
estate and distribute it
in the interest of and for the benefit of Project, to be distributed in the sole
discretion of Project for providing assistance to qualified households as determined by Charity,
according to guidelines established by Monitoring Committee. The Commission found that the
transfer of the accumulated funds to you for the benefit of Project was
in the public interest. In
Year E the trust agreement was amended and restated to include the additional purpose of
administering a second trust share consisting of funds received from an
ad valorem tax refund
paid to Parent Company. Pursuant to a stipulated agreement, the Commission ordered the
funds transferred to you for payment to Project for the purpose
of assisting eligible households
with payment of their energy bills. Company and Parent Company have not made contributions
to you other than these distributions of accumulated funds approved by Commission.
You are managed by a board of trustees composed of five individuals, including the board chair
of Charity, board chair of Company, chair of the Charity's planned giving committee, and the
chair and another member of the Monitoring Committee. Pursuant to your trust agreement, your
trustees have no control or responsibility for the use of the distributions made to Project.
REQUESTED RULINGS
You have requested the following rulings:
1. Distributions by you to Charity for purposes of Project will not adversely affect or
jeopardize your tax exempt status under §501 (c)(3) inasmuch as no part of your net
earnings inures to the benefit of any private individual or shareholder.

3
2. Distributions by you to Charity for purposes of Project will not constitute acts of self-
dealing
under§ 4941(d).
3. Distributions by you to Charity for purposes of Project are qualifying distributions under
§ 4942(g).
4. Distributions by you to Charity for purposes of Project are not taxable expenditures
under § 4945.
LAW
I.R.C. § 501 (c)(3) exempts from federal income tax organizations organized and operated
exclusively for charitable, religious, educational and other purposes, provided that no part of the
organization's net earnings inures to the benefit to any private shareholder or individual.
I.R.C.
§ 507(d)(2)(A) defines a substantial contributor as any person who contributed or
bequeathed an aggregated amount of more than $5,000 to a private foundation, if such amount
is more than 2 percent of the
total contributions and bequests received by the foundation before
the close of the taxable year of the foundation
in which the contribution or bequest is received
by the foundation from such person.
I.R.C. § 4941 imposes an excise tax
on acts of self-dealing between a disqualified person, as
defined
in § 4946, and a private foundation. Section 4941 (d)(1) (E) defines "self-dealing" to
include 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. Section
4942(g)(1 )(A)(i) 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 an organization controlled
(directly or indirectly) by the foundation or one or more disqualified persons.
I.R.C. § 4945 imposes an excise tax on taxable expenditures made by a private foundation.
Section 4945(d)(4) provides that the term "taxable expenditure" means any amount paid or
incurred to attempt to influence legislation, to influence any specific public election or carry
on a
voter registration drive, to grant funds to any individual for travel, study or similar purposes
unless certain requirements are met, to grant to
an organization other than a public charity
describe
in§ 509(a)(1), (2), or (3), unless the private foundation exercises expenditure
responsibility, or for a purpose other than specified in§ 170(c)(2)(B).
I.R.C. § 4946(a)(1) defines "disqualified person" to include a substantial contributor to a private
foundation. Section 4946(a)(2) states that, for this purpose, "substantial contributor" means a
person described
in§ 507(d)(2).
Treas. Reg. § 1.501 (c)(3)-1 (a)(1) provides that to
be exempt as an organization described in
§ 501 ( c)(3}, an organization must be one that is both organized and operated exclusively for

4
one or more of the purposes specified in that 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). An organization will
not be so regarded if more than an insubstantial part of its activities is not
in furthera·nce of an
exempt purpose.
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 exempt purposes unless it serves a public rather than a private interest and that
it
is necessary for an organization to establish that it is not organized or 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. § 1.501 (c)(3)-1 (d)(2) provides that the term "charitable" is used
in its generally
accepted legal sense and includes relief of the poor and distressed, or of the underprivileged.
Treas. Reg. § 53.4941(d)-1(a) provides that for purposes
of§ 4941 the term "self-dealing"
means any direct or indirect transaction described in § 53.4941 ( d)-2.
Treas.
Reg.§ 53.4941(d)-1(b)(5) provides that an organization is controlled by a private
foundation if the foundation or one or more of its managers may, only by aggregating their votes
or positions of authority, require the organization to engage
in a transaction which if engaged in
with the private foundation would constitute self-dealing.
Treas. Reg. § 53.4941 ( d)-2(f) 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. § 53.4941 (d)-2(f)(2) provides that the fact a disqualified person receives an
incidental or tenuous benefit from a private foundation's use of its income
or assets will not, by
itself, make the use an act of self-dealing. Thus, the public recognition a disqualified person
receives from a foundation's charitable activities does not
in itself result in an act of self-dealing,
since the benefit generally is incidental and tenuous.
Treas. Reg. § 53.4941 (d)-2(f)(9) gives
examples illustrating the operation of the self-dealing
definitions
in§ 53.4941(d)-2(f). Example (1) involves a private foundation's grant to a city to
alleviate slum conditions
in a particular neighborhood. Although the area's general improvement
may be an incidental and tenuous benefit to corporation
(a substantial contributor), that benefit
by
itself is not an act of self-dealing under § 4941. Example (2) provides that a private
foundation that
established a scholarship program that awards grants to children of employees
of company
(a substantial contributor) is not engaged in indirect self-dealing.

..---------------------------------------------~-----
5
In Rev. Rul. 80-310, 1980-2 C. B. 319, a private foundation made a grant to a university to
establish a new educational department providing instruction
in manufacturing engineering. A
substantial contributor to the foundation, a corporation, would seek to employ graduates of the
new program and encourage its employees to enroll
in it. The ruling held that because the
educational program was of broad public interest, and the substantial contributor would benefit
from the program only incidentally to its manufacturing business, the benefit the contributor
received was only incidental and tenuous. Therefore, the program did not result
in self-dealing
under § 4941.
In Rev. Rul.85-162, 1985-2 C.B. 275, a private foundation financed construction projects
in
disadvantaged areas. Under its program, the foundation extended an interest-free loan to a
publicly supported organization, which
in turn loaned the funds to exempt, publicly supported
community development organizations. These organizations used the borrowed funds to
acquire construction and permanent financing from financial institutions other than disqualified
person with respect to the foundation. The community development organizations had sole
control over selecting general contractors, subcontractors, and suppliers for projects. Some
general contractors, subcontractors, and suppliers, however, had ordinary business
relationships with a bank that was a disqualified person with respect to the foundation. The
ruling held that any benefits and bank/disqualified person received from this charitable program,
resulting from ordinary business relationships, would be incidental or tenuous under
§ 53.4941 (d)-2(f)(2) of the
regulations, and therefore no self-dealing would result.
ANALYSIS
Ruling 1: Distributions by you to Charity for purposes of Project will not adversely affect or
jeopardize your tax exempt status under§ 501(c)(3) inasmuch as no part of your net earnings
inures to the benefit
of any private individual or shareholder.
An organization exempt under§ 501 (c)(3) may not be operated to benefit private interests
rather than for public purposes, and may not be operated so that there is prohibited inurement
of earnings to the benefit of private shareholders or individuals. Charity only makes grants to
needy and distressed persons. Specifically, an independent Monitoring Committee has
established objective criteria under which it distributes funds to eligible households. Your grants
to Charity do not benefit persons having a
personal and private interest
in your activities and,
therefore, do not constitute private inurement. Your grants to Charity do not further private
interests. The class is sufficiently large and indeterminate to constitute a charitable class under
§ 1.501 (c)(3)-1 (d)(2). Therefore, the distributions as outlined above by you to Charity for
purposes of Project will not adversely affect or jeopardize your tax exempt status under
§
501 ( c)(3) because no part of your net earnings benefits any private individual or shareholder
related
to you.
Ruling 2: Distributions by you to Charity for purposes of Project will not constitute acts of self-
dealing
under§ 4941(d).
Section 4941(a) imposes an excise tax on each act of self-dealing between a disqualified
person and a private foundation.
Under§ 4946(a)(1 ), a disqualified person with respect to a
private foundation includes a person who is a substantial contributor to the foundation. Section

6
507(d)(2) defines a substantial contributor as any person who contributed or bequeathed an
aggregate amount of more than $5,000 to a private foundation. Company's and Parent
Company's contributions to you were each more than $5000 and more than 2 percent of the
total contributions received by you before the close of each taxable year
in which they were
contributed. Company and Parent Company are both
substantial contributors
to you and,
therefore,
disqualified persons with respect to you.
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, as described
in
§ 53.4941 ( d)-2. Section 53.4941 ( d)-2(f) describes the transfer to or use of the income or assets
of a private foundation by a disqualified person. Your funding
of Project is not direct self-
dealing, because there is no direct transaction between you and Company or Parent Company.
A majority of your trustees are independent of Company or Parent Company, and you do not
exercise control over Charity or Project, as defined
in§ 53.4941(d)-1(b)(5). The Joint
Agreement and your trust agreement provide that neither you nor any disqualified person with
respect to you will participate
in the selection of any beneficiaries of Project. In addition,
because bad debt expense
is effectively recovered in the rates set by regulators, there is no
economic benefit to Company or Parent Company
in receiving payments funded by Project. If
the grantees fail to pay their bills, the companies stand to recover the bad debt expense in
future years through rates set by the regulator. If grantees use grants to pay their energy bill,
there is no bad debt expense to be recovered through the rate process.
The benefit provided is similar to those of the corporations
in Example (1) of§ 53.4941 (d)-2(f)(9)
(a general improvement in the neighborhood surrounding the corporation) and Example (2)
(scholarship program for employees of corporation). Grants from Project are made to customers
of Parent Company and provide
incidental and tenuous benefits of increased customer loyalty
and good will. Project provides a benefit to Parent Company similar to those provided to the
substantial contributors
in Rev. Rul. 80-310, supra. (holding that an educational program
providing training for employees did not constitute self-dealing to substantial contributor
company because it was of broad public interest to the community) and Rev. Rul. 85-162, supra
(holding that project did not to constitute self-dealing to bank, a disqualified person, because it
was a program of broad public interest). Similarly, Charity is a public charity exempt under
§
501 (c)(3) and Project's activity of providing financial assistance to help meet the emergency
energy related needs of the elderly and severely disabled is a program of broad public interest.
Under these circumstances, the benefits to Company or Parent Company from your grants to
Project are
incidental or tenuous within the meaning
of§ 53.4941 (d)-2(f)(2) and not indirect self-
dealing
under§ 4941(d).
Ruling 3: Distributions by you to Charity for purposes of Project are qualifying distributions
under§ 4942(g).
Section 4942 imposes a tax on a private foundation that fails to make qualifying distributions.
Qualifying distributions are defined
in §4942(g) as amounts paid to accomplish one or more
purposes described
in §170(c)(2)(B), other than any contribution to an organization controlled
(directly or indirectly) by the foundation or one or more disqualified persons. Your distributions
to Charity for Project are paid to accomplish purposes described
in § 170( c)(2)(B) because they

7
further the charitable purpose of providing assistance to the poor or distressed. You have also
represented that Charity
is not controlled by you or any disqualified persons with respect to you
as defined
in§ 4946. Therefore, distributions to Charity for Project as stated above are
qualifying distributions.
Ruling 4: Distributions by you to Charity for purposes of Project are not taxable expenditures
under§ 4945.
Section 4945 imposes a tax on private foundations and their managers who make taxable
expenditures. Taxable expenditures are defined
in section§ 4945(d) as any amount paid or
incurred by a private foundation for certain enumerated purposes, such as influencing
legislation, making grants to individuals for travel or study, making grants to certain
organizations that are not
public charities, or for purposes other than those specified
in
§ 170( c)(2)(B). The distribution of funds to Charity for Project are for purposes specified in
§ 170( c)(2)(B), providing relief to the poor and distressed, and do not otherwise fall under any of
the activities defined
under§ 4945(d) and Charity is a public charity under§ 509(a)(1). Your
grants to Charity for Project further exempt purposes and therefore, they are not taxable
expenditures.
RULINGS
Based on the information submitted, we rule as follows:
1. Distributions to Charity for purposes of Project will not adversely affect or jeopardize
your tax exempt status under
§501 ( c)(3) inasmuch as no part of your net earnings inures
to the benefit of any private individual or shareholder.
2. Distributions made by you to Charity for purposes of Project will not constitute acts of
self-dealing under§ 4941(d).
3. Distributions made by you to Charity for purposes of Project are qualifying distributions
under§ 4942(g).
4. Distributions made by you to Charity for purposes of Project are not taxable
expenditures 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.

8
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.
Enclosure
Notice 437
Sincerely,
Michael Seto
Manager, EO Technical