IRS written determination 201438032

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: 201438032
Release
Date: 9/19/2014
Date: June 24, 2014
Legend:
M=
Dear
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
UIL: 170.09-02; 501.03-15
We have considered your
ruling request dated March 19, 2013,
in which you requested certain
rulings with respect to a wholly owned foreign subsidiary.
Background:
You are a nonprofit public benefit corporation recognized as a tax-exempt public charity under
§§ 501(c)(3) and 509(a)(1)/170(b)(1)(A)(vi). Three members make up the entirety of your board
of directors and serve as your officers. Your purpose stated
in your Articles of Incorporation is to
support foreign-born orphan children with food, clothing, housing, education, medical treatment,
psychological treatment, and other similar support. Your plan is to operate programs
in the
United States and internationally. Your initial international objective is to build an orphanage
in
foreign country M. Toward that end, you have formed a subsidiary entity in M (Subsidiary).
Subsidiary
is a nonprofit foundation and has no operations in the United States.
Subsidiary's governing statutes provide you with
total control over all aspects
of Subsidiary and
its activities. The statutes state that the entity
is a subsidiary of you, which will be directed and
controlled by you. The stated objective of Subsidiary is to accomplish your purposes and
directives. Furthermore, to achieve this objective, Subsidiary is granted the power to act as
proxy for you, and under your direction.
In addition to these general provisions, the statutes provide you with control of Subsidiary's
most important governing bodies and governing offices, including the General Assembly, the
Board of Directors, the Executive Director, and the Fiscal Auditor. The General Assembly is the
highest governing body within Subsidiary, and
is tasked with providing instruction regarding
Subsidiary's programs and the use of Subsidiary's funds. The General Assembly is controlled
by the Founding Members. The Founding Members must consist entirely
of members of you.
The General Assembly elects Subsidiary's board. However,
at least three of the five members
of Subsidiary's board must
also
be members of your board. Subsidiary's board updates you on

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the expenditures of Subsidiary on no less than a quarterly basis. Subsidiary's board has
several internal executive positions, including a president, who is tasked with ensuring your
directives are followed by Subsidiary.
The General Assembly appoints the Executive Director with your consent. The Executive
Director executes
on the directives of the General Assembly, oversees all programs of
Subsidiary on a day to day basis, and communicates with you on the functioning of Subsidiary.
The
General Assembly also appoints the Fiscal Auditor. The Fiscal Auditor is an independent
professional accountant, unrelated to the members of Subsidiary, who will audit the finances
and accounting of Subsidiary and report to you. The Fiscal Auditor has the obligation to
immediately report to you if any fiscal irregularities or issues arise.
Apart from this structure of governance, Subsidiary's statutes include additional provisions that
establish your control and oversight of Subsidiary and ensure any funds contributed to
Subsidiary by you are used for charitable purposes. Subsidiary is not allowed to substantially
engage
in political propaganda, or otherwise attempt to influence legislation, or participate or
intervene
in any political campaign on behalf of any candidate for public office. Subsidiary is
also prohibited from allowing any of its funds to inure to the benefit of any of its directors,
trustees, officers, private
shareholders or members, or to individuals.
You also have the unilateral power to expel a member of Subsidiary. You are entitled to receive
minutes
of each meeting of the General Assembly and entitled to a copy of the entire minute
book of Subsidiary upon request. You can decide at any time to dissolve and liquidate
Subsidiary and proceeds from the liquidation (after payment of all liabilities) will be paid over to
you.
Furthermore, all of Subsidiary's funds are irrevocably dedicated to your charitable purposes.
Subsidiary will require funding from you from time to time as it seeks to accomplish your
charitable purposes
in M. Towards that end, you intend to transfer portions of donations you
receive to Subsidiary (the Proposed Transaction). Decision-making regarding the Proposed
Transaction is handled by your board under the general corporate authority granted to the board
by your
bylaws. To help formalize and assist in the decision-making process, your board
passed certain resolutions regarding the Proposed Transaction. These resolutions establish an
advisory committee of the board, which provides initial review and assessment of Subsidiary's
funding needs. After review, the committee provides a recommendation to your board regarding
the request.
If the request is approved, your president oversees transfer of the funds to
Subsidiary.
Apart from a request for funds made by Subsidiary, your board may independently decide that
funds are needed to further Applicant's projects
in M and can approve funding for those needs.
Regardless, the transfer of funds will not be approved by your board if any of the conditions
in
the resolutions are not met. Those conditions include that: (1) funds must be kept by Subsidiary
in a separate account; (2) Subsidiary must keep separate financial records regarding use of the
funds; (3) your board maintains control over the use of the funds; (4) Subsidiary may only use
the funds for your charitable purposes and as directed by your board; (5) Subsidiary may not
use the funds for any political campaign, propaganda, advocacy for legislation, or private
inurement; (6) Subsidiary must be current
in providing accounting and audit information to you;

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(7) Subsidiary remains controlled by you and its members; and (8) Subsidiary is in compliance
with its governing documents.
You also represent that you do not adhere to any earmarks or restrictions placed on donations
by donors. Funds are solicited for general use by you
in your various projects. You are not
required
in your charter, governing documents, or by any other source, to transfer contributed
funds to Subsidiary. Your board maintains independent control of the management of all
donations under its general corporate authority, and each transfer of funds to Subsidiary
is
vetted.
Rulings Requested:
1. The Proposed Transaction will not adversely affect your IRC § 501 (c)(3) tax-exempt
status.
2. Donations made to you that are used in the Proposed Transaction will be deductible by
donors under IRC § 170(a).
Law:
Section 170 provides, subject to certain limitations, a deduction for charitable contributions as
defined
in § 170( c), payment of which is made in the taxable year.
Section 170(c)(2) defines the term "charitable contribution" to include a contribution or gift to or
for the use of a corporation, trust, community chest, fund, or foundation (A) created or organized
in the United States or in any possession thereof, or under the law of the United States, any
State, the District of Columbia, or any possession of the United States; (B) organized and
operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to
foster
national or international amateur sports competition, or for the prevention of cruelty to
children or animals; (C) no part of the net earnings of which inures to the benefit of any
shareholder or individual; and (D) which is not disqualified for tax exemption
under§ 501(c)(3)
by reason of attempting to influence legislation, and which does not participate in, or intervene
in (including the publishing or distributing of statements), any political campaign on behalf of (or
in opposition to) any candidate for public office.
Section
501 (c)(3) provides for the exemption from federal income tax of an organization
organized and operated exclusively for charitable purposes, no part
of the net earnings of which
inures to the benefit of any private shareholder or individual, no substantial part of the activities
of which is carrying on propaganda, or otherwise attempting, to
influence legislation (except as
otherwise provided
in subsection (h)), and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf of (or in
opposition to) any candidate for public office.
Revenue Ruling 63-252, 1963-2
C. B. 101, held that contributions to a charity organized in the
United
States that transfers some or all of its funds to a foreign charitable organization are
deductible only
if the contribution was to or for the use of the domestic organization, and that the

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domestic organization was not serving as an agent for, or conduit of, a foreign charitable
organization.
In order to satisfy the requirements of§ 170(c)(2)(A), a qualifying organization
may not be a mere conduit to a foreign charitable organization. The revenue ruling states that
the requirements of § 170( c)(2)(A) would be nullified if contributions inevitably committed to go
to a foreign organization were deductible solely because,
in the course of transmittal to the
foreign organization, they came to rest momentarily
in a qualifying domestic organization. In
such cases, the domestic organization would be only nominally the donee; the real donee would
be the ultimate foreign recipient. The revenue ruling further provides examples of domestic
organizations that transferred donations to foreign organizations. Example (5) concerns a
domestic organization that formed a subsidiary
in a foreign country to facilitate its charitable
operations there and intended to transfer donations to
it. The foreign organization was formed
for purposes of administrative convenience, and the domestic organization controlled every
facet of its operations. The revenue
ruling concluded that the domestic organization described
in Example (5) was the real beneficiary of the contributions it received because the foreign
organization was
merely an administrative arm of the domestic organization. Accordingly,
contributions to the domestic organization described in Example (5) were deductible.
Revenue Ruling 66-79, 1966-1 C.B. 48, amplifying Rev. Rul. 63-252, held that contributions to a
domestic charity that were solicited for a specific project of a foreign charitable organization
were
deductible under § 170 if the domestic charity had reviewed and approved the project as
being
in furtherance of its own exempt purposes and it had control and discretion as to the use
of the contributions. The
ruling concluded that the contributions received by the domestic
charity were for the use of the domestic organization and not the foreign organization.
Rev. Rul. 63-252, (holding amounts paid to a charitable organization were not deductible where
the contributions were earmarked for the benefit of a particular ward of the organization).
However, special earmarking of the use or destination of funds paid to a qualifying charitable
organization may deprive the donor of a deduction. If the gift is earmarked for a particular
individual or organization, it
is appropriate to look beyond the fact that the immediate recipient is
a qualifying organization to determine whether the payment constitutes a deductible
contribution.
In order for donations to be deductible, the organization receiving the donations
must have control and discretion over the donation, unfettered by a commitment or
understanding that the contribution
would benefit a designated individual. See Rev. Rul. 62-
113, 1962-2 C.B.
10. The donor's intent must be to benefit the organization and not the
individual recipient. See Rev. Rul. 68-484, 1968-2 C.B. 105. Similarly, the domestic
organization must have full discretion over whether to transfer the contributions to the foreign
organization. See Rev. Rul. 66-79.
Rev.
Rul. 68-117, 1968-1 C.B. 251, describes an organization formed to help poor rural
inhabitants of developing countries,
in part by conducting a guided self-help program for social
and economic development
in the rural areas of these countries. This program includes
furnishing expert guidance to subsistence-level farmer groups on modern agricultural methods,
livestock and poultry care, and up-to-date marketing practices
in an effort to raise their standard
of living. The organization was held to be exempt under section
501 (c)(3) as relieving the poor
and distressed.

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Rev. Rul. 68-165, 1968-1 C. B. 253, described a similar self-help program, which was held to be
charitable as relieving the poor and
as promoting social welfare. The organization joined with
similar organization
in Latin America to promote student and cultural exchanges as well as
provided
technical and material assistance for self-help projects designed to improve the living
conditions of the underprivileged people
in Latin America.
Rev. Rul. 68-489, 1968-2
C. B. 210 held that an organization will not jeopardize its exemption
under section
501 ( c)(3) of the Code, even though it distributes funds to organizations that are
not exempt under section 501(c)(3), provided that it
limits distributions to specific projects
in
furtherance of its own exempt purposes, retains control and discretion over use of the funds,
and maintains records establishing that the funds were used for section
501 (c)(3) purposes.
Analysis:
Tax exempt corporations may conduct charitable operations overseas and retain tax exempt
status. Rev.
Rul. 71-460. A tax exempt organization may distribute funds to a nonexempt
organization and retain tax exempt status
provided that the exempt organization retains
control
and discretion as to the use of the funds, that records establish that the funds were used for IRC
§
501 (c)(3) purposes, and that the distributions are limited to specific projects that are in
furtherance of its own exempt purposes.
Your Proposed Transaction is consistent with the requirements
delineated
in Rev. Rul. 68-489.
You formed Subsidiary
in a foreign country to facilitate its operations in that location. Subsidiary
was formed to accomplish your purposes and for your administrative convenience. You have
complete control over all aspects of Subsidiary and its activities. Your corporate structure
requires and gives you rights
in ensuring that you maintain control and discretion of the use of
funds that you distribute to your subsidiary. You have a process of requiring accounting to
determine that the funds you distribute are dedicated
in furtherance of your exempt purposes
and have controls for accounting that ensure that there are no co-mingling of funds.
In order for contributions to you to be deductible, § 170(a) requires you to be an organization
described
in§ 170(c). You represent you qualify as an organization described in§ 170(c).
Your Proposed Transaction is consistent with the requirements delineated
in Rev. Rul. 63-252
and Rev. Rul. 66-79. As in Example (5) of Rev. Rul. 63-252, you formed Subsidiary in a foreign
country to facilitate its operations
in that location. Subsidiary was formed to accomplish your
purposes and for your administrative convenience. You have complete control over all aspects
of Subsidiary and its activities.
You represent that you do not adhere to any earmarks or restrictions placed on donations
by
donors. Funds are solicited for your general use in your various projects. You are not required
in your charter, governing documents, or by any other source, to transfer contributed funds to
Subsidiary. Your board maintains independent control of the management of all donations
under your
general corporate authority, and each transfer of funds to Subsidiary is vetted.
The use of funds transferred
in the Proposed Transaction is under your sole control and
discretion. You review, assess, and approve Subsidiary's funding needs. You require periodic

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accountings and audit information from Subsidiary, and you have the discretion to refuse to
make contributions to Subsidiary. The funds that are transferred by you to Subsidiary are used
in furtherance of your charitable purposes.
Conclusion:
Based upon the information submitted and the representations you made, you are not acting as
a mere conduit but instead are considered the true recipient of the funds because you exercise
full control and discretion over the use of contributions, including those transferred to Subsidiary
in order to further your charitable purposes. Accordingly, we conclude that the deductibility
under § 170 of donations made to you will not be affected if the donations are used
in the
Proposed Transaction and transferred to your international subsidiary.
Rulings:
1. The Proposed Transaction will not adversely affect your IRC § 501 (c)(3) tax-exempt
status.
2. Donations made to you that are used in the Proposed Transaction will be deductible by
donors under IRC § 170(a).
Except as specifically ruled upon above, no opinion is expressed as to the federal income tax
consequences of the transaction described above under any other provision of the Code.
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 611 O(k)(3) 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. Specifically, this ruling does not reach any conclusion as to the qualifying distribution
status of your proposed transfer under § 4942(g)(3). 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.

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Enclosure
Notice 437
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Sincerely,
Michael Seto
Manager, EO Technical