IRS written determination 201437015

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: 201437015
Release Date: 9/12/2014
Date: June 6, 2014
UIL: 4942.03-05
Legend:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
Date =
Grantor =
Operating Foundation =
Dear
This
is in response to your ruling request regarding whether grants you will make are properly
characterized as qualified distributions
under§ 4942 of the Internal Revenue Code (I.R.C.).
Facts:
You are a nonprofit corporation recognized as an organization described
in § 501 (c)(3) and
classified as a private non-operating foundation
under§ 509(a) not described in§ 49420)(3).
Grantor's father created you. You are organized and operated for charitable, religious, scientific,
literary,
or educational purposes. Your mission is to receive and maintain a fund or funds of real
and/or personal property and to use the principal and/or income from such fund(s) exclusively for
charitable, religious, scientific, literary,
or educational purposes either directly or by contributions to
organizations exempt
under§ 501 (c)(3).
Your Board of Trustees consists of one Class A Trustee and three Class B Trustees. The Class A
Trustee
is entitled to eight votes, and each Class B Trustee is entitled to one vote. Grantor
currently serves as the Class A Trustee and as a Class B Trustee. Grantor's son and nephew
each currently serve as Class B Trustees. Grantor, Grantor's son, and Grantor's nephew are each
a disqualified person as defined
in § 4946 with respect to you and to Operating Foundation. You
are not a membership corporation but your trustees maintain control and oversight similar to that of
members of a nonprofit corporation, including the power to nominate and elect directors, amend
the
Bylaws and Certificate
of Incorporation, and approve fundamental changes such as merger,
dissolution,
or transfer of substantial assets.
You also have a Board
of Directors, which manages the general business and affairs of the
corporation. Each director is entitled to one vote. Grantor, son, and nephew all serve on the Board

of Directors, along with three additional unrelated directors. Grantor serves as the Chair of the
Board, and with son and nephew
also serve as your officers.
Operating Foundation is a nonprofit corporation described
in § 501 (c)(3) and classified as a private
operating foundation
under§ 509(a) described in § 49420)(3). Its purposes are charitable and
educational, and its mission
is to promote the appreciation of, and education about, Grantor's art
medium
specifically and public art generally, primarily through the creation, maintenance, and
public placement
of artwork created by Grantor. Operating Foundation will own many Grantor
created artwork pieces, all preliminary pieces, all future pieces, and copyrights to all Grantor
created artworks (together, the "Collection"). Operating Foundation's governance and
management structure and composition
is nearly identical to yours except that your Board of
Directors has three more directors than it and those three directors are unrelated whereas all of its
directors are related.
You will also make start-up and on-going grants to Operating Foundation. These grants are not
restricted. They do not require Operating Foundation to expend them for specific purposes. They
are general operating grants and may be used by Operating Foundation to acquire or maintain
assets which are used directly in the conduct
of its exempt activities and for reasonable
administrative expenses and other operating costs, to pay its employees, and to service its debt, if
any. You will ensure that Operating Foundation pays out such grant funds for the active conduct
of
activities constituting its purpose or function (as described in§ 4942U)(3)) not later than the close of
the first taxable year after the taxable year in which such grant funds are received by requiring
Operating Foundation to
complete and submit expenditure responsibility reports annually.
Operating Foundation has represented that
it will (i) use your grant funds for qualifying distributions
directly for the active conduct
of activities constituting its purpose or function (as described in
§ 49420)(3)), including amounts paid to acquire or maintain assets which are used directly in the
conduct
of its exempt activities and for reasonable administrative expenses and other operating
costs; (ii) make such qualifying distributions not
later than the close
of the first taxable year after the
taxable year
in which such grant funds are received, and (iii) treat such expenditures as
distributions out
of corpus.
Rulings Requested:
You have requested the following ruling:
You may count grants made to Operating Foundation as qualifying distributions as
permitted
in § 4942(g)(3) if: (i) Operating Foundation uses such grant funds for qualifying
distributions directly for the active conduct
of activities constituting its purpose or function
(as described
in § 49420)(3)), including amounts paid to acquire or maintain assets which
are used directly
in the conduct of its exempt activities and for reasonable administrative
expenses and other operating costs; (ii) Operating Foundation makes such qualifying
distributions not later than the close
of the first taxable year after the taxable year in which
such grant funds are received, and (iii) the expenditures by Operating Foundation are
treated by it as distributions out of corpus.

I.R.C. § 501(c)(3) provides an exemption from federal tax for organizations that are organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary,
or
educational purposes, no part of the net earnings of which inures to the benefit of any private
shareholder or individual.
I.R.C. § 4942(a) 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.
I.R.C. § 4942(g)(3) states that, for purposes
of this section, the term "qualifying distribution"
includes a contribution to a private operating foundation (and certain other organizations) if 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 (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. § 49420)(3) defines operating foundation for purposes
of§ 4942 to mean one (A) which
makes qualifying distributions (within the meaning
of paragraph (1) or (2) of subsection (g)) directly
for the active conduct
of the activities constituting the purpose or function for which it is organized
and operated equal to substantially all
of the lesser of(i) its adjusted net income (as defined in
subsection (f)), or (ii) its minimum investment return; and (B)(i) substantially more than half of the
assets
of which are devoted directly to such activities or to functionally related businesses (as
defined
in paragraph (4)), or to both, or are stock of a corporation which is controlled by the
foundation and substantially all
of the assets of which are so devoted, (ii) which normally makes
qualifying distributions (within the meaning
of paragraph (1) or (2) of subsection (g)) directly for the
active conduct
of the activities constituting the purpose or function for which it is organized and
operated
in an amount not less than two-thirds of its minimum investment return (as defined in
subsection (e)), or (iii)
substantially all
of the support (other than gross investment income as
defined
in§ 509(e)) of which is normally received from the general public and from 5 or more
exempt organizations which are not described
in § 4946(a)(1 )(H) with respect to each other or the
recipient foundation; not more than 25 percent
of the support (other than gross investment income)
of which is normally received from any one such exempt organization; and not more than half of
the support of which is normally received from gross investment income.
Notwithstanding the provisions
of§ 49420)(3)(A), if the qualifying distributions (within the meaning
of paragraph ( 1) or (2) of subsection (g)) of an organization for the taxable year exceed the
minimum investment return for the taxable year, clause (ii)
of subparagraph (A) shall not apply
unless substantially all
of such qualifying distributions are made directly for the active conduct of
the activities constituting the purpose or function for which it is organized and operated.

Under Treas. Reg. § 53.4942(a)-3(a)(2) for purposes of subparagraph (2)(i)(b) of this paragraph,
an organization is "controlled" by a foundation or one or more disqualified persons with respect to
the foundation if any
of such persons may, by aggregating their votes or positions of authority,
require the donee organization to make an expenditure, or prevent the donee organization from
making an expenditure,
regardless
of the method by which the control is exercised or exercisable.
Analysis:
Section 4942 imposes an excise tax on the undistributed income
of each private foundation for
each taxable year. The tax shall not apply to the undistributed income
of a private foundation for
any taxable year for which it
is an operating foundation (as defined in subsection U)(3)).
Undistributed income is the amount that distributable income exceeds qualifying distributions.
Qualifying distributions generally exclude distributions to private nonoperating foundations and
controlled organizations. Operating Foundation is a controlled organization with respect to you
because
(I) Grantor, Grantor's son, and Grantor's nephew are each a disqualified person within the
meaning
of § 4946 with respect to you and Operating Foundation, and (II) Grantor as Class A
Trustee
of both organizations has a majority vote of all trustees. See Treas. Reg. § 53.4942(a)-
3(a)(2).
Section 4942U) provides that excluded distributions can be qualified distributions
if the recipient
controlled organization (within a certain time period) 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 organization were a private foundation which is not an
operating foundation), and the distributing private foundation 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.
You are making grants to Operating Foundation to acquire and maintain assets which are used
directly
in the conduct of its exempt activities and for reasonable administrative expenses and other
operating costs, to pay its employees, and to service its debt, if any. Operating Foundation has
represented that it
will (i) use your grant funds for qualifying distributions directly for the active
conduct
of activities constituting its purpose or function (as described in§ 4942U)(3}}, including
amounts paid to acquire or maintain assets which are used directly
in the conduct of its exempt
activities and for
reasonable administrative expenses and other operating costs; (ii) make such
qualifying distributions not later than the close
of the first taxable year after the taxable year in
which such grant funds are received, and (iii) treat such expenditures as distributions out of corpus.
Conclusion:
Based on the foregoing, we rule as follows:
You may count grants made to Operating Foundation as qualifying distributions as
permitted
in § 4942(g)(3) if: (i) Operating Foundation uses such grant funds for qualifying
distributions directly for the active conduct
of activities constituting its purpose or function
(as described
in § 4942(j)(3)), including amounts paid to acquire or maintain assets which
are used directly
in the conduct of its exempt activities and for reasonable administrative

expenses and other operating costs; (ii) Operating Foundation makes such qualifying
distributions not later than the close of the first taxable year after the taxable year
in which
such grant funds are received, and (iii) the expenditures by Operating Foundation are
treated by it as distributions out of corpus.
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. 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.
Enclosure
Notice 437
Sincerely,
Michael Seto
Manager, Exempt Organizations
Technical