office_of_chief_counsel internal_revenue_service memorandum number release date cc ita posts-113285-11 uilc date date to deputy area_counsel financial services large business international attention michelle a missry and jennifer l nuding-brock from william a jackson branch chief branch income_tax accounting subject net_operating_loss - interaction between sec_172 and sec_172 g and j this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether a taxpayer who makes an election under sec_172 of the internal_revenue_code code for a taxable_year may carry back a specified_liability_loss farming_loss or qualified_disaster loss from the same taxable_year pursuant to subparagraphs c g and j respectively of sec_172 conclusion a taxpayer who makes an election under sec_172 for a taxable_year may not carry back any portion of the taxpayer’s net_operating_loss nol including any portion of the nol that is attributable to a specified_liability_loss other than an amount described in sec_172 farming_loss or qualified_disaster loss background a taxpayer may have an nol that includes a portion attributable to a specified_liability_loss farming_loss or qualified_disaster loss such losses have extended carryback periods that are different from the general carryback period the issue has arisen as to posts-113285-11 whether an election to relinquish the carryback period under sec_172 also relinquishes the extended carryback periods for such losses this issue arose in a case with respect to a qualified_disaster loss wherein the taxpayer contended that its sec_172 election did not prohibit it from carrying its qualified_disaster loss back years pursuant to sec_172 even though this particular taxpayer’s case was resolved you requested that we clarify the issue law sec_172 allows a deduction equal to the aggregate of the nol carryovers and carrybacks to the taxable_year sec_172 provides that an nol for any taxable_year generally must be carried back to each of the years preceding the taxable_year of the nol and carried forward to each of the years following the taxable_year of the nol sec_172 states that in the case of a taxpayer that has a specified_liability_loss as defined in sec_172 for a taxable_year the specified_liability_loss shall be an nol_carryback to each of the taxable years preceding the taxable_year of the loss sec_172 states that in the case of a taxpayer that has a farming_loss as defined in sec_172 for a taxable_year the farming_loss shall be an nol_carryback to each of the taxable years preceding the taxable_year of the loss sec_172 states that in the case of a taxpayer that has a qualified_disaster loss as defined in sec_172 for a taxable_year the qualified_disaster loss shall be an nol_carryback to each of the taxable years preceding the taxable_year of the loss sec_172 provides in general that the entire amount of the nol for any taxable_year shall be carried to the earliest of the taxable years to which such loss may be carried sec_172 provides that any taxpayer entitled to a carryback period under sec_172 may make an irrevocable election to relinquish the entire carryback period for an nol for any taxable_year sec_172 provides in general that the term net_operating_loss means the excess of the deductions allowed by chapter of the code over the gross_income computed with certain modifications sec_172 provides in general that the term specified_liability_loss means the sum of the following amounts to the extent taken into account in computing the nol for the taxable_year a any amount allowable as a deduction under sec_162 or sec_165 which is attributable to product_liability or expenses_incurred in the investigation or settlement posts-113285-11 of or opposition to claims against the taxpayer on account of product_liability and b any amount allowable as a deduction under chapter of the code other than sec_468 or sec_468a which is in satisfaction of certain liabilities under a federal or state law sec_172 provides that for purposes of applying sec_172 a specified_liability_loss for any taxable_year shall be treated as a separate nol for such taxable_year to be taken into account after the remaining portion of the nol for such taxable_year sec_172 provides that in general the term farming_loss means the lesser_of a the amount which would be the nol for the taxable_year if only income and deductions attributable to farming businesses as defined in sec_263a are taken into account or b the amount of the nol for such taxable_year sec_172 provides that for purposes of applying sec_172 a farming_loss for any taxable_year shall be treated in a manner similar to the manner in which a specified_liability_loss is treated sec_172 provides that in general the term qualified_disaster loss means the lesser_of a the sum of i the losses allowable under sec_165 for the taxable_year attributable to a federally_declared_disaster as defined in sec_165 occurring before date and occurring in a disaster_area as defined in sec_165 and ii the deduction for the taxable_year for qualified_disaster expenses which is allowable under sec_198a or which would be so allowable if not otherwise treated as an expense or b the nol for such taxable_year sec_172 provides that for purposes of applying sec_172 a qualified_disaster loss for any taxable_year shall be treated in a manner similar to the manner in which a specified_loss is treated sec_172 prior to the omnibus budget reconciliation act of obra p l provided that a product_liability_loss shall be a nol_carryback to each of the taxable years preceding the loss_year sec_172 prior to the obra defined product_liability_loss sec_1_172-13 of the income_tax regulations regulations provides that in general the term product_liability_loss means the lesser_of i the nol for the current taxable_year or ii the total of the amounts allowable as deductions under sec_162 and sec_165 directly attributable to product_liability and expenses_incurred in connection with the investigation or settlement of or opposition to claims against the taxpayer on account of alleged product_liability sec_1_172-13 states that if a taxpayer sustains during the taxable_year both an nol not attributable to product_liability and a product_liability_loss as defined in posts-113285-11 sec_172 and sec_1_172-13 an election pursuant to sec_172 relating to election to relinquish the entire carryback period does not preclude the product_liability_loss from being carried back years under sec_172 and sec_1_172-13 since sec_1_172-13 was finalized sec_172 sec_172 and sec_172 have been amended and redesignated analysis sec_172 defines the term net_operating_loss as the excess of the deductions allowed by chapter of the code over the gross_income with certain modifications based on this definition the nol calculation encompasses all deductions for the taxable_year allowed by chapter of the code with certain modifications including any allowed deductions attributable to a specified_liability_loss farming_loss or qualified_disaster loss consequently there is only one nol for the taxable_year for a taxpayer to be able to make separate sec_172 elections with respect to a specified_liability_loss farming_loss qualified_disaster loss or loss that qualifies for a general 2-year carryback period each of these losses must qualify as a separate nol for example assume that a taxpayer incurs a dollar_figure loss dollar_figure of which qualifies for a 2-year carryback period under sec_172 and dollar_figure of which qualifies for a 10-year carryback period as a specified_liability_loss under sec_172 if both of the losses qualify as separate nols then in this circumstance sec_172 does not define an nol but rather the sum of the taxpayer’s separate nols for the taxable_year however because sec_172 does define the term net_operating_loss the two dollar_figure amounts referred to above constitute portions of the nol for the taxable_year rather than two separate nols because no more than one nol exists per year when a taxpayer elects to relinquish the entire carryback period with respect to an nol pursuant to sec_172 the election applies to the entire nol for the taxable_year sec_172 does not allow a taxpayer to make the election for a portion of the nol for a taxable_year in addition no provision in the code or the regulations suggests that there can be multiple nols in a taxable_year for purposes of the election under sec_172 consequently a taxpayer making an election under sec_172 is prohibited from carrying back any portion of the nol including any portion of the nol attributable to a specified_liability_loss a farming_loss or a qualified_disaster loss sec_172 allows a portion of the nol attributable to a specified_liability_loss to be treated as a separate net_operating_loss but the special treatment is strictly limited to determining the order in which the nol is absorbed under sec_172 in a carryback or carryover year specifically under sec_172 a specified_liability_loss is taken into account after the remaining portion of the net_operating_loss for such taxable_year emphasis added here again the statutory language is consistent with a taxpayer having only one nol for the taxable_year of which a specified_liability_loss is a portion rather than a separate nol pursuant to sec_172 and sec_172 a farming_loss and posts-113285-11 a qualified_disaster loss are each treated in a manner similar to a specified_liability_loss for purposes of applying sec_172 however sec_1_172-13 provides that in general the former sec_172 election relating to an election to relinquish the entire carryback period does not preclude a product_liability_loss from being carried back years under former sec_172 and sec_1_172-13 sec_1_172-13 which was proposed on date and finalized on date provides guidance with respect to the carryback of product_liability losses section b of the obra combined pre-1990 obra sec_172 relating to product_liability losses with pre-1990 obra sec_172 relating to deferred statutory or tort liability losses into current sec_172 which contains rules relating to specified liability losses it is our position that this regulation is limited to specified liability losses described in sec_172 relating to product_liability losses and does not apply to specified liability losses described in sec_172 farming losses or qualified_disaster losses accordingly we conclude that a taxpayer may not carry back a specified_liability_loss other than an amount described in sec_172 farming_loss or qualified_disaster loss for a taxable_year for which the taxpayer elects to waive the nol_carryback period under sec_172 case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- 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------------------------------------------------------------------------------------------------ posts-113285-11 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call seoyeon sharon park at if you have any further questions


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-114987-99 date date legend decedent spouse niece trust trustee of unitrust trustees of marital trust charity date date state dear this is in response to your letter dated date in which you requested rulings concerning the tax consequences of a proposed reformation to a charitable_remainder_unitrust on date decedent executed trust decedent died on date and trust became irrevocable decedent is survived by spouse trust provides for the disposition of property upon decedent’s death paragraph a of article three of trust provides that if spouse survives decedent one-half of the remaining property is to be held as a marital trust for spouse in accordance with the provisions of article four marital trust paragraph of article four of trust provides that all income is to be distributed currently to spouse for life at monthly or other convenient intervals but not less often than annually plr-114987-99 paragraph of article four of trust provides that principal is to be distributed as trustee deems suitable for care support and maintenance of spouse paragraph of article four of trust provides that upon the death of spouse all remaining trust property is to be administered as a unitrust named for niece and charity in accordance with provisions of article five unitrust paragraph of article five of trust provides that trustee of unitrust is to distribute to niece for the period of niece’s life an amount which is the lesser_of percent of the net fair_market_value of the trust assets as determined as of the valuation_date unitrust_amount or the trust income as defined in sec_643 of the code and the regulations thereunder for the taxable_year paragraph of article five provides that upon niece’s death trustee is to distribute all of the the remaining income and principal to charity paragraph dollar_figure of article five provides that trustee of unitrust is prohibited from engaging in any act of self-dealing as defined in sec_4941 from retaining any excess_business_holdings as defined in sec_4943 which would subject trust to tax under sec_4943 from making any investments which would subject trust to tax under sec_4944 and from making any taxable_expenditures as defined in sec_4945 additionally trustee is to make distributions at such time and in such manner as not to subject trust to tax under sec_4942 trustees of marital trust propose to reform unitrust to permit the unitrust_amount to be paid for an initial period in accordance with sec_1 a i b of the income_tax regulations and then to be paid as a fixed percentage for the remaining portion of the trust term in accordance with sec_1 a i c the proposed paragraph provides notwithstanding the foregoing provisions of article five this paragraph dollar_figure shall supersede paragraph sec_5 and with respect to unitrust created under of this agreement a_trust term the period for payment of the annual amount for the trust the trust term shall begin on the date of death of spouse and shall end upon the death of the recipient of the trust niece b computation of annual amount during first_phase for each taxable_year of the trust during the period the first_phase which begins with the first day of the trust’s first taxable_year and ends on december of the trust’s first taxable_year the last day of the taxable_year of the trust in which the triggering event occurs the annual amount shall equal the lesser_of i an amount unitrust_amount which equals five percent of the net fair market of the trust assets as determined on the valuation_date for that taxable_year or plr-114987-99 ii the trust income for that taxable_year as defined in sec_643 of the code and the regulations thereunder c triggering event the triggering event shall be december of the year in which spouse dies d computation of annual amount during first_phase for each taxable_year of the trust during the period the second_phase which begins with the first day of the first taxable_year of the trust after the taxable_year of the trust in which the triggering event occurs and continues for the balance of the trust term the annual amount shall be five percent of the net fair_market_value of the trust assets as determined as of the valuation_date for that taxable_year e valuation_date the valuation_date for a taxable_year of a_trust shall be the first business_day of that taxable_year if no valuation_date occurs in a short taxable_year for the trust other than the taxable_year in which the trust term ends trust assets shall be valued for purposes of computing unitrust_amount as of the last day of such short taxable_year in the case of the taxable_year of the trust in which the trust term ends if no valuation occurs before the day the trust term ends trust assets shall be valued for purposes of computing unitrust_amount as of the day the trust term ends the terms governing unitrust became irrevocable on date however the assets are presently held in a marital trust which satisfies the requirements for a qualified terminable_interest trust under sec_2056 unitrust will not come into existence until the death of the spouse trustees of marital trust filed a petition in state court to reform unitrust as provided in proposed paragraph the court granted the order conditioned upon the internal_revenue_service issuing the following requested rulings the proposed reformation will not prevent unitrust from qualifying as a charitable_remainder_unitrust under sec_664 when it is created upon the death of spouse or at any point during its term the proposed reformation will not result in an act of self-dealing under sec_4941 at the time the order reforming article five is issued at the time the method for computing unitrust_amount changes or at any other time during the term of unitrust the proposed reformation will not cause the present_value of the remainder_interest in unitrust from qualifying for an estate_tax charitable deduction under sec_2055 in spouse’s estate ruling_request sec_664 defines a charitable_remainder_unitrust as a_trust that provides for the distribution of the unitrust_amount at least annually for life or a term of years to one or more persons at least one of which is not a charitable_organization with an irrevocable remainder_interest to be held for the benefit of or paid over to a qualified charitable_organization sec_1_664-3 provides that the governing instrument may provide that the plr-114987-99 trust will pay not less often than annually the amount described in sec_1_664-3 for an initial period and then pay the amount described in sec_1_664-3 calculated using the same fixed percentage for the remaining years of the trust sec_1_664-3 provides that sec_1_664-3 applies to charitable_remainder trusts created on or after date sec_1_664-1 provides that in order for a_trust to be a charitable reminder trust it must meet the definition of and function exclusively as a charitable_remainder_trust from the creation of the trust solely for the purpose of sec_664 and the applicable regulations the trust will be deemed to be created at the earliest time that neither the grantor nor any other person is treated as the owner of the entire trust but in no event prior to the time property is first transferred to the trust sec_1_664-3 of the regulations provides that a charitable_remainder trusts may be reformed to allow for a combination of methods as provided in sec_1 a i c without causing the trust to fail to function exclusively as a charitable_remainder_unitrust under sec_1_664-1 if the trustee begins legal proceedings to reform by date extended to date by notice_99_31 i r b in the present case property will not be transferred to unitrust until the death of spouse trustees of marital trust have filed a petition in state court that complies with the special reformation rules under sec_1_664-3 accordingly we rule that the proposed reformation of trust will not prevent unitrust from qualifying as a charitable_remainder_unitrust under sec_664 ruling_request sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 defines self-dealing as any direct or indirect - a sale_or_exchange or leasing of property between a private_foundation and a disqualified_person b lending of money or other extension of credit between a private_foundation and a disqualified_person c furnishing of goods services or facilities between a private_foundation and a disqualified_person d payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person e transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation f agreement by a private_foundation to make any payment of money or other_property to a government_official as defined in sec_4946 other than certain employment agreements sec_4947 generally provides that in the case of a_trust which is not exempt from tax under sec_501 not all of the unexpired interests of which are devoted to charitable purposes and which has amounts in trust for which a charitable deduction was allowed sec_507 sec_508 sec_4941 sec_4943 sec_4944 and sec_4945 apply as if such trust were a private_foundation except for amounts in trust for which a charitable deduction was not allowed and which are segregated from amounts for which a charitable deduction was allowed sec_1_664-3 provides that a charitable_remainder_trust may be reformed to allow for a combination of methods as provided in sec_1_664-3 without causing the plr-114987-99 trust to fail to function exclusively as a charitable_remainder_unitrust under sec_1_664-1 or to engage in an act of self-dealing under sec_4941 if the trustee begins legal proceedings to reform by date extended to date by notice_99_31 i r b sec_53_4947-1 of the foundations and similar excise_taxes regulations provides that a newly created trust shall for purposes of sec_4947 be treated as having amounts in trust for which a deduction was allowed under sec_170 sec_545 sec_556 sec_642 sec_2055 sec_2106 or sec_2522 from the date of its creation even if a deduction was allowed for such amounts only at a later date for purposes of sec_53_4947-1 the date of creation of a charitable_remainder_trust shall be determined by applying the rules in sec_1_664-1 sec_53_4947-1 provides that a revocable_trust that becomes irrevocable upon the death of the decedent-grantor under the terms of the governing instrument of which the trustee is required to hold some or all of its net assets in trust after becoming irrevocable for both charitable and noncharitable beneficiaries is not considered a split-interest trust under sec_4947 for a reasonable period of settlement after becoming irrevocable except that sec_4941 may apply if the requirements of sec_53_4941_d_-1 are not met after that period the trust is considered a split-interest trust under sec_4947 for such purpose the term reasonable period of settlement means that period reasonably required or if shorter actually required by the trustee to perform the ordinary duties of administration necessary for the settlement of the trust these duties include for example the collection of assets the payment of debts taxes and distributions and the determination of rights of the subsequent beneficiaries in the present case unitrust will be a split-interest trust as defined in sec_4947 when unitrust becomes a split-interest trust then sec_4941 will fully apply to it as if it were a private_foundation by the terms of the governing instrument unitrust will not receive property until the death of spouse sec_53_4947-1 and sec_1_664-1 indicate that a unitrust is not deemed created before property is first transferred to the trust as the facts do not indicate any gift of property to the charitable_remainder_unitrust for which a charitable deduction was allowed the trust is not a split-interest trust subject_to sec_4941 at this time therefore the proposed reformation cannot be an act of self-dealing if unitrust were created and a split-interest trust subject_to sec_4941 then unitrust could still engage in the proposed reformation so long as it complied with the special reformation rules under sec_1 a i f accordingly the proposed reformation will not result in an act of self-dealing under sec_4941either i at the time the order reforming article five is issued ii at the time the unitrust is created upon the death of the decedent’s spouse iii at the time the method for computing the unitrust_amount changes at the beginning of the calendar immediately following the year in which the decedent’s spouse dies or iv at any other time during the term of the unitrust ruling_request sec_2044 provides that the gross_estate includes property in which the decedent possesses a qualifying_income_interest_for_life and with respect to which a deduction was allowed under sec_2056 under sec_2044 property included in the gross_estate under sec_2044 is treated as passing from the decedent for purposes of the estate_tax sec_2055 provides that the value of the taxable_estate at the decedent’s death shall be determined by deducting from the value of the gross_estate the amount of all bequests plr-114987-99 legacies devises and transfers to a person or for_the_use_of any corporation organized and operated exclusively for religious charitable scientific literary or educational_purposes sec_2055 provides that where an interest in property other than an interest described in sec_170 passes or has passed_from_the_decedent to a person or for a use described in sec_2055 a and an interest in the same property passes or has passed for less than an adequate_and_full_consideration in money_or_money's_worth from the decedent to a person or for a use not described in subsection a no deduction shall be allowed under sec_2055 for the interest which passed or has passed to the person or for the use described in sec_2055 unless in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 sec_20_2055-2 of the estate_tax regulations provides that if a_trust is created or property is transferred for both a charitable and a private purpose a deduction may be taken for the value of the charitable beneficial_interest only insofar as that interest is presently ascertainable and hence severable from the noncharitable interest under sec_20_2055-2 in the case of decedents dying after date where an interest in property passes from the decedent for charitable purposes and an interest in the same property passes from the decedent for private purposes no deduction is allowed under sec_2055 for the value of the interest passing for charitable purposes unless the interest is a deductible_interest under sec_20_2055-2 the term deductible_interest also includes a unitrust_interest the term unitrust_interest includes a right pursuant to the instrument of transfer to receive payment not less often than annually of a fixed percentage of the net fair_market_value determined annually of the property which funds the unitrust_interest in the present case trustees of marital trust propose to reform unitrust to permit unitrust to use a combination of methods as provided in sec_1_664-3 trustees of marital trust have filed a petition in state court that complies with the special reformation rules under sec_1_664-3 the proposed reformation of trust will not prevent unitrust from qualifying as a charitable_remainder_unitrust under sec_664 accordingly we rule that a federal estate_tax charitable deduction will be allowed to spouse’s estate under sec_2055 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination these rulings are expressly contingent on the issuance of a court order authorizing the proposed reformation we express no opinion on any other provisions of trust or on the federal tax consequences of the formation and operation of unitrust under any other provisions of the code specifically no opinion is expressed as to whether unitrust will qualify as a charitable_remainder_trust under sec_664 plr-114987-99 the rulings contained in this letter are directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to the taxpayer sincerely yours robert g honigman acting assistant to the branch chief branch enclosure copy for sec_6110 purposes


department of the treasury internal_revenue_service _ washington d c tax_exempt_and_government_entities_division date manchir nny toure give - og - oo soi - af sec_71ad of -oo -o4 may contact person identification_number telephone number employer_identification_number legend ms n o dear this is in response to your ruling_request dated date for rulings concerning the federal_income_tax consequences of your transfer of obligations and the assets that secure them to a for-profit entity pursuant to sec_150 of the internal_revenue_code facts you are exempt from federal_income_tax under sec_501 of the code and you are also classified as other than a private_foundation under sec_509 you were originally formed at the request of the city of m state of n under the provisions of an identified state statute pursuant to which you could acquire and service student_loan notes which were guaranteed under the provisions of the o as amended you currently are a qualified_scholarship funding corporation as defined in sec_150 of the code your governing board has decided that you could more effectively carry out your charitable and educational_purposes by ceasing such status pursuant to an election under sec_150 election you intend to carry on your charitable purposes as a private_foundation within the meaning of sec_509 you have provided organizing documents to show that you will comply with the private_foundation requirements you intend to make the election by transferring all of your student_loan notes to a taxable corporation the subsidiary in exchange for senior_stock of the subsidiary within a reasonable period of time after the election immediately_after_the_transfer you will hold all of the senior_stock of the subsidiary the senior_stock will have rights to dividends liquidation and redemption rights that are not inferior to those of any other class of stock and will participate pro_rata and fully in the equity value of any other common_stock of the subsidiary have the right to payments receivable in liquidation prior to any other stock in the subsidiary upon liquidation or redemption have a fixed_right to receive the greater of a the fair_market_value of the stock at the date of liquidation or redemption or b the net fair_market_value of all assets transferred to your subsidiary and have a right to require its redemption by a date which is sooner than years after the date that the election is made in addition the subsidiary will assume all of your qualified_scholarship_funding_bond indebtedness within a reasonable period after the election to the extent permitted by law the subsidiary will assume all of the responsibilities and succeed to all your rights under your agreements with the secretary of education with respect to student loans at least percent of the members of your board_of directors will be independent of the subsidiary and receive no compensation from the subsidiary immediately after the election you will continue to be organized and operated exclusively for charitable and educational_purposes through the carrying out of educational programs and activities these programs and activities may include the coordination and encouragement of and assistance for educational functions and activities support of innovative and exemplary teaching and increasing access to higher education in n through the provision of financial support leadership and professional expertise the establishment of a fund to be used for educational projects or grants throughout f n as well as for the benefit of individual students worthy of scholarship assistance the provision of financial support to supplement the resources available to schools in n in order to preserve maintain and improve education in n the promotion of the development of character integrity leadership and citizenship of students in n the promotion of literacy life skills and family support for education rulings requested ‘ your change in activities purposes and governance as described above will not adversely affect your qualification as a tax exempt_organization described in sec_501 of the code based upon your representations you will be reclassified as a private_foundation under sec_509 of the code your conduct of the activities described above will not constitute an unrelated_trade_or_business under sec_513 of the code law sec_501 of the internal_revenue_code provides for the exemption from federal_income_tax of organizations that are organized and operated exclusively for charitable religious educational or other specified exempt purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that in order to qualify for exemption under code sec_501 an organization must be both organized and operated exclusively for one or more exempt purposes failure to meet either the organizational or operational_test will disqualify an organization from exemption under sec_501 sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if in activities which accomplish one or more exempt purposes under sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose it engages primarily sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for a sec_501 exempt_purpose unless it serves a public rather than a private interest thus it is necessary that the organization establish that it is not operated for the benefit of private individuals sec_1_501_c_3_-1 of the regulations states that the term charitable is used in its generally accepted legal sense the term includes the advancement of education and lessening of the burdens of government sec_509 of the code defines the term private_foundation to mean an organization described in sec_501 other than one that is described in sec_509 or sec_511 of the code imposes a normal_tax and surtax on the unrelated_business_taxable_income defined in sec_512 of organizations exempt from tax under sec_501 of the code sec_512 provides that the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business defined in sec_513 regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business sec_512 of the code excludes from the definition of unrelated_business_taxable_income all dividends interest payments_with_respect_to_securities_loans as defined in sec_512 amounts received or accrued as consideration for entering into agreements to make loans and annuities and all deductions directly connected with such income sec_512 of the code excludes from unrelated_business_taxable_income ail gains or losses from the sale exchange or other_disposition of property other than - a stock_in_trade or other_property of a kind which would properly be includibie in inventory if on hand at the close of the taxable_year or b property_held_primarily_for_sale to customers in the ordinary course of the trade_or_business sec_513 provides that the term unrelated_trade_or_business means in the case of any organization subject_to the tax imposed by sec_511 any trade_or_business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption sec_1_513-1 of the regulations provides that gross_income derives from unrelated_trade_or_business if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted this necessitates an examination of the relationship between the business activities which generate the particular income in question the activities that is of producing or distributing the goods or performing the services involved and the accomplishment of the organization’s exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income further it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one for this relationship to exist the production or the performance of the service from which the gross_income is derived must contribute importantly to the accomplishment of exempt purposes whether the activities productive of gross_income contribute importantly to such purposes depends in each case upon the facts and circumstances involved sec_4942 of the code provides that the term functionally_related_business means - a a trade_or_business which i not an unrelated_trade_or_business as defined in sec_513 or b an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exempt purposes of the organization analysis the facts above show that you are organized and after the election and transfer of student_loan notes to the subsidiary will continue to be operated exclusively for charitable and educational_purposes through your provision of various educational and financial assistance programs and activities see sec_1_501_c_3_-1 of the regulations further based on your representation that you have made the election to terminate your status as a qualified_scholarship funding corporation your change in activities purpose and governance should not adversely affect the carrying out of your charitable purposes you have provided information that you are described in sec_501 of the code and would be described as a private_foundation within the meaning of sec_509 and be subject_to the chapter rules based upon your representation that you have made the election the holding of the senior_stock is a functionally_related_business within the meaning of sec_4942 the information outlined above indicates that you intend to provide a variety of educational programs and services that are substantially related to your exempt purposes see sec_1_513-1 of the regulations accordingly your proposed activities will not constitute an unrelated_trade_or_business within the meaning of code sec_513 the transfer of your assets to the subsidiary in exchange for the senior_stock as well as the subsequent redemption or sale of the stock will constitute a one time sale of the principal asset therefore the modifications of sec_512 and sec_512 apply in this instance to exclude senior_stock dividends and gains and losses from unrelated_business_taxable_income under sec_512 of the code rulings based on your representations and the applicable law we rule as follows the changes in your activities purposes and governance as described above will not adversely affect your tax exempt status under sec_501 of the code you are reclassified as a private_foundation within the meaning of sec_509 of the code your conduct of the activities outlined above will not constitute an unrelated_trade_or_business under sec_513 of the code any changes that may have a bearing upon your tax status should be reported to the ohio tax exempt and government entities te_ge customer service office the mailing address is internal_revenue_service te_ge customer service p o box cincinnati oh the telephone number there is a toll free number pursuant to a power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative we are also sending a copy of this ruling to the ohio te_ge customer service office because this letter could help resolve any questions about your exempt status it should be kept with your permanent records if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter this ruling is directed only to the party that requested the ruling section k of the code provides that it may not be used or cited as precedent thank you for your cooperation sincerely debra j kawecki manager exempt_organizations technical group