tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c date contact person identification_number telephone number employer_identification_number number release date uniform issue list numbers legend m n e r i dear we have considered your letter of date as supplemented by your letter of date in which you request rulings on the federal tax consequences of the transactions described below the interested parties the parties interested in this request are m and r m was organized as a nonprofit corporation under state law prior to it is organized exclusively for religious charitable civic educational literary and scientific purposes within the meaning of sec_170 c b and c of the internal_revenue_code m is recognized as exempt from federal_income_tax under sec_501 c and is classified as a private non-operating foundation under sec_509 m accomplishes its purposes by making grants to other charitable and educational organizations in the united_states and in foreign countries the amount of m's excess qualifying distributions carryover within the meaning of sec_53_4942_a_-3 of the foundation and similar excise_taxes regulations from it sec_2011 tax_year to it sec_2012 tax_year was approximately dollar_figure m has been funded almost exclusively by contributions of cash and stock from n a corporation thus n as a substantial_contributor to m within the meaning of sec_507 is a disqualified_person within the meaning of sec_4946 with respect tom n recently reorganized its business operations into two publicly-traded companies resulting in a part of n's business being conducted by e in conjunction with the reorganization n created r to carry out certain philanthropic activities formerly carried out by m r is organized exclusively for religious charitable civic educational literary and scientific purposes within the meaning of sec_170 and sec_501 c r is recognized as exempt from federal_income_tax under sec_501 c and is classified as a private non-operating foundation under sec_509 r intends to provide grants to other organizations in the united_states and in foreign countries to fund activities that are aligned with and are in furtherance of r's charitable purposes the transfer to effectuate the philanthropic purposes of both m and r m has assigned the following grant commitments to r hereinafter the assigned grants m's rights and obligations under a grant agreement between m and grant is an organization described in sec_501 c and is classified as other than private_foundation under sec_509 at the time of the assignment m remained obligated to disburse dollar_figure to m's rights and obligations under a grant agreement between m and i grant i is an organization described in sec_501 c and is classified as other than private_foundation under sec_509 at the time of the assignment m remained obligated to disburse dollar_figure to i in addition m has transferred the following assets tor subject_to the terms and conditions set forth in an endowment grant agreement the endowment agreement cash in the amount of dollar_figure the cash and approximately shares of n stock the shares the cash and the shares make up the grant assets the transfer of the grant assets and the assignment of grant and grant tor make up the transfer the endowment agreement pursuant to the endowment agreement m and r agree that the transfer of the grant assets is intended as an endowment grant within the meaning of sec_53_4945-5 before entering into the endowment agreement m considered the identity prior history and experience of rand its managers in light of that analysis m asserts that it is reasonably assured that r will use the grant assets for proper charitable purposes in support of this ruling_request m and r provided a copy of the endowment agreement executed by their respective corporate presidents m declared that all documents submitted with the ruling_request are true complete and correct under the terms of the endowment agreement r must maintain separate_accounts and records for the grant assets and any income earned thereon r must use the grant assets and earnings thereon only for religious charitable scientific literary or educational_purposes within the meaning of sec_170 c b furthermore r is prohibited from using any portion of the grant assets including any income earned thereon to purchase products or services from n or any of its affiliated entities or from any employee officer or director of n or any of its affiliated entities r shall return or repay to m any grant assets including earnings on such assets if m in its sole discretion determines that r has not performed in accordance with the endowment agreement or if any portion of the grant assets is not used for the purposes permitted under the terms of the endowment agreement furthermore r must return or repay any grant assets including earnings on such assets not expended in accordance with the terms of the endowment agreement within thirty days of the termination of the grant for any reason or of a demand by m for return or repayment of any portion of the grant assets pursuant to the provisions of the endowment agreement r shall not use the grant assets or any income earned thereon to carry on propaganda or otherwise to attempt to influence legislation within the meaning of sec_4945 to influence the outcome of any specific public election or to carry on directly or indirectly any voter registration drive within the meaning of sec_4945 or to undertake any activity for any purpose other than charitable purposes described in sec_170 r may use the grant assets to make a grant a secondary grant to one or more individuals or organizations each a secondary grantee the endowment agreement provides that except for the assigned grants r is under no obligation to make any specific secondary grants and there is no agreement oral or written whereby m may cause the selection of any secondary grantee by r although m and r anticipate that r will enter into secondary grants with a number of m's current grantees except for the assigned grants r will exercise discretion and control_over the secondary grantee selection process and will make such selections independently of m before making any secondary grant r must enter into a written grant agreement memorializing the terms and conditions under which the grant is made and the grant funds are expended with respect to any secondary grant to an organization other than an organization described in sec_4945 r agrees to exercise expenditure_responsibility with respect to such secondary grantee within the meaning of sec_4945 and sec_53_4945-5 including making such reports to the irs on its annual information_return as are required by sec_4945 and sec_53_4945-5 with respect to any secondary grant to an individual for travel study or similar purposes r shall comply with the requirements of sec_4945 and sec_53_4945-4 r must submit an annual report to m at the close of each taxable_year until the grant assets are expended in full the endowment grant is otherwise terminated or m gives r written notice that it may discontinue the reports m will evaluate r's performance under the grant agreement prior to the end of the second succeeding taxable_year following the taxable_year in which the endowment grant is made and pursuant to sec_53_4945-5 give written notice tor only after ascertaining that neither the principal the income from the grant assets nor any equipment purchased with the grant assets has been used for any purpose that would result in liability for tax under sec_4945 r agrees to keep a systematic accounting record of the receipt and disbursement of the grant assets so that such receipts and expenditures are shown separately on r's books_and_records in an easily verifiable form r must keep such records as well as copies of the reports submitted tom and supporting documentation for at least four years after the completion of the use of any portion of the grant assets or m provides notice to r that it may discontinue the reports whichever is earlier m reserves the right to audit r's books_and_records relating to the expenditure of any of the grant assets for no less than four years following the close of r's annual_accounting_period during which the use of the grant assets is completed or m provides notice that r may discontinue submitting annual reports whichever is earlier representations m has not and will not notify the internal_revenue_service the service of its intention to terminate its private_foundation_status prior to or immediately_after_the_transfer m represents that to the best of its knowledge and belief it has not committed willful repeated acts or failures to act nor has it committed any willful or flagrant act or failure to act that would give rise to liability for tax under chapter of the internal_revenue_code the service has not notified m that it is liable for the tax imposed under sec_507 as a result of any such acts or failures to act at the time of the transfer both m and r were governed by a three-member board_of directors and shared a common director this shared director who also served as the president and principal executive officer of both m and r was an employee of n at the time of the transfer in addition all of the other officers and directors of m and rat the time of the transfer were either employed by n or employed by e a wholly-owned subsidiary of n consequently m and r maintain that at the time of the transfer r was effectively controlled within the meaning of sec_1_482-1a by the same person n that effectively controlled m rulings requested the following rulings have been requested the transfer will not adversely affect the tax exempt status of either m or r as an organization described in sec_501 c the transfer qualifies as a transfer of assets described in sec_507 and will neither result in the termination of m's private_foundation_status under sec_507 nor subject m to the tax imposed by sec_507 r will succeed to m's attributes and characteristics described in subparagraphs and of sec_1_507-3 of the income_tax regulations effectuating the transfer and engaging in such actions as are necessary to effectuate the transfer will not constitute an act of self-dealing within the meaning of sec_4941 m may not treat the distribution of the grant assets as a qualifying_distribution described in sec_4942 r will not succeed to any of m's excess qualifying distributions under sec_53 a - e the transfer will not constitute an investment that jeopardizes the carrying out of m's exempt purposes within the meaning of sec_4944 m has met its pregrant inquiry requirements as to r under sec_53_4945-5 m has met the written commitment requirement under sec_53_4945-5 by requiring r to enter into the endowment agreement so long as m takes all reasonable actions to enforce the terms of the endowment agreement the transfer will not be a taxable_expenditure under sec_4945 because m will exercise capital endowment grant expenditure_responsibility over the grant assets transferred to r however m will not be required to exercise expenditure_responsibility with respect to the assigned grants or any secondary grants made by r to secondary grantees the legal accounting and other expenses paid_by m and r to obtain this ruling and to effectuate the transfer if reasonable in amount will not constitute taxable_expenditures under sec_4945 r will receive the benefit of any transitional rules that were applicable to m as a foundation in existence before date the transfer will not constitute a willful and flagrant act or failure to act and will not constitute one in a series of acts or failures to act that would cause m to incur any taxes under chapter of the internal_revenue_code sec_501 a exempts from federal income_taxation organizations described in sec_501 c sec_501 c describes organizations organized and operated exclusively for charitable and other designated exempt purposes sec_507 provides that except as provided in subsection b the status of any organization as a private_foundation shall be terminated only if it notifies the secretary of its intent to accomplish such termination or with respect to such organization there have been either willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter and the secretary notifies such organization that it is liable for the tax imposed by subsection c and either such organization pays the tax or any portion not abated under subsection g or the entire amount of such tax is abated under subsection g sec_507 provides that in the case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_507 imposes a tax on the termination of a private_foundation under the circumstances described in sec_507 the tax is equal to the lesser_of the aggregate tax_benefit resulting from the tax exempt status of the private_foundation and the value of the net assets of such foundation sec_507 defines aggregate tax_benefit as the sum of the following amounts i the aggregate increases in tax under chapter sec_1 and of the internal_revenue_code that would have been imposed on the substantial contributors to the private_foundation if the charitable income estate and gift_tax deductions were disallowed for contributions made after date ii the aggregate increases in tax under chapter that would have been imposed on the private foundation's income for taxable years beginning after date if the foundation had not been exempt under sec_501 c or if deductions under sec_642 had been limited to percent of taxable_income in the case of a_trust and iii interest on the amounts described in items i and ii above from the first date each amount would have been due and payable until the date when the organization ceases to be a private_foundation sec_509 defines the term private_foundation to mean any domestic or foreign organization described in sec_501 c other than an organization described in sec_509 or sec_4941 a imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 d e provides that the term self-dealing includes any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4942 imposes a tax on the undistributed_income_of_a_private_foundation for any taxable_year which has not been distributed by the first day of the second or any succeeding taxable_year following such taxable_year sec_4942 defines undistributed_income for any taxable_year as the amount by which the distributable_amount for such taxable_year exceeds the qualifying distributions made before such time out of such distributable_amount sec_4942 defines distributable_amount as an amount equal to the sum of the minimum_investment_return plus certain other_amounts reduced by the sum of the taxes imposed for the taxable_year under subtitle a and sec_4940 sec_4942 defines qualifying_distribution as any amount including that portion of reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 other than any contribution to i an organization controlled directly or indirectly by the foundation or disqualified persons with respect to the foundation except as provided in paragraph or ii a private_foundation which is not an operating_foundation as described in subsection except as provided in paragraph sec_4942 provides that the term qualifying_distribution includes a contribution to a sec_501 c organization described in paragraph a i or ii if- a not later than the close of the first taxable_year after its taxable_year in which such contribution is received such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying_distribution within the meaning of paragraph or without regard to this paragraph which is treated under subsection h as a distribution out of corpus or would be so treated if such sec_501 organization were a private_foundation which is not an operating_foundation and b the private_foundation making the contribution obtains adequate_records or other_sufficient_evidence from such organization showing that the qualifying_distribution described in subparagraph a has been made by such foundation i r c sec_4942 provides for a carry-over of the amount by which qualifying distributions during the five preceding_taxable_years other than amounts required to be distributed out of corpus under sec_4942 have exceeded the distributable amounts for such years sec_4944 imposes a tax on any amount invested by a private_foundation in a manner that jeopardizes the carrying out of any of the foundation's exempt purposes sec_4945 imposes a tax on each taxable_expenditure of a private_foundation sec_4945 provides that the term taxable_expenditure includes any amount_paid or incurred by a private_foundation as a grant to a private non-operating foundation unless the grantor foundation exercises expenditure_responsibility with respect to such grant in accordance with subsection h sec_4945 provides that the term taxable_expenditure includes any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 sec_4945 provides that the expenditure_responsibility referred to in subsection d means that the private_foundation is responsible to exert all reasonable efforts and to establish adequate procedures- to see that the grant is spent solely for the purpose for which made to obtain full and complete reports from the grantee on how the funds are spent and to make full and detailed reports with respect to such expenditures to the secretary sec_1_501_c_3_-1 provides that for an organization to be exempt as an organization described in sec_501 c it must be both organized and operated exclusively for one or more of the purposes specified in such section sec_1 c -1 c 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 sec_501 c sec_1 c -1 c 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 sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized and operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_507-1 b provides that in order for a private_foundation to terminate its private_foundation_status under sec_507 an organization must submit a statement to the service of its intent to terminate its private_foundation_status under sec_507 such statement must set forth in detail the computation and amount of tax imposed under sec_507 unless the organization requests abatement of such tax pursuant to sec_507 full payment of such tax must be made at the time the statement is filed under sec_507 sec_1_507-1 b provides that if a private_foundation transfers all or part of its assets to one or more other private_foundations pursuant to a transfer described in sec_507 and sec_1_507-3 such transferor foundation will not have terminated its private_foundation_status under sec_507 sec_1 -3 a provides that in the case of a transfer of assets from one private_foundation to another private_foundation pursuant to a liquidation merger redemption recapitalization or other adjustment organization or reorganization including a significant disposition of assets to one or more private_foundations within the meaning of paragraph c the transferee organization shall not be treated as a newly created organization rather the transferee organization shall be treated as possessing those attributes and characteristics of the transferor organization that are described in subparagraphs and of this paragraph sec_1_507-3 provides that except as provided in subdivision ii a transferee organization to which this paragraph a applies will succeed to the aggregate tax_benefit of the transferor organization in an amount equal to the amount of such aggregate tax_benefit multiplied by a fraction the numerator of which is the fair_market_value of the assets less encumbrances transferred to such transferee and the denominator of which is the fair_market_value of the assets of the transferor less encumbrances immediately before the transfer fair_market_value shall be determined as of the time of the transfer the transferor foundation retains that portion of the aggregate tax_benefit not allocated to the transferee foundation sec_1_507-3 provides that notwithstanding subdivision i of this subparagraph a transferee organization which is not effectively controlled within the meaning of sec_1_482-1 a ie sec_1_482-1a directly or indirectly by the same person or persons who effectively control the transferor organization shall not succeed to an aggregate tax_benefit in excess of the fair_market_value of the assets transferred at the time of the transfer sec_1_482-1a provides that the term controlled includes any kind of control direct or indirect whether legally enforceable and however exercisable or exercised it is the reality of the control which is decisive not its form or the mode of its exercise sec_1 -3 a iii provides examples to illustrate the provisions of subparagraph including- example pursuant to a transfer described in sec_507 m a private_foundation transfers all of its assets which immediately prior to the transfers have a fair_market_value of dollar_figure the assets were transferred to the following organizations at the following fair market values determined at the time of the transfer dollar_figure ton a private_foundation dollar_figure to a private_foundation and dollar_figure top an organization described in sec_170 a vi immediately before the transfer m's aggregate tax_benefit was dollar_figure therefore n succeeds tom's aggregate tax_benefit to the extent of dollar_figure dollar_figure x dollar_figure dollar_figure big_number and succeeds to m's aggregate tax_benefit to the extent of dollar_figure dollar_figure x dollar_figure dollar_figure the remaining dollar_figure of m's aggregate tax_benefit is maintained by mas m has not terminated under sec_507 example assume the same facts as in example except that the transfers were made as follows m transferred dollar_figure ton on date dollar_figure top on date and dollar_figure to on date further assume that the fair_market_value of the assets and the aggregate tax_benefit do not change during and that is not effectively controlled directly or indirectly by the same person or persons who effectively control m n succeeds to m's aggregate tax_benefit to the extent of dollar_figure dollar_figure x dollar_figure dollar_figure however since dollar_figure of the remaining dollar_figure dollar_figure- dollar_figure of assets of m was transferred top on date immediately before the transfer to the fair_market_value of the assets held by m is dollar_figure dollar_figure - dollar_figure on the other hand because pis not a private_foundation m's aggregate tax_benefit immediately before the transfer to remains dollar_figure dollar_figure- dollar_figure therefore before applying subdivision ii of this subparagraph would succeed to dollar_figure dollar_figure x dollar_figure dollar_figure of m's aggregate tax_benefit however applying subdivision ii of this subparagraph since m transferred only dollar_figure to shall succeed to only dollar_figure of m's aggregate tax_benefit the remaining dollar_figure dollar_figure- dollar_figure of m's aggregate tax_benefit is retained by mas m has not terminated under sec_507 sec_1_507-3 provides that in the event of a transfer of assets described in sec_507 any person who is a substantial_contributor within the meaning of sec_507 with respect to the transferor foundation shall be treated as a substantial_contributor with respect to the transferee foundation regardless of whether such person meets the dollar_figure-two percent test with respect to the transferee organization at any time sec_1_507-3 provides that if a private_foundation incurs liability for one or more of the taxes imposed under chapter or any penalty resulting therefrom prior to or as a result of making a transfer of assets described in sec_507 to one or more private_foundations in any case where transferee_liability applies each transferee foundation is treated as receiving the transferred assets subject_to such liability to the extent that the transferor foundation does not satisfy such liability sec_1 -3 a provides that except as provided in subparagraph of this paragraph a private_foundation is required to meet the distribution_requirements of sec_4942 for any taxable_year in which it makes a sec_507 transfer of all or part of its net assets to another private_foundation such transfer shall itself be counted toward satisfaction of such requirements to the extent the amount transferred meets the requirements of sec_4942 sec_1_507-3 provides that for purposes of sec_4943 and whenever a private_foundation makes a sec_507 transfer of all or part of its net assets to another private_foundation the applicable_period of time described in sec_4943 or shall include both the period during which the transferor foundation held such assets and the period during which the transferee foundation holds such assets sec_1 -3 a i provides that except as provided in subdivision ii of this subparagraph or subparagraph or of this paragraph whenever a private_foundation makes a transfer of assets described in sec_507 to one or more private_foundations the transferee foundation a will not be treated as being in existence prior to date with respect to any transferred assets b will not be treated as holding the transferred assets prior to date and c will not be treated as having engaged in or become subject_to any transaction lease contract or other obligation with respect to the transferred assets prior to date sec_1 -3 a ii provides that notwithstanding subdivision i of this subparagraph the provisions enumerated in a through g of this subdivision shall apply to the transferee foundation with respect to the assets transferred to the same extent and in the same manner that they would have applied to the transferor foundation had the transfer described in sec_507 not been effected a sec_4940 and the regulations thereunder with respect to basis_of_property b sec_4942 and the regulations thereunder with respect to distributions of income c sec_101 of the tax reform act of stat as amended by sec_1301 and of the tax reform act of stat with respect to the provisions of sec_4941 d sec_101 of the tax reform act of stat with respect to the provisions of sec_4942 but only if the transferor qualified for the application of such section immediately before the transfer and at least percent of the fair_market_value of the net assets of the transferee immediately_after_the_transfer was received pursuant to the transfer e sec_101 through e of the tax reform act of stat with respect to the provisions of sec_4942 f sec_101 of the tax reform act of stat with respect to the provisions of sec_4945 and g sec_1 of the tax reform act of stat with respect to the provisions of sec_508 sec_1 -3 a i provides that if a private_foundation transfers all if its net assets to one or more private_foundations which are effectively controlled within the meaning of sec_1 a ie sec_1_482-1a directly or indirectly by the same person or persons which effectively controlled the transferor private_foundation for purposes of sec_4940 through and sec_507 through such a transferee foundation shall be treated as if it were the transferor however where proportionality is appropriate such a transferee private_foundation shall be treated as if it were the transferor in the proportion which the fair_market_value of the assets less encumbrances transferred to such transferee bears to the fair_market_value of the assets less encumbrances of the transferor immediately before the transfer sec_1 -3 a iii includes the following example example a and bare the trustees of the p charitable_trust a private_foundation and are the only substantial contributors to p on date in order to facilitate accomplishment of diverse charitable purposes a and b create and control the r foundation the s foundation and the t foundation and transfer the net assets of p to r s and t as of the end of p has an outstanding grant to foundation w and has been required to exercise expenditure_responsibility with respect to this grant under sec_4945 and h under these circumstances r s and t shall each be treated as if they are p in the proportion the fair_market_value of the assets transferred to each bears to the fair_market_value of the assets of p immediately before the transfer sec_1_507-3 provides that a transfer of assets is described in sec_507 if it is made by a private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization this shall include any organization or reorganization described in subchapter_c of chapter for purposes of sec_507 the terms other adjustment organization or reorganization shall include any partial_liquidation or any other significant disposition of assets to one or more private_foundations other than transfers for full and adequate_consideration or distributions out of current income sec_1_507-3 provides that unless a private_foundation gives notice pursuant to sec_507 a transfer of assets described in sec_507 will not constitute a termination of the transferor's private_foundation_status under sec_507 sec_1_507-4 provides that private_foundations that make transfers described in sec_507 or are not subject_to the termination_tax imposed under sec_507 with respect to such transfers unless the provisions of sec_507 become applicable sec_53 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 sec_53_4942_a_-3 defines the term qualifying_distribution as any amount including reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 or other than a contribution to a a private_foundation which is not an operating_foundation except as provided in paragraph c of this section or b an organization controlled directly or indirectly by the contributing private_foundation except as provided in paragraph c of this section sec_53_4942_a_-3 provides that if in any taxable_year for which an organization is subject_to the initial excise_tax imposed by sec_4942 there is created an excess of qualifying distributions as determined under subparagraph of this paragraph such excess may be used to reduce distributable amounts in any taxable_year of the adjustment period as defined in subparagraph of this paragraph sec_53_4942_a_-3 provides that an excess of qualifying distributions is created for any taxable_year if i the total qualifying distributions treated as made out of the undistributed_income for such taxable_year or as made out of corpus with respect to such taxable_year exceeds ii the distributable_amount for such taxable_year sec_53_4942_a_-3 provides that the taxable years in the adjustment period are the five taxable years immediately following the taxable_year in which the excess of qualifying distributions is created sec_53_4945-5 provides that under sec_4945 the term taxable_expenditure includes any amount_paid or incurred by a private_foundation as a grant to an organization other than an organization described in sec_509 or unless the private_foundation exercises expenditure_responsibility with respect to such grant in accordance with sec_4945 sec_53_4945-5 provides that a grant by a private_foundation to a grantee organization which the grantee organization uses to make payments to another organization the secondary grantee shall not be regarded as a grant by the private_foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement oral or written whereby such grantor foundation may cause the selection of the secondary grantee by the organization to which it has given the grant for purposes of this subdivision a grant described herein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control in fact over the selection process and actually makes the selection completely independently of the private_foundation sec_53_4945-5 provides that a private_foundation is not an insurer of the activity of the organization to which it makes a grant thus satisfaction of the requirements of sec_4945 and h will ordinarily mean that the grantor foundation will not have violated sec_4945 or a private_foundation will be considered to be exercising expenditure_responsibility under sec_4945 as long as it exerts all reasonable efforts and establishes adequate procedures- i to see that the grant is spent solely for the purpose for which made ii to obtain full and complete reports from the grantee on how the funds are spent and iii to make full and detailed reports with respect to such expenditures to the commissioner sec_53_4945-5 provides that before making a grant to an organization with respect to which expenditure_responsibility must be exercised under this section a private_foundation should conduct a limited inquiry concerning the potential grantee such inquiry should be complete enough to give a reasonable man assurance that the grantee will use the grant for the proper purposes the inquiry should concern itself with matters such as a the identity prior history and experience if any of the grantee organization and its managers and b any knowledge which the private_foundation has based on prior experience or otherwise of or other information which is readily available concerning the management activities and practices of the grantee organization sec_53_4945-5 provides that except as provided in subparagraph of paragraph b in order to meet the expenditure_responsibility requirements of sec_4945 a private_foundation must require that each grant to an organization with respect to which expenditure_responsibility must be exercised be made subject_to a written commitment signed by an appropriate officer director or trustee of the grantee organization such commitment must include an agreement by the grantee- i to repay any portion of the amount granted which is not used for the purposes of the grant ii to submit full and complete annual reports on the manner in which the funds are spent and progress made in accomplishing the purposes of the grant except as provided in paragraph c of this section iii to maintain records of receipts and expenditures and to make its books_and_records available to the grantor at reasonable times and iv not to use any of the funds- a to carry on propaganda or otherwise to attempt to influence legislation b to influence the outcome of any specific public election or to carry on any voter registration drive c to make any grant which does not comply with the requirements of sec_4945 or or d to undertake any activity for any purpose other than one specified in sec_170 the agreement must also clearly specify the purposes of the grant such purposes may include contributing for capital endowment for the purchase of capital equipment or for general support provided that neither the grants nor the income therefrom may be used for purposes other than those described in sec_170 sec_53_4945-5 provides that if a private_foundation makes a grant described in sec_4945 to a private_foundation which is exempt from taxation under sec_501 a for endowment for the purchase of capital equipment or for other capital purposes the grantor foundation shall require reports from the grantee on the use of the principal and the income if any from the grant funds the grantee shall make such reports annually for its taxable_year in which the grant was made and the immediately succeeding two taxable years only if it is reasonably apparent to the grantor that before the end of such second succeeding taxable_year neither the principal the income from the grant funds nor the equipment purchased with the grant funds has been used for any purpose which would result in liability for tax under sec_4945 may the grantor then allow such reports to be discontinued sec_53_4945-5 provides that to satisfy the report making requirements of sec_4945 a granting foundation must provide the required information on its annual information_return required to be filed by sec_6033 for each taxable_year with respect to each grant made during the taxable_year which is subject_to the expenditure_responsibility requirements of sec_4945 such information must also be provided on such return with respect to each grant subject_to such requirements upon which any amount or any report is outstanding at any time during the taxable_year however with respect to any grant made for endowment or other capital purposes the grantor must provide the required information only for any taxable_year for which the grantor must require a report from the grantee under paragraph c of this section sec_53_4945-5 provides that any diversion of grant funds including the income therefrom in the case of an endowment grant by the grantee to any use not in furtherance of a purpose specified in the grant may result in the diverted portion of such grant being treated as a taxable_expenditure of the grantor under sec_4945 sec_53_4945-5 ii provides that in any event a grantor will not be treated as having made a taxable_expenditure under sec_4945 solely by reason of a diversion by the grantee if the grantor has complied with subdivision iii a and b or iv a and b of this subparagraph whichever is applicable sec_53_4945-5 provides that in cases in which the grantor foundation determines that any part of a grant has been used for improper purposes and the grantee has not previously diverted grant funds the foundation will not be treated as having made a taxable_expenditure solely by reason of the diversion so long as the foundation a is taking all reasonable and appropriate steps either to recover the grant funds or to insure the restoration of the diverted funds and the dedication consistent with the requirements of b and of this subdivision of the other grant funds held by the grantee to the purposes being financed by the grant and b withholds any further payments to the grantee after the grantor becomes aware that a diversion may have taken place hereinafter referred to as further payments until it has received the grantee's assurances that future diversions will not occur and required the grantee to take extraordinary precautions to prevent future diversions from occurring sec_53_4945-5 provides that in cases where a grantee has previously diverted funds received from a grantor foundation and the grantor foundation determines that any part of a grant has again been used for improper purposes the foundation will not be treated as having made a taxable_expenditure solely by reason of such diversion so long as the foundation a is taking all reasonable and appropriate steps to recover the grant funds or to insure the restoration of the diverted funds and the dedication consistent with the requirements of b and of this subdivision of other grant funds held by the grantee to the purposes being financed by the grant except that if in fact some or all of the diverted funds are not so restored or recovered then the foundation must take all reasonable and appropriate steps to recover all of the grant funds and b withholds further payments until such funds are in fact so recovered or restored it has received the grantee's assurances that future diversions will not occur and it requires the grantee to take extraordinary precautions to prevent future diversions from occurring sec_53_4945-5 provides that the phrase all reasonable and appropriate steps as used in subdivisions iii and iv of this subparagraph includes legal action where appropriate but need not include legal action if such action would in all probability not result in the satisfaction of execution on a judgment sec_53_4945-5 provides that a failure by the grantee to make the reports required by paragraph c of this section or the making of inadequate reports shall result in the grant's being treated as a taxable_expenditure by the grantor unless the grantor i has made the grant in accordance with paragraph b of this section ii has complied with the reporting requirements contained in paragraph d of this section iii makes a reasonable effort to obtain the required report and iv withholds all future payments on this grant and on any other grant to the same grantee until such report is furnished sec_53_4945-6 includes among the types of expenditures that ordinarily will not be treated as taxable_expenditures under sec_4945 expenditures to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 reasonable expenses with respect to such investments and any payment that constitutes a qualifying_distribution under sec_4942 sec_53_4946-1 provides that for purposes of sec_4941 only the term disqualified_person shall not include any organization that is described in sec_501 c other than an organization described in sec_509 revrul_78_387 c b concerns a private_foundation m which has a carryover of excess qualifying distributions as described in sec_4942 and sec_53_4942_a_-3 m transferred all of its net assets to another private_foundation n in a transfer qualifying under sec_507 m is controlled within the meaning of sec_1_482-1a by the same persons who control n because the transferee foundation n is treated as if it were the transferor foundation m pursuant to sec_1 -3 a i it is held that for purposes of determining its distribution_requirements under sec_4942 n may reduce its distributable_amount by the excess qualifying distributions carryover of m revrul_2002_28 2002_1_cb_941 posits various situations in which a transferor private_foundation transfers all of its assets to one or more private_foundations that are effectively controlled by the same persons that effectively control the transferor in the context of sec_4942 it is concluded that the transfers to the transferee foundations are not treated as qualifying distributions of the transferor foundation where a private_foundation transfers all of its assets to one private_foundation the transferee foundation assumes all obligation with respects to the transferor's undistributed_income within the meaning of sec_4942 if any and reduces its own distributable_amount by the transferor foundation's excess qualifying distributions under sec_4941 i analysis issue whether the transfer of the grant assets would adversely affect the status of either m orr as a tax-exempt_organization described in sec_501 to be described in sec_501 each of m and r must be operated exclusively for exempt purposes within the meaning of sec_1 c -1 c by engaging primarily in activities that accomplish exempt purposes to that end neither m nor b may allow its net_earnings to inure to the benefit of private shareholders or individuals within the meaning of sec_1 c -1 c and neither may serve private interests within the meaning of sec_1 c -1 d ii each of m and r is currently recognized by the service as an organization described in sec_501 c as private non-operating foundations m and r accomplish their respective missions by making grants to other charitable and educational organizations m states that it determined that the transfer of the grant assets to r under the terms of the endowment agreement would further m's charitable purposes such terms require r to use the grant assets solely for charitable purposes described in sec_170 or to return such assets to m furthermore r is forbidden from using the grant assets to purchase products or services from n its affiliates or subsidiaries or any employees officers or directors thereof under these circumstances we do not find that the transfer of the grant assets would result in the inurement of m's net_earnings to the benefit of private shareholders or individuals within the meaning of sec_1 c -1 c cause either m orr to be operated for the benefit of private interests within the meaning of sec_1 c -1 d ii or result in either m orr engaging in activities other than activities in furtherance of an exempt_purpose within the meaning of sec_1 c - c accordingly we conclude that the transfer of the grant assets from m to r under the terms of the endowment agreement will not adversely affect the status of either m or r as a tax exempt_organization described in sec_501 c issue whether the transfer of the grant assets qualifies as a transfer of assets described in sec_507 whether the transfer will result in the termination of m's private_foundation_status under sec_507 and whether the transfer will subject m to the tax imposed under sec_507 under sec_1 -3 c a transfer of assets is described in sec_507 if it is a transfer from one private_foundation to another private_foundation pursuant to a liquidation merger redemption recapitalization or other adjustment organization or reorganization including any organization or reorganization described in subchapter_c of chapter of the internal_revenue_code concerning corporate_distributions and adjustments n reorganized by forming e and transferring to e some of the business activities formerly conducted by n in conjunction with the reorganization of its business activities n created r in order to transfer tor some of the activities currently conducted by m the transfer of the grant assets from m a private_foundation to r a private_foundation was meant to provide r with funds with which to carry out its activities accordingly the transfer of the grant assets is a transfer by a private_foundation to another private_foundation pursuant to an organization or reorganization described in subchapter_c and is therefore a transfer of assets described in sec_507 sec_1_507-1 b provides that when a private_foundation transfers all or part of its assets to one or more other private_foundations pursuant to a transfer described in sec_507 such transferor foundation will not have terminated its private_foundation_status under sec_507 in addition sec_1_507-3 provides that unless a private_foundation voluntarily gives notice pursuant to sec_507 a transfer of assets described in sec_507 will not constitute termination of the transferor's private_foundation_status under sec_507 m_specifically states that it has not given notice nor will it give notice to the service of an intention to terminate its private_foundation_status in accordance with sec_507 accordingly m has not voluntarily terminated its private_foundation_status m represents that it has not engaged in acts or failures to act that would give rise to liability under chapter of the internal_revenue_code based upon m's representation m's private_foundation_status has not been terminated involuntarily as m's status as a private_foundation has not been terminated voluntarily or involuntarily and as m's status as a private_foundation will not be terminated as a result of the transfer of the grant assets m will not be subject_to the tax imposed upon such terminations under sec_507 issue whether r will succeed tom's attributes and characteristics described in sec_1 a and under sec_1 -3 a in the case of a transfer of assets from one private_foundation to another private_foundation described in sec_507 the transferee organization is treated as possessing those attributes and characteristics of the transferor organization that are described in sec_1_507-3 and as discussed above the transfer of the grant assets is a transfer described in sec_507 therefore sec_1_507-3 applies sec_1_507-3 provides that when the transferee and transferor organizations are effectively controlled within the meaning of sec_1_482-1a by the same persons the transferee organization succeeds to the aggregate tax_benefit of the transferor in an amount equal to the amount of such aggregate tax_benefit within the meaning of sec_507 multiplied by a fraction the numerator of which is the fair_market_value of the assets less encumbrances transferred and the denominator of which is the fair_market_value of the assets of the transferor less encumbrances immediately before the transfer at the time of the transfer r and m were controlled by the same persons therefore r will succeed to a fraction of m's aggregate tax_benefit calculated as described above as m is not terminating under sec_507 and will continue as a private non-operating foundation after the transfer m will retain the portion of its aggregate tax_benefit that is not passing to b see sec_1_507-3 examples and furthermore in the event of a transfer of assets described in sec_507 sec_1_507-3 provides that any person who is a substantial_contributor within the meaning of sec_507 with respect to the transferor foundation will be treated as a substantial_contributor with respect to the transferee foundation therefore any person who is a disqualified_person with respect m at the time of the transfer will be considered a substantial_contributor with respect to r as a result of the transfer finally if a private_foundation incurs liability for one or more of the taxes imposed under chapter or any penalty resulting therefrom prior to or as a result of making a transfer of assets described in sec_507 in any case where transferee_liability applies sec_1_507-3 provides that the transferee foundation will be treated as receiving the transferred assets subject_to such liability to the extent the transferor foundation does not satisfy such liability therefore should m have incurred liability for any chapter tax prior to or as a result of the transfer r will be treated as receiving the grant assets subject_to such liability to the extent that m does not satisfy the liability where transferee_liability applies issue whether effectuating the transfer and engaging in such actions as are necessary to effectuate the transfer would constitute an act of self-dealing within the meaning of sec_4941 sec_4941 a imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation under sec_53 d -2 f the transfer of the assets of a private_foundation to a disqualified_person or the use of such assets by or for the benefit of a disqualified_person constitutes an act of self-dealing however under sec_53_4946-1 a for purposes of sec_4941 the term disqualified_person does not include an organization described in sec_501 aside from an organization described in sec_509 the transfer resulted in the transfer of the assets of m a private_foundation tor an organization described in sec_501 c as an organization described in sec_501 c r is not a disqualified_person with respect to m for purposes of sec_4941 therefore the transfer does not constitute a transfer of the assets of a private_foundation to a disqualified_person accordingly the transfer does not constitute an act of self-dealing within the meaning of sec_4941 issue whether m may treat the distribution of the grant assets as a qualifying_distribution under sec_4942 m and rare private non-operating foundations sec_4942 requires private non-operating foundations to make a certain amount of qualifying distributions each year or incur a tax qualifying distributions generally include grants to public_charities and private operating_foundations that are not controlled by the grantor private_foundation and direct expenditures_for charitable purposes sec_1 -3 a provides generally that a private_foundation making a transfer described in sec_507 must satisfy its distribution_requirements under sec_4942 for the taxable_year in which the transfer is made it further provides that the transfer will count as a distribution in satisfaction of the transferor foundation's distribution requirement under sec_4942 subject_to the provisions of sec_4942 under sec_4942 and sec_53_4942_a_-3 a grant by a private non operating_foundation to another private non-operating foundation or to another organization controlled by disqualified persons with respect to the transferor is not treated as a qualifying_distribution by the transferor foundation for purposes of sec_4942 except to the extent that the transferee makes one or more distributions that would be qualifying distributions under sec_4942 prior to the close of the transferee's first taxable_year following the taxable_year in which it received the transfer and the distributions are treated as being made out of corpus since the transfer of the grant assets to r is intended as an endowment grant m does not anticipate that r will redistribute the full amount of the assets received from m within the time period and in the manner required by sec_4942 therefore m may not treat the transfer of the grant assets as a qualifying_distribution under sec_4942 issue whether r may use any of m's excess qualifying distributions carryover to reduce its distributable_amount m had an excess qualifying distributions carryover from it sec_2011 tax_year to it sec_2012 tax_year where a private_foundation that has excess qualifying distributions distributes all of its net assets to one or more private_foundations controlled by the same persons who control the transferor foundation the transferee foundation s may make use of the transferor's carryover see revrul_78_387 revrul_2002_28 and sec_1_507-3 while m and r were both controlled by n at the time of the transfer m did not distribute a of its net assets in a transfer qualifying under sec_507 but only a part of its net assets therefore because m did not distribute all of its net assets to r b may not use any of m's excess qualifying distributions carryover to reduce its distributable_amount under sec_4942 proportionality is appropriate where all the net assets are transferred to two or more private_foundations but not where only part of the net assets is transferred issue whether the transfer will constitute an investment that jeopardizes the carrying out of exempt purposes within the meaning of sec_4944 sec_4944 imposes an excise_tax on any amount invested by a private_foundation in a manner that jeopardizes the carrying out of the foundation's exempt purposes pursuant to the transfer m made an outright assignment of its rights and obligations under grant and grant to r in addition m made a direct grant of the grant assets to r in the form of an endowment grant the transfers were made to accomplish m's exempt mission in the aftermath of the reorganization of n's business operations and to endow r so that it can pursue its exempt mission except for a contingent right to recover a portion of the grant assets if r were to violate the terms of the endowment agreement m retained no interest in the grant assets the income therefrom or any assets that r may acquire with the grant assets because m made the transfer without consideration and without any expectation of repayment the production_of_income or the appreciation of property the transfer does not constitute an investment of an amount in a manner to jeopardize the carrying out of exempt purposes within the meaning of sec_4944 issue whether m has met its pregrant inquiry requirements as to r under sec_53_4945-5 sec_53_4945-5 describes the limited inquiry that a private_foundation must conduct concerning the potential grantee before making a grant to an organization with respect to which expenditure_responsibility must be exercised such inquiry should concern itself with matters such as a the identity prior history and experience if any of the grantee organization and its managers and b any knowledge which the private_foundation has based on prior experience or otherwise of or other information which is already available concerning the management activities and practices of the grantee organization and should be complete enough to give a reasonable person assurance that the grantee will use the grant assets for the proper purposes m represents that it conducted a pregrant inquiry into the identity prior history and experience of r and its managers based on a review of all information that was readily available to m concerning the management activities and practices of r at the time of the transfer all of the officers and directors m and r were either employees of n or of e a wholly owned subsidiary of n thus provided that the findings of m's inquiry would cause a reasonable person to conclude that r will use the grant assets for the proper purposes m will have met its obligation to conduct a pregrant inquiry under sec_53_4945-5 issue whether m has met the written commitment requirement under sec_53_4945-5 by requiring r to enter into the endowment agreement sec_53_4945-5 provides that in order to meet the expenditure_responsibility requirements of sec_4945 a private_foundation must require that each grant to an organization with respect to which expenditure_responsibility must be exercised be made subject_to a written commitment that clearly specifies the purposes of the grant and that includes an agreement by the grantee- i to repay any portion of the amount granted which is not used for the purposes of the grant ii to submit full and complete annual reports on the manner in which the funds are spent and progress made in accomplishing the purposes of the grant iii to maintain records of receipts and expenditures and to make its books_and_records available to the grantor at reasonable times and iv not to use any of the funds- a to carry on propaganda or otherwise to attempt to influence legislation b to influence the outcome of any specific public election or to carry on any voter registration drive c to make any grant which does not comply with the requirements of sec_4945 or or d to undertake any activity for any purpose other than one specified in sec_170 the written commitment must be signed by an appropriate officer director or trustee of the grantee foundation as the copy of the endowment agreement includes the provisions described in sec_53 b and provided that r's president as signer on behalf of r qualifies as an appropriate officer director or trustee m has met the written commitment requirement under sec_53 b issue whether the transfer is a taxable_expenditure under sec_4945 if m exercises capital endowment grant expenditure_responsibility over the assets transferred to r under the endowment agreement but does not exercise expenditure_responsibility with respect to the assigned grants or with respect to any secondary grants made by r to secondary grantees using the grant assets sec_4945 imposes a tax on each taxable_expenditure of a private_foundation under sec_4945 the term taxable_expenditure includes any amount_paid or incurred by a private_foundation as a grant to an organization other than a public charity or exempt_operating_foundation unless the private_foundation exercises expenditure_responsibility with respect to such grant in accordance with sec_4945 under sec_4945 a private_foundation will be considered to be exercising expenditure_responsibility as long as it exerts all reasonable efforts and establishes adequate procedures to see that the grant is spent solely for the purpose for which made to obtain full and complete reports from the grantee on how the funds are spent and to make full and detailed reports with respect to such expenditures to the commissioner the transfer of the grant assets from m a private_foundation to r a private_foundation would be considered a taxable_expenditure described in sec_4945 unless m exercises expenditure_responsibility with respect to the grant assets in accordance with sec_4945 m will be considered to have exercised expenditure_responsibility in accordance with sec_4945 if first it has made the pregrant inquiry described in sec_53_4945-5 second it has entered into a written grant agreement meeting the requirements of sec_53_4945-5 third it requires reports from ron its use of the grant assets that meet the grantee reporting requirements of sec_53_4945-5 fourth it makes reports to the service meeting the requirements of sec_53 d and fifth in the event r diverts any of the grant assets including the income therefrom to any use not in furtherance of a purpose specified in the endowment agreement or fails to make the reports required by sec_53_4945-5 takes reasonable action in accordance with sec_53_4945-5 issue above addresses the pregrant inquiry requirement under sec_53_4945-5 issue above addresses the written commitment requirement under sec_53_4945-5 under sec_53_4945-5 if a private_foundation makes a grant described in sec_4945 to another private_foundation and the purpose of the grant is to increase the grantee's endowment the grantor foundation must require reports from the grantee concerning the use of the principal and any income derived from the grant funds the grantee must make such reports annually for its taxable_year in which the grant was made and for the immediately succeeding two taxable years thereafter the grantor may cease requiring such reports if it is reasonably apparent to the grantor that before the end of such second succeeding taxable_year neither the principal the income from the grant funds nor the equipment purchased with the grant funds has been used for any purpose which would result in liability for tax under sec_4945 the endowment agreement requires r as grantee to submit an annual report to m as of the close of its taxable_year in which the grant is made and all such subsequent periods until the grant assets are expended in full the grant is otherwise terminated or m has provided r with written notice that r may discontinue such reports under the conditions described in sec_53 c m represents that it will make the required reports to the service with respect to the transfer of the grant assets as required by sec_53_4945-5 therefore in light of the above we conclude that the transfer of the grant assets to r would not be a taxable_expenditure within the meaning of sec_4945 so long as m obtains reports from ron its use of the grant assets in accordance with sec_53_4945-5 submits annual reports to the service in accordance with sec_53_4945-5 and takes reasonable action regarding any noncompliance with the endowment agreement in accordance with sec_53_4945-5 under sec_53_4945-5 a grant by a private_foundation to a grantee organization which the grantee organization uses to make payments to another organization a secondary grantee is not regarded as a grant by the grantor foundation to the secondary grantee if the grantor foundation does not earmark the use of the grant for any named secondary grantee and there exists no agreement whereby such grantor foundation may cause the selection of the secondary grantee by the grantee organization m represents that it has not earmarked the use of the grant assets for any named secondary grantee and there exists no agreement oral or written whereby m may cause the selection of a secondary grantee by r rather the endowment agreement assigns the duty to exercise discretion and control_over the secondary grantee selection process to r and requires r to enter into a grant agreement with each secondary grantee and to exercise expenditure_responsibility with respect to any secondary grant therefore m will not be treated as making a grant to any secondary grantee and need not exercise expenditure_responsibility with respect to any secondary grant made by r while a private_foundation cannot assign away its expenditure_responsibility required under sec_4945 the recipients under grant and grant are both organizations described in sec_501 and are classified as public_charities under sec_509 accordingly neither grant nor grant imposed upon man obligation to exercise expenditure_responsibility m assigned all of its obligations responsibilities and duties with respect to the assigned grants to r m and r have not presented any facts that would support the conclusion that grant or grant should become subject_to expenditure_responsibility by m where no such responsibility existed prior to the assignment of those grants to r accordingly m is not required to exercise expenditure_responsibility with respect to the assigned grants issue whether the legal accounting and other expenses paid_by m and r to obtain this ruling and to effectuate the transfer if reasonable in amount will constitute taxable_expenditures under sec_4945 under d any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 is a taxable_expenditure subject_to tax under sec_4945 under sec_53_4945-6 reasonable expenses with respect to program-related investments and other investments and qualifying distributions under sec_4942 are not treated as taxable_expenditures under sec_4945 conversely under sec_53_4945-6 any expenditures_for unreasonable administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures under sec_4945 the facts indicate that the transfer is a reasonable transaction for legitimate stated purposes therefore the administrative expenses to obtain the ruling and effectuate the transfer to the extent the amounts are reasonable will not constitute taxable_expenditures under sec_4945 issue whether r will receive the benefit of any transitional rules that are applicable tom as a foundation in existence before date m was organized prior to and funded in part with shares of n stock the grant assets that m transferred to r include shares of n stock under sec_1 -3 a i the general_rule with respect to the chapter consequences of a sec_507 transfer is that the transferee foundation will not be treated as having been in existence before date with respect to the transferred assets will not be treated as having held the transferred assets before january and will not be treated as having engaged in or become subject_to any transaction lease contract or other obligation with respect to the transferred assets before date however sec_1_507-3 provides that this general_rule does not apply to the special rules or saving provisions contained in sec_4940 relating to basis_of_property sec_4942 relating to distributions of income and sec_101 of the tax reform act of under issue above we concluded that the transfer of the grant assets from m to r is a transfer of assets described in sec_507 therefore r will receive the benefits of the saving provisions or provisional rules described in sec_1_507-3 that would have applied tom with respect to the transferred assets had the transfer not been effected issue whether the transfer will not constitute a willful and flagrant act or failure to act or one in a series of acts or failures to act that would cause m to incur any taxes under chapter of the internal_revenue_code the status of an organization as a private_foundation may be involuntarily terminated under sec_507 if with respect to the organization there have been either willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter issue addresses the application of sec_4941 to the transfer issue addresses the application of sec_4944 to the transfer issue addresses the application of sec_4945 in connection with m's obligations under sec_53_4945-5 sec_53_4945-5 d and e furthermore m represents that to the best of its knowledge and belief it has not committed willful repeated acts or failures to act nor has it committed any willful or flagrant act or failure to act that would give rise to liability for tax under chapter of the internal_revenue_code the service has not notified m that it is liable for the tax imposed under sec_507 as a result of any such acts or failures to act consequently with respect to the issues discussed above the transfer will not constitute either a willful repeated act or failure to act or a willful and flagrant act or failure to act within the meaning of sec_507 conclusions in light of the foregoing we rule as follows the transfer will not adversely affect the tax exempt status of either m or r as an organization described in sec_501 the transfer qualifies as a transfer of assets described in sec_507 accordingly the transfer will neither result in the termination of m's private_foundation_status under sec_507 nor cause m to be subject_to the tax imposed under sec_507 r will succeed tom's attributes and characteristics described in sec_1_507-3 and including a fraction of m's aggregate tax_benefit as determined under sec_1_507-3 effectuating the transfer and engaging in such actions as are necessary to effectuate the transfer will not constitute an act of self-dealing within the meaning of sec_4941 m may not treat the transfer as a qualifying_distribution within the meaning of sec_4942 r may not use m's excess qualifying distributions as defined in sec_53_4942_a_-3 to reduce its distributable_amount under sec_4942 the transfer will not constitute the investment of an amount in a manner as to jeopardize the carrying out of exempt purposes within the meaning of sec_4944 m has met its pregrant inquiry requirement under sec_53_4945-5 so long as the findings of such inquiry would have caused a reasonable person to conclude that r will use the grant assets for the proper purposes m has met the written commitment requirement under sec_53_4945-5 by requiring r to enter into the endowment agreement the transfer will not be a taxable_expenditure within the meaning of sec_4945 so long as m obtains reports from r on its use of the grant assets in accordance with sec_53_4945-5 submits annual reports to the service in accordance with sec_53_4945-5 d and takes reasonable action regarding any noncompliance with the endowment agreement in accordance with sec_53_4945-5 however m need not exercise expenditure_responsibility over the assigned grants or over any secondary grant made by r using the grant assets the legal accounting and other expenses paid_by m and r to obtain this ruling and to effectuate the transfer if reasonable in amount will not constitute taxable_expenditures within the meaning of sec_4945 with respect to the grant assets r will receive the benefit of any transitional rules as provided under sec_1 -3 a ii that may be applicable to m as a foundation in existence before date with respect to the internal_revenue_code provisions and regulations promulgated thereunder as addressed in this letter the transfer will not constitute either a willful repeated act or failure to act or a willful and flagrant act or failure to act within the meaning of sec_507 this ruling will be made available for public inspection under sec_6110 after certain deletions of identifying information are made for details see enclosed notice 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 if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_611 o k of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representatives sincerely mary jo salins acting manager eo technical enclosure notice


office_of_chief_counsel internal_revenue_service memorandum number release date cc intl b02 ktholman filen-128339-07 uilc date date to ------------------ chief business adjustment section se w cas am ppg b from phyllis e marcus chief international branch cc intl b02 subject legality of abatement of civil penalties under sec_6038 this is in response to your request that we provide advice as to whether the same criteria used for a reasonable_cause determination made by accounts management am for abatement of the sec_6651 failure_to_file_penalty with respect to a late form_1120 can be used for the abatement of the sec_6038 civil penalty with respect to a late form_5471 background sec_6012 of subchapter_a of chapter requires every corporation subject_to taxation under subtitle a to file a return with respect to income taxes form_1120 is used for corporate_income_tax reporting and to comply with sec_6012 all domestic corporations generally must file form_1120 sec_6651 imposes a penalty for failure_to_file any return on the date prescribed including any extension of time for filing unless it is shown that the failure is due to reasonable_cause and not due to willful neglect form_5471 is a return used by certain u s citizens and residents who are officers directors or shareholders in certain foreign_corporations in order to satisfy their reporting obligations under sec_6038 and sec_6046 and the related regulations form_5471 is used for information reporting not tax reporting dollar penalties and penalties of reduced foreign tax_credits are imposed under sec_6038 and c for failure to filen-128339-07 file the information required by sec_6038 within the time prescribed sec_6038 c provides that for purposes of the sec_6038 and c penalties the time prescribed under sec_6038 to furnish information and the beginning of the day period after notice by the secretary shall be treated as being not earlier than the last day on which as shown to the satisfaction of the secretary reasonable_cause existed for failure to furnish such information sec_6038 does not include a provision defining reasonable_cause for failure to furnish the required information within the time prescribed analysis reasonable_cause is based on all the facts and circumstances in each situation and allows the service to provide relief from a penalty that would otherwise be assessed relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations see irm nonassertion or abatement of civil penalties based on reasonable_cause must be made in a consistent manner see irm the language of reasonable_cause provisions vary some penalty provisions also require evidence that the taxpayer acted in good_faith eg sec_6664 or that the taxpayer’s failure to comply with the law was not due to willful neglect eg sec_6651 the sec_6038 reasonable_cause provision does not include the additional requirement and not due to willful neglect that is part of the sec_6651 reasonable_cause provision failure_to_file a form_1120 within the prescribed time ordinarily generates a sec_6651 penalty unless the taxpayer satisfies the applicable reasonable_cause standard as noted above sec_6651 imposes a penalty unless it is shown that the failure is due to reasonable_cause and not due to willful neglect sec_301_6651-1 discusses a showing of reasonable_cause for purposes of the failure_to_file_penalty and provides that if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time then the delay is due to reasonable_cause failure_to_file a form_5471 information_return generates penalties under sec_6038 neither the statute nor the regulations under sec_6038 defines reasonable_cause for failure to timely file a form_5471 irm as well as other analogous regulations eg sec_301_6651-1 suggest standards for evaluating reasonable_cause irm provides factors to consider to determine whether the taxpayer exercised ordinary business care and prudence those factors include taxpayers’ reasons compliance history length of time circumstances beyond the taxpayers control and in some cases ignorance of the law or inability to get records it is our understanding that am’s decision tree for imposing penalties for late filing of form_1120 is based upon such factors the reasonable_cause standard mandated by sec_6651 requires the taxpayer to affirmatively establish that the failure was due to reasonable_cause and not willful filen-128339-07 neglect although taxpayers are not required to demonstrate that failure_to_file was not due to willful neglect for form_5471 the considerations eg exercise of ordinary business care and prudence discussed above would constitute valid considerations for abating a failure_to_file timely forms also there should be consistency in applying the penalty if a taxpayer failed to file both its form_1120 and the form_5471 conclusion we conclude there is no legal rule or internal policy prohibiting am from using the same criteria to abate the sec_6038 penalty for a late filing of form_5471 where am has abated the sec_6651 failure_to_file_penalty for the late form_1120 using the reasonable_cause criteria in irm also there is no legal reason why the same criteria could not be used even where the form_1120 was timely filed but the form_5471 was not the irrelevance of reasonable_cause with respect to one form does not preclude a reasonable_cause determination with respect to the other form thus for example if the form_1120 was timely filed but the form_5471 was not a reasonable_cause determination may be made with respect to the failure_to_file form_5471 even though reasonable_cause is irrelevant with respect to the timely filed form_1120