Splitting a Foundation Into Two Charitable Trusts

No termination tax. The proposed transfers of the original PF’s assets qualify as an “adjustment, organization or reorganization” under IRC 507(b)(2), meaning the new PFs won’t be treated as “newly created organizations” under Section 507(b)(2), which results in no termination tax imposed under on the original PF under Section 507(c) (pursuant to Treasury Regulations Section 1.507-4(b)). The transfers qualified as Section 507(b)(2) transfers because they were made to other PFs and: (1) no consideration was received; (2) no current income was transferred; and (3) the original PF made a “significant disposition” its assets (complying with Treas. Regs. Section 1.507-3(c)(1) and (c)(2)). A “significant disposition of assets” is defined under Treas. Regs. Section 1.507-3(c)(2)), as including a transfer where the aggregate fair market value of the transferred assets exceeds more than 25% of the original PF’s assets (as of the first day of the tax year when the transfers occur). Further, the original PF’s status hasn’t been terminated by its notice to the Secretary of intent to terminate or certain willful acts giving rise to liability for excise taxes under Chapter 42 (both pursuant to Section 507 (a)).

No net investment income. Because the transfers constitute Section 507(b)(2) transfers, they’re not considered investments of the original PF under Section 4940. Therefore, the transfers won’t give rise to net investment income (including capital gains net income) and won’t result in imposition of tax under Section 4940 (Revenue Ruling 2002-282002-1 C.B. 941 states that Section 507(b)(2) transfers aren’t considered “investments” for purposes of Section 4940).

No self-dealing. Even though the trustees of the new PFs are disqualified persons as to the original PF, the original PF’s actions in conjunction with the transfers (effectuating the transfers and their payment of reasonable expenses related to the transfers and the PLR request) aren’t considered self-dealing. Section 4941(a) imposes excise taxes on self-dealing between a disqualified person and a PF; under Treas. Regs. Section 53.4946-1(a)(8), for purposes of Section 4941, a “disqualified person” doesn’t include a Section 501(c)(3) entity, so no self-dealing has occurred as a result of the transfers, provided that the new PFs receive Section 501(c)(3) status.

No investments jeopardizing charitable purposes. The transfers don’t constitute investments that jeopardize the charitable purposes of the PF under IRC Section 4944 because the transfers to other PFs don’t constitute “investments” (Revenue Ruling 2002-28 states that Section 507(b)(2) transfers aren’t considered “investments” for purposes of Section 4944).

Expenses aren’t taxable expenditures. The reasonable legal, accounting and other expenses paid by the original PF in connection with obtaining the PLR don’t constitute taxable expenditures under IRC Section 4945 because the PF demonstrated that expenses were paid or incurred with a good faith belief that they were reasonable and done with ordinary business care and prudence (as required under Treas. Regs. Section 53.4945-6(b)(2)).

Transfers qualify as charitable grants under certain conditions. The transfers qualified as charitable grants (that is, not considered taxable expenditures) under IRC 4945(d)(4), provided that: (1) the original PF exercises “expenditure responsibility” over the grants; and (2) the new PFs ultimately receive Section 501(c)(3) status. Treas. Regs. Section 53.4945-6(c)(3) provides that a transfer of assets pursuant to Section 507(b)(2) to a Section 501(c)(3) organization won’t be a taxable expenditure under Section 4945. But if not all of the PF’s assets are disposed of (as is the case here), the old PF must exercise expenditure responsibility over the grants (see Treas. Regs. Section 1.507-3(a)(9)) to qualify them as charitable grants.

No investments jeopardizing charitable purposes. The transfers don’t constitute investments that jeopardize the charitable purposes of the PF under IRC Section 4944 because the transfers to other PFs don’t constitute “investments” (Revenue Ruling 2002-28 states that Section 507(b)(2) transfers aren’t considered “investments” for purposes of Section 4944).

Expenses aren’t taxable expenditures. The reasonable legal, accounting and other expenses paid by the original PF in connection with obtaining the PLR don’t constitute taxable expenditures under IRC Section 4945 because the PF demonstrated that expenses were paid or incurred with a good faith belief that they were reasonable and done with ordinary business care and prudence (as required under Treas. Regs. Section 53.4945-6(b)(2)).

Transfers qualify as charitable grants under certain conditions. The transfers qualified as charitable grants (that is, not considered taxable expenditures) under IRC 4945(d)(4), provided that: (1) the original PF exercises “expenditure responsibility” over the grants; and (2) the new PFs ultimately receive Section 501(c)(3) status. Treas. Regs. Section 53.4945-6(c)(3) provides that a transfer of assets pursuant to Section 507(b)(2) to a Section 501(c)(3) organization won’t be a taxable expenditure under Section 4945. But if not all of the PF’s assets are disposed of (as is the case here), the old PF must exercise expenditure responsibility over the grants (see Treas. Regs. Section 1.507-3(a)(9)) to qualify them as charitable grants.

Expenses aren’t taxable expenditures. The reasonable legal, accounting and other expenses paid by the original PF in connection with obtaining the PLR don’t constitute taxable expenditures under IRC Section 4945 because the PF demonstrated that expenses were paid or incurred with a good faith belief that they were reasonable and done with ordinary business care and prudence (as required under Treas. Regs. Section 53.4945-6(b)(2)).

Transfers qualify as charitable grants under certain conditions. The transfers qualified as charitable grants (that is, not considered taxable expenditures) under IRC 4945(d)(4), provided that: (1) the original PF exercises “expenditure responsibility” over the grants; and (2) the new PFs ultimately receive Section 501(c)(3) status. Treas. Regs. Section 53.4945-6(c)(3) provides that a transfer of assets pursuant to Section 507(b)(2) to a Section 501(c)(3) organization won’t be a taxable expenditure under Section 4945. But if not all of the PF’s assets are disposed of (as is the case here), the old PF must exercise expenditure responsibility over the grants (see Treas. Regs. Section 1.507-3(a)(9)) to qualify them as charitable grants.

Transfers qualify as charitable grants under certain conditions. The transfers qualified as charitable grants (that is, not considered taxable expenditures) under IRC 4945(d)(4), provided that: (1) the original PF exercises “expenditure responsibility” over the grants; and (2) the new PFs ultimately receive Section 501(c)(3) status. Treas. Regs. Section 53.4945-6(c)(3) provides that a transfer of assets pursuant to Section 507(b)(2) to a Section 501(c)(3) organization won’t be a taxable expenditure under Section 4945. But if not all of the PF’s assets are disposed of (as is the case here), the old PF must exercise expenditure responsibility over the grants (see Treas. Regs. Section 1.507-3(a)(9)) to qualify them as charitable grants.