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TAX CLINIC

The IRS letter
rulings remind
taxpayers of the
complex regulations
and penalties that
private nonoperating
foundations may

face when making
distributions to
nonpublic charities
and making
(or failing to
timely make)
required yearly

elections.

A third private nonoperating founda- separate annual financial statement audit and Company Foundation for three
tion, “New Foundation,” is a grantmak- for New Foundation that covers the years — the year in which the grants
ing charitable trust recognized as a Sec. Bequest.” are made plus the next two years. Grant
501(c)(3) tax-exempt organization. The To better serve the decedent’s chari- agreements will be entered into to
terms of the trust agreement that created table intent, Family Foundation’s trans- specify how the proposed transfers may
New Foundation are essentially identi- fers to New Foundation will be made be used and require annual reporting
cal to the terms of the agreement that as capital endowment grants. This will on the use of the funds and any income
created Family Foundation. Trustee is “allow the Bequest to be administered generated. Following each proposed
the sole trustee of both Family Founda- and invested within New Foundation, transfer, Family Foundation intends
tion and New Foundation. The taxpayer with its activities separated from the to review the reports from the two
represents that all three foundations are smaller-in-scale grant-making activi- transferee foundations and their overall
effectively controlled by the same per- ties of Family Foundation,” permitting operations to confirm that the funds
sons within the meaning of Regs. Sec. greater flexibility in charitable program- have been used properly.
1.507-3(a)(2)(ii). ing and eliminating additional costs that Family Foundation does not intend
Family Foundation established New Family Foundation would otherwise to distribute all its assets or to inform
Foundation in anticipation of receiving a incur in managing the bequest. the IRS of an intent to terminate its
large bequest, distributed over the course Family Foundation also plans to status as a private foundation under Sec.
of year 2. In year 3, Family Foundation make capital endowment grants to 507(a)(1). It further represents that it
anticipates making a series of transfers Company Foundation and restrict has not engaged, and will not engage,
of at least 80% of Family Foundation’s Company Foundation’s endowment in acts that would give rise to tax under
assets to Company Foundation and New spending to only the annual income Code Chapter 42 (Secs. 4940–4968).
Foundation. The transfers are intended from the endowment, in furtherance Rulings: Noting that the transferee PHOTO BY YULIA NAUMENKO/GETTY IMAGES
to “better facilitate separate and distinct of Company Foundation’s chari- foundations “are not treated as newly
programmatic grantmaking between table purposes. created foundations as a result of [a
the two transferee foundations, increase Family Foundation will exercise ex- Sec.] 507(b)(2) transfer of assets” and
transparency of the foundations’ respec- penditure responsibility over the capital that Family Foundation would be mak-
tive charitable activities, and allow a endowment grants to New Foundation ing Sec. 507(b)(2) transfers to Company

12 January 2023 The Tax Adviser