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Foundation and New Foundation, 4944 because they would be given as nonoperating foundation (“Foundation”)
the IRS concluded that the transferee grants for capital endowments to further for making an election under Regs. Sec.
foundations would not be considered charitable purposes and thus would 53.4942(a)-3(c)(2)(iv) to treat amounts
newly created. not constitute investments. Similarly, it received from another private nonop-
Noting that Family Foundation because the proposed transfers are grants erating foundation as distributions out
does not intend to distribute all of its rather than income-producing invest- of corpus.
assets or to inform the IRS of an intent ments, they would not generate any net Facts: Both Foundation and the
to terminate its status as a private foun- investment income that would be subject grantor (X) are private nonoperating
dation under Sec. 507(a)(1), the IRS to the Sec. 4940 excise tax. foundations under Secs. 509(a) and
concluded that the proposed transfers The IRS also determined that the 4942(j)(3). X routinely makes grants to
would not cause Family Foundation’s proposed transfers would not be considered Foundation under agreements that require
termination as a private foundation taxable expenditures under Sec. 4945 “as Foundation to distribute the contributions
under Sec. 507(a) or generate liability long as Family Foundation exercises expen- within 12 months of the end of the year in
for termination tax under Sec. 507(c). diture responsibility over the transfers in which X’s contributions are made. In years
Similarly, because Family Foundation accordance with [Sec.] 4945(h) and [Regs. 1 and 2, the grant agreements required
would not be transferring all of its net Sec.] 53.4945-5(c)(2).” Family Founda- Foundation to elect under Regs. Sec.
assets in making the proposed transfers, tion represents that it would exercise ex- 53.4942(a)-3(c)(2)(iv) to treat the grant
the IRS concluded that the two trans- penditure responsibility during the year amounts received from X as distributions
feree foundations would not be treated of the transfer and at least the following out of corpus.
as if they were Family Foundation two tax years; therefore, the proposed Foundation relied on its first tax ser-
with respect to the proposed transfers. transfers would not be considered tax- vice provider to make these elections but,
Further, the IRS ruled that, based on able expenditures, the IRS ruled. In so when it changed tax advisers, discovered
Family Foundation’s representation that ruling, the IRS confirmed that because that the first adviser had failed to make
all three of the foundations were effec- Family Foundation’s grants to New the elections. These facts were confirmed
tively controlled by the same persons, Foundation and Family Foundation in an affidavit stating that the first adviser
the two transferee foundations each are capital endowment grants, Family was to complete the returns and elections.
would succeed to a portion of Family Foundation would not need to exercise Foundation promptly sought professional
Foundation’s aggregate tax benefit in expenditure responsibility over those advice on how to correct the oversight.
proportion to the Family Foundation grants in perpetuity. (Normally, a private Ruling: The IRS granted relief under
assets they received, pursuant to Regs. foundation must exercise expenditure Regs. Sec. 301.9100-3, determining that
Secs. 1.507-3(a)(1), (2)(ii), and (2)(iii). responsibility until the grant funds are Foundation “acted reasonably and in good
Noting that both Company expended in full or the grant is other- faith” because it relied in good faith on a
Foundation and New Foundation are wise terminated.) qualified tax professional in seeking advice
Sec. 501(c)(3) organizations, the IRS Finally, the IRS considered whether, relating to the election, expecting that
concluded that the proposed transfers following the proposed transfers, any the first adviser would make the elections
would not constitute transfers to dis- part of Family Foundation’s excess consistent with the grant agreements,
qualified persons that would violate the qualifying distribution carryover would and because it requested relief before the
self-dealing prohibition of Sec. 4941. transfer to New Foundation or Com- IRS discovered that the election had not
Noting that Family Foundation pany Foundation. The IRS concluded been made.
plans to make capital endowment that because neither of the transferee
grants to both transferee foundations foundations would be treated as Family Implications
and does not plan to request records Foundation, no part of Family Founda- Together, the above IRS letter rulings re-
from the transferees showing that they tion’s excess qualifying distribution mind taxpayers of the complex regulations
have made distributions from corpus in carryover would transfer to either trans- and penalties that private nonoperating
connection with the transfers, the IRS feree foundation. foundations may face when making distri-
concluded that the proposed transfers butions to nonpublic charities and mak-
would not constitute qualifying distri- Extension granted to elect ing (or failing to timely make) required
butions under Sec. 4942(g)(3). to treat grants received as yearly elections.
The IRS further concluded that distributions from corpus Letter Ruling 202231007 is an ex-
the proposed transfers would not be In Letter Ruling 202231010, the IRS ample of how a private nonoperating
jeopardizing investments under Sec. granted an extension of time to a private foundation may use careful estate and tax

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