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TAX CLINIC

planning to manage tax consequences previously recognized as a Sec. 509(a)
when making distributions to nonpub- (3) supporting organization (Letter The IRS explained
lic charities, including related private from IRS Exempt Organizations
foundations. For instance, if a private Examinations, Number 202238018, that the organization
was not operated
foundation is able to treat a distribu- released Sept. 23, 2022). It is uncom-
tion to another private foundation as a mon for the Service to revoke the
capital endowment grant, it will need tax-exempt status of a supporting exclusively
to exercise expenditure responsibility organization, despite the complexity for charitable
over the grant for only three years and relatively unforgiving nature of the purposes because
rather than until the grant funds are supporting organization requirements
expended in full. Also, careful consid- in the Code and regulations. The its activities
eration is needed to properly transfer revocation notice sheds light on how were more social
a private foundation’s aggregate tax the IRS determines qualification as
benefits, including tax basis of noncash a supporting organization under Sec. than charitable in
nature.
assets, to another private foundation, 509(a)(3).
and/or to avoid transferring other After describing the organiza-
tax benefits (e.g., excess qualifying tion in question and summarizing
distribution carryover) to the trans- the pertinent law, this item discusses
feree foundation. the IRS’s revocation decision and sporting events; and (3) for a year-end
If the IRS had not granted the its implications. picnic. Dues paid to the organization
relief requested in Letter Ruling did not provide any specific benefits but
202231010, the foundation would Facts were to help pay for these activities to
not have been able to treat the grants Because the decision to revoke tax- benefit the supported organization.
received from another private founda- exempt status turned on the facts, On a recent information return,
tion as distributions out of corpus. If some details about the organization the organization indicated that none
the foundation had timely made the are necessary. According to the IRS’s of its officers, directors, or trustees
election on its Form 990-PF, Return revocation notice, the organization’s were appointed or elected by the sup-
of Private Foundation, it would not purpose was to operate exclusively for ported organization or served on the
have needed to seek an extension of the benefit of, and in connection with, supported organization’s governing
that election deadline from the IRS. its supported organization — a public board. In response to a question on an
Electing and treating a distribution as charity recognized under Sec. 501(c) IRS form asking how the organization
made out of corpus permits a private (3) — by organizing local interviews maintained a close relationship with the
nonoperating foundation to count for applicants to the supported orga- supported organization, the organization
the distribution toward its annual nization and hosting receptions for simply wrote “facts and circumstances
mandatory distribution requirement. accepted applicants. The organization’s test” without explaining those facts or
A proper election and related planning articles of incorporation also stated circumstances. The supporting organiza-
could help mitigate a shortfall in a that the organization would raise tion also stated on the return that the
foundation’s distributions and provide funds for the supported organization supported organization did not “have
relief from excise tax imposed under to establish and award scholarships. a significant voice” in the supporting
Sec. 4942 for failure to make sufficient The organization’s bylaws did not organization’s investment policies or in
qualifying distributions. require the organization’s trustees or directing the use of its income or assets.
From Stephen M. Clarke, J.D., board members to be members of the The IRS revocation letter states that the
Washington, D.C.; Melanie A. Mc- supported organization or that the organization’s treasurer acknowledged
Peak, CPA, Tampa, Fla.; Kristin G. supported organization control or that the organization did not qualify as
Farr Capizzi, J.D., Chicago; and Cal supervise the organization. a supporting organization under Sec.
Hoke, Raleigh, N.C. The organization’s activities includ- 509(a)(3), but “does qualify as a not-for-
ed holding a certain number of meet- profit charitable organization, fully sup-
Supporting organization ings each calendar year. Meetings were ported by contributions and investment
loses tax-exempt status held (1) to welcome those who were earnings, benefiting [redacted] with its
The IRS recently revoked the tax- admitted to the supported organiza- activities, and spending only to further
exempt status of a Sec. 501(c)(3) entity tion; (2) for group dinners, travel, and its goals in promoting education.”

14 January 2023 The Tax Adviser