A foundation received 60 days to perfect conduit elections

Plain-English summary

A private foundation intended to qualify as a conduit foundation by treating prior excess qualifying distributions as current distributions out of corpus. Its return preparer calculated carryovers consistently with that treatment but failed to make or advise the foundation to make the required elections on two Forms 990-PF. Another firm discovered the omission before the IRS did, and the foundation promptly sought relief. The IRS found reasonable reliance on a qualified professional, good faith, and no prejudice to the government or lower tax liabilities. It granted 60 days to file amended Forms 990-PF with signed election statements under Treasury Regulation section 53.4942(a)-3(c)(2)(iv). The amended and later returns must reflect the revised carryover amounts.

Ruling snapshot

• Question: Could the foundation make late elections to apply prior corpus distributions toward the conduit-foundation requirement?
• Outcome: Approved, 60 days to file amended returns and election statements
• Key authorities: IRC §§ 170(b)(1)(F)(ii) and 4942; Treas. Reg. §§ 53.4942(a)-3(c)(2)(iv) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201625003                                             [Third Party Communication:
Release Date: 6/17/2016                                       Date of Communication: Month DD, YYYY]
Index Number: 4942.03-02, 4942.03-05,
              9100.00-00                                      Person To Contact:
                                                              --------------------, ID No. ------------------
-----------------------------------                           Telephone Number:
------------------------                                      ----------------------
-----------------------------                                 Refer Reply To:
                                                              CC:TEGE:EOEG:EO2
                                                              PLR-131278-15
                                                              Date:
                                                              March 14, 2016




Legend

Foundation       =    -----------------------------------
Year 1           =    -------
Year 2           =    -------
Company          =    ----------------------------------------------------------------------------------------------
A                =    ----------------------------------------------------------------------------------------------
B                =    ----------------------------------------------------------------------------------------------
C                =    ----------------------------------------------------------------------------------------------
Firm             =    -----------------------



Dear -------------------:

This letter responds to Foundation’s ruling request dated September 8, 2015 and
subsequent correspondence submitted by its authorized representatives for
discretionary relief under Treas. Reg. § 301.9100-3 for an extension of time to make the
election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv).

FACTS

Foundation is recognized as an organization described in I.R.C. § 501(c)(3) and
classified as a private foundation under I.R.C. § 509(a). Foundation provides grants to
further the charitable purposes of organizations described in § 501(c)(3).

During Year 1, Foundation received contributions of A dollars, including cash of B
dollars and appreciated real property with a fair market value of C dollars. The real
property was contributed based on the understanding that Foundation would take the
PLR-131278-15                                 2

necessary steps to qualify as a conduit foundation within the meaning of I.R.C. §
170(b)(1)(F)(ii).

Foundation engaged Company, a well-regarded and experienced tax return preparation
company, to prepare Foundation’s Year 1 Form 990-PF. Foundation relied on
Company to advise Foundation on the proper completion of the Form 990-PF. In
connection with the preparation of the Year 1 Form 990-PF, Company calculated the
excess distribution carryovers in a manner that was consistent with having made a valid
election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv) by not reducing the carryover from
the Year 1 Qualifying Distributions. However, the election to apply distribution
carryovers to meet the conduit foundation requirement was not made when the Year 1
Form 990-PF was prepared and filed.

Firm discovered Foundation’s failure to make the election for Year 1 in March 2015, as
a result of Firm’s subsequent review of Foundation’s Year 1 Form 990 PF in connection
with a proposed donation of property to Foundation. Upon this discovery, Firm notified
Foundation and Foundation immediately decided to seek permission to make and
attach a late election to its Forms 990-PF for Year 1 and Year 2.

Foundation has submitted a sworn affidavit from an officer of Company. The affidavit
declares that Company failed to include any amount on Part VII, Line7, the line used to
indicate distributions out of corpus in order for Foundation to qualify as a “conduit
foundation” within the meaning of § 170(b)(1)(F)(ii) of the Code. Company also
declared that it failed to make, or inform Foundation of the availability of, the election
under § 53.4942(a)-3(c)(2)(iv) of the Regulations to apply distribution carryovers to meet
the conduit foundation requirement at the time the Year 1 Form 990-PF was prepared
and filed.

The information returns prepared by Company met the requirement to make the
election. Foundation asserts that none of the excess qualifying distributions were used
for any other purpose, and there was no intention to use them for any other purpose.

LAW AND ANALYIS

Section 170(b)(1)(F)(ii) provides, in part, that contributions by an individual to a private
foundation that makes qualifying distributions that are treated as distributions out of
corpus in an amount equal to 100 percent of the contribution within three months and 15
days of the end of the private foundation's taxable year, are deductible at 50 percent of
the Foundation's contribution base for the taxable year.

Section 4942(a) provides for the imposition on the undistributed income of a private
foundation for any taxable year, which has not been distributed before the first day of
the second (or any succeeding) taxable year following such taxable year (if such first
day falls within the taxable period), a tax equal to 30 percent of the amount of such
PLR-131278-15                                3

income remaining undistributed at the beginning of such second (or succeeding) taxable
year.

Section 4942(d) defines a private foundation's “distributable amount” for any taxable
year as an amount equal to (1) the sum of the minimum investment return plus the
amounts described in subsection (f)(2)(C), reduced by (2) the sum of the taxes imposed
on such private foundation for the taxable year under subtitle A and § 4940.

Section 4942(h) provides rules as to the treatment of “qualifying distributions” made
during a taxable year. Generally, qualifying distributions for a taxable year are treated
as made (A) first out of the undistributed income of the immediately preceding taxable
year (if the private foundation was subject to tax imposed by this section for the
preceding year) to the extent thereof, (B) second out of undistributed income for the
taxable year to the extent thereof, and (C) then out of corpus.

Section 53.4942(a)-3(c)(2)(iv) provides that a donee organization may elect to treat as a
current distribution out of corpus any amount distributed in a prior taxable year which
was treated as a distribution out of corpus under paragraph (d)(1)(iii) of this section
provided that (a) such amount has not been availed of for any other purpose, such as a
carryover under paragraph (e) of this section or a redistribution under this paragraph for
a prior year, (b) such corpus distribution occurred within the preceding 5 years, and (c)
such amount is not later availed of for any other purpose. Such election must be made
by attaching a statement to the return the foundation is required to file under § 6033
with respect to the taxable year for which such election is to apply. Such statement must
contain a declaration by an appropriate foundation manager (within the meaning of §
4946(b)(1) that the foundation is making an election under this paragraph and it must
specify that the distribution was treated under paragraph (d)(1)(iii) of this section as a
distribution out of corpus in a designated prior taxable year (or years). This election is
permissible in order to satisfy distribution requirements under § 170(b)(1)(F)(ii).

Furthermore, for purposes of making the election, an extension of time for making the
election may be available under the relief provisions found in Treas. Reg. § 301.9100-1.
Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in Treas. Regs. §§ 301.9100-2
and 301.9100-3 to make certain regulatory elections. Section 301.9100-1(b) defines a
“regulatory election” as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, notice or
announcement published in the Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election. Section
301.9100-2 provides automatic extensions of time for making certain elections. Section
301.9100-3 provides extensions of time for making elections that do not meet the
requirements of § 301.9100-2.
PLR-131278-15                                  4


Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections may be granted when a foundation provides evidence to establish to the
satisfaction of the Commissioner that a foundation acted reasonably and in good faith,
and the grant of relief will not prejudice the interests of the Government.
Section 301.9100-3(b)(1) provides that a foundation is deemed to have acted
reasonably and in good faith if the foundation:
(i) Requests relief under this section before the failure to make the regulatory election is
discovered by the Service;
(ii) Failed to make the election because of intervening events beyond the foundation's
control;
(iii) Failed to make the election because, after exercising reasonable diligence (taking
into account the foundation's experience and the complexity of the return or issue), the
Foundation was unaware of the necessity for the election;
(iv) Reasonably relied on the written advice of the Service; or
(v) Reasonably relied on a qualified tax professional, including a tax professional
employed by the foundation, and the tax professional failed to make, or advise the
foundation to make the election.

Section 301.9100-3(b)(2) provides that a foundation will not be considered to have
reasonably relied on a qualified tax professional if the foundation knew or should have
known that the professional was not:
(i) Competent to render advice on the regulatory election; or
(ii) Aware of all relevant facts.

Section 301.9100-3(b)(3)(ii) provides, in part, that a foundation is deemed to have not
acted reasonably and in good faith if the foundation was informed in all material
respects of the required election and related tax consequences, but chose not to file the
election.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time to make a regulatory election only when the interests of the
Government will not be prejudiced by the granting of relief.

Section 301.9100-3(c)(1)(i) provides, in part, that the interests of the Government are
prejudiced if granting relief would result in the foundation having a lower tax liability in
the aggregate for all taxable years affected by the election than the foundation would
have had if the election had been timely made.

Section 301.9100-3(d)(2) provides, in part, that for relief to be granted, the Service may
require the foundation to consent under § 6501(c)(4) to an extension of the period of
limitations on assessment for the taxable year in which the regulatory election should
have been made and any taxable years that would have been affected by the election
had it been timely made.
PLR-131278-15                                5


Section 301.9100-3(e)(2) & (3) specifies evidence which must be provided when a
foundation requests relief under this section which includes (a) affidavit and declaration
from foundation and (b) affidavits and declarations from other parties.

Section 301.9100-3(e)(4) further requires additional information to support request for
relief under § 301.9100-3(a) which includes:
(i) The foundation must state whether the foundation's return(s) for the taxable year in
which the regulatory election should have been made or any taxable years that would
have been affected by the election had it been timely made is being examined, or is
being considered by an appeals office or a federal court. The foundation must notify the
Service office considering the request for relief if the Service starts an examination of
any such return while the foundation's request for relief is pending;
(ii) The foundation must state when the applicable return, form, or statement used to
make the election was required to be filed and when it was actually filed;
(iii) The foundation must submit a copy of any documents that refer to the election;
(iv) When requested, the foundation must submit a copy of the foundation's return for
any taxable year for which the foundation requests an extension of time to make the
election and any return affected by the election; and
(v) When applicable, the foundation must submit a copy of the returns of other
Foundations affected by the election.

Foundation is an organization recognized as exempt under § 501(c)(3) and classified as
a private foundation under § 509(a). Foundation is a private foundation required to
distribute all undistributed income by the close of the following tax year. See § 4942(a);
see also § 4942(d) which defines “distributable amount.”

Pursuant to § 53.4942(a)-3(c)(2)(iv), a private foundation may elect to treat as a current
distribution out of corpus any amount distributed in a prior taxable year which was
treated as a distribution out of corpus provided that such amount has not been availed
of for any other purpose, such as a carryover under paragraph (e) of this section, or a
redistribution under this paragraph for a prior year, and such corpus distribution
occurred within the preceding five years, and such amount is not later availed for any
other purpose. This election is allowed in order to satisfy distribution requirements under
§ 170(b)(1)(F)(ii). The election must be made by attaching a statement to the return the
foundation is required to file under § 6033 with respect to the taxable year for which the
election applies. The statement must contain a declaration by an appropriate foundation
manager, within the meaning of § 4946(b)(1) that the foundation is making an election
under this paragraph and it must specify that the distribution was treated under
paragraph (d)(1)(iii) of this section as a distribution out of corpus in a designated prior
taxable year, or years.

Foundation did not properly make this election when it timely filed each of its Year 1 and
Year 2 Form 990-PFs. However, Foundation asserts that it met the requirements in
PLR-131278-15                                   6

each of those years to make the election and that it acted reasonably and in good faith
at all times because it relied on the experience of a qualified tax professional to properly
prepare its returns.

Under § 301.9100-3(a), when the foundation is required to make the election under §
53.4942(a)-3(c)(2)(iv) but omits to, a request for an extension of time for regulatory
election(s) may be granted if the foundation provides evidence (including an affidavit) to
establish to the satisfaction of the Commissioner that the foundation acted reasonably
and in good faith, and the grant of the relief will not prejudice the interests of the
Government. As further explained in § 301.9100-3(b)(1), the foundation will be deemed
to have acted reasonably and in good faith if, among other things, the foundation
requests relief under this section, before the failure to make the regulatory election is
discovered by the Service, or if the foundation failed to make the election because of
intervening events beyond their control, or failed to make the election because after
exercising reasonable diligence (taking into account the foundation's experience and the
complexity of the return or issue), the foundation was unaware of the necessity of the
election, or the foundation reasonably relied on a qualified tax professional, including a
tax professional employed by the foundation, and the foundation failed to make, or
advise the foundation to make, the election.

Foundation provided documentation which included an affidavit from Company, a well-
regarded and experienced tax preparation firm, to support the position that it acted
reasonably and in good faith as required by § 301.9100-3(b)(1). Foundation reasonably
relied on Company to properly advise it about the returns they prepared for Foundation
and to explain the technical areas of the Form 990-PF. Foundation exercised
reasonable diligence and held review meetings with the preparer to explain the excess
distribution carryover. Foundation did not have any reason to believe that Company was
not competent to render advice about required regulatory elections. In addition, the
discovery of the failure to properly make the election on the Form 990-PF for Year 1 and
Year 2 was by Firm rather than by the Internal Revenue Service.

In order to qualify for discretionary relief, a foundation must demonstrate that the
interests of the Government will not be prejudiced by the granting of relief as required
under § 301.9100-3(c)(1). The interest of the Government is prejudiced if granting such
relief would result in a foundation having a lower tax liability than if the election had
been timely made. Foundation represented and provided support to show that its
request for relief for the late filing of an election under § 53.4942(a)-3(c)(2)(iv) to treat as
current distribution out of corpus the amounts distributed in the prior taxable years, that
are available as excess distributions carryovers held in corpus, does not result in it or its
grantor(s) having lower tax liabilities than if they had timely properly filed such election.
The affidavits and other evidence provided satisfy the requirements of § 301.9100-3(b)-
(c) and the procedural requirements of § 301.9100-3(e). Therefore, to grant Foundation
an extension of time to make the election will not prejudice the Government's interest.
PLR-131278-15                                 7


RULING

Based solely on the facts and representations submitted by Foundation, we conclude
that the requirements of § 301.9100-3 have been satisfied. As a result, Foundation is
granted an extension of time to make an election under § 53.4942(a)-3(c)(2)(iv) in
replacement of the unsigned elections filed with the Year 1 and Year 2 returns. The
election shall be made by filing an amended Forms 990-PF for these years and
attaching a statement making the election to each amended return. Foundation shall
have 60 days from the date of this letter ruling to file the amended returns. The
amended returns and subsequent returns should reflect the revised carryover amounts.

In addition, a copy of this letter must be attached to the relevant returns. If Foundation
files electronically it may satisfy this requirement by attaching a statement to the return
that provides the date and control number of this letter ruling.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited by others as precedent.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

Pursuant to the Power of Attorney on file with this office, we are sending a copy of this
letter to your authorized representatives.




                                       Sincerely,



                                       Andrew F. Megosh, Jr.
                                       Senior Tax Law Specialist, EO Branch 2
                                       (Tax Exempt & Government Entities)