Foundation's employee matching gifts receive favorable excise-tax treatment

Plain-English summary

A private foundation planned to take over two employee matching-donation programs from its sole corporate contributor in most jurisdictions. The corporation was a disqualified person, but it had no legal obligation to continue the programs and represented that the matches were not employee benefits. The foundation would avoid controlled organizations, duplicate corporate matches, supporting organizations, and donations for which employees received something in return, while verifying that recipients were qualifying public charities. The IRS ruled that the programs would not constitute self-dealing because any publicity, goodwill, or workforce benefit to the corporation was incidental or tenuous. It also ruled that the grants would be qualifying distributions under section 4942(g) and would not be taxable expenditures under section 4945(d).

Ruling snapshot

• Question: Would the foundation's matching gifts avoid self-dealing, count as qualifying distributions, and avoid taxable-expenditure treatment?
• Outcome: approved
• Key authorities: IRC §§ 4941, 4942(g), 4945(d), and 4946; Treas. Reg. §§ 53.4941(d)-2(f), 53.4942(a)-3, and 53.4945-5

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201725008                                             Third Party Communication: None
Release Date: 6/23/2017                                       Date of Communication: Not Applicable
Index Number: 4941.00-00, 4942.00-00,
              4945.00-00                                      Person To Contact:
                                                              ----------------------------, ID No. --------------
-----------------------------------------                     -----------------
--------------------------                                    Telephone Number:
-----------------------------------                           ----------------------
------------------------------                                Refer Reply To:
                                                              CC:TEGE:EOEG:EO3
                                                              PLR-129196-16
                                                              Date:
                                                              March 13, 2017


Legend


Corporation       =   ---------------------------
Foundation        =   --------------------------
Charity           =   -----------------
Date 1            =   ------------------------
Year 1            =   -------
Program 1         =   --------------------------------------------------
Program 2         =   ------------------------------------
State 1           =   --------------
State 2           =   -----------------
State 3           =   --------------
State 4           =   ---------------------------

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

This is in response to the letter dated September 16, 2016, and additional submissions
in which your representative requested rulings under section 4941, section 4942, and
section 4945 of the Internal Revenue Code (Code) with respect to your matching
donation programs.1

Background

Based on the documents and representations submitted, we construe the facts as
follows:



1
 The Internal Revenue Code of 1986, as amended, to which all subsequent “section” references are
made unless otherwise indicated.
PLR-129196-16                                2

Corporation is the sole contributor to Foundation. Foundation is described in section
501(c)(3) and is classified as a private foundation under section 509(a). Corporation
and Foundation have the same officers and directors.

Corporation provides its employees with two matching donation programs. Foundation
represents that Corporation’s matching donation programs are not employee benefits.
Foundation further represents that Corporation has no legal obligation to continue the
matching donation programs and could discontinue either or both of them at any time.

Under Program 1, when a Corporation employee makes a charitable contribution to a
public charity described in section 501(c)(3), Corporation makes a corresponding
charitable contribution to Charity, which is a public charity described in section
501(c)(3), in an amount equal to 50 percent of the individual’s contribution.

Under Program 2, when a Corporation employee performs volunteer service hours for a
public charity described in section 501(c)(3), Corporation contributes a certain amount
to a section 501(c)(3) public charity selected by the employee, which could be the
service-recipient organization. The amount of Corporation’s contribution depends on
the number of hours volunteered by the employee and is subject to an annual limit.
Corporation uses a third party vendor to verify the public charity status of the service-
recipient organization.

Corporation intends to cease maintaining its matching donation programs, except with
respect to contributions to organizations located in State 1, State 2, State 3, and State
4, and Foundation will then began matching donation programs for contributions by
Corporation’s employees to organizations in all other jurisdictions. The matching
donation programs maintained by Foundation will be identical to the programs
maintained by Corporation, and will contain the following requirements: (1) Foundation
will not satisfy an employee’s pledge of a donation; (2) Foundation will not make any
donations to any organization that it controls or that is controlled by one or more
disqualified persons (with respect to Foundation); (3) the recipient organization must
have an IRS determination letter that it is tax-exempt as an organization described
under section 501(c)(3), and is a public charity that is not a supporting organization; (4)
Foundation has the discretion to refuse to make a matching donation and may modify or
end the matching donation programs at any time; and (5) employee contributions are
not eligible for Foundation’s matching donation programs when the employee receives
anything in return for the donation. Foundation will add the following additional
restrictions to its matching donation programs: (1) Foundation will not match any
donations that were made under the Corporation’s matching donation programs; and (2)
Foundation will not match any employee donations made pursuant to the portion of
Corporation’s matching donation programs retained by Corporation for donations to
organizations located in State 1, State 2, State 3, and State 4. A third-party vendor will
verify the public charity status of the organizations involved.
PLR-129196-16                                   3

Corporation will continue to conduct its matching donation programs with respect to
contributions to organizations located in State 1, State 2, State 3, and State 4 pursuant
to existing contractual commitments with third parties and certain governmental officials.

Corporation previously maintained a third matching donation program for its employees,
but Foundation has maintained that program for Corporation’s employees since Year 1.
On Date 1, the IRS issued a private letter ruling to Foundation regarding its
commencement and Corporation’s cessation of the third matching donation program.
Foundation is seeking the current ruling because it hopes to capitalize on efficiencies by
having a single entity operate all three matching donation programs.

Rulings Requested, Law, and Analysis

Requested Ruling 1:

        1. The donations made through the matching donation programs that are
          currently provided by Corporation for its employees and that will be provided
          by Foundation for Corporation’s employees do not constitute self-dealing
          under section 4941.

Section 507(d)(2)(A) defines a substantial contributor as any person who contributed or
bequeathed an aggregated amount of more than $5,000 to a private foundation, if such
amount is more than 2 percent of the total contributions and bequests received by the
foundation before the close of the taxable year of the foundation in which the contribution
or bequest is received by the foundation from such person.

Section 4941(a) imposes an excise tax on each act of self-dealing between a disqualified
person and a private foundation. Taxes are imposed on both the self-dealers involved in
an act of self-dealing and on any foundation managers who knowingly participate in an act
of self-dealing. Even though section 4941 does not impose a tax on a private foundation
when an act of self-dealing occurs, a foundation with respect to which there has been an
act of self-dealing is required to report it on its annual information return, which is the Form
990-PF in this case.

Section 4941(d)(1) provides that the term self-dealing includes any direct or indirect
transfer to, or use by, or for the benefit of, a disqualified person of the income or assets of
a private foundation. The term self-dealing includes the furnishing of goods, services, or
facilities between a disqualified person and a private foundation. The term also includes
the payment of compensation (or payment or reimbursement of expenses) by a private
foundation to a disqualified person.

Section 4946(a)(1) provides, in part, that the term disqualified person includes, with
respect to a private foundation, a person who is a substantial contributor to the foundation,
PLR-129196-16                                   4

foundation manager, or a member of the family of a substantial contributor or foundation
manager.

Section 4946(a)(2) provides that the term substantial contributor means a person who is
described in section 507(d)(2).

Section 4946(b) defines a foundation manager as an officer, director, or trustee of a
private foundation, and with respect to any act (or failure to act), the employees of the
foundation having authority or responsibility with respect to such act (or failure to act).

Treas. Reg. § 53.4941(d)-2(f)(1) provides that if a private foundation makes a grant or
other payment which satisfies the legal obligation of a disqualified person, such grant or
payment shall ordinarily constitute an act of self-dealing.

Treas. Reg. § 53.4941(d)-2(f)(2) provides that the fact that a disqualified person receives
an incidental or tenuous benefit from the use by a foundation of its income or assets will
not, by itself, make such use an act of self-dealing. Thus, the public recognition a person
may receive, arising from the charitable activities of a private foundation to which such
person is a substantial contributor, does not in itself result in an act of self-dealing because
generally the benefit is incidental and tenuous. For example, a grant by a private
foundation to an organization described in section 509(a)(1), (2), or (3) will not be an act of
self-dealing merely because one of the organization’s officers, directors, or trustees is also
a manager of or a substantial contributor to the foundation.

Treas. Reg. § 53.4941(d)-2(f)(9), Example 2, gives the following situation. Private
foundation X established a program to award scholarship grants to the children of
employees of corporation M, a substantial contributor to X. After disclosure of the method
to carrying out such program, X received a determination letter from the IRS stating that X
is exempt under section 501(c)(3), that contributions to X are deductible under section
170, and that X’s scholarship program qualifies under section 4945(g)(1). A scholarship
grant to a person not a disqualified person with respect to X paid or incurred by X in
accordance with such program shall not be an indirect act of self-dealing between X and
M.

Rev. Rul. 73-407, 1973-2 C.B. 383, holds that a contribution by a private foundation to a
public charity made on the condition that the public charity change its name to that of the
foundation’s substantial contributor for at least 100 years does not constitute an act of self-
dealing.

Rev. Rul. 77-160, 1977-1 C.B. 351, concerns the issue of whether payment by a private
foundation of a disqualified person’s church membership dues constitutes an act of self-
dealing. The revenue ruling holds that the payment is not an incidental or tenuous benefit
within the meaning of Treas. Reg. § 53.4941(d)-2(f)(2), because the foundation’s payment
results in a direct economic benefit to the disqualified person. The foundation’s payment
PLR-129196-16                                  5

of the membership dues was a substitute for an obligation belonging to the disqualified
person. As a result of the payment, the disqualified person was entitled to participate in
the activities of the congregation. Consequently, the payment of the membership dues by
the private foundation is an act of self-dealing under section 4941(d)(1)(E).

Rev. Rul. 80-310, 1980-2 CB 319, holds that private foundation grants to an educational
institution for engineering instruction are not an act of self-dealing, even though a
corporation, a disqualified person, intended to hire graduates of the engineering program
and to encourage its employees to participate in the engineering program. The revenue
ruling notes that an incidental or tenuous benefit occurs when a disqualified person’s
general reputation or prestige is enhanced by public acknowledgement of some specific
donation by such person, when a disqualified person receives some other relatively minor
benefit of an indirect nature, or when a disqualified person merely participates to a wholly
incidental degree in the fruits of some charitable program that is of broad public interest to
the community. The revenue ruling states that, because the engineering program is of
broad public interest to the community, and because the corporation competes on an
equal basis for the program’s graduates and its employees compete with the general
public for admission, the corporation receives only an incidental or tenuous benefit from
the grant by the private foundation to the educational institution.

Rev. Rul. 85-162, 1985-2 C.B. 275, concludes that self-dealing does not occur where a
private foundation makes loans to public charities for construction projects in
disadvantaged areas where the contractors doing the construction could be ordinary
customers of a bank, that is a disqualified person with respect to the foundation. The
ruling states that the bank would receive only an incidental or tenuous benefit if the public
charities used the loan proceeds to pay the contractors who might be ordinary customers
of the bank.

In this case, Corporation is the sole contributor to Foundation. Accordingly, Corporation is
a disqualified person under section 4946(a)(1)(A), and any use of Foundation’s assets by,
or for the benefit of, Corporation would be an act of self-dealing. Foundation stipulates
that it will not make any grants to an organization which it controls or which is controlled by
a disqualified person. Foundation also stipulates that it will not match any donation that
was made under a donation matching program maintained by Corporation. Foundation
further stipulates that the donations made by Corporation under Corporation’s matching
donation programs are not employee benefits and Corporation is not and has never been
obligated to continue its matching donation programs. Foundation also stipulates that only
organizations described in section 501(c)(3) and that are classified as public charities are
eligible to receive donations under the matching donation programs.

Section 53.4941(d)-2(f)(2) of the Regulations states that an act of self-dealing does not
occur when a disqualified person receives an incidental or tenuous benefit from a private
foundation’s use of its income or assets, absent other facts. The regulations also state
that the public recognition a disqualified person may receive from a private foundation’s
PLR-129196-16                                   6

charitable activities does not, by itself, result in an act of self-dealing because, generally,
such benefit is incidental and tenuous.

Pursuant to the stipulations made be Foundation, it will not match any donation that was
made under a donation matching program maintained by Corporation. Most of the benefit
from Foundation’s matching donation programs will go to the public charities that receive
the matched donations. Corporation will nevertheless benefit from Foundation’s matching
donation programs because it will receive favorable public recognition and good will. It
may also experience a happier and more loyal work force. These benefits, however, are
similar to the incidental or tenuous benefits described in Treas. Reg. § 53.4941(d)-2(f)(2).
Thus, they do not, by themselves, constitute self-dealing.

Requested Ruling 2:

        2. The donations provided by Foundation through its matching donation
          programs for Corporation’s employees will be “qualified distributions” under
          section 4942(g) of the Code.

Section 4942(a) generally imposes a tax on the undistributed income of a private
foundation (other than an operating foundation under section 4942(j)(3)) for any taxable
year, that has not been distributed before the first day of the second (or any
succeeding) taxable year following such taxable year.

Section 4942(c) defines undistributed income for any taxable year as the amount by
which the distributable amount for such taxable year, exceeds the qualifying
distributions made out of such distributable amount for such taxable year.

Section 4942(g)(1) defines qualifying distribution as (A) any amount paid to accomplish
one or more purposes described in section 170(c)(2)(B), other than any contribution to
(i) an organization controlled by the foundation or one or more disqualified persons, or
(ii) a private foundation which is not an operating foundation, except as otherwise
provided; or (B) any amount paid to acquire an asset used directly in carrying out one or
more purposes described in section 170(c)(2)(B).

Treas. Reg. § 53.4942(a)-3(a)(2) defines the term qualifying distribution, in relevant
part, as any amount (including program related investments and reasonable and
necessary administrative expenses) paid to accomplish one or more purposes
described in section 170(c)(1) or (2)(B), other than any contribution to a private
foundation which is not an operating foundation or to an organization controlled (directly
or indirectly) by the contributing private foundation or one or more disqualified persons
with respect to such foundation.

Under section 4942, a qualifying distribution includes any amount paid to a public
charity that is not controlled by the contributing private foundation in order to accomplish
PLR-129196-16                                7

one or more purposes described in section 170(c)(1) or (2)(B). Foundation represents
that it will only match contributions made to an organization that has received an IRS
determination letter that it is tax-exempt as an organization described under section
501(c)(3) and is a public charity under sections 509(a)(1) or (a)(2). Foundation also
represents that it will not make any matching contributions to any organization that it
controls or that is controlled by its disqualified persons. Accordingly, based on these
representations, Foundation’s contributions under its matching donation programs will
constitute qualifying distributions.

Requested Ruling 3:

        3. The donations provided by Foundation through its matching donation
          programs for Corporation’s employees will not be “taxable expenditures”
          under section 4945(d) of the Code.

Section 4945(a) imposes a 20 percent tax on each taxable expenditure of a private
foundation.

Section 4945(d) defines taxable expenditure as any amount paid or incurred by a
private foundation as a grant to an organization unless such organization is described in
section 509(a)(1) or (a)(2), or the private foundation exercises expenditure responsibility
with respect to such grant in accordance with section 4945(h). Section 4945 further
defines taxable expenditure as any amount paid for any purpose other than one
specified in section 170(c)(2)(B).

Treas. Reg. § 53.4945-5(a)(1) provides that the term taxable expenditure includes any
amount paid or incurred by a private foundation as a grant to an organization (other
than an organization described in section 509(a)(1), (2), or (3) (other than one described
in section 4942(g)(4)(A)), unless the private foundation exercises expenditure
responsibility with respect to such grant.

Under section 4945(d), taxable expenditures include any amount paid or incurred by a
private foundation as a grant to an organization (other than an organization described in
section 509(a)(1), (2), (3)). Section 509(a)(1) refers to organizations described in
section 170(b)(1)(A) (other than vii and viii). Section 509(a)(2) refers to organizations
that are publically supported. Foundation represents that it will only make matching
contributions to a recipient organization that has received an IRS determination letter
that it is tax-exempt as an organization described under section 501(c)(3) and is a
public charity under sections 509(a)(1) or (a)(2). Accordingly, Foundation’s
contributions made under its matching donation programs will not constitute taxable
expenditures.
PLR-129196-16                                  8

Conclusion

Based on the foregoing, and assuming the accuracy of the facts and representations
described herein, we rule as follows with respect to Program 1 and Program 2:

    1. The donations that Foundation makes pursuant to its matching donation
      programs will not constitute self-dealing under section 4941.

    2. The donations that Foundation makes pursuant to its matching donation
      programs will be qualified distributions for Foundation under section 4942(g).

    3. The donations that Foundation makes pursuant to its matching donation
      programs will not constitute taxable expenditures under section 4945(d).

This letter does not address the applicability of any section of the Code or regulations to
the facts submitted other than with respect to the sections specifically described.
Because it could help resolve questions concerning your federal income tax status, this
ruling should be kept in your permanent records.

This letter will be made available for public inspection under section 6110 after certain
deletions of identifying information are made. For details, please read the enclosed
Notice 437, Notice of Intention to Disclose. A copy of this ruling with the deletions we
intend to make available for public inspection is attached to the Notice 437. If you
disagree with our proposed deletions, you should follow the instructions in the Notice
437.

The rulings contained in this letter are based upon information and representations
submitted by Foundation and accompanied by a penalty of perjury statement executed
by an individual with authority to bind Foundation and upon the understanding that there
will be no material changes in the facts. This office has not verified any of the materials
submitted in support of the request for rulings, and such material is subject to
verification on examination.

This letter is directed only to Foundation. Section 6110(k)(3) provides that it may not be
used or cited by others as precedent. This letter does not apply to the matching
donation programs retained by Corporation for the donations occurring in State 1, State
2, State 3, and State 4.

A copy of this letter must be attached to any tax return to which it is relevant.
Alternatively, if Foundation files its returns electronically, it may satisfy this requirement
by attaching a statement to its return that provides the date and control number of this
letter.
PLR-129196-16                                  9

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

If you have any questions about this ruling, please contact the person whose name and
phone number are shown in the heading of this letter.


                                       Sincerely,



                                       Kenneth M. Griffin
                                       Chief
                                       Exempt Organization Branch 3
                                       (Tax Exempt & Government Entities)




Enclosure:    Notice 437, Notice of Intention to Disclose
              Redacted copy of this letter