Private foundation gets 60 extra days to make a late conduit-foundation election so its donors keep the 50% deduction limit

Plain-English summary

A private foundation that regrants money to other charities wanted "conduit foundation" treatment, which lets its individual donors deduct contributions at the higher 50 percent of income limit (like gifts to public charities) instead of the 20 percent limit that normally applies to private-foundation gifts of appreciated property. To get that treatment, the foundation must formally elect on its Form 990-PF to treat prior-year excess distributions as current distributions out of corpus under Treas. Reg. § 53.4942(a)-3(c)(2)(iv). The foundation's accounting firm never told it the election was available, so it was missed, and the problem surfaced only when the donors' own returns were audited. The foundation asked for "9100 relief," the discretionary extension for a blown regulatory-election deadline. The IRS found the foundation had acted reasonably and in good faith (it reasonably relied on a qualified tax professional who failed to advise the election), that granting relief would not lower anyone's tax below what a timely election would have produced, and that the foundation had signed a Form 872 keeping the year open. The IRS granted 60 days to make the election by filing an amended Form 990-PF. The payoff: the donors can amend their individual returns to claim the more generous 50 percent deduction limit.

Ruling snapshot

• Question: Should the foundation get more time to make a late § 53.4942(a)-3(c)(2)(iv) election claiming conduit-foundation status after its accountant failed to advise it?
• Outcome: Approved (60-day extension granted to file an amended Form 990-PF with the election)
• Key authorities: IRC §§ 4942, 170(b)(1)(F)(ii); Treas. Reg. §§ 53.4942(a)-3(c)(2)(iv), 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201852012                                                Third Party Communication: None
Release Date: 12/28/2018                                         Date of Communication: Not Applicable
Index Number: 4942.03-02, 4942.03-05,
              9100.00-00                                         Person To Contact:
                                                                 ----------------------, ID No. ------------------
----------------------------------                               Telephone Number:
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---------------------------------------------                    Refer Reply To:
----------------------------                                     CC:TEGE:EOEG:EO1
------------------------------------                             PLR-112447-18
                                                                 Date:
                                                                 October 02, 2018

         Taxpayer:                   -------------------------------------------
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         Individuals:                -------------------------------------------------
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         Firm:                      -----------------------------------------------------

         Year 1:                    -----------------------------------------------

         Year 2:                    -----------------------------------------------

         Year 3:                    -----------------------------------------------

         Year 4:                    -----------------------------------------------

         Year 5:                    -----------------------------------------------

         Year 5a:                   -------------------------------------------------

         Year 6:                    -----------------------------------------------

         Year 6a:                   -------------------------------------------------

         Program:                    --------------------------------------------------------------------------------
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         Date 1:                    --------------------------

         Date 2:                    ----------------------

        Date 3:             -------------------

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

This letter responds to a letter from Taxpayer's authorized representative dated April 4,
2018, as supplemented, submitted on behalf of Taxpayer, requesting an extension of
time under § 301.9100-3 of the Procedure and Administration Regulations to elect
under § 53.4942(a)-3(c)(2)(iv) of the Foundation and Similar Excise Tax Regulations to
treat excess distribution carryovers from prior tax years, beginning in Year 1, as current
distributions out of corpus for purposes of meeting the distribution requirements of
§ 170(b)(1)(F)(ii) for Year 6. Taxpayer represents the facts as follows.

                                             FACTS

Taxpayer is an entity recognized as exempt under § 501(a) as an organization
described in § 501(c)(3) and classified as a private foundation under § 509(a). It
provides grants to other § 501(c)(3) organizations. Individuals, as directors of, and
substantial contributors to, the Taxpayer, are disqualified persons under § 4946.

For Taxpayer's Year 6, Taxpayer made qualifying distributions in an amount less that
the contributions it received that year, all of which were from Individuals. For each of its
previous five tax years (Years 1-5), Taxpayer made qualifying distributions, as defined
by § 4942(g), in excess of distributable amounts, as defined by § 4942(d), which it
carried forward.

Taxpayer engaged the accounting services of Firm to prepare its Year 6 Form 990-PF.
It had reason to believe that Firm was competent to render these services and to advise
it on any available elections, and Taxpayer provided Firm with all of the relevant facts.
Taxpayer had sufficient excess qualifying distributions from Years 1-5 and was eligible
to elect on its Year 6 Form 990-PF to treat its carryover excess qualifying distributions
as current distributions out of corpus under § 53.4942(a)-3(c)(2)(iv). However, Firm did
not inform Taxpayer of the availability of the election under § 53.4942(a)-3(c)(2)(iv) to
apply its excess qualifying distribution carryovers to meet the distribution requirements
of § 170(b)(1)(F)(ii), even though Taxpayer satisfied the requirements for claiming
conduit foundation status under § 170(b)(1)(F)(ii) and for making the election under
§ 53.4942(a)-3(c)(2)(iv). As a consequence Taxpayer did not make this election for
Year 6.

Individuals also engaged Firm to prepare their federal income tax returns for Years 5a
and 6a. Individuals contributed appreciated property to Taxpayer in their Years 5a and
6a, for which they claimed charitable contribution deductions subject to the 20-percent
limit of § 170(b)(1)(D). Individuals had assumed that Taxpayer was a private foundation
not described in § 170(b)(1)(F) for this period. In preparing these returns, Firm relied on
Program, a tax compliance and return preparation software suite from a well-respected
provider of such products.

Individuals' tax returns for Years 5a and 6a were audited by the IRS. At this time, Firm
conducted a review of Taxpayer's Year 6 tax return, becoming aware of the significance
to Individuals of its failure to recommend that Taxpayer make the § 53.4942(a)-
3(c)(2)(iv) election, which would have allowed Individuals' charitable contribution
deductions subject to the 50-percent of § 170(b)(1)(F)(ii) rather than the 20-percent limit
of § 170(b)(1)(D). Taxpayer became aware of the fact and significance of this failure
only when Firm so notified Taxpayer on Date 2.

Taxpayer submitted sworn affidavits from its officer and Firm that Firm did not
communicate the availability of, and failed to make the election under, § 53.4942(a)-
3(c)(2)(iv) to apply distribution carryovers to meet the conduit foundation requirement
within the meaning of § 170(b)(1)(F)(ii) to the Year 6 Form 990-PF. Taxpayer represents
that it did not use, nor does it intend to use, any of the excess qualifying distributions for
any other purpose. Taxpayer represents that it is not seeking to alter a return position
with regard to the election for which an accuracy-related penalty has been or could be
imposed under § 6662(a).

                                    LAW & GUIDANCE

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

With respect to the income of a private foundation for any tax year that has not been
distributed before the first day of the second (or any succeeding) tax year following that
tax year (if the first day falls within the tax period), § 4942(a) imposes a tax on the
undistributed income equal to 30 percent of the amount of income remaining
undistributed at the beginning of the second (or succeeding) tax year.

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

Section 4942(h) provides, in general, that qualifying distributions for a tax year are
treated as made (A) first out of the undistributed income of the immediately preceding
tax 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 tax
year to the extent thereof, and (C) then out of corpus.

Section 53.4942(a)-3(c)(2)(iv) provides that, in order to satisfy distribution requirements
of § 170(b)(1)(E)(ii), a donee organization may elect to treat as a current distribution out
of corpus any amount distributed in a prior tax year which was treated as a distribution
out of corpus under § 53.4942(a)-3(d)(1)(iii), provided that (a) the amount has not been
used in a prior year for any other purpose, such as a carryover under § 53.4942(a)-3(e)
or a redistribution under § 53.4942(a)-3(c), (b) the corpus distribution occurred within
the preceding 5 years, and (c) the amount is not later used for any other purpose. The
election is made by attaching a statement to the return that the foundation is required to
file under § 6033 for the tax year to which the election is to apply. 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
§ 53.4942(a)-3(c) and that the distribution was treated under § 53.4942(a)-3(d)(1)(iii) as
a distribution out of corpus in a designated prior tax year (or years). This election
permits a taxpayer to satisfy the distribution requirements of § 170(b)(1)(F)(ii).

An extension of time to elect under § 53.4942(a)-3(c)(2)(iv) may be available pursuant
to the relief provisions of §§ 301.9100-1 through -3.

Pursuant to § 301.9100-1(c), the Commissioner may grant a reasonable extension of
time under the rules of §§ 301.9100-2 and -3 for making certain regulatory elections. A
"regulatory election" is defined by § 301.9100-1(b) as an election the due date for which
is prescribed by a regulation published in the Federal Register, or by a revenue ruling,
revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

Sections 301.9100-1 through -3 provide the standards by which the Commissioner
determines 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.

Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections may be granted when the taxpayer provides evidence satisfactory to the
Commissioner (including the affidavits described in § 301.9100-3(e)) that it acted
reasonably and in good faith, and that the grant of relief will not prejudice the interests
of the Government.

Except as provided in § 301.9100-3(b)(3), a taxpayer is deemed under § 301.9100-
3(b)(1) to have acted reasonably and in good faith if it (i) requests relief under
§ 301.9100-3 before the IRS discovers the failure to make the regulatory election;
(ii) failed to make the election because of intervening events beyond the taxpayer's
control; (iii) failed to make the election because, after exercising reasonable diligence
(taking into account the taxpayer's experience and the complexity of the return or issue),
the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the
written advice of the IRS; or (v) reasonably relied on a qualified tax professional,
including a tax professional employed by the taxpayer, and the tax professional failed to
make, or advise the taxpayer to make, the election.

For purposes of § 301.9100-3(b), § 301.9100-3(b)(2) provides that a taxpayer will not be
considered to have reasonably relied on a qualified tax professional if the taxpayer
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.

A taxpayer is deemed under § 301.9100-3(b)(3) not to have acted reasonably and in
good faith if it (i) seeks to alter a return position for which an accuracy-related penalty
has been or could be imposed under § 6662 at the time the taxpayer requests relief and
the new position requires or permits a regulatory election for which relief is requested;
(ii) was informed in all material respects of the required election and related tax
consequences, but chose not to file the election; or (iii) uses hindsight in requesting
relief. If specific facts have changed since the election due date that make the election
advantageous to a taxpayer, the IRS ordinarily will not grant relief, unless the taxpayer
provides strong proof that its decision to seek relief did not involve hindsight.

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 granting relief.

Under § 301.9100-3(c)(1)(i), the interests of the Government are prejudiced if granting
relief would result in a taxpayer having a lower tax liability in the aggregate for all tax
years affected by the election than the taxpayer would have had if the election had been
timely made. If the tax consequences of more than one taxpayer are affected by the
election, the Government's interests are prejudiced if extending the time for making the
election may result in the affected taxpayers, in the aggregate, having a lower tax
liability than if the election had been timely made.

Under § 301.9100-3(c)(1)(ii), the interests of the Government ordinarily are prejudiced if
the tax year in which the regulatory election should have been made or any tax years
that would have been affected by the election had it been timely made are closed by the
period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a
ruling granting relief under this section.

According to § 301.9100-3(d)(2), as a condition for relief, the IRS may require the
taxpayer to consent under § 6501(c)(4) to an extension of the period of limitations on
assessment for the tax year in which the regulatory election should have been made
and for any tax years that would have been affected by the election had it been made
timely.

A taxpayer seeking relief under § 301.9100-3 is required by § 301.9100-3(e) to provide
evidence that satisfies the requirements of § 301.9100-3(b) [reasonableness and good
faith] and (c) [prejudice to government interests], as well as certain additional
information.

As required by § 301.9100-3(e)(2), a taxpayer seeking relief under § 301.9100-3 must
submit a detailed affidavit describing the events that led to the failure to make a valid
regulatory election and to the discovery of the failure. If the taxpayer relied on a
qualified tax professional for advice, the affidavit must describe the engagement and
responsibilities of the professional, as well as the extent to which the taxpayer relied on
the professional.

As required by § 301.9100-3(e)(3), a taxpayer seeking relief under § 301.9100-3 must
submit detailed affidavits from any individuals knowing about the events leading to the
failure to make a valid regulatory election and to the discovery of that failure. These
individuals must include the taxpayer's return preparer, any individual (including an
employee of the taxpayer) who made a substantial contribution to the preparation of the
return, and any accountant or attorney, knowledgeable in tax matters, who advised the
taxpayer regarding the election. The affidavit must describe the engagement and
responsibilities of the individual, as well as the advice that the individual provided to the
taxpayer.

As required by § 301.9100-3(e)(4), in addition to the affidavits specified above, a
taxpayer seeking relief under § 301.9100-3 must –

(i) state whether the taxpayer's return for the tax year in which the regulatory election
should have been made or any tax years that would have been affected by the election
had it been timely made is being examined by a district director, or is being considered
by an appeals office or a federal court. The taxpayer must notify the IRS office
considering the request for relief if the IRS starts an examination of any such return
while the taxpayer's request for relief is pending;

(ii) 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) submit a copy of any documents that refer to the election;

(iv) if requested, submit a copy of the taxpayer's return for any tax year for which the
taxpayer requests an extension of time to make the election and any return affected by
the election; and

(v) if applicable, submit a copy of the returns of other taxpayers affected by the election.

                                         ANALYSIS

Taxpayer is an entity recognized as exempt under § 501(a) as an organization
described in § 501(c)(3) and classified as a private foundation under § 509(a). As a
private foundation, Taxpayer must distribute all of its distributable income for any tax
year by the close of the following tax year. See § 4942(a) and (d). Taxpayer represents
that, for the tax year in question, in reliance upon a qualified tax professional, it failed to
make a proper election under § 53.4942(a)-3(c)(2)(iv) claiming conduit foundation status
under § 170(b)(1)(F)(ii), even though it satisfied the requirements for this election.

Consequently, Taxpayer is requesting an extension of time under § 301.9100-3 to elect
under § 53.4942(a)-3(c)(2)(iv) to treat excess distribution carryovers from prior tax
years, beginning in Year 1, as current distributions out of corpus for purposes of
meeting the distribution requirements of § 170(b)(1)(F)(ii) for Year 6.

The IRS may grant an extension of time for making a regulatory election if the taxpayer
establishes by sufficient evidence, including detailed affidavits, that it acted reasonably
and in good faith in failing to properly elect, and that relief would not prejudice the
interests of the government.

Based on representations made and documents submitted, Taxpayer is not seeking to
alter a return position, as reported on its timely-filed Year 6 Form 990-PF, for which an
accuracy-related penalty has been or could be imposed under § 6662(a). Taxpayer did
not willfully fail to file the election under § 53.4942(a)-3(c)(2)(iv) after having been
informed in all material respects of the election and its tax consequences. Nor is the
Taxpayer using hindsight in requesting relief; no specific facts have changed since the
election due date that would make the election more advantageous to Taxpayer now
than if it had elected on its timely-filed Form 990-PF. Therefore, Taxpayer is not
deemed by § 301.9100-3(b)(3) to have failed to act reasonably and in good faith in
failing to make the desired regulatory election.

Based on documentation provided, including affidavits, Taxpayer relied on Firm, a
qualified tax professional, to complete and file its Form 990-PF for Year 6. Taxpayer
had reason to believe that Firm was competent to advise it on all aspects of its return
position, including the election under § 53.4942(a)-3(c)(2)(iv), and it provided Firm with
all relevant facts. Taxpayer's reliance on Firm under these circumstances was
reasonable. Therefore, Taxpayer is deemed under § 301.9100-3(b)(1)(v) and (2) to
have acted reasonably and in good faith in its failure to make the desired regulatory
election.

Based on representations made and documents provided, if Taxpayer had made the
election under § 53.4942(a)-3(c)(2)(iv) in its timely-filed Year 6 Form 990-PF, its tax
liability would have remained the same. A grant of relief will allow Individuals to file
amended Forms 1040 for their Years 5a and 6a likely showing lower tax liabilities.
However, any adjusted tax liabilities for these years will not be lower than they would
have been had Taxpayer made the election timely. In addition, on Date 3, Taxpayer
filed Form 872, consenting under 6501(c)(4) to extend the period of limitations on
assessment for Year 6. Therefore, pursuant to § 301.9100-3(c)(1), a grant of relief will
not prejudice the interests of the government.

                                         RULING

Based solely on the facts represented by Taxpayer, we conclude that the requirements
of § 301.9100-3(b), (c), and (e), both substantive and procedural, have been satisfied.
Consequently, Taxpayer is granted an extension of 60 days after the date of this letter
to elect under § 53.4942(a)-3(c)(2)(iv) to treat excess distribution carryovers from prior
years, beginning in Year 1, as current distributions out of corpus for purposes of
meeting the distribution requirements of § 170(b)(1)(F)(ii) for Year 6. The election is to
be made by filing an amended Form 990-PF for Year 6 and attaching a statement
making the election.

A copy of this letter must be attached to the amended return. If Taxpayer files
electronically, it must include the date and control number of this letter ruling.

Except as explicitly provided, we express no opinion concerning the tax consequences
of any transaction or item discussed or referred to in this letter.

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

Under a power of attorney on file with this office, we are sending a copy of this letter to
your authorized representative.

                                          Sincerely,

                                          Mary J. Salins
                                          Branch Chief
                                          Exempt Organizations Branch 1
                                          Office of Associate Chief Counsel
                                          (Tax Exempt & Government Entities)