Community foundation and corporation could file one Form 990

Plain-English summary

A community foundation organized as a trust was the sole member and original funder of a supporting nonprofit corporation. The organizations proposed amendments placing all gifts under common governing documents, making their boards identical, and giving the governing body the required powers over restrictions, fiduciaries, and investment returns. The IRS ruled that the foundation would be treated as a single entity and the corporation as one of its component parts under the community-trust regulations. Other associated funds meeting the same requirements would also be component parts, and the foundation and corporation could file one annual Form 990. The IRS did not decide whether the foundation independently qualified under sections 501 or 509.

Ruling snapshot

• Question: Could the community foundation be treated as one entity with its supporting corporation as a component part and file a single Form 990?
• Outcome: approved, based on the proposed governing-document and operational changes
• Key authorities: Treas. Reg. § 1.170A-9(f)(11) and (12); IRC § 6033

Full text (IRS public release)

Internal Revenue Service                                 Department of the Treasury
                                                         Washington, DC 20224

Number: 201936002                                        [Third Party Communication:
Release Date: 9/6/2019                                   Date of Communication: Month DD, YYYY]
Index Number: 170.19-00
                                                         Person To Contact:
------------------------------------------------------   ---------------------, ID No. ----------------
-------------------                                      Telephone Number:
----------------------------------------------------     --------------------
                                                         Refer Reply To:
                                                         CC:EEE:EOET:EO3
                                                         PLR-107166-18
                                                         Date:
                                                         June 03, 2019




LEGEND:

Foundation = ------------------------------------------------------

Corporation = ----------------

State            = ------------------



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

This letter responds to your request for rulings that Foundation will be treated as a
single entity and Corporation will be treated as a component part of Foundation under
Treas. Reg. § 1.170A-9(f)(11).

FACTS

Foundation, a community organization formed by four banks, is established as a trust
under state law. Foundation makes distributions for charitable, educational and
scientific purposes primarily in a six-county region in the state. Foundation is exempt
under § 501(c)(3) of the Internal Revenue Code (Code) and is a publicly supported
organization described in § 170(b)(1)(A)(vi).

Foundation is the sole member of Corporation. Corporation is exempt under
§ 501(c)(3) and is an organization described in § 509(a)(3). Foundation states that it
initially funded Corporation by transferring assets to Corporation and continued funding
Corporation with assets donated to the community foundation. Corporation’s articles of
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incorporation and its bylaws provide that Corporation is organized and operated
exclusively for charitable, educational and scientific purposes for the benefit of
Foundation. Corporation’s governing documents also provide that Corporation’s
purpose is to receive gifts, devises, bequests and contributions and use, invest, reinvest
or distribute funds to support Foundation’s exempt purposes. Corporation represents
that it has been described to the local community as a supporting organization of the
Foundation since its inception.

The Foundation’s Declaration of Trust provides that all gifts, grants, devises or bequests
to the Foundation shall be subject to the provisions contained in the Declaration of Trust
and all agreements to establish funds in trust form have been made subject to the terms
of the Declaration of Trust.

 Corporation’s articles and bylaws provide that Corporation is organized and operated
for the benefit of Foundation. Corporation and Foundation will amend Corporation’s
articles and bylaws to provide that any and all gifts, devises and bequests to
Corporation are subject to the terms and conditions of the organizing documents and
common governing documents of the Foundation. Foundation and Corporation
represent that they use a single distribution committee to evaluate grant requests and
make recommendations to the Foundation’s board. Foundation selects the
recommendations to be funded and identifies funds from both the Foundation and
Corporation to fund the requests.

The organizing documents of the Foundation and Corporation make both organizations
subject to a common governing body. Specifically, Corporation will amend its articles
and bylaws to provide that Corporation’s board shall consist of all the current members
of Foundation’s board of trustees, so that all such individuals are concurrently serving
as members of both the board of directors of the Corporation and the board of trustees
of the Foundation.

Further, the organizing documents of Foundation and the amended governing
documents of Corporation provide that the boards of directors have the power to modify
conditions or restrictions concerning the distributions of income and principal for
charitable purposes and to remove any trustee that has breached its fiduciary duty or
failed to produce a reasonable return on net income.

Foundation and Corporation’s organizing documents require that each prepare annual
reports. Foundation and Corporation represent that they have filed separate Form 990s
each year, although the Foundation has included the net value of funds held by
Corporation on its Form 990 balance sheet as other assets of Foundation.
PLR-107166-18                                  3

Foundation will operate Corporation as one of its component parts and not as a
supporting organization separately recognized as exempt under § 501(c)(3).
Corporation will cease filing a separate Form 990, file a final Form 990 and label it as a
final return. Thereafter, Foundation will fully report the funds and assets of Corporation
on Foundation’s Form 990.

Foundation and Corporation represent that Corporation has been presented to the
community and is perceived to be a single entity with Foundation. All donations in
recent years have been made to Corporation. Foundation and Corporation state that in
light of a trend by the general public to donate to organizations in corporate form rather
than trust form and in recognition of the reduced administrative fees when foundation
assets are held in corporate/custodial form rather than in trust form (which frees up
more funds for charitable purposes), Foundation and Corporation will seek court and
Attorney General approval to transfer Foundation assets held in trust form to custodial
assets held in corporate form by Corporation.

Rulings Requested

        1. Foundation will be treated as a single entity under Treas. Reg. § 1.170A-9(f)(11).
        2. Corporation will be treated as a component part of Foundation under Treas. Reg.
      § 1.170A-9(f)(11)(ii). In addition, any other funds associated with foundation that
      meet the requirements of Treas. Reg. § 1.170A-9(f)(11)(i) also will be treated as
      component parts of Foundation under Treas. Reg. § 1.170A-9(f)(11)(ii).
        3. Because Foundation is treated as a single entity and Corporation is treated as a
      component part of Foundation, Foundation and Corporation will file an annual
      return (Form 990) as a single entity.


LAW

In general, § 6033 provides that every organization exempt from taxation under section
501(a) shall file an annual return. Section 6033(b) generally provides the information to
be furnished annually by organizations described in § 501(c)(3).

Treas. Reg. § 1.170A-9(f)(11)(i) provides that, for purposes of §§ 170, 501, 507, 508,
509 and Chapter 42, any organization that meets the requirements in § 1.170A-
9(f)(11)(iii) through (vi) will be treated as a single entity, rather than as an aggregation of
separate funds. In addition, all funds associated with such organization (whether a
trust, not-for-profit corporation, unincorporated association, or a combination thereof),
which meet the requirements of § 1.170-9(f)(11)(ii), will be treated as component parts
of such organization.
PLR-107166-18                                  4

Treas. Reg. § 1.170A-9(f)(11)(ii) provides that, to be treated as a component part of a
community trust referred to in paragraph (f)(11)(i) of this section, a trust or fund: (A)
must be created by gift, bequest, legacy, devise, or other transfer to a community trust
which is treated as a single entity under Treas. Reg. § 1.170A-9(f)(11); and (B) may not
be directly or indirectly subjected by the transferor to any material restriction or condition
with respect to the transferred assets.

Treas. Reg. § 1.170A-9(f)(11)(iii) provides that the organization must be commonly
known as a community trust, fund, foundation or other similar name conveying the
concept of a capital or endowment fund to support charitable activities in the community
or area it serves.

Treas. Reg. § 1.170A-9(f)(11)(iv) requires that all funds of the organization be subject to
a common governing instrument or a master trust or agency agreement, which may be
embodied in a single document or several documents containing common language.

Treas. Reg. § 1.170A-9(f)(11)(v)(A) requires that the organization must have a common
governing body which directs or, in the case of a fund designated for specified
beneficiaries, monitors the distribution of all funds exclusively for charitable purposes.

Treas. Reg. § 1.170A-9(f)(11)(v)(B) requires that the governing body of a community
trust have the power to:

       (1) Modify any restriction or condition on the distributions of funds for any
           specified charitable purpose or to specified organizations if in the sole
           judgment of the governing body (without the necessity of approval by any
           participating trustee, custodian or agent) such restriction becomes, in effect,
           unnecessary, incapable of fulfillment, or inconsistent with the charitable needs
           of the community or area served;
       (2) Replace any participating trustee, custodian or agent for breach of fiduciary
           duty under state law; and
       (3) Replace any participating trustee, custodian or agent for failure to produce a
           reasonable rate of return.

Treas. Reg. § 1.170A-9(f)(11)(v)(E) provides that the governing body of the community
trust must commit itself to exercise certain specified powers in the best interests of the
community trust.

Treas. Reg. § 1.170A-9(f)(11)(v)(F) provides that the governing body shall (by resolution
or otherwise) commit itself to obtain information and take other appropriate steps with
the view to seeing that each participating trustee, custodian or agent, with respect to
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each restricted trust or fund that is, and with respect to the aggregate of the unrestricted
trusts or funds that are, a component part of the community trust, administers such trust
or fund in accordance with the terms of its governing instrument and accepted
standards of fiduciary conduct to produce a reasonable return of net income, with due
regard to safety of principal, in furtherance of the exempt purposes of the community
trust.

Treas. Reg. § 1.170A-9(f)(11)(vi) requires the organization to prepare periodic financial
reports treating all of the funds which are held by the community trust, either directly or
in component parts, as funds of the organization.

Treas. Reg. § 1.170A-9(f)(12)(i) states: “In the case of a fund that is ultimately treated
as not being a component part of a community trust pursuant to this paragraph (f)(12), if
the Forms 990 filed annually by the community trust included financial information with
respect to such fund and treated such fund in the same manner as other component
parts thereof, such returns filed by the community trust prior to the taxable year in which
the Commissioner notifies such fund that it will not be treated as a component part will
be treated as a separate return for purposes of subchapter A of Chapter 61 of Subtitle
F.

ANALYSIS

Ruling No. 1

Treas. Reg. §1.170A-9(f)(11)(i) provides that, for purposes of §§ 170, 501, 507, 508,
509 and Chapter 42, any organization that meets the requirements described in
§ 1.170A-9(f)(11)(iii) through (vi) will be treated as a single entity, rather than as an
aggregation of separate funds.

Foundation established Corporation as a supporting organization. Foundation and
Corporation have similar names. Both are named for the community they serve and are
commonly known in the community as funds that support charitable activity in that
community. Therefore, Foundation and Corporation will meet the requirement of Treas.
Reg. § 1.170A-9(f)(11)(iii).

Treas. Reg. § 1.170A-9(f)(11)(iv) provides that all of the funds of the organization must
be subject to a common governing instrument or a master trust or agency agreement
which may be embodied in a single document or several documents containing
common language. The organizing documents of the Foundation and the amendments
to the organizing documents of Corporation state that all gifts, devises and bequests are
made subject to a common governing instrument. Therefore, all the donor funds will be
PLR-107166-18                                6

subject to a common governing instrument or a master trust or agency agreement,
which may be embodied in a single document or several documents containing
common language within the meaning of Treas. Reg. § 1.170A-9(f)(11)(iv).
Accordingly, Foundation and Corporation will meet this requirement of Treas. Reg.
§ 1.170A- 9(f)(11)(iv).

Corporation will amend its organizational documents to provide that the board of
directors of Corporation will be the same as the members of the Foundation. Foundation
and Corporation represent that they use a single distribution committee to evaluate
grant requests and make recommendations to the Foundation’s board of trustees.
Thus, the same people have the responsibility to ensure that the application and
distribution of funds are made exclusively for one or more of the Foundation’s charitable
purposes. Accordingly, they will meet the requirement of Treas. Reg. § 1.170A-
9(f)(11)(v)(A).

The organizing documents of Foundation and the amendments to Corporation’s
organizational documents each give their boards of directors the power to modify
conditions or restrictions concerning the distributions of income and principal for
charitable purposes and to remove any trustee that has breached its fiduciary duty or for
failure to produce a reasonable return of net income. Therefore, both Foundation and
Corporation will meet this requirement of Treas. Reg. § 1.170A-9(f)(11)(v)(B).

Foundation and Corporation’s organizing documents require that each organization
prepare annual reports. Foundation will operate Corporation as one of its component
parts and not as a supporting organization separately recognized as a tax-exempt
entity. As such, Foundation will report the funds and assets of Corporation as part of a
single entity. Treas. Reg. § 1.170A-9(f)(11)(vi).

Because Foundation meets all the requirements in Treas. Reg. § 1.170A-9(f)(11)(i),
Foundation will be treated as a single entity rather than as an aggregation of separate
funds for purposes of §§ 170, 501, 507, 508, 509 and Chapter 42.

Ruling No. 2

Treas. Reg. § 1.170A-9(f)(11)(ii) provides that, for purposes of §§ 170, 501, 507, 508,
509 and Chapter 42, all funds associated with an organization treated as a single entity
(whether a trust, not-for-profit corporation, unincorporated association or a combination
thereof) will be treated as component parts of such organization if they meet the
requirements of Treas. Reg. § 1.170A-9(f)(11)(ii).
PLR-107166-18                                 7

To be treated as a component part of Foundation, Corporation: (A) must be created by
gift, bequest, legacy, devise, or other transfer to a community trust which is treated as a
single entity under Treas. Reg. § 1.170A-9(f)(11); and (B) may not be directly or
indirectly subjected by the transferor to any material restriction or condition with respect
to the transferred assets. Treas. Reg. § 1.170A-9(f)(11)(ii).

Ruling No. 1 above holds Foundation will be treated as a single entity under Treas. Reg.
§ 1.170A-9(f)(11)(i). Corporation was created by a transfer from Foundation and has
been operating to support Foundation’s charitable purposes. In addition, the
amendments to Corporation’s articles of incorporation and bylaws will not permit any of
Corporation’s donors to impose any material restrictions or conditions with respect to
the donated assets. Therefore, because Corporation will meet the requirements of
Treas. Reg. § 1.170A-9(f)(11)(ii), Corporation will be treated as a component part of
Foundation. Moreover, all funds associated with Foundation or Corporation that meet
the requirements of Treas. Reg. § 1.170A-9(f)(11)(ii) also will be treated as component
parts of Foundation under Treas. Reg. § 1.170A-9(f)(11)(ii).

Ruling No. 3

Section 6033 generally provides that every organization exempt from taxation under
section 501(a) shall file an annual return. For purposes of §§ 170, 501, 507, 508, 509
and Chapter 42, Ruling No. 1 above holds Foundation will be treated as a single entity,
and Ruling No. 2 holds Corporation will be treated as a component part of Foundation.
Therefore, because Foundation and Corporation are treated as a single entity for
purposes of §§ 170, 501, 507, 508, 509 and Chapter 42, Foundation and Corporation
will file an annual return (Form 990) as a single entity. See, generally, Treas. Reg.
§ 1.170A-9(f)(12)(i) (separate return when not treated as component part).

RULINGS

Based upon the facts and representations submitted:

        1. For purposes of §§ 170, 501, 507, 508, 509 and Chapter 42, Foundation will be
      treated as a single entity under Treas. Reg. § 1.170A-9(f)(11)(i).
        2. For purposes of §§ 170, 501, 507, 508, 509 and Chapter 42, Corporation will be
      treated as a component part of Foundation under Treas. Reg. 1.170A-9(f)(11)(ii).
      In addition, all other funds associated with Foundation or Corporation that
      otherwise meet the requirements of Treas. Reg. § 1.170A-9(f)(11)(ii) also will be
      treated as component parts of Foundation under Treas. Reg. § 1.170A-
      9(f)(11)(ii).
PLR-107166-18                                8

    3. Because Foundation will be treated as a single entity and Corporation will be
     treated as a component part of Foundation for purposes of §§ 170, 501, 507,
     508, 509 and Chapter 42, Foundation and Corporation will file an annual return
     (Form 990) as a single entity.

  The rulings contained in this letter are based upon information and representations
  submitted by the taxpayer and accompanied by a penalty of perjury statement
  executed by an individual with authority to bind the taxpayer and upon the
  understanding that there will be no material changes in the facts. This office has not
  verified any of the material submitted in support of the request for rulings, and such
  material is subject to verification on examination. The Associate office will revoke or
  modify a letter ruling and apply the revocation retroactively if there has been a
  misstatement or omission of controlling facts; the facts at the time of the transaction
  are materially different from the controlling facts on which the ruling was based; or,
  in the case of a transaction involving a continuing action or series of actions, the
  controlling facts change during the course of the transaction. See Rev. Proc. 2018-1,
  § 11.05.

  No ruling is granted as to whether Foundation qualifies as an organization described
  in § 501(c) or § 509(a), and, except as expressly provided above, no opinion is
  expressed or implied concerning the federal income tax consequences of any other
  aspects of any transaction or item of income set forth in the letter ruling.

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

  In accordance with the Power of Attorney on file with this office, a copy of this letter
  is being sent to Foundation’s authorized representatives.

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

  Sincerely,



  Don R. Spellmann
  Senior Counsel
  Exempt Organizations Branch 3
  (Employment Benefits, Exempt Organizations and Employment Taxes)