Foundation's grants for electric buses are qualifying distributions, not self-dealing with its utility founder

Plain-English summary

A private foundation was created and is funded entirely by a regulated electric and gas utility, which makes the utility a "disqualified person" the foundation generally cannot benefit. The foundation wants to make grants that cover the price gap between conventional gasoline or diesel vehicles and more expensive low- or no-emission electric ones, mainly to help the local public bus system and other governments and charities convert their fleets. Because the grantees would buy electric vehicles that might draw power from the utility, the foundation asked the IRS to confirm the grants would not create tax problems. The IRS ruled in the foundation's favor on all four questions. The grants count as "qualifying distributions" under Section 4942(g) because they serve charitable and public purposes (environmental protection and public transit), and they are not "taxable expenditures" under Section 4945 because they go only to governments and public charities for charitable purposes. The grants do not confer impermissible private benefit on the utility, since at most about ten electric buses over five years would add a negligible amount of electricity sales, and the utility's profits are decoupled from sales under state rate regulation. For the same reasons, any benefit to the utility is "incidental and tenuous," so the grants are not self-dealing under Section 4941. The IRS did not rule on the foundation's underlying exempt status.

Ruling snapshot

• Question: Are a utility-funded foundation's grants to subsidize electric-vehicle purchases qualifying distributions, free of taxable-expenditure treatment, private benefit, and self-dealing?
• Outcome: approved (all four rulings granted)
• Key authorities: IRC §§ 4941, 4942(g), 4945; IRC §§ 501(c)(3), 170(c)(1) and (c)(2); Treas. Reg. §§ 53.4941(d)-2(f)(2), 53.4942(a)-3, 53.4945-5, 1.501(c)(3)-1; Rev. Ruls. 70-186, 76-204, 78-68, 80-278, 81-125, 85-162

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202034001 Third Party Communication: None
Release Date: 8/21/2020 Date of Communication: Not Applicable
Index Number: 4942.03-05, 4945.04-00,
501.09-01, 4941.04-00 Person To Contact:
-----------------------, ID No. -----------------
------------------------- Telephone Number:
------------------- -------------------
-------------------------------------------------- Refer Reply To:
-------------------- CC:EEE:EOET:EO3
-------------------------- PLR-110676-19
-------------------------------------- Date:
May 20, 2020

Foundation = ---------------------------------------------------------
Utility = ------------------------------------------------
City = -----------
State = --------------
Bus = ------------------------------
University = -------------------------------------------
Date = --------------------------
Year = -------
Agency = --------------------------------------------------------------------------------------------
Statute 1 = --------------------------------------------------------------------------------------------
Statute 2 = --------------------------------------------
A = -----------
B = -----------
C = -----------
D = -----------
E = -----------
F = -----------
G = --------
H = --------------

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

This letter responds to a request for rulings from your authorized representative dated
May 1, 2019, as supplemented by information submitted in letters dated October 18,
PLR-110676-19 2

2019, and March 18, 2020. The request involves rulings under §§ 501, 4941, 4942, and
4945 of the Internal Revenue Code1 with respect to proposed grants to offset the cost
difference between the purchase of traditional gasoline or diesel vehicles and the
purchase of low- or no-emission electric vehicles.

Facts

Foundation, a non-profit non-stock corporation, was established on Date in State.
Foundation is recognized as a tax-exempt organization described in § 501(c)(3) and is
classified as a private foundation under § 509(a). Foundation’s purpose is to make
contributions for charitable, scientific, literary or educational purposes, or otherwise to
promote such purposes either directly or by making grants or engaging in other
activities in aid of other organizations, enterprises, or persons.

Utility formed Foundation and Foundation receives support only from Utility, making
Utility a disqualified person with respect to Foundation. Utility is the primary provider of
electricity services and natural gas services to customers in and around City, State.

Foundation supports organizations working to improve and preserve the health and
vitality of the local City area. Traditionally, Foundation makes grants in the total amount
of about $A to various charitable and governmental organizations annually. Foundation
currently provides grants to numerous tax-exempt organizations in the City area that
“support vulnerable populations, foster culture, the arts, and history, protect health and
the environment, advance diversity and inclusion, and educate and nurture children.”

In addition to the traditional grants that it has always made and will continue to make in
about the same amount each year, Foundation is proposing also to make grants to Bus
(a subdivision of City that operates the public bus system in and around City), other
state and local governments and/or their political subdivisions, University (a tax-exempt
educational institution and an instrumentality of State), other public educational
institutions, and § 501(c)(3) exempt organizations within the local City, State area.
Foundation represents that Bus is a § 170(c)(1) entity. Foundation represents that the
purpose of the grants is to offset the cost difference between the purchase price of
traditional gasoline or diesel buses or vehicles and the higher purchase price of low- or
no-emission electric buses or other types of electric vehicles (hereinafter “Proposed
Grants”). Foundation further represents that all Proposed Grants will be distributed only
to § 170(c)(1) or § 170(c)(2) organizations. Finally, Foundation represents that any
§ 501(c)(3) recipients of the Proposed Grants from Foundation will not be controlled by
Foundation or Utility, will not be private foundations, and will not be supporting
organizations described in § 4942(g)(4)(A). Foundation states that, for the new
Proposed Grants, it will not distribute more than $B over a five-year period and no more
than $C in any one year.

1 The Internal Revenue Code of 1986, as amended, to which all subsequent section or “§” references are

made unless otherwise indicated.
PLR-110676-19 3

Most of the towns and counties that Foundation serves have set goals to reduce their
carbon outputs. Bus, which is not related to Foundation or Utility, has a goal to convert
its entire fleet of buses to electric propulsion by Year. Foundation represents that the
Proposed Grants would be provided to Bus to subsidize its purchases of electric buses.
The cost of a gasoline or diesel bus is $D per bus. The cost of an electric bus is $E per
bus (nearly twice the cost of a gasoline or diesel bus). Accordingly, the cost difference
between a gasoline or diesel bus and an electric bus is $F per bus, which would be
provided by Foundation. Based upon the amounts of the annual grants and the higher
costs of electric buses, Foundation will be able to only provide grants to support the
purchase of one to two electric buses per year, at the most.

Foundation has made the following representations regarding electric buses. One
electric bus travels approximately 50,000 miles per year and uses 2 kilowatts of
electricity every mile, so an electric bus would use about 100 megawatts of electricity
every year. By comparison, the total amount of electricity produced by Utility is about
3.2 million megawatts per year. Accordingly, one electric bus would use approximately
.003% of Utility’s total electric usage per year. The total cost for the electric usage of
one electric bus is about $G per year. By comparison, the cost for total electric usage
billed annually by Utility is about $H. Accordingly, one electric bus would account for a
minimal .001% of the total costs billed by Utility. Electric buses can run all day on one
charge, and Foundation believes that Bus would likely charge the electric buses at night
during off-peak hours when electricity usage is at its lowest levels. Thus, the amount of
a grant for one electric bus far exceeds the total payments received for presumably
decades of electric usage for one bus, assuming the regulated costs of electricity
remain similar or the same.

Notwithstanding the minimal cost for the electricity usage of one electric bus per year,
Foundation represents that the electricity usage of a bus does not necessarily increase
Utility’s profits due to the regulatory landscape of State utilities. Foundation explains
that profits are decoupled from the sale of electricity in the following way. Foundation
represents that Utility is a fully regulated monopoly in State. Utility is regulated by
Agency, which must approve the rates charged to customers for electricity usage, the
amount and types of major infrastructure investments made by Utility, and a reasonable
return on investment. Statute 1 provides that any rate charged by a public utility for its
service “shall be reasonable and just and every unjust or unreasonable charge for such
service is prohibited and declared unlawful.” Statute 2 provides that if Agency
determines that any rate charged by a public utility for its service is unjust and
unreasonable, Agency shall determine and order reasonable rates and charges. In
order to determine electricity rates to customers, Utility must determine its revenue
requirement, which is based on a number of factors including forecasted sales of
electricity and electric load requirements, the value of Utility’s assets (power plants,
transformers, electrical lines, etc.), the cost of debt and equity financing, and operating
and administrative expenses. Once the revenue requirement is approved by Agency,
forecasted electricity sales are considered to determine the unit cost charged to
customers through electricity rates. If the actual electricity sales are greater than the
PLR-110676-19 4

forecasted sales, Foundation states that Agency would likely determine that the rates
are not “reasonable and just,” as required by statute, and reduce electricity rates for
customers in subsequent years in order to match with the approved revenue
requirement. Accordingly, because of the regulated monopoly rates approved by
Agency, profits are decoupled from the sale of electricity. Utility would only be able to
increase its profits if it was required to invest in a new infrastructure project to meet
additional demands. As provided above, the addition of up to ten electric buses over a
five-year period would produce a negligible increase in Utility’s electric load and would
likely not require the production of a new infrastructure. Additionally, any revenue from
the buses’ minimal use of electricity would likely result in a rate decrease for the
following year if the minimal use resulted in the actual sales being greater than the
projected rates determined by Agency.

Furthermore, the electric buses may not even be charged using Utility’s electricity.
Foundation represents that the Proposed Grants do not include any restrictions
requiring grant recipients to operate the electric vehicles within Utility’s service area or
to charge the electric vehicles only within Utility’s service area. A portion of Bus’s bus
routes are outside Utility’s service area and Bus is currently installing solar panels at its
service center, which would enable Bus to generate its own electricity, so it is possible
that some or all of the buses would not be charged with electricity purchased from
Utility.

Foundation represents that there are many public benefits from the use of electric buses
and other low- or no-emission vehicles. Foundation states that gasoline or diesel
engines release harmful emissions of particulate matter and other pollutants into the air.
This particulate matter contains arsenic, selenium, and sulfates from sulfur dioxide,
which directly contributes to respiratory and cardiovascular illnesses. Emissions from
gasoline and diesel engines also contribute to the formation of ground level ozone,
which can harm an individual’s respiratory system, causing coughing, choking, and
reduced lung capacity. Electric vehicles do not produce any direct emissions into the
environment, thereby reducing carbon emissions and harmful byproducts produced by
gasoline or diesel engines and improving the environment and public health.
Foundation also states that electric vehicles cost less to operate and maintain than
traditional gasoline or diesel vehicles. Foundation submitted several articles to support
its representations regarding the environmental and public health benefits from the use
of electric vehicles. One of these articles by the Environmental Protection Agency
provides that the particle emissions from gasoline and diesel engines are a main cause
of haze in parts of the United States and can cause lakes and streams to become
acidic, change the nutrient balance in coastal waters and river basins, deplete nutrients
in the soil, which can damage forests and farm crops, and affect the diversity of
ecosystems. Particulate Matter (PM) Pollution, U.S. Environmental Protection Agency,
https://www.epa.gov/pm-pollution/particulate-matter-pm-basics#effects.

Rulings Requested
PLR-110676-19 5

Foundation requests the following rulings:

  1.      Foundation’s Proposed Grants to offset the cost difference between the

purchase of traditional gasoline and diesel vehicles and the purchase of low- or no-
emission electric vehicles will be considered qualifying distributions under § 4942(g).

  2.      Foundation’s Proposed Grants to offset the cost difference between the

purchase of traditional gasoline and diesel vehicles and the purchase of low- or no-
emission electric vehicles will not constitute taxable expenditures described in § 4945.

   3.     Foundation’s Proposed Grants to offset the cost difference between the

purchase of traditional gasoline and diesel vehicles and the purchase of low- or no-
emission electric vehicles will not cause Foundation to serve a private interest as
described in Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).

   4.       Foundation’s Proposed Grants to offset the cost difference between the

purchase of traditional gasoline and diesel vehicles and the purchase of low- or no-
emission electric vehicles will not constitute acts of self-dealing between Foundation
and Utility, a disqualified person, because any benefit to be received by Utility will be
incidental and tenuous within the meaning of Treas. Reg. § 53.4941(d)-2(f)(2).

Law and Analysis

Requested Ruling 1 and Requested Ruling 2

Law:

Section 4942(a) generally imposes a tax on the undistributed income of a private
foundation.

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 a qualifying distribution as (A) any amount (including that
portion of reasonable and necessary administrative expenses) paid to accomplish one
or more purposes described in § 170(c)(2)(B), other than any contribution to (i) an
organization controlled (directly or indirectly) by the foundation or one or more
disqualified persons (as defined in § 4946) with respect to the foundation, except as
provided in § 4942(g)(3)2, or (ii) a private foundation which is not an operating

2 Section 4942(g)(3) provides that the term “qualifying distribution” includes a contribution to a § 501(c)(3)

organization described in paragraph (1)(A)(i) or (ii) if—
PLR-110676-19 6

foundation (as defined in § 4942(j)(3)), except as otherwise provided in § 4942(g)(3); or
(B) any amount paid to acquire an asset used (or held for use) directly in carrying out
one or more purposes described in § 170(c)(2)(B).

Section 4942(g)(4)(A) provides that the term “qualifying distribution” shall not include
any amount paid by a private foundation which is not an operating foundation to
(i) any type III supporting organization (as defined in § 4943(f)(5)(A)) which is not a
functionally integrated type III supporting organization (as defined in § 4943(f)(5)(B)),
and (ii) any organization which is described in § 4942(g)(4)(B) or § 4942(g)(4)(C) if a
disqualified person of the private foundation directly or indirectly controls such
organization or a supported organization (as defined in § 509(f)(3)) of such organization,
or the Secretary determines by regulations that a distribution to such organization
otherwise is inappropriate.

Section 4945(a) imposes a tax on each “taxable expenditure” of a private foundation.

Section 4945(d)(4) provides that “a taxable expenditure” includes a grant to an
organization unless (A) the organization is described in § 509(a)(1), § 509(a)(2), or
§ 509(a)(3) (other than a non-functionally-integrated type III supporting organization, or
any other type of supporting organization if a disqualified person of the private
foundation directly or indirectly controls such organization or controls a supported
organization (as defined in § 509(f)(3)) of such supporting organization, or if the
Secretary determines by regulations that a distribution to such supporting organization
otherwise is inappropriate), or an exempt operating foundation as defined in
§ 4940(d)(2)), or (B) the private foundation exercises expenditure responsibility with
respect to such grants in accordance with § 4945(h).

Section 4945(d)(5) provides that a “taxable expenditure” includes any amount paid or
incurred by a private foundation for any purpose other than the ones specified in
§ 170(c)(2)(B). The purposes specified in § 170(c)(2)(B) include religious, charitable,
scientific, literary, and educational purposes, and are purposes that are listed in
§ 501(c)(3).

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 § 170(c)(1) or § 170(c)(2)(B), other than any contribution to: (a) a private

(A) not later than the close of the first taxable year after its taxable year in which such contribution is
received, such organization makes a distribution equal to the amount of such contribution and such
distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this
paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if
such § 501(c)(3) organization were a private foundation which is not an operating foundation), and

(B) the private foundation making the contribution obtains adequate records or other sufficient evidence
from such organization showing that the qualifying distribution described in subparagraph (A) has been
made by such organization.
PLR-110676-19 7

foundation which is not an operating foundation, (b) an organization controlled (directly
or indirectly) by the contributing private foundation or one or more disqualified persons
with respect to such foundation, or (c) a non-functionally integrated type III supporting
organization described in § 4942(g)(4)(A)(i). Section 170(c)(1) provides that the term
“charitable contribution” means a contribution or gift to or for the use of a state, a
possession of the United States, or any political subdivision of any of the foregoing, or
the United States or the District of Columbia, but only if the contribution or gift is made
for exclusively public purposes. Section 170(c)(2)(B) further defines a charitable
contribution to include a contribution to a corporation, trust or community chest, fund, or
foundation that is organized and operated exclusively for religious, charitable, scientific,
literary, or educational purposes.

Treas. Reg. § 53.4945-5(a)(1) provides, in part, 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 § 509(a)(1), (2), or (3) (other than
one described in § 4942(g)(4)(A)), unless the private foundation exercises expenditure
responsibility with respect to such grant.

Treas. Reg. § 53.4945-5(a)(4) provides that for purposes of § 4945, an organization will
be treated as a § 509(a)(1) organization if it is an organization described in § 170(c)(1)
or § 511(a)(2)(B), even if it is not described in § 501(c)(3)), if the grant is made
exclusively for charitable purposes described in § 170(c)(2)(B).

Treas. Reg. § 53.4945-6(b)(1)(v) provides, in part, that any payment that constitutes a
qualifying distribution under § 4942(g) ordinarily will not be treated as a taxable
expenditure under § 4945(d)(5).

Dumaine Farms v. Commissioner, 73 T.C. 650 (1980), acq., 1980-2 C.B. 1, provides
that testing and demonstrating the economic feasibility of practicing environmental
conservation theories on a working farm is educational and scientific and qualifies for
exemption under § 501(c)(3). The purpose of the farm was to demonstrate to local
farmers and the general public the economic feasibility of experimental farming
practices which would conserve the area's ecology and native wildlife. The court stated,
“…petitioner is a model farm operated as a conservation project. Both its experimental
projects and its demonstration function further its overriding purpose of conserving the
ecology...Thus, one of [the farm’s] goals is to demonstrate the economic feasibility of
farming techniques which conserve and protect the environment.” The court found that
the term “scientific” includes scientific research if the research is carried on in the public
interest; additionally, the research must also benefit the public. The court determined
that there was broad public benefit because the farm's conservation work actively
furthered the public policies expressed by Congress in the National Environmental
Policy Act of 1969, 42 U.S.C. secs. 4321-4361 (1976), by emphasizing the restoration
of depleted natural resources to productive use, rather than merely preventing
ecological damage. Because the court found that the farm’s activities qualified it for
exemption as a scientific and educational organization, the court decided that it did not
PLR-110676-19 8

need to reach the question of whether the farm was also operated for "charitable"
purposes because the farm’s activities benefited the community and the general public.

Rev. Rul. 72-560, 1972-2 C.B. 248, holds that an organization formed to educate the
public regarding environmental deterioration due to solid waste pollution qualifies for
exemption under § 501(c)(3). The organization sponsored workshops, conferences,
and exhibits to inform the public of the environmental problems caused by solid waste
materials and the advantages of recycling such materials. By providing information to
the public concerning environmental problems caused by solid waste materials and the
advantages of recycling such materials, the organization is instructing the public on
subjects useful to the individual and beneficial to the community. The ruling further
provided that the recycling of waste materials is an essential element in the
organization's efforts to combat environmental deterioration, since it prevents the
pollution of the environment caused by the usual disposition of these materials. The
ruling concludes that this type of activity serves a charitable and educational purpose.

Rev. Rul. 76-204, 1976-1 C.B. 152, holds that an organization formed for the purpose of
preserving the natural environment by acquiring, by gift or purchase, ecologically
significant undeveloped land, and either maintaining the land itself with limited public
access or transferring the land to a government conservation agency by outright gift or
being reimbursed by the agency for its cost, qualifies for exemption under § 501(c)(3).
The organization worked closely with Federal, state, and local government agencies,
and private organizations concerned with environmental conservation. The ruling
stated, “It is generally recognized that efforts to preserve and protect the natural
environment for the benefit of the public serve a charitable purpose. Restatement
(Second) of Trusts § 375 (1959).” The ruling also stated, “Furthermore, the promotion
of conservation and protection of natural resources has been recognized by Congress
as serving a broad public benefit.” Additionally, the ruling stated, “The benefit to the
public from environmental conservation derives not merely from the current educational,
scientific, and recreational uses that are made of our natural resources, but from their
preservation as well. Only through preservation will future generations be guaranteed
the ability to enjoy the natural environment. A national policy of preserving unique
aspects of the natural environment for future generations is clearly mandated in the
Congressional declarations of purpose and policy in numerous Federal conservation
laws…While the public benefits from environmental conservation are clearly recognized
and measurable, an equally important public purpose is served by preserving natural
resources for future generations.”

Rev. Rul. 78-68, 1978-1 C.B. 149, holds that an organization formed as a Model Cities
Demonstration project to provide bus transportation to isolated areas of the community
unserved by the existing bus system is providing bus service under the authority of the
Federal and local governments and qualifies for exemption under § 501(c)(3).

Rev. Rul. 80-278, 1980-2 C.B. 175, provides that it is generally recognized that efforts
to preserve and protect the natural environment for the benefit of the public constitute a
PLR-110676-19 9

charitable purpose within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(2) and that the
promotion of conservation and protection of natural resources has been recognized by
Congress as serving a broad public benefit with the enactment of the National
Environmental Policy Act of 1969. The ruling states, “In determining whether an
organization meets the operational test, the issue is whether the particular activity
undertaken by the organization is appropriately in furtherance of the organization's
exempt purpose…Two organizations having the same charitable purpose may both be
recognized as exempt even though their viewpoints on the subject may differ, and they
may be undertaking differing, even conflicting, means to accomplish that charitable
objective. See Restatement (Second) of Trusts, section 374, comment 1 (1959). The
law of charity provides no basis for weighing or evaluating the objective merits of
specific activities carried on in furtherance of a charitable purpose, if those activities are
reasonably related to the accomplishment of the charitable purpose, and are not illegal
or contrary to public policy.” Accordingly, the revenue ruling held that an organization
that was formed to protect and restore environmental quality and whose principal
activity consisted of instituting litigation as a party plaintiff to enforce environmental
legislation was operated exclusively for charitable purposes.

Rev. Rul. 81-125, 1981-1 C.B. 515, provides that a grant, for exclusively charitable
purposes, made by a private foundation to a wholly owned instrumentality of a political
subdivision of a state does not constitute a taxable expenditure under § 4945(d)(4) even
though the foundation does not exercise expenditure responsibility, with respect to the
grant in accordance with § 4945(h).

Analysis:

Under § 4942 and the applicable regulations, a qualifying distribution includes any
amount paid to accomplish one or more purposes described in § 170(c)(1) or
§ 170(c)(2)(B) other than any contribution to a non-operating private foundation, an
organization controlled (directly or indirectly) by the foundation or one or more
disqualified persons with respect to the foundation, or a non-functionally integrated type
III supporting organization. These purposes include exclusively public purposes or
charitable purposes. See § 4942(g)(1) and § 53.4942(a)-3(a)(2).

The purpose of the Proposed Grants from Foundation to Bus is to help Bus accomplish
its purpose of providing public bus service consistent with its goal to convert its entire
fleet of buses to electric by Year in order to improve the environment and public health
by lowering emissions and air pollutants. Foundation provided information indicating
that electric vehicles do not produce any direct emissions into the environment, thereby
reducing carbon emissions and harmful byproducts produced by gasoline or diesel
engines, which can cause haze and smog, cause lakes and streams to become acidic,
change the nutrient balance in coastal waters and river basins, deplete nutrients in the
soil, damage forests and farm crops, and affect the diversity of ecosystems.
Accordingly, the reduction of carbon emissions and harmful byproducts can improve the
environment and public health. (Additionally, providing bus service under the authority
PLR-110676-19 10

of local governments can be a charitable purpose. See Rev. Rul. 78-68.) Although
Foundation’s grants will not expand bus service, like the organization described in Rev.
Rul. 78-68, the grants will nevertheless assist a local governmental entity in meeting its
goals of converting its entire fleet of buses to electric in order to achieve carbon
reduction goals in the community. Thus, by aiding Bus’s goal of converting to its fleet to
electric buses in order to improve the environment and public health, the Proposed
Grants to Bus are for exclusively public purposes and charitable purposes as discussed
in more detail below. Accordingly, the Proposed Grants to Bus meet the definition of a
qualifying distribution under Treas. Reg. § 53.4942(a)-3(a)(2).

With respect to possible grants to organizations other than Bus, Foundation proposes to
grant funds to tax-exempt and governmental organizations to enable them to purchase
low- or no-emission electric vehicles rather than just gasoline or diesel vehicles. As
noted above, Foundation represents that electric vehicles reduce carbon emissions and
harmful byproducts produced by gas engines. Foundation plans to provide Proposed
Grants to a governmental or charitable entity for environmental conservation purposes.
Generally, preserving the environment can further a § 170(c)(2)(B) purpose. See Rev.
Rul. 72-560 (preventing pollution of the environment serves a charitable and education
purpose), Rev. Rul. 76-204 (efforts to preserve and protect the natural environment for
the benefit of the public serve a charitable purpose), Rev. Rul. 80-278 (efforts to
preserve and protect the natural environment for the benefit of the public constitute a
charitable purpose), and Dumaine Farms v. Commissioner (testing and demonstrating
the economic feasibility of practicing environmental conservation theories on a working
farm is educational and scientific and benefits the community and the general public).
Therefore, these Proposed Grants would further a § 170(c)(2)(B) purpose.

Foundation further represents that any § 501(c)(3) recipients of the Proposed Grants
will not be controlled by Foundation or Utility, are not private foundations, and are not
supporting organizations described in § 4942(g)(4)(A). Thus, because the Proposed
Grants will further public and charitable purposes described under § 170(c)(1) and
§170(c)(2)(B) and will not be to prohibited organizations described in § 4942(g)(4)(A),
the Proposed Grants will constitute qualifying distributions under § 4942.

Regarding taxable expenditures under § 4945, Foundation represents that the
Proposed Grants will be provided to § 170(c)(1) or (c)(2) organizations. As long as the
Proposed Grants are “qualifying distributions” under § 4942(g), such expenditures
ordinarily will not be “taxable expenditures” within the meaning of § 4945(d)(4). See
Treas. Reg. § 53.4945-6(b)(1)(v). Moreover, if the grants are made exclusively for
charitable purposes to certain public charities as described in § 4945(d)(4)(A) or to a
wholly owned instrumentality of a political subdivision of a state as in Rev. Rul. 81-125,
the payments are not taxable expenditures that are subject to tax under § 4945 without
the Foundation having to exercise expenditure responsibility. See Treas. Reg.
§ 53.4945-5(a)(1) and Treas. Reg. § 53.4945-5(a)(4).
PLR-110676-19 11

As noted in the discussion about qualifying distributions, preserving the environment
can further a § 170(c)(2)(B) educational, scientific, or charitable purpose. See Rev. Rul.
72-560, Rev. Rul. 76-204, Rev. Rul. 80-278, Dumaine Farms v. Commissioner and
§ 4945(d)(5). Since Foundation is making grants only to § 170(c)(1) and (c)(2)
organizations to purchase electric vehicles that will reduce carbon emissions and
harmful byproducts produced by gasoline or diesel engines, and not to prohibited
organizations described in § 4945(d)(4), Foundation is furthering a § 170(c)(2)(B)
charitable purpose. Thus, the Proposed Grants will not be taxable expenditures within
the meaning of § 4945(d)(5).

Requested Ruling 3

Section 501(c)(3) exempts from federal income tax an organization organized and
operated exclusively for charitable, educational, and other exempt purposes, provided
that no part of the organization's net earnings inures to the benefit of any private
shareholder or individual.

Treas. Reg. § 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization
described in § 501(c)(3), the organization must be both organized and operated
exclusively for one or more of the purposes specified in that section.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded as
operated exclusively for exempt purposes if more than an insubstantial part of its
activities is not in furtherance of exempt purposes.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather
than a private interest.

Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945),
provides that the presence of private benefit, if substantial in nature, will destroy the
exemption regardless of an organization’s other charitable purposes or activities.

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the Tax Court
held that an organization whose primary activity was to operate a school to train
individuals for careers as political campaign professionals was not operated exclusively
for an exempt purpose as described in § 501(c)(3) because the school’s activities
conferred impermissible private benefit. The court defined private benefit as “non-
incidental benefits conferred on disinterested persons that serve private interests.”
The court provided that an organization may provide benefits to private individuals
provided those benefits are incidental, both quantitatively and qualitatively. To be
qualitatively incidental, the private benefit must be a necessary outcome of an activity
that benefits the public at large. In other words, the benefit to the public cannot be
achieved without necessarily benefiting certain private individuals. To be quantitatively
PLR-110676-19 12

incidental, the private benefit must be insubstantial, measured in the context of the
overall public benefit conferred by the activity.

Rev. Rul. 69-175, 1969-1 C.B. 149, provides that an organization formed by parents of
pupils attending a private school that provides school bus transportation for its
members’ children serves a private rather than a public interest.

Rev. Rul. 70-186, 1970-1 C.B. 128, involves an organization that was formed to
preserve a lake as a public recreational facility and to improve the condition of the water
in the lake to enhance its recreational features. Although the organization clearly
benefited the public at large, there necessarily was also significant benefit to the private
individuals who owned lake front property. The ruling provided that the private benefit
to the lake front property owners, however, was incidental in a qualitative sense, stating
that the benefits to be derived from the organization’s activities flow principally to the
general public through the maintenance and improvement of public recreational
facilities. Any private benefits derived by the lake front property owners did not lessen
the public benefits flowing from the organization’s operations and did not affect the
organization’s tax-exempt status.

Foundation represents that Utility is the primary provider of electricity to the local City
area. Foundation’s Proposed Grants to Bus and other § 170(c)(1) or (c)(2)
organizations could appear to result in additional sales of electricity by Utility, which
would serve a private interest. However, the stated purpose of the Proposed Grants is
to provide environmental and public health benefits to the local City area, by reducing
carbon emissions and harmful byproducts of gasoline and diesel engines, and by
providing City with buses that are less costly to operate and maintain. Similar to Rev.
Rul. 70-186, where the public recreational element outweighed the private benefit to
certain property owners, the benefits to be received from Foundation’s activities will flow
principally to the general public through the improvements to the environment and the
public bus system. See also Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). Unlike Rev. Rul. 69-
175, any private benefit received by Utility will be merely incidental to the benefits
received by the public and do not lessen those benefits received by the public.

Furthermore, the additional sales of electricity by Utility resulting from the addition of a
maximum of ten electric buses total will be negligible in comparison with Utility’s total
electric sales, and due to the statutorily required regulation of the industry, is highly
unlikely to result in an increase in profits. Additionally, unlike the situation in Rev. Rul.
69-175, where there was a direct and substantial benefit to the parents and children of a
private school, because there is no requirement to use the vehicles within Utility’s
service area, or to charge them using electricity provided by Utility, there may be little or
no direct benefit to Utility. Accordingly, any private benefit potentially received by Utility
will be insubstantial when measured against the overall public benefit resulting from the
activity. See Better Business Bureau of Washington D.C., Inc. v. United States and
Treas. Reg. § 1.501(c)(3)-1(c)(1). Therefore, unlike American Campaign Academy v.
Commissioner, where the organization’s activities conferred impermissible private
PLR-110676-19 13

benefit, any private benefit potentially received by Utility will be both qualitatively and
quantitatively incidental to the public benefit received from the activity, and Foundation’s
activities will not serve a private interest.

Requested Ruling 4

Section 4941(a)(1) imposes a tax on each act of self-dealing between a disqualified
person (as defined in § 4946(a)) and a private foundation.

Section 4941(d)(1)(E) 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.

Section 4946(a)(1)(A) states that the term “disqualified person” includes a substantial
contributor to a private foundation. Section 507(d)(2)(A) provides that the term
"substantial contributor" means any person who contributed or bequeathed an
aggregate amount of more than $5,000 to the 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.

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 since generally the benefit is incidental and tenuous. For
example, a grant by a private foundation to a § 509(a)(1), (2), or (3) organization will not
be an act of self-dealing merely because such organization is located in the same area
as a corporation which is a substantial contributor to the foundation, or merely because
one of the § 509(a)(1), (2), or (3) 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 (1) illustrates that there is only incidental and
tenuous benefit to a disqualified person when a private foundation makes a grant to a
city for the purpose of alleviating the slum conditions which existed in a particular
neighborhood when the disqualified person is located in the same neighborhood.

Revenue Ruling 85-162, 1985-2 C.B. 275, provides that there is no act of self-dealing
under § 4941 if a private foundation, whose disqualified person is a bank, makes loans
to publicly supported organizations for the charitable purpose of construction projects in
disadvantaged areas where the contractors doing the construction may be ordinary
customers of the bank. Any benefit to the bank from the fact that the loan proceeds are
paid by the public charities to the contractors who are ordinary customers of the bank is
incidental or tenuous under Treas. Reg. § 53.4941(d)-2(f)(2).
PLR-110676-19 14

Foundation represents that Utility is the primary provider of electricity to the local City
area. Foundation also represents that Utility is the sole contributor to Foundation and is
a disqualified person of Foundation within the meaning of § 4946(a)(1)(A). Accordingly,
Foundation’s Proposed Grants to cover the cost difference between the purchase of
traditional gasoline or diesel vehicles and the purchase of low- or no-emission electric
buses or other types of electric vehicles could result in additional sales of electricity by
Utility, which is a disqualified person to Foundation. However, the additional sales of
electricity resulting from the addition of a maximum of ten electric buses total will be
negligible in comparison with Utility’s total electricity sales and minimal in relation to the
Proposed Grants. Foundation represents that, because of the statutorily required
regulated monopoly rates approved by Agency, profits are decoupled from the sale of
electricity, and the public benefit of helping charitable and governmental organizations
purchase low- or no-emission vehicles will far outweigh the benefit, if any, to Utility.
Accordingly, Foundation’s Proposed Grants to offset the cost difference between the
purchase of traditional gasoline and diesel vehicles and low- or no-emission electric
vehicles are for the public benefit of City. Similar to the benefit to a disqualified person
in the example in Treas. Reg. § 53.4941(d)-2(f)(9), and to the bank in Rev. Rul. 85-162,
any benefit to Utility from the Proposed Grants is incidental or tenuous within the
meaning of Treas. Reg. § 53.4941(d)-2(f)(2) and does not constitute self-dealing under
§ 4941.

Rulings

Based solely on the facts and representations submitted by Foundation, we rule as
follows:

1. Foundation’s Proposed Grants to offset the cost difference between the purchase of
   traditional gasoline and diesel vehicles and the purchase of low- or no-emission electric
   vehicles will be considered qualifying distributions under § 4942(g).

2. Foundation’s Proposed Grants to offset the cost difference between the purchase of
   traditional gasoline and diesel vehicles and the purchase of low- or no-emission electric
   vehicles will not constitute taxable expenditures described in § 4945.

3. Foundation’s Proposed Grants to offset the cost difference between the purchase of
   traditional gasoline and diesel vehicles and the purchase of low- or no-emission electric
   vehicles will not cause Foundation to serve a private interest as described in Treas.
   Reg. § 1.501(c)(3)-1(d)(1)(ii).

4. Foundation’s Proposed Grants to offset the cost difference between the purchase of
   traditional gasoline and diesel vehicles and the purchase of low- or no-emission electric
   vehicles will not constitute acts of self-dealing between Foundation and Utility, a
   disqualified person, because any benefit to be received by Utility will be incidental and
   tenuous within the meaning of Treas. Reg. § 53.4941(d)-2(f)(2).
   PLR-110676-19 15

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

The Associate Office will revoke or modify a letter ruling and apply the revocation
retroactively if: (1) there has been a misstatement or omission of controlling facts; (2)
the facts at the time of the transaction are materially different from the controlling facts
on which the ruling is based; or (3) the transaction involves a continuing action or series
of actions and the controlling facts change during the course of the transaction. See
Rev. Proc. 2020-1, § 11.05.

Except as specifically set forth above, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter and no ruling is granted as to whether Foundation qualifies as an organization
described in § 501(c) or § 509(a).

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

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

Because it could help resolve questions concerning federal income tax status, this letter
should be kept in Foundation’s permanent records.

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,


                                   Virginia Richardson
                                   Senior Tax Law Specialist
                                   Exempt Organizations Branch 3
                                   (Employee Benefits, Exempt Organizations, and
                                   Employment Taxes)

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