A private foundation gets 60 days to make late elections its preparer forgot, treating grants from another foundation as distributions out of corpus

Plain-English summary

A private foundation regularly received grants from another private foundation under agreements that required it to pass the money along and to make a specific tax election each year. That election, under Treasury Regulation section 53.4942(a)-3(c)(2)(iv), treats the incoming grants as distributions out of the foundation's corpus, which matters for meeting the annual payout rules that avoid the section 4942 excise tax on undistributed income. The foundation relied on its tax preparer to make the elections, but the preparer failed to do so for two years. A new accounting firm caught the omission while reviewing the Forms 990-PF, and the foundation promptly asked the IRS for more time to make the elections. Under the section 301.9100-3 relief rules, the IRS found the foundation acted reasonably and in good faith (it relied on a professional and came forward before the IRS found the error) and that granting relief would not cost the government any tax. The IRS granted a 60-day extension to make the late elections by filing amended returns.

Ruling snapshot

• Question: Should a private foundation get an extension of time to make late section 53.4942(a)-3(c)(2)(iv) corpus-distribution elections that its tax preparer failed to make?
• Outcome: Approved (60-day extension granted via section 9100 relief)
• Key authorities: IRC § 4942; Treas. Reg. §§ 53.4942(a)-3(c), 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202231010                                            Third Party Communication: None
 Release Date: 8/5/2022                                       Date of Communication: Not Applicable
 Index Number: 4942.00-00, 4942.03-00,
               4942.03-05, 4942.03-06,                        Person To Contact:
               9100.00-00                                     ---------------------------, ID No. ---------------
                                                              -----------------
 -------------------------------------                        Telephone Number:
 ---------------------------------------------------          --------------------
 ------------------------------------------------------       Refer Reply To:
 -------------------------------------------------            CC:EEE:EOET:EO3
                                                              PLR-123555-21
                                                              Date:
                                                              May 10, 2022




 Taxpayer                             = -------------------------------------
 X                                    = -------------------------------------
 Firm 1                               = --------------------------------
 Firm 2                               = ---------------------------
 Year 1                               = ------
 Year 2                               = -------
 Year 3                               = -------

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

This letter responds to a letter from Taxpayer’s authorized representative, dated
November 12, 2021, and subsequent documentation dated February 4, 2022, and May
4, 2022, requesting a ruling permitting an extension of time under § 301.9100-3 of the
Procedure and Administration Regulations to make elections under Treas. Reg.
§ 53.4942(a)-3(c)(2)(iv).

Facts

Each of Taxpayer and X is an organization that is exempt from federal income tax
pursuant to section 501(a) as an organization described in section 501(c)(3). Each is
classified as a private foundation pursuant to section 509(a) and is not an operating
foundation as defined in section 4942(j)(3).

Taxpayer regularly receives contributions from X pursuant to grant agreements that
require Taxpayer to distribute the contributions it receives from X within 12 months of
the year-end of the year in which the contributions are made. From Year 1 to Year 2,
the grant agreements required Taxpayer to make elections under Treas. Reg.
§ 53.4942(a)-3(c)(2)(iv), treating amounts received from X as distributions out of corpus.
Taxpayer represents that it relied on its tax service provider to make the elections in
accordance with the grant agreements. Taxpayer and X each continuously operated in
PLR-123555-21                                2

a manner consistent with Taxpayer having made the elections during Year 1 through
Year 2.

During Year 3, Taxpayer changed its tax service provider, selecting Firm 1 to replace
Firm 2. During Firm 1’s review of Taxpayer’s Forms 990-PF for Year 1 through Year 2,
Firm 1 discovered that Firm 2 had failed to make the elections to treat amounts
Taxpayer received from X as distributions out of corpus in order to satisfy redistribution
rules under Treas. Reg. § 53.4942(a)-3(c). In an affidavit, the prior return preparer from
Firm 2 attested to the facts as presented by Taxpayer, including that Taxpayer relied on
Firm 2 to file its returns and make the elections. After Firm 1 informed Taxpayer that
elections were not made under Treas. Reg. § 53.4942(a)-3(c)(2)(iv), Taxpayer promptly
sought professional advice for correcting the oversight for tax years Year 1 through
Year 2.

Ruling Requested

Taxpayer requests a ruling granting it an extension of time to make elections under
Treas. Reg. § 53.4942(a)-3(c)(2)(iv) for tax years Year 1 through Year 2.

Law

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

Section 4942(c) provides that the term “undistributed income” means, with respect to
any private foundation for any taxable year as of any time, the amount by which (1) the
distributable amount for such taxable year, exceeds (2) the qualifying distributions made
before such time out of such distributable amount.

Section 4942(d) provides that the term “distributable amount” means, with respect to
any foundation for any taxable year, an amount equal to (1) the sum of the minimum
investment return plus the amounts described in subsection (f)(2)(C), reduced by (2) the
sum of the taxes imposed on such private foundation for the taxable year under subtitle
A and section 4940.

Section 4942(g)(1)(A)(ii) excludes from the definition of “qualifying distribution” amounts
paid to accomplish one or more purposes described in section 170(c)(2)(B) to a private
foundation which is not an operating foundation, except as provided in section
4942(g)(3).
PLR-123555-21                                 3

Section 4942(g)(3) provides that the term “qualifying distribution” includes a contribution
to a private foundation which is not an operating foundation if (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 which is treated under subsection (h) as a
distribution out of corpus (or would be so treated if such 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.

Section 4942(h)(1) provides that any qualifying distribution made during a taxable year
shall be treated as made (A) first out of the undistributed income of the immediately
preceding taxable year (if the private foundation was subject to tax imposed by this
section for the preceding year) to the extent thereof, (B) second out of undistributed
income for the taxable year to the extent thereof, and (C) then out of corpus.

Section 53.4942(a)-3(c)(2)(iv) provides that a donee organization may elect to treat as a
current distribution out of corpus any amount distributed in a prior taxable year which
was treated as a distribution out of corpus under paragraph (d)(1)(iii) of this section
provided that (a) such amount has not been availed of for any other purpose, (b) such
corpus distribution occurred within the preceding 5 years, and (c) such amount is not
later availed of for any other purpose. Such election must be made by attaching a
statement to the return the foundation is required to file under section 6033 with respect
to the taxable year for which such election is to apply.

Section 301.9100-1(a) provides that § 301.9100-1, -2, and -3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make a
regulatory election. Section 301.9100-2 provides automatic extensions of time for
making certain regulatory elections when the deadline for making the election is the due
date of the return or the due date of the return including extensions. Section 301.9100-
3 provides extensions of time for making regulatory elections that do not meet the
requirements of § 301.9100-2.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time under the rules set forth in §§ 301.9100-2 and -3 to make a regulatory
election under all subtitles of the Code except subtitles E, G, H, and I.

Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3 will be
granted when the taxpayer provides evidence (including affidavits described in
§ 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and the grant of relief will not prejudice the interests
of the government.
PLR-123555-21                                 4

Section 301.9100-3(b)(1)(i) provides generally that the taxpayer will be deemed to have
acted reasonably and in good faith if the taxpayer requests relief before the failure to
make the regulatory election is discovered by the IRS. In addition, § 301.9100-
3(b)(1)(v) provides that the taxpayer will be deemed to have acted reasonably and in
good faith if the taxpayer reasonably relied on a qualified tax professional, and the tax
professional failed to make, or advise the taxpayer to make, the election.

Section 301.9100-3(b)(2) provides that the 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.

Section 301.9100-3(b)(3) provides that a taxpayer will not be considered to have acted
reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which
an accuracy related penalty could be imposed under section 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.

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

Section 301.9100-3(e)(1) provides that requests for relief under § 301.9100-3 must
provide evidence that meets the requirements in § 301.9100-3(b) and (c), and must
provide additional information as required by § 301.9100-3(e), including certain
affidavits.

Analysis

A taxpayer may seek relief under § 301.9100-1 through -3 for an extension of time to file
an election. Under § 301.9100-3(a), requests for relief subject to § 301.9100-3 will be
granted when the taxpayer provides evidence (including affidavits described in
§ 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and the grant of relief will not prejudice the interests
of the government.

Taxpayer is deemed to have acted reasonably and in good faith as those terms are
used in § 301.9100-3, based on representations made by Taxpayer and affidavits
submitted pursuant to § 301.9100-3(e). Specifically, Taxpayer is deemed to have acted
reasonably and in good faith because Taxpayer requested relief before the failure to
make the election was discovered by the IRS. See § 301.9100-3(b)(1)(i). In addition,
Taxpayer relied in good faith on a qualified tax professional in seeking advice relating to
PLR-123555-21                                  5

the election, expecting that Firm 2 would make the elections consistent with the grant
agreements. See § 301.9100-3(b)(1)(v). Further, the interests of the government will
not be prejudiced by granting the requested relief as the tax liability is the same as a
result of granting the relief as it would be if Taxpayer had filed the elections to be
effective when intended.

Ruling

Based solely on the facts and representations Taxpayer submitted, Taxpayer is granted
an extension of time to make an election under § 53.4942(a)-3(c)(2)(iv) for tax years
Year 1 through Year 2, consistent with the grant agreements. The election shall be
made by filing an amended Form 990-PF for these years and attaching a statement
making the election to each amended return. Taxpayer shall have 60 days from the
date of this letter ruling to file the amended returns. The amended returns and
subsequent returns must reflect carryover amounts consistent with making the
elections.

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

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by penalty of perjury statements executed by
an individual with authority to bind Taxpayer. While this office has not verified any of
the material submitted in support of the ruling request, 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 transaction. See Rev. Proc.
2022-1, 2022-1 IRB 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.

This ruling is directed only to Taxpayer. 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 Taxpayer’s authorized representatives.
PLR-123555-21                                             6

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,



                                                               Kenneth M. Griffin
                                                               Branch Chief
                                                               Exempt Organizations Branch 3
                                                               (Employee Benefits, Exempt
                                                               Organizations, and Employment Taxes)

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