Private foundation may divide assets among family branches

Plain-English summary

A family private foundation proposed transferring more than 25 percent of its assets to two newly formed private foundations after directors from different family branches disagreed about programs, distributions, and governance. The IRS ruled that the transfers qualify as significant asset dispositions under IRC § 507(b)(2), do not terminate the original foundation, and do not cause the recipients to be treated as newly created organizations for the stated purposes. Because the original foundation receives no consideration and the transfers are not from current income, the transfers do not create net investment income subject to IRC § 4940 or jeopardizing investments under IRC § 4944. The transfers, formation activities, and reasonable related expenses will not be self-dealing if the new foundations receive recognition under IRC § 501(c)(3). Reasonable legal, accounting, and transaction expenses are not taxable expenditures. The asset transfers will be charitable grants rather than taxable expenditures only if the original foundation exercises expenditure responsibility and the recipients are recognized section 501(c)(3) organizations when the transfers occur.

Ruling snapshot

• Question: What private-foundation termination and Chapter 42 consequences follow from transferring a significant portion of the foundation's assets to two new family foundations?
• Outcome: Approved, subject principally to section 501(c)(3) recognition and expenditure responsibility for the recipient foundations
• Key authorities: IRC §§ 507(b)(2), 4940, 4941, 4944, 4945; Treas. Reg. §§ 1.507-3, 1.507-4, 53.4945-5, 53.4945-6

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202535005 Third Party Communication: None
Release Date: 8/29/2025 Date of Communication: Not Applicable
Index Number: 507.00-00, 4940.00-00,
4941.00-00, 4944.00-00, Person To Contact:
4945.00-00 -----------------------, ID No. -----------------
Telephone Number:
------------------------------------------ -------------------
----------------------------------------------------------- Refer Reply To:
---------------------- CC:EEE:EOET:EO1
---------------------------- PLR-121715-24
Date:
June 02, 2025

LEGEND

Foundation = -----------------------------------------------------------
Founder = ----------------------------
A = ---
B = ---------
C = ---------
D = ---------
E = ---------

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

This letter responds to a letter dated December 4, 2024, and subsequent
correspondence, in which the Foundation’s authorized representatives requested on
behalf of the Foundation rulings under sections 507, 4940, 4941, 4944, and 4945 of the
Internal Revenue Code (Code).1

Background

The Foundation is recognized as described in section 501(c)(3) and classified as a
private foundation under section 509(a). The Foundation was funded by distributions
from Founder, deceased, who was a substantial contributor to the Foundation within the
meaning of section 507(d)(2).

The Foundation has a A-person board of directors composed of grandchildren, great-
grandchildren, and spouses of grandchildren of Founder. Because of differing beliefs
among the directors regarding the Foundation’s programs, distributions, and

1 Unless otherwise noted, all references in this letter ruling to “section” refer to the Internal Revenue Code

of 1986, as amended.
PLR-121715-24 2

governance, a decision has been reached that two additional foundations will be formed
of which one class of Founder’s descendants and their spouses will serve as trustees of
one of the new foundations, and another class of Founder’s descendants and their
spouses will serve as trustees of the other (collectively, the “New Foundations”). The
New Foundations are charitable trusts, have applied for recognition as tax-exempt
organizations described in section 501(c)(3), and will be classified as private
foundations within the meaning of section 509(a) (but not as operating foundations as
defined in section 4942(j)(3)).

The Foundation will distribute approximately B percent of the fair market value of its
assets to one of the New Foundations and will distribute approximately C percent of the
fair market value of its assets to the other New Foundation. The Foundation will retain
approximately D percent of the assets that it will own immediately before the transfers to
the New Foundations. The Foundation represents that the aggregate fair market value
of the assets transferred by the Foundation on the date of transfer(s) to the New
Foundations will constitute more than 25 percent of the fair market value of the
Foundation’s assets on the first day of the taxable year in which the proposed transfers
occur.

Once the transfers described above have occurred, the Founder’s descendants and
their spouses associated with forming the New Foundations will cease to serve as
directors and members of the Foundation. The Foundation will receive no consideration
for the amounts transferred to the New Foundations, and none of the amounts
transferred will be out of current income of the Foundation.

All of the directors of the Foundation and trustees of the New Foundations are
disqualified persons with respect to the Foundation and the New Foundations because
they are all descendants of Founder (down to great-grandchildren) or spouses of such
descendants.

The Foundation will not pay any expenses related to the creation of the New
Foundations but intends to pay all reasonable expenses related to the transfer of assets
to the New Foundations, including the reasonable expenses incurred in connection with
this ruling request. The Foundation has represented that the legal, accounting, and
other expenses paid or incurred by the Foundation in connection with the Ruling
Request will be reasonable in amount, and that the Foundation will exercise ordinary
business care and prudence in paying and incurring such expenses. The Foundation
has also represented that it will exercise expenditure responsibility in accordance with
section 4945(h) and Treas. Reg. § 53.4945-5(b) with respect to the proposed transfers
to the New Foundations.

The Foundation has not given, and does not intend to give, notice to the Service of
intention to terminate its private foundation status, nor has the Foundation received from
the Service notice that its private foundation status has been terminated. Further, the
PLR-121715-24 3

Foundation represents that it has not committed any willful repeated acts or any willful
and flagrant act giving rise to liability for tax under Chapter 42.

Rulings Requested, Law, and Analysis

Requested Rulings 1 and 2:

1.) The proposed transfers of approximately E percent of the fair market value of the
Foundation’s assets to the New Foundations will qualify as transfers of assets
described in section 507(b)(2) and will not be described in section 507(a).
2.) The New Foundations will not be treated as newly created organizations as a
result of the transfers.

Section 507(a) provides that, except as provided in subsection (b), the status of any
organization as a private foundation shall be terminated only if (1) it notifies the
Secretary of its intent to accomplish such a termination, or (2) with respect to such
organization, there have been either willful repeated acts (or failures to act), or a willful
and flagrant act (or failure to act), giving rise to liability for tax under Chapter 42, and the
Secretary notifies such organization that it is liable for the tax imposed by
section 507(c), and either such organization pays the tax (or any portion not abated
under section 507(g)) or the entire amount of such tax is abated under section 507(g).

Section 507(b)(2) provides that in the case of a transfer of assets of any private
foundation to another private foundation pursuant to any liquidation or other adjustment,
organization, or reorganization, the transferee foundation shall not be treated as a newly
created organization. See also Treas. Reg. § 1.507-3(a)(1). A transfer described in
section 507(b)(2) is referred to as a “section 507(b)(2) transfer.”

Treas. Reg. § 1.507-3(c)(1) describes the terms “other adjustment, organization, or
reorganization” as including any significant distribution of assets to one or more private
foundations, other than transfers for full and adequate consideration or distributions out
of current income. The term “significant disposition of assets to one or more private
foundations” is defined by Treas. Reg. § 1.507-3(c)(2) as including any disposition or
series of dispositions where the aggregate value transferred is 25 percent or more of
the fair market value of the net assets of the transferor foundation at the beginning of
the taxable year.

The Foundation will transfer to the New Foundations approximately E percent of the fair
market value of the assets that it will own immediately before the transfers to the New
Foundations (approximately B percent of assets to one of the New Foundations and C
percent to the other). The Foundation has represented that the aggregate fair market
value of the assets transferred to the New Foundations will constitute more than 25
percent of the fair market value of the Foundation’s assets at the beginning of the
taxable year in which the proposed transfers occur. The Foundation will not receive any
consideration for the amounts transferred, and none of the amounts will be out of
PLR-121715-24 4

current income. Accordingly, the Foundation’s proposed transfers to the New
Foundations will constitute a significant disposition of assets that will qualify as section
507(b)(2) transfers.

Treas. Reg. § 1.507-4(b) provides, in part, that a private foundation that makes transfers
described in section 507(b)(2) is “not subject to the tax imposed under section 507(c)
with respect to such transfers unless the provisions of section 507(a) become
applicable.” The Foundation has represented that it has not and will not notify the
Secretary of any intent to terminate its status as a private foundation within the meaning
of section 507(a)(1) before the transfers take place, and that it has not either committed
willful repeated acts (or failures to act) or committed a willful and flagrant act (or failure
to act) which gives rise to tax under Chapter 42 within the meaning of section 507(a)(2).

Therefore, because the proposed transfers will be described in section 507(b)(2) and
because the Foundation will not give the notice described in section 507(a)(1) or be
described in section 507(a)(2), the Foundation’s proposed transfers to the New
Foundations will not be described in section 507(a), and the New Foundations will not
be treated as newly created organizations for this purpose.

The conclusion that the New Foundations will not be treated as newly created
organizations is reached herein only for purposes of responding to the Foundation’s
request for the ruling that the proposed transfers will not subject the Foundation to the
tax imposed by section 507(c) because the transfers will be described in
section 507(b)(2). Section 6110(k)(3) provides, in part, that unless “the Secretary
otherwise establishes by regulations, a written determination may not be used or cited
as precedent.” For this purpose, section 6110(b)(1)(A) provides that a “written
determination” generally means “a ruling, determination letter, technical advice
memorandum, or Chief Counsel advice.” The request for rulings to which this letter is
directed was submitted by the Foundation, not by the New Foundations. Accordingly,
the New Foundations may not use or cite this letter as precedent. See also,
section 11.02 of Rev. Proc. 2024-1, 2024-1 I.R.B. 1.

Requested Ruling 3:

   The transfers of assets will not give rise to net investment income (including
   capital gain net income) and will not result in the imposition of tax under
   section 4940.

Section 4940(a) imposes an excise tax on a private foundation’s net investment income
for the taxable year. Section 4940(c)(1) defines net investment income as the amount
by which the sum of the gross investment income and the capital gain net income
exceeds the deductions allowed under section 4940(c)(3). Section 4940(c)(2) provides,
in part, that for purposes of section 4940, the term “gross investment income” means
the gross amount of income from interest, dividends, rents, payments with respect to
PLR-121715-24 5

securities loans, and royalties. Section 4940 does not comprehensively define the term
“capital gain net income.”

In the context of applying sections 507(b)(2) and 4940 to a transfer of all of a private
foundation’s assets to one or more other private foundations, Rev. Rul. 2002-28, 2002-1
C.B. 941, states that section 507(b)(2) transfers do not constitute investments of the
transferor for purposes of section 4940, and therefore the transfers do not give rise to
net investment income subject to tax under section 4940(a).

The Foundation has proposed to distribute an aggregate amount equal to approximately
E percent of the fair market value of its assets to the New Foundations. The Foundation
will not receive any form of consideration for the proposed transfers to the New
Foundations, and none of the amounts transferred will be out of current income. Similar
to the transfers described in Rev. Rul. 2002-28, the Foundation’s proposed transfers of
assets to the New Foundations are transfers described in section 507(b)(2).
Accordingly, the proposed transfers to the New Foundations will not give rise to net
investment income (including capital gain net income) and will not result in the
imposition of tax under section 4940 on the Foundation.

Requested Ruling 4:

   The Foundation will not be deemed to have engaged in an act of self-dealing
   under section 4941 by effectuating the transfers of assets to the New
   Foundations and the transactions contemplated herein, including the formation of
   the New Foundations and the payment by the Foundation of reasonable
   expenses related to the transfer of assets to the New Foundations, including the
   reasonable expenses incurred in connection with this ruling request, provided
   that the New Foundations are recognized by the IRS as organizations described
   in section 501(c)(3).

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

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) defines the term “disqualified person.”
Treas. Reg. § 53.4946-1(a)(8) provides that, for purposes of section 4941, the term
“disqualified person” does not include organizations described in section 501(c)(3)
(other than an organization described in section 509(a)(4)). See also, Situation 1, Rev.
Rul. 2002-28, supra.
PLR-121715-24 6

The New Foundations have applied to the IRS for recognition as organizations
described in section 501(c)(3) and exempt from tax under section 501(a). Section
501(c)(3) organizations are not treated as disqualified persons for purposes of section
4941. See Treas. Reg. § 53.4946-1(a)(8). Accordingly, the Foundation’s proposed
transfers of assets to the New Foundations, the formation of the New Foundations, and
the Foundation’s payment of reasonable expenses related to the transaction, including
the reasonable expenses incurred in connection with this ruling request, will not
constitute acts of self-dealing under section 4941, provided that the New Foundations
are recognized by the IRS as organizations described in section 501(c)(3).

With respect to the request for a ruling, this letter is directed to the Foundation, and not
to the New Foundations or to any disqualified persons with respect to the Foundation or
the New Foundations. As previously stated, section 6110(k)(3) provides, in part, that
unless “the Secretary otherwise establishes by regulations, a written determination may
not be used or cited as precedent.” Accordingly, neither the New Foundations nor any
disqualified persons with respect to the Foundation or the New Foundations may use or
cite this letter as precedent. See section 11.02 of Rev. Proc. 2024-1, supra.

Requested Ruling 5:

   The proposed transfers of assets by the Foundation to the New Foundations will
   not constitute an investment that jeopardizes the charitable purposes of the
   Foundation under section 4944.

Section 4944(a)(1) imposes a tax on any amount invested by a private foundation in a
manner that jeopardizes the carrying out of any of the foundation’s exempt purposes.

Neither section 4944 nor the regulations thereunder define “invest” or “investment.”
However, in the context of applying sections 507(b)(2) and 4944 to a transfer of all of a
private foundation’s assets to one or more other private foundations, Rev. Rul. 2002-28,
supra, states that section 507(b)(2) transfers do not constitute investments for purposes
of section 4944.

Accordingly, the proposed transfers will not constitute investments that jeopardize the
Foundation’s exempt purposes and will not be subject to tax under section 4944(a)(1).

Requested Ruling 6:

   The reasonable legal, accounting, and other expenses paid by the Foundation in
   connection with this ruling request and in effectuating the transfers of assets to
   the New Foundations will not constitute taxable expenditures pursuant to
   section 4945.

Section 4945(a) imposes an excise tax on each “taxable expenditure” made by a private
foundation. Section 4945(d)(5) provides that the term “taxable expenditure” includes any
PLR-121715-24 7

amount paid or incurred by a private foundation for any purpose other than one
specified in section 170(c)(2)(B).

Treas. Reg. § 53.4945-6(b)(2) provides that with respect to any unreasonable
administrative expenses, such expenses will ordinarily be taxable expenditures under
section 4945(d)(5) unless the foundation can demonstrate that such expenses were
paid or incurred in the good faith belief that they were reasonable and that the payment
or incurrence of such expenses in such amounts was consistent with ordinary business
care and prudence. The determination of whether any expenditure is unreasonable
depends upon the facts and circumstances of the particular case. By clear implication,
reasonable administrative expenses are not taxable expenditures under section
4945(d)(5), and an administrative expense, even if later determined to have been
unreasonable, is not a taxable expenditure provided that the foundation demonstrates
that such expense was paid or incurred in the good faith belief that it was reasonable
and that the payment or incurrence of such expense was consistent with ordinary
business care and prudence.

The Foundation has represented that it intends to pay all reasonable expenses related
to the transfer of assets to the New Foundations, including all reasonable expenses
incurred in connection with this letter ruling request. The Foundation has further
represented that the legal, accounting, and other expenses paid or incurred by the
Foundation in connection with this ruling request will be reasonable in amount and that
the Foundation will exercise ordinary business care and prudence in paying and
incurring such expenses. Accordingly, the reasonable legal, accounting, and other
expenses paid by the Foundation in connection with this ruling request and in
effectuating the transfers of assets to the New Foundations will not constitute taxable
expenditures under section 4945.

Requested Ruling 7:

  The proposed transfers of the Foundation’s assets to the New Foundations will
  constitute charitable grants to organizations described in section 4945(d)(4) and
  as such will not constitute taxable expenditures under section 4945, provided that
  the Foundation exercises expenditure responsibility with respect to the transfers
  in accordance with section 4945(h), and provided that the New Foundations are
  recognized by the IRS as described in section 501(c)(3).

Section 4945(a) imposes a tax on each “taxable expenditure” of a private foundation.
Section 4945(d)(4) provides that the term “taxable expenditure” includes any amount
paid or incurred by a private foundation (such as, in this case, the Foundation) as a
grant to a private non-operating foundation (such as each of the New Foundations)
unless the grantor foundation exercises expenditure responsibility with respect to such
grant in accordance with section 4945(h).
PLR-121715-24 8

Treas. Reg. § 53.4945-4(a)(2) provides that for purposes of section 4945, the term
“grants” includes such expenditures as “payments to exempt organizations to be used in
furtherance of such recipient organizations’ exempt purposes.” The Foundation has
represented that the New Foundations have applied to the IRS for recognition as
organizations described in section 501(c)(3) and classified as private foundations under
section 509(a). The New Foundations will not be operating foundations as defined in
section 4942(j)(3) and thus will not be exempt operating foundations under section
4940(d)(2) (which would be exempted from expenditure responsibility).

Treas. Reg. § 53.4945-6(c)(3) provides that if a private foundation makes a transfer of
assets pursuant to section 507(b)(2), the transferred assets will not be considered used
exclusively for purposes described in section 170(c)(2)(B) unless the assets are
transferred to a fund or organization described in section 501(c)(3) (other than an
organization described in section 509(a)(4)) or treated as so described under
section 4947(a)(1). Thus, a private foundation is permitted to transfer its assets to
exempt organizations described in section 501(c)(3), including private foundations,
pursuant to section 507(b)(2), without the transfers being taxable expenditures under
section 4945.

However, Treas. Reg. § 53.4945-6(c)(3) does not override the requirement under
section 4945(d)(4) that grants to private, non-operating foundations be subject to the
expenditure responsibility requirements of section 4945(h). Such an override is
available under Treas. Reg. § 1.507-3(a)(9) when the transfer of assets is a
section 507(b)(2) transfer of all of the transferor’s assets (and the other requirements of
that regulation are satisfied), but it is not available when the transfer does not constitute
a transfer of all of the transferor’s assets, as in this case. Consequently, the Foundation
will have to exercise expenditure responsibility with respect to the distributions to the
New Foundations to avoid liability for tax under section 4945.

Section 4945(h) and Treas. Reg. § 53.4945-5(b) provide that in order to exercise
expenditure responsibility, a private foundation must exert all reasonable efforts and
establish adequate procedures (1) to see that the grant is spent solely for the purpose
for which it is made, (2) to obtain full and complete reports from the grantee on how the
funds are spent, and (3) to make full and detailed reports with respect to such
expenditures to the Service. The Foundation has represented that it will exercise
expenditure responsibility in accordance with section 4945(h) and Treas. Reg.
§ 53.4945-5(b) with respect to the proposed transfers to the New Foundations.
Provided that such expenditure responsibility is exercised and the New Foundations are
recognized by the IRS as organizations described in section 501(c)(3) at the time of the
transfers, the Foundation’s transfers to the New Foundations will be payments to
exempt organizations in furtherance of such organizations’ exempt purposes (and in
furtherance of the Foundation’s exempt purposes), and therefore will constitute
charitable grants under section 4945(d) and will not constitute taxable expenditures
under section 4945.
PLR-121715-24 9

RULINGS

Based on the foregoing, and assuming the accuracy of the facts and representations set
forth herein, we rule as follows:

1.) The proposed transfers will qualify as transfers of assets described in
section 507(b)(2) and will not be described in section 507(a).
2.) None of the New Foundations will be treated as newly created organizations as a
result of the proposed transfers for purposes of applying section 507(b)(2) and
Chapter 42 to the Foundation.
3.) The proposed transfers will not give rise to net investment income (including
capital gain net income) and will not result in the imposition of tax under
section 4940.
4.) The Foundation will not be deemed to have engaged in an act of self-dealing
under section 4941 by effectuating the transfers of assets to the New
Foundations and the transactions contemplated herein, including the formation of
the New Foundations and the payment by the Foundation of reasonable
expenses related to the transfer of assets to the New Foundations, including the
reasonable expenses incurred in connection with this ruling request, provided
that the New Foundations are recognized by the IRS as organizations described
in section 501(c)(3).
5.) The proposed transfers of assets by the Foundation to the New Foundations will
not constitute an investment that jeopardizes the charitable purposes of the
Foundation under section 4944.
6.) The reasonable legal, accounting, and other expenses paid by the Foundation in
connection with this ruling request and in effectuating the transfers of assets to
the New Foundations will not constitute taxable expenditures pursuant to
section 4945.
7.) The proposed transfers of the Foundation’s assets to the New Foundations will
constitute charitable grants to organizations described in section 4945(d)(4) and
as such will not constitute taxable expenditures under section 4945, provided that
the Foundation exercises expenditure responsibility with respect to the transfers
in accordance with section 4945(h), and provided that the New Foundations are
recognized by the IRS as organizations described in section 501(c)(3).

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of the Foundation and accompanied by a penalty of perjury
statement executed by an individual with authority to bind the Foundation, 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 a ruling, it 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
PLR-121715-24 10

change during the course of the transaction. See section 11.05 of Rev. Proc. 2024-1,
supra.

This letter does not address the applicability of any section of the Code or Regulations
to the facts submitted other than with respect to the sections specifically described, and,
except as expressly provided in this letter, no opinion is expressed or implied
concerning the tax consequences of any aspects of any transaction or item of income
discussed or referenced in this letter.

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

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

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

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

                                            Sincerely,



                                            Theodore R. Lieber
                                            Senior Technician Reviewer
                                            Exempt Organizations Branch 1
                                            (Employee Benefits, Exempt Organizations, and
                                            Employment Taxes)

cc: -------------------------------------------------------------
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