In Private Letter Ruling 202328004 (April 18, 2023), a transferring private foundation sought several rulings involving Internal Revenue Code Sections 507, 4940, 4941, 4942, 4944, 4945, 6033 and 6043 to confirm the tax implications of their plan to transfer substantially all their assets to another PF followed by a voluntary termination, with the goal of consolidating two PFs.
The two PFs, which were created by a shared grantor, controlled by the same two co-trustees, and shared offices and support staff, sought to consolidate their operations to achieve administrative efficiencies. They planned to achieve this through a significant transfer of assets, referred to as a “507(b)(2) transfer.” While IRC Section 507 and its corresponding Treasury regulations outline a series of complex rules that must be followed, the guidance is limited and therefore PFs, such as the ones in this PLR, attempt to adhere as closely as possible to the scenarios that have been previously published as the details, asking for verification of each intended step.
Voluntary Termination
The initial tax hurdle to examine in a Section 507(b)(2) transfer occurs when there’s a voluntary termination of a PF. Section 507 states that a termination tax is assessed against a PF that has its status terminated, but the amount of that tax is equal to the lower of the aggregate tax benefit and the value of its net assets on the day of termination. In this PLR, the rulings concerning the termination tax were twofold. One ruling stated that the initial asset transfer wouldn’t cause a termination of the transferring PF’s status and, therefore, wouldn’t cause any termination tax. A subsequent ruling addressed the occurrence when the transferring PF did provide notice of voluntary termination. The transferring PF indicated it would only provide notice at least one day after it had transferred all its assets to the recipient PF, therefore the ruling was that the resulting tax imposed by Section 507(c) would be zero.
Carryover of Certain Tax Attributes
In addition to the termination tax, additional tax consequences may arise under Treasury Regulations Section 1.507-3(a), which specifies when a Section 507(b)(2) transfer occurs, certain tax attributes of the transferring PF carry over to the receiving PF. There are “standard tax attributes,” such as the aggregate tax benefit and excess business holding periods as well as “Chapter 42 tax attributes.” The Chapter 42 attributes of tax based on investment income (IRC Section 4940), tax on self-dealing (IRC Section 4941), tax on failure to distribute income (IRC Section 4942), tax on investments that jeopardize charitable purpose (IRC Section 4944) and tax on taxable expenditures (IRC Section 4945) were each individually addressed as separate requested rulings within the PLR. The findings for each led to a determination of no tax liability based on the factors of effective control, timing of administrative events and the ultimate transfer of all assets from one PF to another.
The ultimate result of no tax due under this scenario may allow this PLR to serve as further guidance to practitioners and PFs about how to effectively consolidate two PFs through a Section 507(b)(2) transfer.