Tax alert

IRS grants private foundation extension to make out of corpus election

Aug 09, 2022
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Executive Summary

The IRS granted a private foundation an extension of time to make elections under Treas. Reg. § 53.4942(a)-3(c)(2)(iv) to treat distributions as paid out of corpus. Based on the analysis, the ruling suggests that 9100 relief may be required to correct the omission of such election.

On Aug. 5, 2022, the IRS released PLR 202231010, in which it granted a private foundation’s request for an extension of time to make elections (i.e., 9100 relief) to treat distributed amounts as paid out of corpus to satisfy redistribution requirements for grants received from another private foundation.

Background

Section 4942 imposes a 30 percent excise tax on a private foundation’s undistributed income, or the excess of required minimum distributions over qualifying distributions made before the end of the succeeding tax year. To satisfy its minimum distribution requirement, a private foundation may make grants for charitable purposes to other section 501(c)(3) organizations; however, section 4942(g)(1)(A)(ii) excludes amounts paid to a private non-operating foundation from treatment as “qualifying distributions” unless the grantee foundation satisfies the conduit rules described in section 4942(g)(3).

Under section 4942(g)(3), a private foundation may treat as qualifying distributions grants to another non-operating foundation if the grantee foundation makes qualifying distributions of equal amounts and elects to treat the amounts as distributed “out of corpus.” In other words, both private foundations are not entitled to claim a qualifying distribution on the same funds, and the default rule is that the grantee foundation has the right to claim the qualifying distribution unless it redistributes the granted funds to qualified organizations in a specified time period, does not claim the qualifying distribution associated with such grant, and provides sufficient reporting back to the grantor private foundation. These grants must be made by the grantee foundation no later than the end of the succeeding tax year after the contribution is received. 

Section 4942(h)(1) provides that any qualifying distribution made during a tax year is treated as paid first out of the undistributed income of the immediately preceding taxable year (if any), second out of undistributed income for the taxable year to the extent thereof, and finally out of corpus. In satisfying the redistribution requirements of conduit grants, the regulations permit the grantee private foundation to elect to treat as a current distribution out of corpus any prior year distributions treated as paid out of corpus, provided the amounts have not otherwise been utilized to satisfy any distribution requirements of the foundation. This election must be made by attaching a statement to grantee private foundation’s Form 990-PF.

Overview of relief

The taxpayer in PLR 202231010 received grants from another private foundation for which it agreed to make the relevant regulations, treating a distribution of grants in an amount equal to the amount received as distributions out of corpus. The taxpayer relied on its tax service provider to make the elections in accordance with the grant agreements, and both the taxpayer and grantor foundation operated as though the relevant elections had been made. During the third year of the agreement, after changing tax service firms, the taxpayer discovered that its previous provider omitted the required out of corpus elections, at which point the foundation promptly sought professional advice to correct the oversight.

The taxpayer requested, and the IRS granted, 9100 relief in the form of an extension of time to file the omitted elections. Under § 301.9100-3(a), requests for relief are granted when the taxpayer provides evidence that it acted reasonably and in good faith and that the grant of relief will not prejudice the interests of the government. Based on the Foundation’s representations (including affidavits from the previous tax services firm), the IRS concluded that the taxpayer acted reasonably and in good faith when it relied on a qualified tax professional, operated as if the intended elections were made, and made efforts to correct the failure immediately upon discovery of the omission. 

Accordingly, the IRS granted the taxpayer 60 days from the date of the ruling to file amended Forms 990-PF and attach the elections under the regulations to treat the conduit grants as paid out of corpus. 

RSM Takeaway

This ruling suggests that 9100 relief may be required to correct the omission of an out of corpus election under Treas. Reg. § 53.4942(a)-3(c)(2)(iv) for conduit grants. Based on the analysis, it appears that including the omitted election on an amended Form 990-PF may be insufficient to correct the omission.

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