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Part 7. Rulings and Agreements

Chapter 20. Exempt Organizations Determination Letter Program

Section 3. Processing Private Foundations and Other Types of Cases

7.20.3  Processing Private Foundations and Other Types of Cases

7.20.3.1  (11-01-2004)
Overview of Foundations

  1. This IRM section provides procedures for employees in EO Determinations for processing foundation issues, including foundation status under IRC 509(a), IRC 4940(d)(2), IRC 4942(j)(3), and individual grants under IRC 4945(g).

  2. Every organization that qualifies for tax exemption as an organization described in IRC 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term. Organizations excluded from classification as private foundations are commonly referred to as public charities defined in IRC 509(a)(1), IRC 509(a)(2), IRC 509(a)(3), or IRC 509(a)(4).

  3. Private foundations may request further classification as an operating foundation defined in IRC 4942(j)(3) or an exempt operating foundation defined in IRC 4940(d)(2).

  4. Detailed information about private foundations is provided in IRM 7.26, Private Foundations Manual, and IRM 7.27, Exempt Organizations Tax Manual.

7.20.3.2  (11-01-2004)
Foundation Classification

  1. After an organization establishes that it is described in IRC 501(c)(3), EO Determinations is responsible for making a determination of foundation status under IRC 509(a).

  2. A determination of foundation status can be made by issuance of a definitive determination or an advance ruling. See IRM 7.20.3.3.

  3. IRC 508(b) provides that an IRC 501(c)(3) organization is presumed to be a private foundation unless it provides information to establish that it is not a private foundation as defined in IRC 509(a). An organization may overcome this presumption by submitting information to establish that it is not a private foundation when it initially applies for exemption, or upon the expiration of its advance ruling.

  4. IRC 508(b) does not apply to organizations described in IRC 508(c) (churches and organizations with gross receipts of less then $5,000), or to organizations described in IRC 4947(a)(1) (nonexempt charitable trusts).

  5. EO Technical assumes jurisdiction of the foundation issue in cases transferred to it under IRM 7.20.1.3, Identification of EO Technical Cases.

  6. EO Determinations is responsible for making a final determination of foundation status at the end of an advance ruling period for organizations described in IRC 501(c)(3) and analyzing whether an organization is entitled to a definitive ruling as to its public charity status.

  7. Form 5060,Report of Adverse Determination on Private Foundation Status and Private Operating Foundation Status, is the input voucher for publication in the Internal Revenue Bulletin (I.R.B.) of certain adverse foundation determinations. Public charities or operating foundations that fail to maintain their public charity status are reported in the I.R.B. to notify contributors and grantors that these organizations have been reclassified as private foundations.

    1. If an organization does not establish that it is eligible for a definitive ruling that it is a public charity at the end of its advance ruling period, Form 5060 is completed along with other input forms used to update the Master File. Data from the Master File are then used to update Publication 78.

    2. If the organization subsequently establishes through reconsideration that it was a public charity, the Master File is updated to reflect the correct status; however, Form 5060 is not prepared since this information is not reported in the Internal Revenue Bulletin.

7.20.3.2.1  (11-01-2004)
Processing Foundation Cases

  1. When processing a Form 1023, after determining that an organization is entitled to a favorable determination under IRC 501(c)(3), agents need to determine the foundation classification of the organization as a private foundation or a public charity described in IRC 509(a)(1) through IRC 509(a)(4).

  2. If an applicant indicates that it is not a private foundation on Form 1023, it must check the appropriate box to indicate which of the following foundation classifications is most appropriate:

    Entity Type IRC Section Source
    Church 509(a)(1) and 170(b)(1)(A)(i) American Guidance Foundation v. U.S., 80-1 USTC ¶ 9452
    Rev. Rul. 74-224
    IRM 7.25.3.6
    IRM 7.26.2.2
    School 170(b)(1)(A)(ii) Reg. 1.170A-9(b)(1)
    Rev. Proc. 75-50
    IRM 7.25.3.7
    IRM 7.26.2.3
    Hospital/Medical Research 170(b)(1)(A)(iii) Reg. 1.170A-9(c)(1)
    Rev. Rul. 76-452
    IRM 7.25.3.11
    IRM 7.26.2.4
    Educational for the Benefit of State or Municipal Colleges or Universities 509(a)(1) and 170(b)(1)(A)(iv) Reg. 1.170A-9(b)(2)
    IRM 7.26.2.5
    Rev. Rul. 82-132
    Governmental Entities 509(a)(1) and 170(b)(1)(A)(v) IRM 7.26.2.6
    Publicly Supported 509(a)(1) and 170(b)(1)(A)(vi) Reg. 1.170-9(e)(1)
    IRM 7.26.3
    Rev. Rul. 82-132
    Publicly Supported 509(a)(2) IRM 7.26.4
    Supporting Organizations 509(a)(3) IRM 7.26.5
    Testing for Public Safety 509(a)(4) IRM 7.26.5

7.20.3.2.2  (11-01-2004)
Public Charity Issues

  1. If the applicant fails to check the appropriate box or checks more than one box on Form 1023, the appropriate foundation status must be determined. In determining the appropriate foundation status, the agent should consider the following:

    Note:

    Although the following list is not all-inclusive of foundation status issues encountered in a determination case, it provides guidance for many common scenarios.

    1. An organization that receives at least one-third of its support from gifts, grants and contributions from the general public will be described in IRC 509(a)(1) and 170(b)(1)(A)(vi). Where the organization receives at least 10 percent of its support from these sources, it may be described in IRC 509(a)(1) and 170(b)(1)(A)(vi) if it also meets the facts and circumstances test.

    2. An organization that receives income from membership fees may be described in IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) depending on particular facts. As a general rule, if an organization uses membership fees as a means of selling admissions, merchandise, services, or the use of facilities to the general public, who have no common goal, then the income from such fees from related activities constitutes gross receipts described in IRC 509(a)(2). However, to the extent the basic purpose for making the payment is to provide support for the organization rather than to purchase admission, merchandise, etc., the income from such fees constitutes membership fees described in IRC 170(b)(1)(A)(vi). Refer to Reg. 1.509(a)-3(h) and Reg. 1.170A-9(e)(3)(vii).

    3. If an organization is described in both IRC 509(a)(1) and IRC 509(a)(2), the organization will be treated as described in IRC 509(a)(1). Refer to Reg. 1.509(a)-6. However, if the applicant also meets IRC 509(a)(3) and it specifically requests classification as an organization described in 509(a)(3), it may be granted.

    4. If a payment is received from an individual or governmental unit that requires the recipient organization to provide a specific service, facility or product that serves the direct or immediate need of the payor, such payment is considered gross receipts and not a grant. Refer to Reg. 1.509(a)-3(g) and Rev. Rul. 83-153.

    5. If a payment is made by a governmental unit primarily to enable the recipient organization to provide a service or maintain a facility for the direct benefit of the public rather than to serve the direct needs of the payor, it is considered a grant. Refer to Reg. 1.509(a)-3(g).

    6. If an organization appears to be described in more than one section, such as a church in IRC 170(b)(1)(A)(i) and a school in IRC 170(b)(1)(A)(ii), then determine the primary purpose to recommend the appropriate foundation status.

    7. If an organization conducts educational activities, the agent should develop the case to determine if the applicant is operating a school described in IRC 170(b)(1)(A)(ii).

7.20.3.2.3  (11-01-2004)
Organizations that Fail to Qualify for Requested Foundation Classification

  1. After the initial processing of the Form 1023, if the agent determines that the applicant is described in IRC 501(c)(3), and does not qualify for its requested public charity status under IRC 509(a), but qualifies under another paragraph of IRC 509(a), then the agent will:

    1. Advise the organization of the problem and the impact of the change.

    2. Request written approval from the applicant to process the foundation status under the correct paragraph. The applicant may submit a revised page of Form 1023, signed and dated, as written approval.

  2. The agreement to accept an alternative foundation status may be faxed or mailed by the organization.

  3. In circumstances in which the facts clearly indicate that the applicant erroneously checked the wrong foundation classification block on the Form 1023, and the application may otherwise be closed on merit, then the agreement from the organization may be documented by telephone and no written contact is necessary.

  4. An agreement to change from church classification under IRC 170(b)(1)(A)(i) to any other non-private foundation status should be obtained in writing from the applicant even if no other additional information is needed. The reason to get this in writing is that a change from church status under IRC 170(b)(1)(A)(i) to any other non-private foundation status classification is a substantial change since it affects the exception to the Form 990 filing requirement and the loss of protection from most examinations under IRC 7611.

  5. If the organization does not agree with the recommended change in foundation status, then the case should be closed adverse on the foundation issue. See IRM 7.20.2.5.6.

7.20.3.2.4  (11-01-2004)
Failure to Qualify as a Public Charity

  1. ) An agent may determine that an organization may be described in IRC 501(c)(3), but be classified as a private foundation for the following reasons:

    1. The information provided in the Form 1023 application does not support the organization being classified under IRC 509(a)(1)-(4).

    2. The organization agrees to be classified as a private foundation.

    3. The organization fails to respond to requests for information relating to its public charity status at the end of its advance ruling period.

  2. EDS Letter 1079, EO Favorable Determination Letter 501(c)(3) Status-Adverse on Foundation Status, should be issued when the information provided by the organization does not support the organization's claim to being classified as an organization described in IRC 509(a)(1)-(4). Letter 1079 provides an organization with protest rights and IRC 7428 rights with respect to the adverse closing on foundation status. See IRM 7.20.2.10.2.

7.20.3.3  (11-01-2004)
Requests for Public Charity Status under IRC 509(a)(1) and 170(b)(1)(A)(vi) or 509(a)(2)

  1. An organization that qualifies for recognition of exemption under IRC 501(c)(3) may receive a determination of its public charity status under IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) by the issuance of:

    1. A definitive ruling ( see IRM 7.20.3.3.2), or

    2. An advance ruling ( see IRM 7.20.3.3.1).

  2. An organization will receive a definitive ruling on its public charity status under IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2), provided that:

    1. It has completed at least one tax year consisting of at least 8 months, and

    2. It actually meets the support tests of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2).

    Example:

    If an unincorporated exempt association incorporates, then a definitive ruling may be granted to the incorporated organization if the 8-month requirement is met by using the financial data for the period when the organization was an unincorporated association. See Rev. Rul. 73-422, 1973-2 C.B. 70.

  3. If an organization requested a definitive ruling and the exemption application can be closed on merit, but there is some doubt as to whether the financial information is sufficient to issue a definitive ruling, then an advance ruling on foundation status should be issued without securing an agreement or offering an appeal. See IRM 7.20.3.3.1. An advance ruling may be issued only if the organization agreed to extend the statute of limitations for IRC 4940 taxes by completing a Form 872-C.

    1. If the organization did not agree to extend the statute of limitations for IRC 4940 taxes, the organization should be asked to submit a request to change from a definitive to an advance ruling together with an agreement to extend the statute of limitations under IRC 4940.

    2. If additional information is required for another reason, the organization should also be asked to submit a request to change from a definitive to an advance ruling together with an agreement to extend the statute of limitations under IRC 4940.

    IF an organization THEN
    a. Has a first tax year of eight months or more, and has provided actual information It will receive a definitive ruling if it meets the IRC 170(b)(1)(A)(vi)/509(a)(1) or IRC 509(a)(2) support tests for the years in which it has been in existence.
    b. Has a first tax year of eight months or more but has not completed 5 years, and has insufficient operations, but provides budgeted information It may receive an advance ruling if it establishes that it is likely to meet the IRC 170(b)(1)(A)(vi)/509(a)(1) or IRC 509(a)(2) support tests at the end of its advance ruling period.
    c. Has a first tax year of less than eight months, and provides budgeted information for the first year and current year It may receive an advance ruling if it establishes that it is likely to meet the IRC 170(b)(1)(A)(vi)/509(a)(1) or IRC 509(a)(2) support tests at the end of its advance ruling period.
    d. Has not completed 5 years and submits financial information indicating that it fails under IRC 170(b)(1)(A)(vi)/509(a)(1) or IRC 509(a)(2) to meet the support tests for a definitive ruling, and it fails to provide budgeted information that it is likely to meet these tests at the end of an advance ruling period It would be issued an adverse letter as to its foundation status.
    e. Has not provided the information necessary to confirm its public charity status Close the case as "Failed to Establish."

7.20.3.3.1  (11-01-2004)
Advance Ruling Procedures

  1. If an organization has not completed a tax year of at least 8 complete months when it makes application under IRC 501(c)(3), then it must request an advance ruling on its foundation status.

  2. Generally, the advance ruling period is a five-year period beginning on the effective date of exemption and ending on the last day of the organization's fifth tax year. An organization must show through its budgeted financial statements that it can reasonably be expected to be publicly supported prior to an advance ruling being issued.

  3. The organization needs to have executed a specific agreement to extend the statute of limitations under IRC 4940 for an organization to receive an advance ruling on foundation classification. Delegation Order 42 (Rev. 28)(09-13-1995) designates Reviewers, Grade GS-11 or higher, and Group Managers to authorize the extension of the statute of limitations. A signed Form 872-C, Consent Fixing Period of Limitations Upon Assessment of Tax Under Section 4940 of the Internal Revenue Code, will continue to be obtained from an organization as its agreement to extend the statute of limitations until the Form 1023 is revised to be self-executing.

  4. Organizations that qualify for advance rulings or determinations must establish within 90 days after the end of their advance ruling period whether or not they qualify as organizations described in either IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2). See IRM 7.20.3.5.

  5. Procedures for processing advance ruling cases:

    1. Secure from the organization an indication of "no" to item 7 on page 6 of Form 1023. When the new Form 1023 is used, box 6a needs to be checked on page 7.

    2. Also secure an indication in item 9 of box "h," "i" or "j."

    3. On page 7, secure an indication for an "advance ruling" in item 10 and secure two completed Forms 872-C.

    4. Upon closing, agents must indicate on Form 6038 that an advance ruling has been recommended by checking the appropriate block.

7.20.3.3.2  (11-01-2004)
Definitive Ruling Procedures

  1. Definitive rulings are made with respect to foundation status and apply only to organizations applying under IRC 501(c)(3). For a foundation status of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2), an organization may be granted a definitive ruling if it has completed a tax year of at least 8 complete months.

    Example:

    An organization's fiscal year ends December 31. It was formed on May 1. This organization can be considered for a definitive ruling. However, if the organization was formed on May 2, it would not qualify for consideration for a definitive ruling.

  2. The organization's first tax year begins on the effective date of exemption recognition and ends according to its calendar (December 31) or fiscal year (other than December 31) month. Each succeeding full tax year is determined according to its calendar or fiscal year month.

  3. Definitive rulings are given to organizations described in other sections of IRC 509(a)(1) that are not described in IRC 170(b)(1)(A)(vi) or IRC 509(a)(2), regardless whether they completed an 8-month year. For example, churches, schools, and hospitals are not required to meet a public support test; therefore, when exemption is granted, they are given a definitive ruling. Similarly, organizations that are described in IRC 509(a)(3) or IRC 509(a)(4) are given definitive rulings when exemption is granted.

  4. Organizations that must meet a public support test should be granted the "best" public charity classification for which they qualify. For example, consideration of the IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) support test may be given with as little as 10-percent (based on facts and circumstances) total support from exclusively 509(a)(1) sources. Also, some organizations may consider IRC 509(a)(3) classification as their " best" public charity classification.

    1. Note:

      Workpapers are required to provide justification for granting a definitive ruling under any section and should be attached to Form 6038.

  5. If an organization does not first meet the support requirements of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2), consider qualification under a more appropriate section. If it does not qualify as a public charity under any section, then it is classified as a private foundation.

  6. If an organization does not meet the public support test under IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) for a definitive ruling, then, if it can show that it can be reasonably expected to meet the public support test in the future and it is in the first five years after the effective date of exemption, it may be given an advance ruling under IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2).

    Note:

    If a change to a different foundation status is requested (e.g., a status different from the foundation status requested), mention the effect of the change to the organization. If this is done via telephone, be sure to thoroughly document the Case Chronology Record. For example, when asking an organization to switch from IRC 509(a)(1) and IRC 170(b)(1)(A)(i) to any other non-private foundation subsection, tell the organization it will be subject to the annual Form 990 filing requirement.

  7. Exception 1 to the requirement that a publicly supported organization complete an 8-month tax year is when an organization is already recognized as exempt under IRC 501(c)(3) as an unincorporated organization (association or trust) and later incorporates. In this case, a definitive ruling may be granted to the organization, subject to IRC 508(a) and the 27-month filing requirement, using the financial data for the period when the organization was operating as an unincorporated organization. As part of case closing, secure a new EIN for the organization, terminate the exempt status of the unincorporated predecessor using Form 2363-A, and include an addendum to the determination letter such as the following:

    "This determination letter supersedes our determination letter dated (insert date of original determination letter), due to the fact that you changed the character of your organization from (an unincorporated association or trust) to a corporation. Your new employer identification number is shown in the heading of this letter. Please discontinue using the number, (insert previous EIN), which was assigned to you as (an unincorporated association or a trust)."

  8. Exception 2 is when an unincorporated organization (association or trust), that was not already recognized as exempt under IRC 501(c)(3), subsequently incorporates and now requests IRC 501(c)(3) status in conjunction with its application as a corporation. A separate user fee is not required, but secure a conformed copy of the organizing document from the unincorporated organization.

    Note:

    The unincorporated organization is subject to IRC 508(a) and the 27-month filing requirement.

    1. For case closing, use the formation date of the unincorporated organization as the effective date.

    2. If granting an advance ruling, use the formation date of the unincorporated organization to determine the correct advance ruling dates and Form 872-C date. Include an addendum to address the exempt status prior to incorporation such as the following:

      "This determination letter is also effective for the period (insert formation date of unincorporated organization), through (insert date prior to the incorporation date), the period during which you operated as (an unincorporated association or trust)."

  9. An organization must secure a new EIN when it changes its form (e.g., association or trust to a corporation) except as indicated in the above Exception 2. An organization does not need a new EIN if it is changing from a for-profit to a non-profit corporation or if it is reincorporating in a different state.

7.20.3.3.3  (11-01-2004)
Organizations Qualifying for Advance Ruling on Foundation Classification

  1. Form 872-C, Consent Fixing Period of Limitation Upon Assessment of Tax Under Section 4940 of the Internal Revenue Code, should be completed in order for an organization to receive an advance ruling on foundation classification.

  2. Form 1023 is undergoing revisions and will incorporate Form 872-C. Prior to issuance of the revised Form 1023, agents should continue to use the Form 872-C that is part of Package 1023.

7.20.3.3.4  (11-01-2004)
Organizations Not Qualifying for Advance Ruling

  1. An organization may qualify for tax exempt status but not qualify for an advance ruling if it is unable to show that it can "reasonably be expected" to meet the support requirements of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2). In this situation, the organization is treated as a private foundation, if it does not meet the requirements for a definitve ruling. Issue EDS Letter 1051, which includes protest and appeal rights paragraphs.

    Note:

    Generally, organizations that have not completed five years and claim that they expect to receive public support are issued an advance ruling. Therefore, this procedure will be used rarely.

  2. If the organization exercises its appeal rights, then a final determination of private foundation status will be made after these rights have been exercised.

7.20.3.3.5  (11-01-2004)
Dissolution/Merger in Advance Ruling Period

  1. If the organization dissolves or otherwise terminates its existence during the advance ruling period, the foundation status must be resolved before the termination can be considered. Refer to IRM 7.20.2.4.3 for general termination procedures.

    1. If information obtained while resolving the foundation status shows that the public support tests are not met, the organization is a private foundation in its advance ruling period.

    2. If there is potential for IRC 4940 excise tax in the years in the advance ruling period, establish a Foundation Follow-up case on EDS.

  2. Establish a Termination case on EDS. Documentation required in a Termination case is described in IRM 7.20.2.4.3.

  3. Request information to determine if the organization has met the required public support tests. Issue Letter 1050 if the public support tests are met.

  4. This table explains the consequences when an organization dissolves or is involved in a merger during its advance ruling period.

    IF THE ORGANIZATION AND THEN ISSUE LETTER PREPARE
    a. Had little or no investment income (resulting in little or no excise tax potential under IRC 4940) Has, in fact, terminated as an organization and properly distributed its assets There is no need to establish a Foundation Follow-up case or to prepare an adverse foundation status letter. L-2242, Termination Letter 1. Form 2363-A to update the organization’s Master File to 20, Terminated, and
    2. Form 3198, to notify State officials of the termination when necessary.
    b. Had income resulting in excise tax potential under IRC 4940 Has, in fact, terminated and properly distributed its assets Advise the organization that it has been classified as a PF for the years in the advance ruling period and that its exempt status has been changed to reflect the termination of its existence. Prepare the appropriate composed adverse foundation status letter 1. Form 2363-A to update the MF status to 20, Terminated,
    2. Form 3198 to notify State officials of the termination,
    3. Form 5060, and
    4. Form 8670 with status 12.
    c. Does not respond to the request for information and the termination of exempt status The correct foundation classification cannot be determined The organization is presumed to be a private foundation. L-1048.
    Note: adverse procedures do not apply.     		l. Form 2363-A to classify the organization on the MF as a PF having Form 990-PF filing requirements,
    2. Form 3198 to notify State officials,
    3. Form 5060, and
    4. Form 8670 with status 12.
    NOTE: Input 999999 in Box 31 of Form 2363-A to delete the advance ruling ending date on the MF.

7.20.3.3.6  (11-01-2004)
Effective Date of Private Foundation Classification in Advance Rulings

  1. If the organization is determined to be a private foundation based on its advance ruling period, the effective date of the private foundation classification is:

    1. The date of the adverse determination letter, if the requested information is submitted within the 90-day period following the end of the advance ruling period, or

    2. The 91st day after the end of the advance ruling period, if the organization submitted the requested information after the 90-day period following the end of the advance ruling period.

7.20.3.3.7  (05-09-2008)
Requests for Reconsideration of Public Charity Status

  1. Occasionally, an organization that has been issued a favorable determination on public charity status will request a reconsideration or update to change its public charity status under IRC 509(a)(1) through IRC 509(a)(4).

    • An organization classified under IRC 509(a)(3) as a Type I, II or III may also request a determination to change its Type. This includes changing to a functionally integrated or other than a functionally integrated Type III.

  2. These types of cases should be controlled as Amendment (A) cases.

  3. The organization should provide sufficient information to enable the agent to make an independent determination of the correct foundation classification.

    1. If the information provided supports the reclassification and the organization remains a public charity, issue a letter similar in format to Letter 1050. Indicate that the prior ruling or determination letter has been modified with respect to the holding on public charity classification. Since the organization requested the change, do not include a paragraph on protest and appeal rights.

    2. If the organization requests reclassification as a private foundation, issue a composed letter. Since the organization requested the change, do not include a paragraph on protest and appeal rights. The case is subject to mandatory review. See IRM 7.20.3.3.7.1, Voluntary Requests for Private Foundation Status, for detailed procedures.

    3. If the organization requests confirmation or reclassification of its public charity status, but the information provided supports the reclassification to private foundation status, issue an adverse letter with protest and appeal rights.

    4. If there is no change to its public charity status, issue an affirmation of public charity status.

7.20.3.3.7.1  (05-09-2008)
Voluntary Requests for Private Foundation Status

  1. An organization that has received an exemption status determination letter under IRC 501(c)(3) and has been classified as a public charity described in either IRC 509(a)(1) and IRC 170(b)(1)(A)(i) through 170(b)(1)(A)(vi), 509(a)(2), 509(a)(3), or 509(a)(4) may seek to have its classification changed from public charity status to that of a private foundation.

    • A nonexempt charitable trust that has received a foundation status determination classifying it as an organization described in IRC 509(a)(3) pursuant to Rev. Proc. 72-50, 1972-2 C.B. 830, may also request to change its foundation status and seek classification as a private foundation.

  2. The Exempt Organizations Determinations office has the authority to issue a determination letter in response to an organization's request for a change in its foundation status pursuant to Section 7.04 of Rev. Proc. 2008-4 (updated annually). The determination is subject to public inspection under IRC 6104.

    Note:

    For general disclosure information, refer to IRM 11.3.9, Disclosure of Official Information – Exempt Organizations.

  3. When an organization submits a request for reclassification to private foundation status, an Amendment (A) case is established. A composed letter is issued for this type of request. Since the organization is requesting the change, the letter should not include protest or appeal rights.

  4. These cases are subject to mandatory review. See IRM 7.20.5.4,Cases Subject to Review.

  5. Since private foundation classification is a default status under IRC 509(a), an organization may request private foundation status because it no longer qualifies, or because it no longer wants to be treated, as an organization described in IRC 509(a)(1), (2), (3), or (4).

  6. The following is a list of the actions required to process a request for reclassification to private foundation status. A composed development letter should be used to obtain information:

    1. Determine that the organization is voluntarily requesting status as a private foundation described in IRC 509(a).

    2. Determine that the organization understands the consequences of being reclassified as a private foundation. For example, the organization will be subject to the requirement that it file Form 990-PF and that it will be subject to PF excise tax provisions under Chapter 42 (i.e., IRC 4940 through IRC 4948).

    3. Address IRC 508(e). Most states have statutes that address issues relating to IRC 508(e). See Rev. Rul. 75-38, 1975-1 C.B. 161.

    4. Consider IRC 4945(g). If the organization will be conducting individual grant-making activity for travel, study, or other similar purposes, it will need advance approval of its grant making procedures. See IRM 7.20.3.4, Advance Approval of Individual Grants Under IRC 4945(g).

    5. If the organization appears to qualify for private operating foundation status, the specialist should develop the facts.

    6. Determine the effective date of private foundation status.

      • The effective date that an organization is classified as a private foundation is generally the first day after the tax year in which the organization fails the public support test if it was previously determined to be a public charity under IRC 509(a)(1) and IRC 170(b)(1)(A)(iv) or (vi) or IRC 509(a)(2).

      • For other public charities, the effective date occurs when an organization no longer qualifies as a public charity or when it voluntarily relinquishes its status as a public charity. If possible, the effective date should be the first day of a tax year to avoid part-year information returns (i.e., Forms 990 and 990-PF).

      Note:

      If the effective date is other than the first day and month of a tax year, consult with your manager, since the organization may have a Form 990 and Form 990-PF filing obligation for the tax year.

      • Perform IDRS research to determine whether the organization has filed Form 990-PF for the tax year in which it is reclassified as a private foundation so that information can be provided to the organization about its filing requirement, as noted in the sample letter referred to in (7) (a) below.

  7. The following is a list of actions required to approve a voluntary request for reclassification to private foundation status:

    1. Prepare a composed approval letter and enclose Publication 4221-PF. See Exhibit 7.20.3-1 for a sample letter. See the Note in 7.20.3.3.7.1(6)(f) above, if an organization has an effective date for classification as a private foundation other than the first day and month of a tax year.

    2. Prepare Form 8670 with closing Status Code 01 on Screen 1. The information on Screen 2 should remain the same except as follows:

      • Foundation Code should be 04.

      • Filing Requirements will be 01 for Form 990-PF. Also, input any other filing requirement codes listed on BMFOLO (e.g., 941, 990-T, etc).

      • If BMFOLO shows a Form 990 filing requirement (either 01 or 02), this must be zeroed-out (00) on Form 8670.

    3. Prepare Form 3198-A and identify the case as Mandatory Review - Voluntary PF Request.

    4. Forward the case to Quality Assurance.

7.20.3.3.8  (11-01-2004)
Private Foundation Terminations Under IRC 507

  1. A private foundation (PF), which has not been presumed to be a private foundation, may voluntarily terminate its private foundation classification under IRC 507(a)(1).

    1. The PF must submit notification of its intent to terminate under IRC 507(a)(1) to EO Determinations. The notice will detail the computation and amount of tax imposed under IRC 507(c).

    2. The PF must pay the tax imposed under IRC 507(c) unless the tax is abated under IRC 507(g).

    3. The organization’s private foundation status is not terminated until the tax is paid in full or the procedures set forth under IRC 507(g)(2) have been completed and the IRC 507(c) tax has been abated.

    4. An IRC 501(c)(3) organization that terminates its private foundation status under IRC 507(a)(1) is no longer treated as exempt under IRC 501(c)(3).

    5. Control the case on EDS as a P case. In all cases coordinate processing the case with the EO Technical IRC 507 contact. The organization may have requested and received a private letter ruling before filing its notification of termination.

      Note:

      Do not update the Master File to reflect the termination until the termination is completed.

    6. A private foundation will automatically terminate its private foundation status under IRC 507(b)(1)(A) by distributing all its net assets to one or more organizations with a ruling or determination letter described in IRC 509(a)(1). However, the organization to which the distribution is made must have been in existence and so described for a continuous period of at least 60 months before the distribution.

  2. If a private foundation wishes to terminate its private foundation status under IRC 507(b)(1)(B), it must submit the following information to EO Determinations before the commencement of the termination period:

    1. Name and address of the private foundation.

    2. Its intention to terminate its private foundation status and a description of how it intends to become a public charity. (For example, if it intends to become an IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) organization, it would describe how it intends to attract the necessary public support, including providing proposed budgets that list anticipated public support).

    3. Applicable Code section under which it is seeking classification as a public charity.

    4. Date its regular (or new) tax year begins.

    5. Date the 60-month period begins.

    6. An executed Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise Taxes, for Chapter 42 excise taxes described in IRC 4940 through IRC 4945.

  3. An organization that fails to meet a public support test at the end of its advance ruling period and is classified as a private foundation may request IRC 507 termination. The earliest the 60-month period begins is the beginning of the first fiscal year after the organization requests the IRC 507 termination. See IRM 7.20.3.3.8.

    1. If the organization is presumed to be a private foundation, then the organization needs to follow the rules in IRM 7.20.3.5.4.

  4. In addition, if the organization does not want to pay the IRC 4940 tax in the 60 month period, it must submit Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise Taxes, to extend the statute for IRC 4940 tax for each of the 5 taxable years in the 60-month period plus an additional 3 years, 4 months, and 15 days beyond the end of the first tax year. The Form 872-B must extend the statute for Chapter 42 excise taxes described in IRC 4940 through IRC 4945.

    Example:

    If the first year in the 60-month period ended 12/31/94, the statute must be extended to 5/15/2002.

    Note:

    The organization may pay the IRC 4940 tax and file a claim for refund at the end of the advance ruling period instead of filing the Form 872-B. However, the Form 872-B must be submitted to extend the statute for Chapter 42 excise taxes described in IRC 4941 through IRC 4945.

  5. If the organization requests an advance ruling, signs Form 872-B and appears likely to satisfy the requirements of IRC 507 in the 60-month period:

    1. Issue Letter 2245.

    2. Prepare Form 2363-A to update the Master File to status 25 and to input the advance ruling date.

    3. Close case status 01 on screen 1 of Form 8670.

  6. Although the organization will be treated as a public charity by contributors during the 60-month termination, it continues to have a Form 990-PF filing requirement. Do not update the filing requirement to Form 990.

  7. If, at the end of the 60-month period, the organization has provided sufficient documentation to show that it has met the requirements of IRC 507(b)(1)(B), issue the composed approval letter for a P case at the end of the 60-month termination and prepare Form 2363-A to remove the advance ruling date.

  8. If it can be shown that an organization was improperly classified as a private foundation (e.g., the Service failed to consider IRC 509(a)(3) on the Foundation Follow-up), then set up an A case and immediately convert the organization to non-PF status without going through the IRC 507 termination period.

  9. If the organization was unable to show that it qualified for public charity status at the end of its advance ruling period, then the case should be closed adverse, even if the organization signs Form 6018 agreeing to the classification as a private foundation. Refer to adverse procedures in IRM 7.20.2.2.11, et seq.

  10. If the organization submits a notification of a 60-month IRC 507(b)(1)(B) termination at the same time that it is classified as a private foundation at the end of its advance ruling period, the 60-month period begins with the first fiscal year after the IRC 507 termination is submitted. If the organization changes its accounting period, the 60-month period begins with the first new fiscal year after the IRC 507(b)(1)(B) termination notice is submitted.

7.20.3.3.9  (11-01-2004)
Private Operating Foundation Status Under IRC 4942(j)(3)

  1. The following procedures apply to organizations that meet the requirements of a private operating foundation under IRC 4942(j)(3).

    IF an organization THEN issue
    a. Admits in its application or Foundation Follow-up that it is a private foundation and meets the requirements of IRC 4942(j)(3) Letter 1075(DO/CG). Note: If the organization appears to qualify as a private operating foundation, either on the Form 1023 application or in information submitted in a Foundation Follow-up case, but fails to request the private operating foundation status, raise and develop the issue.
    b. Claims in its application that it is a private operating foundation, and has not been issued a determination letter on its exempt status, and does not meet the requirements of IRC 4942(j)(3) A composed letter similar to Letter 1080(DO/CG) and follow adverse procedures.
    c. That has been in existence for less than a year and submits a good faith determination with its application EDS Letter 1075. An affidavit or opinion by the organization's counsel that the assets test and one of the other tests are likely to be met is considered a good faith determination. See Reg. 53.4942(b)-3(b)(2).
    d. Previously classified as a private foundation requests classification as a private operating foundation and meets the requirements of IRC 4942(j)(3) Letter 1077(DO/CG). If the organization does not qualify as a private operating foundation, follow adverse procedures.

7.20.3.3.10  (11-01-2004)
Nonexempt Charitable Trusts (NECTs)

  1. A nonexempt charitable trust (NECT) is a trust that has not obtained a determination from the IRS that it is exempt from federal income tax, has had a charitable deduction allowed, and all of the unexpired interests are devoted to one or more charitable purposes. A nonexempt charitable trust is treated as a private foundation described in IRC 501(c)(3).

  2. Since IRC 508(b) does not apply to nonexempt charitable trusts, such trusts do not have to notify the Service about their foundation status.

  3. A nonexempt charitable trust may request a determination of its foundation status under IRC 509(a)(3). Refer to Rev. Proc. 72-50, 1972-2 C.B. 830, for procedures for an NECT to follow to request a determination letter that it is described in IRC 509(a)(3). These cases are not applications for exempt status. A request under Rev. Proc. 72-50 indicates that the trust is not trying to establish exemption from income tax, but wants to be classified as a public charity under IRC 509(a)(3). Therefore, the organizational test under IRC 501(c)(3) is not met.

7.20.3.3.10.1  (11-01-2004)
Processing NECTs

  1. The request from an IRC 4947(a)(1) trust for classification as a public charity is established on EDS as an A case. The organization is not required to pay a user fee. The agent may need to solicit additional information to determine if the trust meets the guidelines of Rev. Proc. 72-50.

    1. If a request for public charity status is being approved:
      Prepare EDS 1071 approval letter.
      Status code on Screen 1 of EDS is 12.
      Prepare Form 2363-A to update the Subsection to 91 and the Type of Organization to 6 using Definer Codes A and B. Refer to IRM 7.20.2.5.3.

    2. If the request is not approved, follow adverse procedures and refer to Rev. Proc. 76-34.
      Prepare a composed letter and classify the trust as a private foundation.
      Status code on Screen 1 of EDS is 40.
      Prepare Form 2363-A to update the Subsection to 92 and the Type of Organization to 6 using Definer Codes A and B. Refer to IRM 7.20.2.5.3.

  2. An NECT may determine that an IRC 501(c)(3) determination letter is needed and will need to file a Form 1023. The trust must meet the organizational, operational tests and all other requirements before a determination is granted. If the determination is granted, then the trust is no longer an NECT. If the organization is unable to meet these requirements, the application may be closed as a withdrawal (per organization's request) or as a " Failure-to-Establish" (FTE):

    1. Issue appropriate closing letter with the following addendum:

      Since you are considered a charitable trust under IRC 4947(a)(1) that is treated as a private foundation, you are subject to the following requirements:

      • Form 990-PF

      • Form 1041 (If the trust has zero taxable income under Subtitle A of the Code, Form 990-PF may be used to satisfy the requirements of filing Form 1041)

      • Form 4720, if there is a liability for Chapter 42 excise tax (excluding section 4940).

    2. Prepare Form 2363-A to update the Subsection to 92 and the Type of Organization to 6 using Definer Codes A & B.

    3. Status code on Screen 1 of EDS is 12.

7.20.3.4  (11-01-2004)
Advance Approval of Individual Grants Under IRC 4945(g)

  1. Under IRC 4945(g), private foundations are required to request advance approval procedures for certain individual grants, including scholarships, fellowships, educational loans, and similar grants intended to enhance an individual’s educational, artistic, or scientific abilities. If a request for advance approval is not submitted, individual grants described in IRC 4945(g) are taxable expenditures under IRC 4945(d)(3).

  2. A request for advance approval of individual grant procedures may be made either with an application for exemption or by a separate request for a ruling letter after an organization obtains exemption.

  3. If possible, separate requests should be worked within 45 days from the control date of the request. Reg. 53.4945-4(d)(3) provides that:

    "If, by the 45th day after a request for approval of grant procedures has been properly submitted to the Internal Revenue Service, the organization has not been notified that such procedures are not acceptable, such procedures must be considered as approved from the date of submission until receipt of actual notice from the Internal Revenue Service that such procedures do not meet the requirements of this section. If a grant to an individual for a purpose described in section 4945(d)(3) is made after notification to the organization by the Internal Revenue Service that the procedures under which the grant is made are not acceptable, such grant is a taxable expenditure under this section."

  4. Rev. Rul. 81-46, 1981-1 C.B. 514, includes examples of how the 45-day rule works.

  5. Organizations seeking advance approval of grant-making procedures must specify whether the approval is requested under IRC 4945(g)(1), (2) or (3). (This is to prevent the private foundation from later claiming protection under the 45-day rule where it requested approval under IRC 4945(g) and the Service assumed the grant program was a scholarship, award or specific grant).

7.20.3.4.1  (11-01-2004)
IRC 4945(g) Request as Part of Form 1023

  1. For purposes of the 45-day rule of Reg. 53.4945-4(d)(3), an organization that makes a full and complete disclosure of its grant-making procedures with its Form 1023 is considered to have requested approval of its grant-making procedures. This disclosure is considered equivalent to a request for advance approval of grant-making procedures even though the organization did not specifically request such a determination or check the appropriate block on the application. See Rev. Rul. 86-77, 1986-1 C.B. 334, for an example of how this rule works.

  2. The agent will:

    1. Contact the organization to confirm that the organization is requesting advance approval and whether the request is for approval under IRC 4945(g)(1), (2) or (3).

    2. If the request for approval of grant-making procedures is submitted as part of the Form 1023, issue a single letter, EDS Letter 1076, EO Favorable Determination to a Non-Operating Private Foundation, for exempt status and approval of grant-making procedures.

    3. When preparing Letter 1076, use the appropriate paragraph in the table below that applies to the facts and circumstances.

    IF THEN Use Paragraphs
    a. The grant is approved 3239, 3240 and 3241
    b. The approved grant is employer related 3243, 3244, 3245, 3246, 3247 and 3248
    c. The loan is approved 3250, 3251 and 3552
    d. The loans are employer approved 3254, 3255, 3256, 3257 and 3258
    e. Approving grants and loans 3260, 3261, 3262 and 3263
    f. The grants and loans are employer related 3265, 3266, 3267, 3268, 3269, 3270, 3271, 3272

7.20.3.4.2  (11-01-2004)
IRC 4945(g) Request Submitted After Exemption is Approved

  1. If the request for approval of grant-making procedures is received after tax exempt status has been approved, control the case as an Amendment case on EDS.

  2. If the grant-making procedures are approved, issue a composed letter to the private foundation. A sanitized version of the composed letter should also be prepared. The letter using legends must recite the pertinent facts regarding the foundation’s grant program. Use the appropriate EDS paragraphs listed in the table above in the composed letter.

  3. The request for approval of grant-making procedures is subject to mandatory review. Refer to IRM 7.20.5.4.

  4. Because the request for approval of grant-making procedures is submitted after tax exemption is approved, the letter is treated as a ruling to which the disclosure rules of IRC 6110 apply. The organization may review the proposed letter and request deletions before issuance of the letter. Notice 441, prepared by Quality Assurance and Review, accompanies the approval letter and the sanitized copy sent to the organization.

  5. The "6110/4945(g) case" is microfiched and therefore requires special instructions for future public requests. Include a Form 1725 to be microfiched with the case with instructions:

    " The Materials in the File Relate to a Ruling Request Under IRC 6110. This Material is Not Available for Public Inspection Under IRC 6104."

7.20.3.4.3  (11-01-2004)
Requesting Advice from EO Technical

  1. Under the following circumstances, advice should be requested from EO Technical by telephone or email concerning approval of grants under IRC 4945(g):

    1. Cases with no published precedent

    2. Proposed adverse cases

    3. Cases involving employer–related scholarship and educational loan programs under Rev. Proc. 76-47, 1976-2 C.B. 670 and Rev. Proc. 80-39, 1980-2 C.B. 772, respectively, involving the "facts and circumstances test"

    4. Cases in which the organization does not clearly meet the requirements of Rev. Proc. 76-47 or Rev. Proc. 80-39

7.20.3.4.4  (11-01-2004)
Processing Advance Approvals

  1. The authority to issue IRC 4945(g) advance approval of grant-making procedures for private foundations has been delegated to the EP/EO Determination Processing Office. See Rev. Proc. 2004-4 (reissued annually).

  2. The requests are controlled on EDS as A cases and are required to be worked within 45 days. These cases are designated to stay in Cincinnati by the screeners. These requests are only those made by organizations which are already exempt.

7.20.3.5  (11-01-2004)
Foundation Follow-up Overview

  1. EO Determinations is responsible for classifying organizations that have received an advance ruling as publicly supported organizations or private foundations at the end of the advance ruling period. Certain procedures, specified below, need to be performed before the end of the advance ruling period.

  2. Organizations that have received advance rulings on their foundation status that they will be treated as organizations described in IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2), must, within 90 days after the end of their advance ruling period, provide information to establish whether or not they meet the public support test.

    1. Prior to the end of the advance ruling period, Letter 1046 is mailed to the organization along with Form 8734 by the Determination Processing Office.

    2. The organization must complete Form 8734 and return it within 90 days from the date its advance ruling period ended.

    3. Upon receipt of the Form 8734, the case is established on EDS as an F case.

    4. The support data is forwarded for screening and may be merit closed or assigned to an agent for further development.

  3. If the organization does not provide the support data on the Form 8734 that it is not a private foundation within the 90-day time period, then it will be presumed to be a private foundation. See Reg. 1.508-1(b)(2)(iv).

  4. If an organization does not provide the support data, then the Master File is updated to reflect the presumptive private foundation status. If the organization files a Form 990, the return will not post because of the mismatch in filing requirements and the kind of return filed. If Ogden Campus (previously Ogden Service Center) personnel are unable to determine if the organization will pass the support test, they will forward a copy of Form 990 to the Determination Processing Office to establish an F case on EDS.

  5. Foundation Follow-up processing procedures that will be discussed below include:

    • Obtaining Foundation Follow-up information and establishing on EDS

    • Closing Foundation Follow-up Cases

    • Processing adverse cases

7.20.3.5.1  (11-01-2004)
Obtaining Foundation Follow-up Information and Establishing on EDS

  1. The agents generally need to complete the following to process an F case:

    1. Verify the following on the microfiche, if available:
      The Letter 1045 date and the foundation status on the letter
      The advance ruling period ending date and the fiscal year month
      The activities of the organization

      Note:

      This will be used in determining the correct NTEE Code needed for case closing.

    2. Verify that all appropriate lines are completed on Form 8734.

      Note:

      If the organization is not claiming to have unusual grants, this item will be blank.

    3. Verify that items 12a and b or 13a and b are completed depending on the indicated foundation code on BMFOLO and the indicated sources of support on Form 8734 (IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) or IRC 509(a)(2)).

    4. Financial data must be submitted for each year during the advance ruling period.

    5. Verify that Form 8734 is properly signed.

  2. The private foundation presumption is rebuttable at any time by the organization's submission of data indicating that, in fact, one of the support tests was met. However, sometimes the rebuttal of the presumption does not occur until several years after the end of the advance ruling period.

    1. If the organization is seeking rebuttal of the presumption within two years of the end of its advance ruling period, the agent will solicit the financial data on the five years in the advance ruling period. Financial data on succeeding years would not be required because the organization would still be within the two-year reliance period.

    2. If the organization is seeking rebuttal of the presumption more than two years after the end of its advance ruling period, the agent will initially solicit financial data only on the four most recent years.

      Note:

      If a support test is met based on the four years, and there is no reason to suspect that the organization would fail based on earlier years, no additional data should be solicited and a favorable determination letter should be issued with no limitation as to its effective date.

  3. If additional information is required, request the information using Letter 2383.

    1. If no reply is received by the initial 21-day response due date, then the organization needs to be contacted.

    2. An additional 14-day extension may be given upon request, but the agent must explain to the organization that it will be "presumed" to be a private foundation if no reply or an insufficient reply is received. The agent must also explain that the presumption is rebuttable.

  4. Minor foundation status classification adjustments may be documented with a telephone call in Foundation Follow-up cases. However, if in response to the Letter 1046, an applicant provides the data needed to compute the 1/3 support tests under either IRC 509(a)(2) or IRC 170(b)(1)(A)(vi), the screener may grant the most favorable classification for which the organization qualifies without securing agreement via letter or telephone.

7.20.3.5.1.1  (11-01-2004)
Closing Foundation Follow-up Cases

  1. Once all data have been obtained, prepare the appropriate worksheet to determine whether the organization has passed the support test.

    1. If the organization meets the public support test, prepare Letter 1050.

    2. If the organization does not meet the public support test and does not qualify as a public charity under any other provision of the Code, then see IRM 7.20.3.5.1.2 below.

  2. If a response is not received to Letter 2383, the organization will be presumed to be a private foundation. To close the case:

    1. Prepare EDS Letter 1048,

    2. Prepare Form 2363-A with Definer Code A (foundation code 04, 1 for Form 990-PF filing requirement, and 00 for Form 990 filing requirement if present per BMFOLO),

    3. Prepare Form 5060, and

    4. Update Form 8670 with Status Code 12.

7.20.3.5.1.2  (11-01-2004)
Processing Adverse Foundation Follow-up Cases

  1. On all potential adverse F cases the agent will:

    1. Review the amounts reported on the various lines of Form 8734 to ensure that amounts were properly classified by the organization. For example, amounts shown as "Other Income" generally need to be reclassified under one or more other categories in the computation.

    2. Review the list of 2-percent donors and disqualified persons. The organization may have included IRC 509(a)(1) and IRC 170(b)(1)(A)(vi) organizations (IDRS research may be appropriate) or any donors of $5,000 or less as substantial contributors.

    3. Attempt to secure and review microfiche on proposed adverse F cases.

    4. Secure concurrence from the group manager that the case is, in fact, adverse.

  2. Prior to issuing an adverse foundation status letter, consideration should be given to the following three items:

    • Classifying organization as an IRC 509(a)(3) public charity

    • Private operating foundation (POF)

    • IRC 4945(g) issues

  3. Requests for additional information regarding possible IRC 509(a)(3) qualification should generally be limited to cases in which the name or other information in the file indicates some reasonable belief that there may be a supporting relationship with another exempt organization. Agents may discover the IRC 509(a)(3) issue by reviewing the microfiche.

  4. If an organization in a proposed adverse F case appears likely to qualify for private operating foundation status, the agent should develop the facts (Schedule E of Form 1023 or page 9 of Form 990-PF may be used).

    1. Assuming the organization wants private operating foundation status and qualifies for it, the organization should be asked to execute a Form 6018 agreeing to the classification before the agent closes the case to Quality Assurance. This is an exception to the usual situation where Form 6018 is not signed by the taxpayer prior to closing the case to Quality Assurance.

    2. The box checked on Form 6018 should be "Classification as a private foundation …" not" Classification as a private operating foundation …"

    3. Agents might discover the private operating foundation issue by reviewing the microfiche. Organizations with little or no support are less likely to benefit from, or qualify for, private operating foundation status. For more information on private operating foundations, refer to IRM 7.26.6 and Publication 578.

  5. If an organization in a proposed adverse F case appears to have a grant or scholarship program that would require the submission of a request for advance approval under IRC 4945(g), the agent should develop the facts. If appropriate, the agent will request a separate A case be established to be worked in conjunction with the adverse F case.

    1. Assuming the organization wants IRC 4945(g) approval at the time of its reclassification, the organization should be asked to execute a Form 6018 agreeing to PF status.

    2. Agents may discover the IRC 4945(g) issue by reviewing microfiche.

  6. Check BMFOLO and microfiche (if available) to see if the organization is the parent of a group ruling. It is possible for the parent to be a private foundation, provided the subordinates are publicly supported; however, an exam referral may be appropriate on the subordinates to ensure they are receiving public support.

  7. Since it is the aim of the Service to resolve unagreed cases at the lowest possible level, reviewers should ascertain whether agents have made a reasonable attempt to obtain the position of the taxpayer and to secure agreement. Therefore, agents should try to call the organization after the tentative adverse decision has been reached. Topics to be briefly covered include:

    1. General reasons why the organization is a private foundation.

    2. Form 990-PF filing requirements and private foundation excise taxes under Chapter 42 (see Rev. Proc. 79-8, 1979-1 C.B. 487).

    3. Appeal rights (refer to Publication 892).

    4. IRC 507(b) termination procedures for how the organization, in the future, may wish to terminate its private foundation status by operating as a publicly supported organization.

    5. In the case of an organization that has had no support, it may be appropriate to ask whether the organization intends to dissolve and, if so, when.

    6. If applicable, discuss IRC 509(a)(3), POF and IRC 4945(g) issues.

      Note:

      If the organization cannot be reached by telephone, then a Letter 2383 addressing the above topics should be sent.

  8. There are four separate adverse F case letters, as follows:

    1. More than $7,500 in investment income letter solicits the limited 990-PF Returns. This should be used in cases with investment income and potential tax consequences under IRC 4940. Use this letter when the total investment income during the five-year advance ruling period is more than $7,500.

    2. A $7,500 or less investment income letter does not solicit the limited 990-PF Returns. This should be used in cases in which the IRC 4940 tax potential is minimal. Use this letter if the total investment income during the five-year advance ruling period is $7,500 or less.

    3. No support letter is used in cases in which the organization did not receive any income during its advance ruling period.

    4. Private Operating Foundation letter is used in cases in which the organization qualifies for private operating foundation status. This letter contains the paragraph that solicits the limited 990-PF Returns which should be deleted if the investment income during the five-year advance ruling period is $7,500 or less.

  9. All worksheets and narrative explanations detailing why the organization failed the public support tests of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi), and 509(a)(2) are required when using composed letters for all proposed adverse cases with the exception of no support cases.

  10. Adverse letters should include protest rights paragraphs whether or not the organization has agreed to private foundation status. If the organization has agreed to PF status by signing Form 6018, the sentence in the adverse letter that states,

    • "If you are in agreement with our proposed determination, please sign and return one copy of the enclosed Form 6018, Consent to Proposed Adverse Action"

      must be replaced with

    • "You agreed to private foundation status by signing Form 6018 dated mm\//dd\//yyyy; however, you may reconsider your position during a 30-day period starting on the date of this letter."

  11. All of the adverse F case letters require the agent to determine the effective date for classification as a private foundation. This is accomplished as follows:

    1. If the organization submits Form 8734 timely (within 90 days from the end of its advance ruling period), the adverse letter should state that the organization is classified as a private foundation as of "the date of this letter."

    2. If the organization does not submit Form 8734 timely, the organization will be classified as a private foundation as of the 91st day after the end of its advance ruling period. This 91st day should be calculated and input into the adverse letter.

  12. Follow adverse procedures with the following exceptions:

    1. It is not necessary to tab or index the right side of the file in routine proposed adverse F cases. Only tab and index the right side of the file in proposed adverse F cases that are unusually large, complex, or likely to be protested.

    2. It is not necessary to Acco-fasten the right side of the file in routine proposed adverse F cases. The right side of the file only needs to be Acco-fastened in cases that are unusually large.

  13. The following information is entered on EDS when inputting Form 8670:

    1. The closing status is 40.

    2. The Effective Date is the Current Status Date on BMFOLO.

    3. The Ruling Date should be the date of the 1045 letter (available from microfiche). If microfiche is not available, check EDS for the prior I or S case for the "Date" field (the date of the 1045 letter). If neither is available, use the Ruling Date on BMFOLO.

    4. All other information is taken from BMFOLO except for:
      i) Foundation Code is 04 for a private foundation or 03 for a private operating foundation.
      ii) Adv. Ruling Ends is 999999.
      iii) The Filing Requirement is 01 for 990PF. Also, input any other filing requirement codes listed on BMFOLO (e.g., 941, 990-T, etc.).

      Note:

      If BMFOLO shows a Form 990 filing requirement (either 01 or 02), this must be zeroed-out (00) on Form 8670.

    5. The NTEE code listed on BMFOLO is used unless information in the file or on microfiche indicates differently.

7.20.3.5.2  (11-01-2004)
Public Charity Status Established

  1. If the organization establishes that it has, in fact, met the requirements of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi), or IRC 509(a)(2), in its advance ruling period, issue Letter 1050. The organization will be publicly supported for all years in the advance ruling period and the succeeding two years. After that, an organization's qualification under the applicable support test is based on the most recently completed four-year period.

  2. If the organization previously received Letter 1048, issue Letter 1050 with selective paragraph 3.

7.20.3.5.3  (11-01-2004)
Organizations Presumed to be Private Foundations — Requests for Reconsideration

  1. An organization presumed to be a private foundation under IRC 508(b) will be able to rebut the presumption in the following circumstances:

    1. The organization has the same facts as the organization described in Rev. Rul. 73-504, 1973-2 C.B. 190, which provides that the IRC 508(b) presumption is rebuttable if the organization was formed before October 9, 1969.

    2. The organization was never required to file because it is described in IRC 508(c).

    3. The organization does not provide the information in the Form 8734 at the end of its advance ruling period.

  2. At the end of an advance ruling period, if an organization does not provide any support information to support that it is a public charity, then the organization will be presumed to be a private foundation. The organization can request reconsideration of its foundation status by providing supporting information to show that it qualifies as a public charity.

  3. Reconsideration will not be granted if the organization exercised its protest and conference rights when it was classified as a private foundation. Factors that would support reconsideration of foundation status would include an error on the Service's part or a circumstance out of the Service's control such as an item lost in the mail.

    1. If after reconsideration the organization always qualified as a public charity, issue Letter 1050.

    2. If the organization was unable to establish that it always qualified as a public charity, then follow adverse procedures and issue Letter 1079.

  4. If a presumed private foundation requests reconsideration more than two years after the end of its advance ruling period, initially solicit financial data only on the four most recent years.

    1. If the organization meets the support test for the four years, and there is no reason to suspect that including earlier years’ data would change the result, do not solicit the data for the earlier years. Issue a final determination letter retroactive to the start of the advance ruling period.

    2. If the organization does not meet the support test in the four most recent years, request the data from the earlier years as needed to establish the effective date of PF status.

7.20.3.5.4  (11-01-2004)
Organizations that Admit to Private Foundation Status

  1. If an organization that qualifies as tax exempt under IRC 501(c)(3) admits when it files an application for tax exempt status that it is a private foundation, issue Letter 1076 to the organization.

  2. If the organization claims to be a private operating foundation, refer to IRM 7.20.3.3.9.

  3. If the organization submits information that indicates it may not be a private foundation, contact the organization to see if it wishes to claim public charity status.

  4. If an organization requests exempt operating foundation status, refer to IRM 7.20.3.2.

7.20.3.6  (11-01-2004)
Section 508(e)

  1. IRC 508(e) applies only to private foundations.

  2. Rev. Rul. 75-38 provides that each of the States, except New Mexico and Arizona, has provisions built into the law which enable foundations to meet IRC 508(e) without amending their organizational documents to include the required provisions.

  3. IRC 508(e) provisions should be checked on Form 6038.

Exhibit 7.20.3-1  (05-09-2008)
Voluntary Request for Private Foundation Status — Sample Letter

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