IRS Revenue Ruling
2002-28

Code Secs. 507, 4940, 4941, 4942, 4943, 4944 ....

<<FULL TEXT>>

26 CFR 1.507-1, 1.507-3, 1.507-4, 1.507-7, 1.507-8: Special rules;
transferee foundations; liability in case of transfers.
(Also sections 4940, 4941, 4942, 4943, 4944, 4945, 6033, 6043; 53.4940-1,
53.4941(a)-1, 53.4942(a)-3, 53.4943-3, 53.4944-1, 53.4945-5, and 1.6033-2,
1.6043-3(a)(1)).

Private foundation transfer of assets; notification, filing, and other
implications. This ruling addresses a private foundation's
responsibilities relating to sections 507 and 4940 through 4945 of the
Code and its tax return filing obligations in sections 6033 and 6043 when
it transfers all of its assets to one or more effectively controlled
private foundations.


REV. RUL. 2002-28

ISSUES

(1) If a private foundation transfers all of its assets to one or more
private foundations, is the transferor foundation required to notify the
Manager, Exempt Organizations Determinations, Tax Exempt and Government
Entities Division (TE/GE), that it plans to terminate its private
foundation status pursuant to section 507(a) of the Internal Revenue Code
and pay the tax under section 507(c)?

(2) What are a private foundation's tax return filing obligations after
it transfers all of its assets to one or more transferee private
foundations and:

(a) terminates, or

(b) does not terminate?


(3) If a private foundation transfers all of its assets to one or more
private foundations that are effectively controlled (within the meaning of
the Income Tax Regulations under section 507), directly or indirectly, by
the same person or persons who effectively control the transferor
foundation, what are the implications under:

(a) section 4940,

(b) section 4941,

(c) section 4942,

(d) section 4943,

(e) section 4944, and

(f) section 4945?


(4) If a private foundation transfers all of its assets to one or more
private foundations that are effectively controlled (within the meaning of
the regulations under section 507), directly or indirectly, by the same
person or persons who effectively control the transferor foundation, what
are the implications for the transferor foundation's aggregate tax
benefits under section 507(d)?


FACTS

In each of the following situations: (i) the transferee private
foundations are effectively controlled (within the meaning of the
regulations under section 507), directly or indirectly, by the same
persons who effectively controlled the transferor private foundations;
(ii) the private foundations have not committed 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; (iii) the private
foundations have not terminated under section 507(a)(2) or (b)(1); (iv)
prior to the transactions described below, the transferor private
foundations made outstanding grants to organizations not described in
section 4945(d)(4)(A), which required the transferor foundations to
exercise expenditure responsibility in accordance with section 4945(h);
and (v) the private foundations are not operating foundations within the
meaning of section 4942(j)(3).


SITUATION 1

P is recognized as exempt from federal tax under section 501(c)(3) and
is classified as a private foundation under section 509(a). P's current
directors have divergent charitable objectives.

X, Y, and Z are recognized as exempt from federal tax under section
501(c)(3) and are classified as private foundations under section 509(a).
Pursuant to a plan of dissolution, after satisfying all of its outstanding
liabilities, P distributes all of its remaining assets in equal shares to
X, Y, and Z. As part of the plan of dissolution, X agrees to exercise
expenditure responsibility for all outstanding grants made by P. The day
after P distributes all of its assets, P files articles of dissolution
with the appropriate state authority.


SITUATION 2

T, a charitable trust, is recognized as exempt from federal tax under
section 501(c)(3) and is classified as a private foundation under section
509(a). The trustees of T determine that T's charitable purposes can be
more effectively accomplished by operating in corporate form.

The trustees of T create W, a not-for-profit corporation, for the
purpose of carrying on T's activities. W is recognized as exempt from
federal tax under section 501(c)(3) and is classified as a private
foundation under section 509(a). T transfers all of its assets and
liabilities to W.


SITUATION 3

J and K are not-for-profit corporations that are recognized as exempt
from federal tax under section 501(c)(3) and are classified as private
foundations under section 509(a). J and K generally confine their
grantmaking activities to supporting charitable programs in the city in
which both J and K are located.

V, a newly-formed entity, is recognized as exempt from federal tax
under section 501(c)(3) and is classified as a private foundation under
section 509(a). To eliminate the costs of maintaining two private
foundations with identical charitable purposes, J and K transfer all of
their assets and liabilities to V.


LAW
Section 507(a) provides that, except as provided in section 507(b), the
status of any organization as a private foundation shall be terminated
only if: (1) such organization notifies the Secretary of its intent to
accomplish such 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 a liability
for tax under chapter 42, and the Secretary notifies such organization
that it is liable for the tax imposed by section 507(c). Under section
507(a)(1) and (2), the organization's private foundation status is
terminated when the organization pays the tax imposed by section 507(c) or
the entire amount of such tax is abated under section 507(g). The person
currently designated to receive the notice of termination described in
section 507(a)(1) is Manager, Exempt Organizations Determinations (TE/GE).

Section 507(b)(2) provides that in the case of a transfer of assets of
any private foundation to another private foundation pursuant to a
liquidation, merger, redemption, recapitalization, or other adjustment,
organization or reorganization, the transferee foundation shall not be
treated as a newly created organization.

Section 507(c) imposes a tax on each organization whose private
foundation status is voluntarily or involuntarily terminated under section
507(a). The tax imposed is equal to the lower of: (1) the amount which the
private foundation substantiates by adequate records or other
corroborating evidence as the aggregate tax benefit resulting from the
section 501(c)(3) status of such foundation, or (2) the value of the net
assets of the foundation.

Section 1.507-1(b)(6) of the Income Tax Regulations provides that if a
private foundation transfers all or part of its assets to one or more
other private foundations pursuant to a transfer described in section
507(b)(2) and section 1.507-3(c), such transferor foundation will not have
terminated its private foundation status under section 507(a)(1).

Section 1.507-1(b)(7) provides that a transfer of all the assets of a
private foundation does not result in a termination of the transferor
private foundation under section 507(a), unless the transferor private
foundation elects to terminate pursuant to section 507(a)(1), or section
507(a)(2) is applicable.

Section 1.507-3(a)(1) provides that, in a section 507(b)(2) transfer, a
transferee organization will not be treated as a newly created
organization. The transferee organization is treated as possessing those
attributes and characteristics of the transferor organization which are
described in section 1.507-3(a)(2), (3) and (4).

Section 1.507-3(a)(2)(i) provides that a transferee organization shall
succeed to the aggregate tax benefit of the transferor organization in an
amount equal to the amount of such aggregate tax benefit multiplied by a
fraction the numerator of which is the fair market value of the assets
(less encumbrances) transferred to such transferee and the denominator of
which is the fair market value of the assets of the transferor (less
encumbrances) immediately before the transfer.

Section 1.507-3(a)(3) provides that, in the event of a transfer of
assets under section 507(b)(2), any person who is a substantial
contributor with respect to the transferor foundation shall be treated as
a substantial contributor with respect to the transferee foundation,
regardless of whether such person meets the $5,000 two-percent test with
respect to the transferee at any time. If a private foundation makes a
transfer described in section 507(b)(2) to two or more transferee private
foundations, any person who is a substantial contributor with respect to
the transferor foundation prior to such transfer shall be considered a
substantial contributor with respect to each transferee.

Section 1.507-3(a)(4) provides that if a private foundation incurs
liability for one or more of the taxes imposed under chapter 42 (or any
penalty resulting therefrom) prior to, or as a result of, making a
transfer of assets described in section 507(b)(2) to one or more private
foundations, in any case where transferee liability applies each
transferee foundation shall be treated as receiving the transferred assets
subject to such liability to the extent that the transferor foundation
does not satisfy such liability.

Section 1.507-3(a)(5) provides that, except as provided in section
1.507-3(a)(9), a private foundation is required to meet the distribution
requirements of section 4942 for any taxable year in which it makes a
section 507(b)(2) transfer of all or part of its net assets to another
private foundation.

Section 1.507-3(a)(6) provides that whenever a private foundation makes
a section 507(b)(2) transfer of all or part of its net assets to another
private foundation, the applicable period of time described in section
4943(c)(4), (5), or (6) shall include both the period during which the
transferor foundation held such assets and the period during which the
transferee foundation holds such assets.

Section 1.507-3(a)(7) provides that, except as provided in section
1.507-3(a)(9), where the transferor has disposed of all of its assets,
during any period in which the transferor has no assets, section
4945(d)(4) and (h) shall not apply to the transferee or the transferor
with respect to any expenditure responsibility grants made by the
transferor. However, the information reporting requirements under section
4945 will apply for any year in which any such transfer is made.

Section 1.507-3(a)(9)(i) provides that if a private foundation
transfers all of its net assets to one or more private foundations that
are effectively controlled, directly or indirectly, by the same person or
persons that effectively controlled the transferor private foundation, the
transferee private foundation will be treated as if it were the transferor
private foundation for purposes of sections 4940 through 4948 and sections
507 through 509. However, where proportionality is appropriate, such a
transferee foundation shall be treated as if it were the transferor in the
proportion which the fair market value of the assets (less encumbrances)
transferred to such transferee bears to the fair market value of the
assets (less encumbrances) of the transferor immediately before the
transfer.

Section 1.507-3(a)(9)(ii) provides that section 1.507-3(a)(9)(i) shall
not apply to the requirements under section 6033, which must be complied
with by the transferor foundation, nor to the requirement under section
6043 that the transferor foundation file a return with respect to its
liquidation, dissolution or termination.

Section 1.507-3(a)(9)(iii) (example 2) provides that if the transferees
of a section 507(b)(2) transfer are effectively controlled by the same
persons who control the transferor, each transferee is required to
exercise expenditure responsibility with respect to the transferor's
outstanding grants, unless, as part of the transfer, the transferor
assigns and one or more transferees assume the transferor's expenditure
responsibility, in which case, only the transferees assuming the
transferor's expenditure responsibility are required to exercise such
expenditure responsibility. Section 1.507-3(a)(9)(iii) (example 2) also
provides that because such transferee foundations are treated as the
transferor, rather than as recipients of expenditure responsibility
grants, there are no expenditure responsibility requirements which must be
exercised under section 4945(d)(4) and (h) with respect to the section
507(b)(2) transfer.

Section 1.507-3(a)(10), by reference to section 1.507-1(b)(9), provides
that a private foundation that transfers all of its net assets is required
to file the annual information return required by section 6033 for the
taxable year in which such transfer occurs. However, the foundation will
not be required to file such return for any taxable year following the
taxable year in which the last of such transfers occurred, provided the
foundation does not hold equitable title to any assets or engage in any
activity during such subsequent taxable year.

Section 1.507-3(c)(1) provides that for purposes of section 507(b)(2),
the terms "other adjustment, organization, or reorganization" shall
include any partial liquidation or any other significant disposition of
assets to one or more private foundations, other than transfers for full
and adequate consideration or distributions out of current income.

Section 1.507-3(c)(2) provides that the term "significant disposition
of assets to one or more private foundations" includes any disposition (or
series of related dispositions) by a private foundation to one or more
private foundations of 25 percent or more of the fair market value of the
net assets of the transferor foundation at the beginning of the taxable
year in which the transfers occur.

Section 1.507-3(d) provides that unless a private foundation
voluntarily gives notice pursuant to section 507(a)(1), a transfer of
assets described in section 507(b)(2) will not constitute a termination of
the transferor's private foundation status under section 507(a)(1).

Section 1.507-4(b) provides that private foundations which make
transfers described in section 507(b)(2) are not subject to the tax
imposed under section 507(c) with respect to such transfers unless the
provisions of section 507(a) become applicable.

Section 1.507-7(a) provides that the net value of assets for purposes
of section 507(c) shall be determined at whichever time such value is
higher: (1) the first day on which action is taken by the organization
which culminates in its ceasing to be a private foundation, or (2) the
date on which it ceases to be a private foundation.

Sections 1.507-7(b)(1) and 1.507-8 provide that in the case of a
termination under section 507(a)(1), the date referred to in section
1.507-7(a)(1) shall be the date on which the terminating foundation gives
the notification described in section 507(a)(1).

Section 4940(a) generally 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 4941(a)(1) imposes a tax on each act of self-dealing between a
disqualified person and a private foundation. Section 53.4946-1(a)(8)
provides that, for purposes of section 4941, the term "disqualified
person" shall not include any organization described in section 501(c)(3)
(other than an organization described in section 509(a)(4)).

Section 4942(a) generally imposes a tax on the undistributed income of
a private foundation (other than an operating foundation under section
4942(j)(3)) for any taxable year, which has not been distributed before
the first day of the second (or any succeeding) taxable year following
such taxable year.

Section 4942(c) defines "undistributed income" for any taxable year as
the amount by which the distributable amount for such taxable year exceeds
the qualifying distributions made out of such distributable amount for
such taxable year.

Section 4942(d) defines "distributable amount" as the amount equal to
the sum of the minimum investment return, plus certain other amounts,
reduced by the sum of the taxes imposed on such private foundation for the
taxable year under subtitle A and section 4940.

Section 4942(g)(1)(A) defines "qualifying distribution" as any amount
(including that portion of reasonable and necessary administrative
expenses) paid to accomplish one or more purposes described in section
170(c)(2)(B) other than a contribution to: (i) an organization controlled
directly or indirectly by the foundation or by one or more disqualified
persons with respect to the foundation, unless certain requirements are
satisfied, or (ii) any private foundation which is not an operating
foundation under section 4942(j)(3), unless certain requirements are
satisfied.

Section 4942(i) provides for a carryover of the amount by which
qualifying distributions during the five preceding taxable years (other
than amounts required to be distributed out of corpus under section
4942(g)(3)) have exceeded the distributable amounts for such years.

Rev. Rul. 78-387 (1978-2 C.B. 270) holds that when a private foundation
transfers all its assets to another private foundation that is controlled
by the same persons who controlled the transferor foundation, the
transferee foundation may reduce its distributable amount under section
4942(d) by the amount of the transferor's excess qualifying distributions
as described in section 4942(i).

Section 4943(a)(1) imposes a tax on the "excess business holdings" (as
defined in section 4943(c)) of any private foundation in a business
enterprise.

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.

Section 4945 imposes a tax on any "taxable expenditure" (as defined in
section 4945(d)) made by a private foundation.

Section 4945(d)(4) provides that the term "taxable expenditure"
includes any amount paid or incurred as a grant to a private non-operating
foundation unless the grantor foundation exercises expenditure
responsibility with respect to such grant in accordance with section
4945(h).

<<END RULING>>


Section 4945(h) provides that the expenditure responsibility referred
to in section 4945(d)(4) means a private foundation is responsible to
exert all reasonable efforts and to establish adequate procedures to: (1)
see that the grant is spent solely for the purpose for which made, (2)
obtain full and complete reports from the grantee on how the funds are
spent, and (3) make full and detailed reports with respect to such
expenditures to the Secretary.

Section 4946(a)(1) defines a "disqualified person" for purposes of
subchapter A of chapter 42.

Section 6033(a)(1) provides that, with certain exceptions, every
organization exempt from taxation under section 501(a) shall file an
annual return.

Section 6043(b) and section 1.6043-3(a)(1) provide that, with certain
exceptions, a private foundation must provide information with respect to
a liquidation, dissolution, termination or substantial contraction as
required by the instructions accompanying the foundation's annual return.


ANALYSIS

SECTION 507

Section 507(b)(2) applies to a significant disposition of assets by one
private foundation to one or more private foundations, other than
transfers for full and adequate consideration or distributions out of
current income. See section 1.507-3(c)(1). A transfer of all of a private
foundation's assets to one or more private foundations constitutes a
significant disposition. See section 1.507-3(c)(2). In Situations 1, 2 and
3, each transferor foundation transfers all of its assets to one or more
private foundations. The transfers are not for full and adequate
consideration and are not distributions out of current income. Thus, the
transfers in Situations 1, 2 and 3 are section 507(b)(2) transfers.

A transfer of assets described in section 507(b)(2) does not constitute
a termination of the transferor's private foundation status under section
507(a)(1) unless the transferor voluntarily gives notice pursuant to
section 507(a)(1). See sections 1.507-1(b)(6) and 1.507-3(d). The
transferor foundation is not required to provide such notice. In Situation
1, P's dissolution under state law has no effect on whether P has
terminated its private foundation status for federal tax purposes.

In Situations 1, 2, and 3, if the transferor foundation does not give
notice to the Manager, Exempt Organizations Determinations (TE/GE), of its
intent to terminate, the transferor retains its private foundation status
and the section 507(c) tax does not apply. See section 507(a)(1) and
section 1.507-4(b). The transferor foundation is required to file a Form
990-PF for the taxable year of the transfer(s), but is not required to
file a Form 990-PF for subsequent taxable years during which it does not
have equitable title to any assets and does not engage in any activity.
See sections 6033(a)(1) and 6043(b), and sections 1.507-1(b)(9) and
1.507-3(a)(10). If, at any time following the transfer(s), the transferor
foundation receives additional assets or engages in any activity, the
transferor foundation must file a Form 990-PF. Additionally, because the
transferor foundation has not terminated its private foundation status,
the transferor foundation continues to be treated as a private foundation.

In Situations 1, 2, and 3, if the transferor foundation does give
notice to the Manager, Exempt Organizations Determinations (TE/GE), of its
intent to terminate, then the section 507(c) tax applies on the date such
notice is given. See section 1.507-7(a) and (b)(1). Thus, in Situations 1,
2, and 3, if the transferor foundation provides notice at least one day
after it transfers all of its assets, the tax imposed by section 507(c)
will be zero. The transferor foundation is required to file a Form 990-PF
for the taxable year of the transfer(s). See sections 6033(a)(1) and
6043(b).

Regardless of whether the transferor foundation provides notice of its
intent to terminate, the transferee foundations are treated as possessing
the aggregate tax benefit of the transferor foundations. See section
1.507-3(a)(1) and (2)(i). In Situation 1, X, Y, and Z succeed to P's
aggregate tax benefit in proportion to the assets transferred to each. See
section 1.507-3(a)(2)(i).

Moreover, regardless of whether the transferor foundation provides
notice of its intent to terminate, where transferee liability applies,
each transferee foundation is treated as receiving the transferred assets
subject to the transferor foundation's prior excise tax liabilities under
chapter 42 (and any penalties resulting therefrom), if any, to the extent
the transferor did not previously satisfy those liabilities. See section
1.507-3(a)(1) and (4).


SECTION 4940

In Situations 1, 2 and 3, the transfers do not constitute investments
of the transferor for purposes of section 4940; therefore, the transfers
do not give rise to net investment income subject to tax under section
4940(a).

In Situations 1, 2, and 3, because each transferor foundation transfers
all of its assets to one or more private foundations effectively
controlled by the same persons that effectively control the transferor,
any excess section 4940 tax paid by the transferor may be used by the
transferees to offset the transferees' section 4940 tax liability. See
section 1.507-3(a)(9)(i). In Situation 1, where there are several
transferees, proportionality is appropriate, and X, Y, and Z will each
succeed to one third of any excess section 4940 tax paid by P. See section
1.507-3(a)(9)(i).


SECTION 4941

In Situations 1, 2 and 3, the transfers are to section 501(c)(3)
organizations, which are not treated as disqualified persons for purposes
of section 4941. See section 53.4946-1(a)(8). Thus, the transfers do not
constitute self-dealing transactions and are not subject to tax under
section 4941(a)(1).


SECTION 4942

In Situations 1, 2 and 3, because each transferor foundation transfers
all of its assets to one or more private foundations effectively
controlled by the same persons that effectively control the transferor,
the transferee foundations are treated as though they were the transferor
for purposes of section 4942. See section 1.507-3(a)(9)(i). Accordingly,
the transfers to the transferee foundations are not treated as qualifying
distributions of the transferor foundation. In addition, in Situations 2
and 3, each transferee foundation assumes all obligations with respect to
the transferor's "undistributed income" within the meaning of section
4942(c), if any, and reduces its own distributable amount under section
4942 by the transferor foundation's excess qualifying distributions under
section 4942(i). In Situation 1, where there are several transferee
foundations, proportionality is appropriate, and X, Y and Z each becomes
responsible for one third of P's undistributed income and succeeds to one
third of P's excess qualifying distributions, if any. See section
1.507-3(a)(9)(i) and Rev. Rul. 78-387.


SECTION 4943

Whether the transfers cause a transferee foundation to have excess
business holdings and be subject to tax under section 4943(a) depends on
the facts and circumstances. In Situations 1, 2, and 3, because each
transferor foundation transfers all of its assets to one or more private
foundations effectively controlled by the same persons that effectively
control the transferor, the transferee foundations are treated as though
they were the transferor for purposes of sections 4943 and 4946. See
section 1.507-3(a)(9)(i). Accordingly, in determining whether a transferee
foundation has excess business holdings, the disqualified persons of the
transferee foundation are determined in part by treating the transferee as
though it were the transferor. For example, both the substantial
contributors of the transferee and the substantial contributors of the
transferor are treated as a disqualified persons of the transferee in
determining whether the transferee has excess business holdings as a
result of the transfer. See section 4946(a)(1)(A) and section
1.507-3(a)(9)(i); see also section 1.507-3(a)(3). In addition, in
determining whether a transferee foundation is subject to tax under
section 4943, the transferee's holding period in the transferred assets
for purposes of section 4943(c)(4), (5), and (6) includes both the period
during which the transferor foundation held such assets and the period
during which the transferee foundation holds such assets. See section
1.507-3(a)(6).


SECTION 4944

In Situations 1, 2, and 3, the transfers do not constitute investments
for purposes of section 4944; therefore the transfers do not constitute
investments jeopardizing the transferor foundation's exempt purposes and
are not subject to tax under section 4944(a)(1).


SECTION 4945

In Situations 1, 2, and 3, because each transferor foundation transfers
all of its assets to one or more private foundations effectively
controlled by the same persons that effectively control the transferor,
the transferee foundations are treated as though they were the transferor
for purposes of section 4945. See section 1.507-3(a)(9)(i). Because the
transferee foundations are treated as the transferor foundation rather
than as recipients of expenditure responsibility grants, there are no
expenditure responsibility requirements that must be exercised under
section 4945(d)(4) or (h) with respect to the transfers to the transferee
foundations. See section 1.507-3(a)(9)(i) and (iii) (example 2).

The transferor foundation is required to exercise expenditure
responsibility over the transferor's outstanding grants until the
transferor disposes of all of its assets. Thereafter, during any period in
which the transferor foundation has no assets, the transferor foundation
is not required to exercise expenditure responsibility over any
outstanding grants. See section 1.507-3(a)(7). However, the transferor
foundation still must meet the section 4945(h) reporting requirements for
the outstanding grants for the year in which the transfers are made. See
section 1.507-3(a)(7).

The transferee foundations assume expenditure responsibility for all
the transferor's outstanding grants. See section 1.507-3(a)(9)(i). In
Situation 1, because X agreed to exercise expenditure responsibility for
all of P's outstanding grants, Y and Z have no expenditure responsibility
over P's grants. However, in the absence of such an agreement, X, Y and Z
each would be required to exercise expenditure responsibility with respect
to all of P's outstanding grants. See section 1.507-3(a)(9)(i) and (iii)
(example 2).


HOLDINGS

(1) A private foundation that transfers all of its assets to one or
more private foundations in a transfer described in section 507(b)(2) is
not required to notify the Manager, Exempt Organizations Determinations
(TE/GE), that it plans to terminate its private foundation status under
section 507(a)(1). If the private foundation does not provide notice and
does not terminate, the private foundation is not subject to the section
507(c) termination tax. If the private foundation chooses to provide
notice, and therefore terminates, it is subject to the section 507(c) tax;
however, if the private foundation has no assets on the day it provides
notice (e.g., it provides notice at least one day after it transfers all
of its assets), the section 507(c) tax will be zero.

(2)(a) A private foundation that has disposed of all of its assets and
terminates its private foundation status must file a Form 990-PF for the
taxable year of the disposition and must comply with any expenditure
responsibility reporting obligations on such return.

(b) A private foundation that has disposed of all of its assets and
does not terminate its private foundation status must file a Form 990-PF
for the taxable year of the disposition and must comply with any
expenditure responsibility reporting obligations on such return, but does
not need to file returns in the following taxable years if it has no
assets and does not engage in any activities. If, in later taxable years,
it receives additional assets or resumes activities, it must resume filing
a Form 990-PF for those taxable years in which it has assets or
activities.


(3) Where transferee liability applies, each transferee foundation is
treated as receiving the transferred assets subject to the transferor
foundation's prior excise tax liabilities under chapter 42 (and any
penalty resulting therefrom), if any, to the extent the transferor
foundation did not previously satisfy those liabilities.

(a) The transfers do not give rise to net investment income and are not
subject to tax under section 4940(a). The transferee foundations may use
their proportionate share of any excess section 4940 tax paid by the
transferor to offset their own section 4940 tax liability.

(b) The transfers do not constitute self-dealing and are not subject to
tax under section 4941(a)(1).

(c) The transfers do not constitute qualifying distributions for the
transferor foundation under section 4942. The transferee foundations
assume their proportionate share of the transferor foundation's
undistributed income under section 4942 and reduce their own distributable
amount for purposes of section 4942 by their proportionate share of the
transferors' excess qualifying distributions under section 4942(i).

(d) Whether the transfers cause a transferee foundation to have excess
business holdings and be subject to tax under section 4943(a) depends on
the facts and circumstances. In making these determinations, the
disqualified persons of a transferee foundation are determined in part by
treating the transferee as though it were the transferor. In addition, the
transferee's holding period in the transferred assets for purposes of
section 4943(c)(4), (5) and (6) includes both the period during which the
transferor foundation held such assets and the period during which the
transferee foundation holds such assets.

(e) The transfers do not constitute investments jeopardizing the
transferor foundation's exempt purposes and are not subject to tax under
section 4944(a)(1).

(f) The transferor foundation is not required to exercise expenditure
responsibility under section 4945(h) with respect to the transfers. The
transferor foundation is required to exercise expenditure responsibility
over any outstanding grants until the time it disposes of all of its
assets and must satisfy the section 4945(h) reporting requirements for the
taxable year in which the transfers were made. Following the transfers and
during any period in which the transferor has no assets or activities, the
transferor foundation is not required to exercise expenditure
responsibility with respect to any of its outstanding grants.

Each transferee foundation must exercise expenditure responsibility
with respect to all outstanding grants by the transferor foundation. If,
however, the transferor foundation assigns and transferees assume the
transferor's expenditure responsibility with respect to a grant, only the
transferees assuming the transferor's expenditure responsibility are
required to exercise such expenditure responsibility with respect to such
grant.


(4) The transferor foundation's aggregate tax benefits under section
507(d) are transferred to the transferee foundations in proportion to the
transferor's assets transferred to each transferee.


DRAFTING INFORMATION

The principal author of this revenue ruling is Theodore R. Lieber of
the Exempt Organizations, Tax Exempt and Government Entities Division. For
further information regarding this revenue ruling, contact Theodore R.
Lieber at (202) 283-8999 (not a toll-free call).

<<END RULING>>

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