part7-32

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 organizations 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 organizations
    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 organizations 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 organizations 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 organizations 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 organizations 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 organizations 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
    organizations 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 organizations 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 Services part or a circumstance out of the Services 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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