Community Foundation and Supporting Organization Held Single Entity

Date01 November 2019
Published date01 November 2019
November 2019 5
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
organizations, reviewing grant proposals, selecting grant-
ees, working with grantees on initiatives, drafting grant
recommendations, drafting grant agreements, and moni-
toring grant performance. A’s employees facilitate and
shepherd the foundation’s grant process; maintain and
update all documentation relating to grants, grantees,
and a grant database; ensure that due diligence files are
complete; and monitor and document grantee compli-
ance with the terms of the grant agreements.
The foundation’s charitable consulting activities
include organizing meetings of experts and grant recipi-
ents and providing to other charities consulting services
related to their philanthropic programs, which coordi-
nate with the foundation’s programs, as well as to their
investment activities.
B provides investment services to the foundation. A
and B also provide services to the founder, the founder’s
family members, their donees, and other tax-exempt
organizations. About one-third of A’s time is spent on
projects for entities other than the foundation. The
foundation, utilizing B’s employees, provides advice to
public charities regarding investment strategies, asset
allocation, and liquidity needs for making grants.
To help the foundation better understand its operat-
ing expenses and plan for its future self-sufficiency, the
foundation will begin paying A for its charitable consult-
ing services. The services agreement will permit A to hire
B to provide investment services to the foundation and
other charities.
Generally, the payment of compensation (and the pay-
ment or reimbursement of expenses) by a private founda-
tion to a disqualified person for personal services that
are reasonable and necessary to carrying out the exempt
purposes of the private foundation involved is not an act
of self-dealing if the compensation (or payment of reim-
bursement) is not excessive (IRC § 4941(d)(2)(E)).
The founder is a substantial contributor to the foun-
dation (IRC § 507(d)(2)) and, therefore, is a disqualified
person with respect to it (IRC § 4946(a)(1)(A)). A and B
are disregarded entities, so payments to them are con-
sidered payments to the founder.
The IRS concluded that the foundation requires the
services of individuals such as those employed by the
founder through A, who provides the services to the
The IRS ruled that the payment by the foundation of a
fee to its founder through A for programmatic and grant-
making services, and to enable the foundation to engage
in charitable consulting activities, will not be an act of
self-dealing because the services are personal services that
are reasonable and necessary to carrying out the exempt
purposes of the foundation, assuming the amount of the
payments are not excessive. A similar ruling was issued
in connection with services provided by A to enable the
foundation to enable it to engage in investment consult-
ing services provided to other charities. [12.4(a)]
The IRS ruled that a tax-exempt community foundation
and a corporation that is a supporting organization with
respect to the foundation will be treated as a single entity
for tax law purposes and thus file one annual information
return (Priv. Ltr. Ruls. 201936002, 201936003).
The community foundation, primarily serving a six-
county region in a state, is established as a trust. It is
tax-exempt as a charitable entity and is a publicly sup-
ported charity (IRC § 170(b)(1)(A)(vi)). The corporation,
which has been funded by the foundation, has been
represented to the community involved as a supporting
organization of the foundation since its inception.
For various federal tax law purposes, including
tax-exempt status (IRC § 501) and contribution deduct-
ibility (IRC § 170), an organization that meets certain
requirements (Reg. § 1.170A- 9(f)(11)(iii)-(vi)) is treated
as a single entity, rather than an aggregation of sepa-
rate funds (Reg. § 1.170A-9(f)(11)(i)). Also, all funds
associated with such an organization are, where certain
requirements are met, treated as component parts of the
organization (Reg. § 1.170-9(f)(11)(ii)).
An organization of this nature files an annual infor-
mation return as a single entity (as noted in the first
article, IRC § 6033(b)). Separate returns are required
where entities are not treated as component parts (Reg.
§ 1.170A-9(f)(12)(i)).
All the requirements for single-entity status were met
in this case. The foundation and corporation have similar
names. Both are named for the community they serve.
Both are known in the community as supporting chari-
table activity in that region. All the donor funds will be
subject to a common governing instrument. The board
of directors of the corporation will be the same as the
foundation’s members. The governing boards of both
entities have authority as to distributions for charitable
purposes and the power to remove a trustee that has
breached a fiduciary duty.

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