Foundation's Grants for Electric Buses Ruled in Conformity With PF Tax Laws

• Date: 01 November 2020
• Published date: 01 November 2020
• DOI: http://doi.org/10.1002/npc.30788

Bruce R. Hopkins’ NONPROFIT COUNSEL

November 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

inurement doctrine and not engage in attempts to influ-

ence legislation or intervene in political campaigns.

These grants by the foundation will be expenditure

responsibility grants. The foundation will not earmark

the use of any grant to FC and will not have any role in

the selection of the secondary grantees. The foundation

represented to the IRS that neither it nor any disqualified

person with respect to it will control FC or any possible

secondary grantee.

A director of the private foundation purchased works

of art from a collaborating artist whose work had been

displayed by an art gallery supported by another of the

foundation’s grant programs. The foundation anticipates

that a secondary grantee may purchase one or more

works of art from this artist, using funds received from

FC, which were granted by the foundation. This director

will obtain an appraisal stating that the fair market value

of this artwork is not more than the amount paid for it.

The appraiser will be an independent qualified one and

not a disqualified person with respect to the foundation.

The IRS concluded that this was not a scheme to ena-

ble the director to purchase the artwork at a below-fair-

market-value-price. That is, this was not an attempt by a

disqualified person to manipulate the price of the works

of art to the advantage of a disqualified person (Reg. §

53. 4941(d)-2(f)(1)). In a striking passage, the IRS stated

that there is no indication that the foundation director

“could influence the purchase price negotiated between a

collaborating artist and any secondary grantee.” [12.4(a)]

Commentary: The property-price manipulation rule is

embodied in the tax regulation stating that self-dealing

occurs where a private foundation is manipulating the

price of securities for the benefit of a disqualified person

(Reg. § 53.4941(d)-2(f)(1)). This, however, is an exam-

ple; this concept of manipulation also applies where a

disqualified person engages in an act to manipulate the

price (or value) of securities to the advantage of a dis-

qualified person, where the income or assets of a private

foundation are involved. Indeed, this type of manipula-

tion can occur with respect to any type of property. Here,

the attempt to manipulate is extended to an “influenc-

ing” of the property’s price. This type of “influencing”

is a nice (and warranted) expansion of the concept of

“attempting to manipulate” the value of property for the

benefit of a disqualified person. ◆

FOUNDATION’S GRANTS

FOR ELECTRIC BUSES RULED

IN CONFORMITY WITH PF TAX

LAWS

A private foundation, created and solely funded by

a utility providing electricity and natural gas services, is

proposing to make grants to governmental bodies and

other public charities to offset the cost difference be-

tween the purchase of gasoline and diesel vehicles and

the purchase of electric vehicles. Prospective grantees

are to include a governmental entity operating a city bus

system and a public university. Essentially, the purpose

of these grants is to subsidize the purchase of electric

buses for the city.

The foundation represented to the IRS many pub-

lic benefits associated with the use of electric buses,

including elimination of air pollutants and ground-level

ozone. These particle emissions cause lakes and streams

to become acidic, change the nutrient balance in coastal

waters and river basins, deplete nutrients in the soil, and

adversely affect the diversity of ecosystems. These vehi-

cles also cost less to operate and maintain.

The IRS first ruled that by assisting conversion of

this bus fleet to electric vehicles, the foundation will be

improving the environment and public health and thus

be for exclusively public and charitable purposes (Priv.

Ltr. Rul. 202034001). Therefore, the proposed grants will

be qualifying distributions and not taxable expenditures.

The IRS then ruled that any private benefit poten-

tially received by the utility will be qualitatively and

quantitatively incidental to the public benefit received

by the grants, so that the foundation’s activities in this

regard will not serve a private interest. The fourth of

these rulings concerned the self-dealing rules, inasmuch

as the utility is a disqualified person with respect to the

foundation (being a substantial contributor). The poten-

tial problem is that the purchase of the electric vehicles

will result in additional sales of electricity by the utility.

The IRS dismissed this issue, however, holding that the

additional sales “will be negligible in comparison with

[the] utility’s total electricity sales and minimal in relation

to the [amount of the] proposed grants.” [14.4(a), (b),

(e), 20.13(b)]

Commentary: This ruling is surely correct as to these

points of law. Nonetheless, this element of the facts

looms: Why is the charitable entity involved with a pri-

vate foundation to begin with, rather than a supporting

organization? ◆

STOCK TRANSFERS

TO DAF RULED GIFTS,

NOT TAXABLE REDEMPTIONS

An individual, on three occasions, contributed appre-

ciated securities to the Fidelity Investments Charitable

Gift Fund. These transfers were authorized by the issuer’s

board of directors, which recognized that the fund has a

policy of immediate liquidation of contributed securities

(see the May 2020 issue). Pursuant to letters of under-

standing between the parties, the donor agreed that the