Recent IRS Private Letter Rulings

• Published date: 01 February 2021
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/npc.30824

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 February 2021 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

IRS DELAYS FOUNDATIONS’

ELECTRONIC FILING OF

FORMS 4720

The IRS, on December 16, announced a delay of

application of the requirement (IRC § 6033(n)) that

private foundations electronically file Form 4720 (Notice

2021-01). This mandatory electronic filing requirement

became law on enactment of the Taxpayer First Act

(summarized in the September 2019 issue).

Generally, of course, most categories of tax-exempt

organizations are required to file annual information

returns. The annual return for private foundations is Form

990-PF (Reg. § 1.6033-2(a)(2)(i)). Although the informa-

tion to be reported for a particular tax year is set forth in

the forms and instructions for that year, the tax regulations

also provides a list of information generally required to be

furnished by an exempt organization on its annual infor-

mation return (Reg. § 1.6033-2(a)(2)(ii)). This list includes,

in the case of private foundations, the information that is

required on Form 4720 (Reg. § 1.6033-2(a)(2)(ii)(J)).

The IRS noted that the information on annual infor-

mation returns generally is disclosable to the public (IRC

§ 6104(b); Reg. § 301.6104(b)-1(a)(1)). This means that

the Form 4720 filed by a private foundation is disclosa-

ble, whereas a Form 4720 filed by a person other than a

private foundation is not required to be disclosed.

The Taxpayer First Act accords the IRS the authority

to delay application of its amendments if the IRS deter-

mines that application of the amendments would cause

undue burden without a delay, but the delayed applica-

bility date may not be later than tax years beginning on

or after July 1, 2021 (Act § 3101(d)(2)).

The IRS is modifying Form 4720 so that private

foundations can electronically file the form. The coming

modifications to the form are also necessary to meet the

Act’s requirement that the IRS must make available to

the public in machine readable format the electronically

filed annual returns.

The IRS stated that a modified paper version of the

Form 4720 will be available at the beginning of 2021.

Private foundations may continue to file the paper ver-

sion of the form until electronic filing is available and

required. Once electronic filing is required, Form 4720

filed by private foundations after the applicability date

will have to be filed electronically in accordance with the

instructions to the form.

The Department of the Treasury and the IRS will com-

mence the process of removing the provision in the tax

regulations enabling private foundations and other per-

sons to jointly file the same Form 4720 (Reg. § 53.6011-

1(c)) because the changes wrought by the Act have

“rendered unfeasible” the ability for foundations and

others to jointly file the form electronically. [28.2(a)(iv)] ◆

RECENT IRS PRIVATE LETTER

RULINGS

• Spouses proposed to contribute their income inter-

ests in a charitable remainder annuity trust to a pri-

vate foundation they formed. It was represented to

the IRS that this assignment of the annuity interests

will result in a merger, under state law, of the income

and remainder interests. The IRS ruled that the trans-

fer will (1) not entitle these individuals to an income

tax charitable contribution deduction, (2) be recog-

nized as gift and not a sale for federal tax purposes,

(3) entitle them to a gift tax charitable deduction for

both the income and remainder interests, (4) not

result in an act of self-dealing, and (5) not subject

the trust or the foundation to a termination tax (Priv.

Ltr. Rul. 202047005).

• An organization was found by the IRS to be a Type

III supporting organization but that classification

was, following an examination, revoked, sending

the entity into private foundation status (Priv. Ltr.

Rul. 202047011). The organization annually makes

grants to one or more of nine charities. The entity

tried to convince the IRS it is a Type II supporting

organization but that failed because the governing

boards of the two organizations do not consist of the

“same persons.” This ruling has several truisms, such

as “[h]aving one or two of its board members on

the board of a supported organization isn’t having

the same board members” and “having one board

member on a supported organization board isn’t

a majority.” Type III supporting organization status

could not be achieved because the entity did not

satisfy the responsiveness test, the integral part test,

or the notification requirement. [12.3(c)]

• A nonprofit corporation was formed to inspire “fam-

ilies, memories, and communities to benefit families

in helping their children heal.” Its activities include the

provision of amusement rides, a Christmas display, a

Halloween walk-through, and rental of a party room.

Fees are charged. This organization was denied rec-

ognition of tax exemption as a charitable entity, on

the ground of violation of the operational test, in that

it is conducting substantial social and recreational

activities (Priv. Ltr. Rul. 202049005). [4.5(a)]

• A nonprofit corporation was established to develop and

implement an open standard to enable the exchange

of certain data formats among its members. This

standard provides its members with a format/language

for applications that are used by the members’ cus-

tomers who produce or consume the data involved. In

general, the standard being provided allows its mem-

bers to build “common language” software products

for the industry. The entity licenses the standard

exclusively to its members for fees. The organization

has direct links on its website to its founders’ products