Stock Transfers to DAF Ruled Gifts, Not Taxable Redemptions

Date01 November 2020
Published date01 November 2020
November 2020 5
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.
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
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

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