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Operation as a Public Charity

An organization may terminate its private foun­dation status under section 507(b)(1)(B) if it meets the requirements of section 509(a)(1), (2), or (3)) for a continuous 60-month period beginning with the first day of any tax year, and notifies the Service before beginning the 60-month period that it is terminating its private foundation status.  Also, it must establish immediately after the end of the 60-month pe­riod that it has met the requirements of section 509(a)(1), (2), or (3).

Notification to the Service by a foundation that it is terminating under section 507(b)(1)(B) does not constitute notice of a section 507(a) termination even if the foundation fails to meet the requirements of section 507(b)(1)(B).  How­ever, a successful section 507(b)(1)(B) termina­tion will incur no tax under section 507(c) and, therefore, will require no abatement of tax.

Effect of satisfying termination require­ments.  If the organization meets the require­ments of section 507(b)(1)(B) during the continuous 60-month period, it will be treated as a section 509(a)(1), (2), or (3) organization for the entire 60-month period.

Failure to meet 60-month requirements.  Generally, any organization that does not meet section 507(b)(1)(B) termination requirements during the 60-month period will be treated as a private foundation for the entire 60-month pe­riod.  Any grants or contributions made to such an organization will be treated as contributions made to a private foundation.

However, the organization will be treated as a section 509(a)(1), (2), or (3) organization for any tax year or years that the requirements are met.  Any grants or contributions to the organiza­tion during such year or years will be treated as made to a section 509(a)(1), (2), or (3) organiza­tion and the organization itself will not be subject to private foundation taxes and restrictions for such year or years.

In determining whether an organization meets section 509(a)(1), (2), or (3) requirements for any year in the 60-month period, the organi­zation will be treated as if it were a new organi­zation with its first tax year beginning on the date the 60-month period begins.

Advance rulings for 60-month terminations
An organization that files the notification re­quired for a 60-month termination may receive, at the discretion of the Service, an advance ruling that the organization can reasonably be expected to terminate its private foundation sta­tus over the 60-month period.

To receive an advance ruling, the organiza­tion must also agree to an extension of time to assess the section 4940 tax on net investment income  for the years in the 60-month termination period.  If an organiza­tion agrees to the extension and it is accepted, it will not have to pay the tax on net investment income during the 60-month period.  The signed and dated agreement Form 872, Consent to Extend the Time to Assess Tax, should be filed with the request for the advance ruling.  The assessment period for all years in the termina­tion period must be extended to 4 years, 4 months and 15 days after the end of the last year in the 60-month termination period.

The decision to grant a favorable ruling will be based on the facts and circumstances, taking into account organizational structure, proposed programs and activities, intended methods of operation, and projected sources of support.

Grantors or contributors to an organization that has obtained a favorable advance ruling may rely on that ruling until notice of revocation is published in the Internal Revenue Bulletin.  However, a grantor or contributor may not rely on such a ruling if the grantor or contributor was responsible for, or aware of, the action or inac­tion that resulted in the organization’s failure to meet the requirements of section 509(a)(1), (2), or (3) or knew that the Service had notified the organization that its advance ruling would be revoked.

A potential grantee organization may re­quest an advance ruling before receiving a grant or contribution, to the effect that the grant or contribution will not result in the grantee’s failing to meet section 509(a)(1), (2), or (3) require­ments.  If a favorable ruling is issued, the grantor or contrib­utor may rely upon it.

However, an advance ruling may not be re­lied upon by the organization obtaining that rul­ing.  If the organization later fails to complete a successful termination under section 507(b)(1)(B) and was not a section 509(a)(1), (2), or (3) organization, it will have to pay interest on the amount of tax imposed on net investment income under section 4940 that is unpaid as of the last date for payment of that tax.  However, because the failure to pay the tax during the 60-month period (or before revocation of the ruling) is due to reasonable cause, no penalty will be assessed.

Organizations without advance rulings.  An organization that does not receive an advance ruling does not have to pay the tax on net invest­ment income during the 60-month termination period if it signs the consent to extend the as­sessment period for the tax.  The same rules regarding interest and penalties apply if the or­ganization does not complete a successful ter­mination of its private foundation status under section 507(b)(1)(B).


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Page Last Reviewed or Updated: 30-Apr-2013