IRS rules that community trust and affiliated nonprofit corporation can file a single Form 990

Editor: Susan M. Grais, CPA, J.D., LL.M.

The IRS found in Letter Ruling 202533005 that a community trust and a nonprofit corporation that is controlled by the trust and supports the trust’s charitable activities will be treated as a single entity that needs to file only one Form 990, Return of Organization Exempt From Income Tax, each year. The corporation will be treated for federal tax purposes as a component part of the trust, so that its activities and assets are treated as activities and assets of the trust.

Facts

The trust, recognized by the IRS as tax–exempt under Sec. 501(c)(3) and as a public charity under Sec. 170(b)(1)(A)(vi), operates as a community foundation.

The trust plans to form a nonprofit corporation, per state law, funded with the trust’s assets. The corporation’s charitable purposes will be substantively the same as those of the trust, and most future contributions will be made to the corporation. Both entities will share a common governing body, as the trust’s trustees will become directors of the corporation’s board of directors. In addition, the charitable purposes and most of the substantive provisions in the trust’s amended and restated trust instrument and the corporation’s articles of organization will be the same. Additionally, the corporation’s board will be required to prepare periodic financial reports that treat all the funds and other property held by the corporation as part of the trust.

Law

For purposes of Secs. 170, 501, 507, 508, and 509 and Code Chapter 42 (Secs. 4940 through 4968), Regs. Sec. 1.170A–9(f)(11)(i) treats any community trust and a legal entity that it controls as a single entity rather than as an aggregation of separate funds, if they meet the requirements in Regs. Secs. 1.170A–9(f)(11)(iii) through (vi). These regulations do not, however, explicitly state that a community trust and its controlled legal entity are treated as a single entity for purposes of the filing requirements of Form 990 under Sec. 6033.

All funds that are associated with a community trust, including a nonprofit corporation, and meet the requirements of Regs. Sec. 1.170A–9(f)(11)(ii) are treated as component parts of the organization. Under this section, to be a component part of a community trust, a trust or fund: “(A) [m]ust be created by gift, bequest, legacy, devise, or other transfer to a community trust which is treated as a single entity under [Regs. Sec. 1.170A–9(f)(11)]; and (B) [m]ay not be directly or indirectly subjected by the transferor to any material restriction or condition … with respect to the transferred assets.”

Regs. Sec. 1.170A–9(f)(11)(iii) requires an organization to be commonly known as a community trust, fund, foundation, or other similar name showing the fund supports charitable activities in the community or area it serves.

Regs. Sec. 1.170A–9(f)(11)(iv) requires all the organization’s funds to be subject to a common governing instrument or a master trust or agency agreement.

Regs. Sec. 1.170A–9(f)(11)(v) requires the organization and the community trust to have a common governing body that directs or, in certain cases, monitors the distribution of all funds exclusively for charitable purposes and that the community trust has sufficient powers to ensure that the organization’s funds are dedicated to the trust’s tax–exempt purposes.

Regs. Sec. 1.170A–9(f)(11)(vi) requires the organization to prepare periodic financial reports treating all of the funds held by the community trust, either directly or in component parts, as funds of the organization. 

Analysis

The IRS ruled that the trust and the corporation will be treated as a single entity under Regs. Sec. 1.170A–9(f)(11)(i). The IRS determined that the trust and corporation meet the requirements of Regs. Secs. 1.170A–9(f)(11)(iii) through (vi) and therefore will be treated as a single entity rather than as an aggregation of separate funds. In support of its finding, the IRS noted that the trust and corporation will have a similar name and purpose, share substantially similar provisions in their respective governing documents, share a common governing body that directs fund distribution, and treat their funds as being held by a single entity. 

Second, the IRS said the corporation and all funds of the corporation will be treated as component parts of the trust under Regs. Sec. 1.170A–9(f)(11)(ii) because (1) the trust will make a gift to the corporation upon its creation, and (2) neither the corporation’s articles nor its bylaws permit any donor to the corporation to impose any material restriction or condition on donated assets.

Third, the IRS ruled that the corporation will not be required to file a separate Form 990 and may be included as a component part of the trust on its Form 990. Because the IRS concluded that the trust and corporation will be treated as a single entity for purposes of Secs. 170, 501, 507, 508, and 509 and Chapter 42 and that the corporation is treated as a component part of the trust, the two organizations can file a single Form 990 as a single entity, with the corporation included as a component part of the trust on its Form 990.

Fourth, because the trust and the corporation will be treated as a single entity for purposes of Sec. 170, the IRS ruled that contributions to the corporation will be fully deductible as charitable contributions to the trust, assuming that those contributions meet all the Sec. 170 requirements for deductibility.

Fifth, the IRS ruled that the amendment and restatement of the trust instrument and the formation of the corporation will not adversely affect the trust’s exemption or public–charity status under Secs. 501(c)(3) and 170(b)(1)(A)(vi) because the new trust instrument will be substantially similar to the original trust instrument.

Implications

IRS Letter Ruling 202533005 is the first to confirm that a controlled entity of a community trust that meets the requirements of Regs. Sec. 1.170A–9(f)(11) does not have to file a separate Form 990 from the community trust, but rather that the two organizations can file a consolidated Form 990 as a single entity. Although Regs. Sec. 1.170A–9(f)(11)(i) does not explicitly state that a controlled entity and its community trust are treated as a single entity for Sec. 6033 purposes, the IRS ruled that they may file a single Form 990 because they are treated as a single entity — and the controlled entity is treated as a component part of the community trust — for purposes of Secs. 170, 501, 507, 508, and 509 and Chapter 42. The ruling does not address, however, whether such entities could be treated as a single entity for other federal filing purposes (e.g., employment tax and reporting of foreign entity ownership).

Organizations operating as community trusts should evaluate whether their affiliated entities could be classified as component parts of the trusts for certain federal tax purposes. Such component–part/single–entity treatment could streamline governance and simplify annual reporting requirements.

Editor

Susan M. Grais, CPA, J.D., LL.M., is a managing director (retired) at Ernst & Young LLP in Washington, D.C.

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Contributors are members of or associated with Ernst & Young LLP.