§ 13.8 Required court action to amend a private foundation's governing instrument.

(a) In general. Under section 508(e) of the Internal Revenue Code of 1954, a private foundation (as defined in section 509 of the Code) generally, shall not be exempt under section 501 (a) of the Code unless its governing instrument contains certain provisions. These provisions, generally, must require or prohibit, as the case may be, the foundation to act or refrain from acting so that it shall not be liable to the taxes imposed by sections 4941, 4942, 4943, 4944, and 4945 of the Code. Private foundations organized before January 1, 1970, are not subject to the requirements of such section 508(e) with respect to taxable years beginning before January 1, 1972.

(b) Manner of satisfying requirements of section 508(e). A private foundation may satisfy the requirements of section 508 (e) if its governing instrument is amended as required by such section. A private foundation's governing instrument shall be deemed to have been so amended if valid provisions of State law have been enacted which:

(1) Require it to act or refrain from acting so as not to subject the foundation to the taxes imposed by sections 4941 (relating to taxes on self-dealing), 4942 (relating to taxes on failure to distribute income), 4943 (relating to taxes on excess business holdings), 4944 (relating to taxes on investments which jeopardize charitable purpose), and 4945 (relating to taxable expenditures), or

(2) Treat the required provisions as contained in the foundation's governing instrument.

[T.D. 7040, 35 F.R. 7301, May 9, 1970] § 13.9

Special rules for certain section 501(c)(3) organizations.

(a) New organizations must notify the Secretary that they are applying for recognition of section 501(c)(3) status(1) In general. Under section 508(a) of the Internal Revenue Code of 1954, as added by section 101 (a) of the Tax Reform Act of 1969, except as provided in subparagraph (3) of this paragraph, an organization that is organized after October 9, 1969, will not be treated as an organization described in section 501 (c) (3)

(i) Unless such organization has given the Secretary or his delegate notice in

the manner prescribed in subparagraph (2) of this paragraph; or

(ii) For any period before the giving of such notice, unless such notice is given in the manner and within the time prescribed in subparagraph (2) of this paragraph.

See section 508(d) (2) (B) for the effect on the deductibility of charitable contributions during the period an organization is not treated as an organization described in section 501(c)(3).

(2) Filing of notice. (i) For purposes of subparagraph (1) of this paragraph, notice must be filed within 1 year from the end of the month in which the organization seeking exemption under section 501 (c) (3) was organized, or before the 90th day after final regulations under section 508(a) are filed with the FEDERAL REGISTER, whichever comes later. Such notice is filed by submitting a properly completed and executed Form 1023, Exemption Application. A Form 1023 properly filed prior to the publication of this temporary regulation will satisfy this requirement. Notice should be filed with the district director for the internal revenue district in which is located the principal place of business or principal office of the organization. An extension of time for the filing of such notice may be granted by such district director upon timely request to him by the organization, if it demonstrates that additional time is required.

(ii) Although the information required by Form 1023 must be submitted to satisfy the notice required by this section, the failure to supply, within the required time, all of the information required to complete such form is not alone sufficient to deny exemption from the date of organization to the date such complete information is submitted by the organization. If the information which is submitted within the required time is incomplete, and the organization supplies the necessary additional information at the request of the Commissioner or his delegate within the additional time period allowed by him, the original notice will be considered timely.

(3) Exceptions from notice. Subparagraphs (1) and (2) are inapplicable to the following organizations:

(i) Churches, their integrated auxiliaries, and conventions or associations of churches;

(ii) Any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000;

(iii) Subordinate organizations (other than private foundations) included in an application for an original or supplemental group exemption letter; and

(iv) Any other class of organizations that the Commissioner or his delegate by Revenue Procedure from time to time excludes from the requirement of filing notice under section 508(a).

(4) Applications of new organizations exempted from filing notice. Any organization excepted from the requirement of filing notice under section 508(a) will be exempt from taxation under section 501(c)(3) if it meets the requirements of that section, whether or not it files the notice under section 508(a). However, in order to establish its exemption with the Internal Revenue Service and receive a ruling or determination letter recognizing its exempt status, an organization excepted from the notice requirement by reason of subparagraph (3) of this paragraph should file proof of its exemption in the manner prescribed in § 1.501(a)–1. (b) Presumption that old and new organizations are private foundations-(1) In general. Under section 508(b), except as provided in subparagraph (7) of this paragraph, any organization (including an organization in existence on Oct. 9, 1969) which is described in section 501 (c) (3), and which does not notify the Secretary or his delegate within the time and in the manner prescribed in subparagraph (2) that it is not a private foundation, will be presumed to be a private foundation.

(2) Filing of notice. (i) Except as provided in subparagraph (7) of this paragraph, an organization must file the notice described in section 508 (b) within 1 year from the end of the month in which such organization was organized, or before the 90th day after final regulations under section 508(b) are filed with the FEDERAL REGISTER, whichever comes later.

(ii) Any organization filing notice under this paragraph that has received a ruling or determination letter from the Internal Revenue Service dated on or before July 13, 1970, recognizing its exemption from taxation under section 501 (c) (3) (or the corresponding provisions of prior law), shall file the notice described in section 508(b) by submit

ting a properly completed and executed Form 4653, Notification Concerning Foundation Status.

(iii) The financial schedule on Form 4653 need be completed only if the organization is, or thinks it might be, described in section 170(b) (1) (A) (iv) or (vi) or section 509(a) (2).

(iv) Any organization filing notice under this paragraph that has not received a ruling or determination letter from the Internal Revenue Service dated on or before July 13, 1970, recognizing its exemption from taxation under section 501(c) (3) (or the corresponding provisions of prior law), shall file its notice by submitting a properly completed and executed Form 1023 and attaching a statement that it is not a private foundation. A Form 1023 submitted prior to the publication of this temporary regulation will satisfy this requirement if the organization submits an additional statement that it is not a private foundation. Any statement filed under this subdivision shall be accompanied by a written declaration by the principal officer, manager, or authorized trustee that there is a reasonable basis in law and in fact for the statement that the organization so filing is not a private foundation, and that to the best of the knowledge and belief of such officer, manager or trustee, the information submitted is complete and correct.

(v) The notice filed under subdivision (ii) of this subparagraph should be filed with the Internal Revenue Service Center, 11601 Roosevelt Boulevard, Philadelphia, Pa. 19155, Attention: EOMF Group. The notice required by subdivision (iv) of this subparagraph should be filed with the district director for the internal revenue district in which is located the principal place of business or principal office of the organization. An extension of time for the filing of such notice may be granted by the district director for the internal revenue district in which is located the principal place of business or principal office of the organization, upon timely request to him by the organization, if it demonstrates that additional time is required.

(3) Effect of notice upon the filing organization. The notice filed under this paragraph may not be relied upon by the organization so filing unless and until the Internal Revenue Service notifies the organization that it is an organization described in paragraph (1), (2), (3), (4) of section 509 (a). For purposes of the

or

preceding sentence, an organization that has filed notice under section 508 (b), and has received a ruling that it is an organization described in section 170(b) (1) (A) (other than clauses (vii) and (viii) thereof), will be considered to have been notified by the Internal Revenue Service that it is an organization described in paragraph (1) of section 509(a) if (i) the facts and circumstances forming the basis for the issuance of such ruling have not substantially changed and (ii) the ruling issued under that section has not been revoked expressly or by a subsequent change of the law or regulations under which the ruling was issued.

(4) Effect of notice upon grantors or contributors to the filing organization. Any organization which has properly filed the notice described in section 508 (b) will not be treated as a private foundation for purposes of making any determination under the internal revenue laws with respect to a grantor or contributor thereto, unless the organization is controlled directly or indirectly by such grantor or contributor, if by the 30th day after the day on which such notice is filed the organization has not been notified by the Commissioner or his delegate that the notice filed by such organization has failed to establish that such organization is not a private foundation. See subparagraph (6) of this paragraph for the effect of a notice by the Internal Revenue Service given after such 30th day.

(5) Statement that old and new organizations are operating foundations. (i) Any organization (including an organization in existence on October 9, 1969) which is described in section 501 (c) (3) may submit a statement, in the form and manner provided for notice in subparagraph (2) of this paragraph, that it is an operating foundation (as defined in section 4942 (j) (3) ) and include in such statement:

(a) necessary supporting information to confirm such determination (including a statement identifying the clause of section 4942 (j) (3) (B) applicable); and

that

is

(b) a written declaration by the principal officer, manager, or authorized trustee that there is a reasonable basis in law and in fact that the organization so filing is an operating foundation, and that to the best of the knowledge and belief of such officer, manager, or trustee, the information submitted is complete and correct.

(ii) The statement filed under this subparagraph may not be relied upon by the organization so filing unless and until the Internal Revenue Service notifies the organization that it is an operating foundation described in section 4942 (j) (3).

(iii) Any organization which has properly filed the statement described in this subparagraph will be treated as an operating foundation for purposes of making any determination under the internal revenue laws with respect to a grantor or contributor thereto, unless the organization is controlled directly or indirectly by such grantor or contributor, if by the 30th day after the day on which such statement is filed the organization has not been notified by the Commissioner or his delegate that its statement has failed to establish that such organization is an operating foundation. See subparagraph (6) of this paragraph for the effect of a notice by the Internal Revenue Service given after such 30th day.

(6) Effect of notice by Internal Revenue Service concerning organization's notice or statement. Subparagraph (4) and subdivision (iii) of subparagraph (5) of this paragraph shall have no effect:

(i) with respect to a grantor or contributor to any organization for any period after the date on which the Internal Revenue Service makes notice to the public (such as by publication in the Internal Revenue Bulletin) that a grantor or contributor to such organization can no longer rely upon the notice or statement submitted by such organization; and

(ii) upon any grant or contribution made to an organization on or after the date on which a grantor or contributor acquired knowledge that the Internal Revenue Service has given notice to such organization that its notice or statement has failed to establish that such organization either is not a private foundation, or is an operating foundation, as the case may be.

(7) Exceptions from notice. Subparagraphs (1) and (2) of this paragraph are inapplicable to the following

organizations:

(i) Churches, their integrated auxiliaries, and conventions or associations of churches;

(ii) Any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of

which in each taxable year are normally not more than $5,000; and

(iii) Subordinate organizations (other than private foundations) included in an application for an original or supplemental group exemption letter, provided the parent or supervisory organization submits a notice covering the subordinates.

(8) Applications of organizations exempted from filing notice. Any organization that is excepted from the notice requirement of section 508(b) by reason of subparagraph (7) of this paragraph may receive the benefits of subparagraph (4) of this paragraph by filing the notice described in section 508(b).

[T.D. 7052, 35 F.R. 11233, July 14, 1970]

§ 13.10 Distribution of money in lieu of fractional shares.

(a) In general. (1) Under the general rule of section 305, as amended by section 421(a) of the Tax Reform Act of 1969, gross income does not include the amount of any distribution of the stock (or rights to acquire the stock) of a corporation made by such corporation to its shareholders with respect to its stock. Under an exception to the general rule, a distribution by a corporation of its stock or rights to acquire its stock is treated as a distribution of property to which section 301 applies if the distribution (or a series of distributions of which such distribution is one) has the result of (i) the receipt of money or other property by some shareholders, and (ii) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation. Also, the Secretary or his delegate is directed to prescribe regulations under which a redemption which is treated as a distribution to which section 301 applies, or any other transaction having a similar effect on the interest of any shareholder, shall be treated as a distribution with respect to any shareholder whose proportionate interest in the assets or earnings and profits of the corporation is increased by such redemption or transaction.

(2) The general rule, and not the exception, applies in the case where cash is distributed in lieu of fractional shares to which the shareholders would otherwise be entitled, provided the purpose in distributing the cash is to save the distributing corporation the trouble, expense, and inconvenience of issuing and

transferring fractional shares (or scrip representing fractional shares), or issuing full shares representing the sum of fractional shares, and not to give any particular group of shareholders an increased interest in the assets or earnings and profits of the corporation.

(b) Illustration. The application of paragraph (a) of this section may be illustrated by the following example:

Example. Corporation X is a large corporation whose stock is widely held by the public, no one shareholder owning more than 10 percent of the outstanding stock. The stock is listed on a recognized exchange and is currently selling at less than $75 per share. During the year the corporation pays a 3-percent stock dividend. Cash is paid to each shareholder in lieu of a fractional share to which he would otherwise be entitled. The distribution of cash in lieu of fractional shares is not intended to give any particular group of shareholders an increased interest in the assets or earnings and profits of the corporation, but is intended to save the corporation the trouble, expense, and inconvenience of issuing and transferring scrip representing fractional shares. The general rule, and not the exception, applies in this situation.

(Secs. 305 (c) 83 Stat. 614; 26 U.S.C. 305 (c)) [T.D. 7039, 35 F.R. 7012, May 2, 1970] Revocation of election to report income on the installment basis.

§ 13.11

(a) In general. Under section 453 (c) (4) taxpayers who are dealers in personal property and who elected installment-basis income reporting, subject to the provisions of section 453 (c) (1) (relating to change from accrual to installment basis), may revoke their previously made election.

(b) Time and manner of revoking election. The revocation by a taxpayer may be made by filing an amended return on an appropriate form or forms, such as Form 1040X for an individual taxpayer, for the year of change (the first year for which income was computed using the installment basis) and for each subsequent year for which a return was filed using the installment basis. The taxpayer should indicate on such amended returns that he is revoking an election to report income on the installment basis. Such revocation must be made within 3 years from the last date prescribed for the filing of the return for the year of change including any extension of time granted the taxpayer. In reporting income on the amended returns described in this section, the tax

(a) Transfer to public charities-(1) General rule. Under section 507(b) (1) (A) of the Internal Revenue Code of 1954, a private foundation can terminate its status as such without incurring the tax imposed by section 507 (c), provided there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under Chapter 42, if such organization distributes all of its net assets to one or more organizations described in section 170(b) (1) (A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution.

(2) Effect of current ruling. An organization to which a distribution of net assets is made will qualify as an organization "described in section 170(b) (1) (A) (other than clauses (vii) and (viii))” for purposes of meeting the requirements of section 507(b) (1) (A) without a further showing if such organization:

(i) Has been in existence for a continuous period of at least 60 calendar months preceding the distribution described in subparagraph (1) of this paragraph;

(ii) Has received a ruling that it is an organization described in clause (i), (ii), (iii), (iv), (v), or (vi) of section 170 (b) (1) (A);

(iii) The facts and circumstances forming the basis for the issuance of the ruling have not substantially changed during the 60-month period referred to in subdivision (i) of this subparagraph; and

(iv) The ruling referred to in subdivision (ii) of this subparagraph has not been revoked expressly or by a subsequent change of the law or regulations under which the ruling was issued.

(3) Organizations described in more than one clause in section 170(b) (1) (A). For purposes of section 507(b)(1) (A), the parenthetical term "other than in clauses (vii) and (viii)" shall be treated as referring only to an organization which is described only in section 170

(b) (1) (A) (vii) or (viii). If an organization is described in section 170(b) (1) (A) (other than in clauses (vii) and (viii)), it will not be precluded from being a distributee described in section 507(b) (1) (A) merely because it also appears to meet the description of an organization described in section 170(b) (1) (A) (viii).

(4) Special transitional rule. (i) Section 4940 (a) imposes a tax upon private foundations with respect to the carrying on of activities for each taxable year. For purposes of section 4940, an organization which terminates its private foundation status under section 507(b) (1) (A) by the end of the period described in subdivision (ii) of this subparagraph will not be considered as carrying on activities within the meaning of section 4940 during such period. Such organization will therefore not be subject to the tax imposed under section 4940 (a) for such period.

(ii) The period referred to in subdivision (i) of this subparagraph is the 12month period beginning with the first day of the organization's first taxable year which begins after December 31, 1969, but such period shall not be treated as ending before the 45th day after the last of the following dates:

(a) The day on which regulations (other than temporary regulations) first prescribed under section 507(b) (1) become final;

(b) The day on which regulations (other than temporary regulations) first prescribed under section 509 become final; or

(c) The day on which corrective and clarifying regulations under section 170 (b) (1) (A) and designated as § 1.170A-9 of this chapter become final.

(iii) If the period described in subdivision (ii) of this subparagraph has not expired prior to the due date for the organization's Form 990 (determined with regard to any extension of time for filing the return) for its first taxable year which begins after December 31, 1969, and if the organization has not terminated its private foundation status under section 507(b) (1) (A) by such date, then notwithstanding the provisions of subdivision (ii) of this subparagraph, the organization must take either of the following courses of action:

(a) Complete and file its Form 990, including the line entitled "Tax on investment income from Part III", by such date, and pay the tax on investment