Deductible Donations to Foreign Subs

        In PLR 201438032, the Service considered whether donations to a nonprofit public benefit corporation that engages in transactions of funds with its foreign subsidiary are tax deductible and whether such transactions would harm its 501(c)(3) status.   The PLR confirms aspects of how a transaction between a 501(c)(3) and a wholly-owned foreign subsidiary should be structured to secure a favorable tax result.  One question the IRS still has not resolved is whether a donation to a  wholly-owned foreign single-member LLC is deductible.  The nonprofit world will be waiting.

        In the ruling, the subsidiary in question is a foreign nonprofit foundation whose activities, namely seeking to aid foreign orphanages, are carried out internationally.  The governing board and governing officers are under the control of the public benefit corporation.  The stated purpose of the subsidiary is to carry out the purposes and objectives of the public benefit corporation.  In terms of board overlap, at least three of the five board members of the subsidiary are members of the public benefit corporation’s board.  In terms of governance, it is clear that the public benefit corporation is involved in each area and ensures that the subsidiary complies with U.S. tax rules and regulations regarding tax-exempt entities, e.g., restrictions regarding private inurement and lobbying expenditures.  The public benefit corporation also has the ability to expel members from the board of directors and to dissolve the subsidiary.  Under the “Proposed Transaction,” the public benefit corporation may vote to transfer funds to the subsidiary.  There are also mechanisms in place to ensure a type of expenditure responsibility-like accountability for the maintenance and use of funds.  Finally, the public benefit corporation disallows earmarking, and its board maintains the requisite discretion and control over funds, i.e., does not have an obligation to transfer funds to the subsidiary.

        Both of the public benefit corporation’s requested rulings were granted.  First, the Proposed Transaction was deemed not to jeopardize the public benefit corporation’s tax-exempt status.  Second, donations made to the public benefit corporation were deemed deductible under Code section 170(a).  In reaching this ruling,  Treasury stated that the Proposed Transaction is consistent with the anti-conduit rules of Rev. Ruling 63-252 and the discretion and control requirement of Rev. Ruling 66-79.  Moreover, it looked to Revenue Ruling 68-49 which states that a 501(c)(3) organization does not jeopardize its tax-exempt status by contributing funds to non-501(c)(3) organizations as long as it can show the funds were used for 501(c)(3) purposes.  Ultimately, Treasury found the public benefit corporation’s actions congruent with this ruling.  In terms of the second ruling, Treasury found that since the public benefit corporation is an organization described in Section 170(c), contributions to it are deductible under Section 170(a). 

Khrista Johnson