Tax Planning and Compliance for Tax-Exempt Organizations, 6th Edition

CHAPTER 13Excise Tax Based on Investment Income: IRC §4940

• § 13.2 Capital Gains
  • (c) Nontaxed Gains

§ 13.2 Capital Gains

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Capital Gains. An operating exempt organization transferred the assets of a program to a newly created exempt organization under an agreement that the new entity conduct the activity for charitable purposes. Additionally, an exempt subsidiary of the operating entity was partly sold and partly donated to the new organization as a part of a reorganization. The gain inherent in the transfer/sale was not recognized for tax purposes because involved entities were commonly controlled. The IRS also ruled that it will not jeopardize tax-exempt status when funds are distributed to organizations not themselves described in § 501(c)(3), provided the organization:

• Retains control and discretion as to the use of the funds;
• Maintains records establishing that the funds were used for § 501(c)(3) purposes; and
• Limits distributions to specific projects that further its own exempt purposes.¹

(c) Nontaxed Gains

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• Trust transfers: Pro rata transfer of a portion of the assets from one irrevocable trust to a newly created irrevocable trust didn't result in a sale or exchange, or other disposition, of the trust properties for Code Section 1001(a) purposes. As a result, no gain or loss need be recognized by trusts or beneficiaries for purposes of IRC § 661(a)(3) or § 6001(c). Also, the transfer isn't treated ...