REORGANIZATION WON'T AFFECT ORGANIZATIONS' EXEMPT STATUS.

UIL # 501.03-11, 509.00-00, 511.00-00

This is in reference to your ruling request concerning the proposed reorganization (Reorganization) as described below.

V, W, X, and Y are organizations described in section 501(c)(3) of the Code and are not private foundations because they are described in section 509(a)(3). Under the Reorganization, V will become the parent holding company of T, W, X, and Y. T's bylaws have been amended to make V its sole member, and V will become the sole member of W, X and Y. V will appoint the board of directors of T, W, X, and Y and approve certain extraordinary corporate transactions such as mergers, dissolution and liquidation.

The Reorganization will provide flexibility to cope with the increasingly competitive environment to deliver services and allocate resources and plan effectively for the future by pulling together new and existing affiliates into a planned and coordinated system. V will now have a system-wide perspective that will enable it to study and respond to the community's needs in a more effective manner than could be achieved by any of its affiliates acting alone. Other goals will be to promote better use of specialized services and expertise by avoiding unnecessary duplication and realizing economies of scale through the sharing of assets, services, and or personnel among the affiliates.

Pursuant to the Reorganization, V will coordinate the efforts of the autonomous providers and other operating entities, which are or will become part of the reorganized corporate structure. V will be responsible for developing a long-range strategic plan for the overall system, focusing on broader system-wide issues to reduce functional overlap and maximize the utilization of available resources.

V will monitor each affiliate's actual and proposed programs to help assure that services are being or will be delivered efficiently. V will focus on whether new organizations should be created or acquired to assume certain functions currently performed by existing affiliates or to add new services to the overall system.

Pursuant to the Reorganization, T will transfer assets to V, W, X and Y. W will operate the care center T currently operates and other similar programs in the future, X will hold all real property, and Y will operate endowments currently that were held by T.

You are requesting the following rulings:

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations provides that the term "charitable" is used in Code section 501(c)(3) in its generally accepted legal sense. The promotion of health has long been recognized as a charitable purpose. See Restatement (Second) of Trusts, sections 368, 372; IV Scott on Trusts, sections 368, 372 (3rd ed. 1967); and Rev. Rul. 69-545, 1969-2 C.B. 117.

Rev. Rul. 69-545, 1969-2 C.B. 117, sets forth standards under which a nonprofit hospital may qualify for recognition of exemption under section 501(c)(3) of the Code. This revenue ruling gave consideration to two separate hospitals, only one of which was determined to qualify for exempt status under section 501(c)(3). By weighing all the relevant facts and circumstances, the revenue ruling analyzed whether both the control and use of the hospitals were for the benefit of the public or for the benefit of private interests. The hospital that qualified for exemption was found to be organized and operated to further the charitable purpose of promoting health by satisfying a community benefit standard that included, among other factors, a board of directors that broadly represented the interests of the community. The hospital that did not qualify for recognition of exemption was found to be operating for the private benefit of those who controlled it rather than for the benefit of the public.

Rev. Rul. 67-149, 1967-1 C.B. 131, holds that an organization providing only financial assistance to organizations exempt under section 501(c)(3) of the Code may qualify for exemption under section 501(c)(3).

Rev. Rul. 69-463, 1969-2 C.B. 131, holds that the leasing of its adjacent office building, and the furnishing of certain office services by an exempt hospital to a hospital based medical group is not unrelated trade or business under section 513 of the Code where the medical group performs important health services for the hospital.

Rev. Rul. 78-41, 1978-1 C.B. 148, concludes that a trust created by a hospital to accumulate and hold funds to pay malpractice claims against the hospital qualified for exemption under section 501(c)(3) of the Code as an integral part of the hospital. The hospital provided the funds for the trust, and the banker-trustee was required to make payments to claimants at the direction of the hospital. The organization conducted an activity that the hospital could perform itself.

Section 509(a)(1) of the Code provides that the term "private foundation" means a domestic or foreign organization described in section 501(c)(3) other than an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)).

Section 511 of the Code imposes a tax on the unrelated business taxable income of organizations exempt from federal income tax under section 501(c).

Section 512(a)(1) of the Code defines the term "unrelated business taxable income" as gross income derived by an organization from any unrelated trade or business regularly carried on by it, less the deductions directly attributable to such business activity.

Section 513(a) of the Code defines the term "unrelated trade or business" as any trade or business the conduct of which is not substantially related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exercise or performance by an organization of the purpose or function constituting the basis for its exemption.

Section 1.513-1(a) of the regulations defines "unrelated business taxable income" to mean gross income from any unrelated trade or business regularly carried on. Section 1.513-1(b) states that the phrase "trade or business" includes activities carried on for the production of income and which possess the characteristics of a trade or business within the meaning of section 162 of the Code. Finally, section 1.513-1(c) of the regulations explains that "regularly carried on" has reference to the frequency and continuity of the conduct of an activity and the manner in which the activity is pursued.

Section 1.513-1(d)(2) of the regulations provides that a trade or business is "related" to exempt purposes only where the conduct of the business activity has a causal relationship to the achievement of any exempt purpose, and is "substantially related" for purposes of section 513 of the Code, only if the causal relationship is a substantial one. Thus, for the conduct of a trade or business from which a particular amount of gross income is derived to be substantially related to purposes for which exemption is granted, the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute importantly to the accomplishment of those purposes.

The restructuring of T and the transfer of assets to V, W, X , and Y pursuant to the Reorganization will not adversely affect their exempt status as organizations described in section 501(c)(3) of the Code. V, W, X and Y will perform the same functions that T formerly performed or could have performed in furtherance of its exempt purposes, which are charitable as described in section 1.501(c)(3)- 1(d)(2) of the regulations, and the promotion of health as described in Rev. Rul. 69-545. See also Rev. Rul. 78-41 and Rev. Rul. 67-149. The activities performed by V, W, X and Y support T's exempt purposes and would not jeopardize their statuses as supporting organizations under section 509(a)(3).

The transfer of assets and/or funds pursuant to the Reorganization will be one-time transfers and therefore, will not possess the characteristics of a trade or business "regularly carried on" within the meaning of sections 1.513-1(b) and 1.513-1(c) of the regulations. Following the Reorganization, the sharing of services and facilities, whether or not a fee is charged, and transfers of cash and assets among the exempt organizations will be substantially related to the exercise or performance of their exempt purposes and will, therefore, not constitute unrelated trade or business activities within the meaning of section 513 of the Code and sections 1.513-1(a) and 1.513-1(d)(2) of the regulations. Each organization will be merely supplying a related charitable organization with a service or facility necessary for, and in furtherance of, the performance of its own exempt functions under section 501(c)(3). See Rev. Rul. 69-463.

Based on all the facts and circumstances described above, we rule as follows:

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.