Q&A #120 – Can a program be transferred from a 501(c)(3) organization to a 501(c)(6) organization?

Question: I am on the Board of a 501(c)(3) nonprofit organization that runs various educational programs. We are considering transferring one of these educational programs along with related cash assets to a local 501(c)(6) chamber of commerce because they are in a better position to manage and promote the program. Is it possible for a 501(c)(3) organization to transfer a program to a 501(c)(6) organization?

Answer: Internal Revenue Service rulings suggest that it is possible to transfer a program from a 501(c)(3) organization to a 501(c)(6) organization so long as the transfer is subject to certain restrictions that ensure the assets remain dedicated to proper 501(c)(3) purposes. However, the specific circumstances are likely to impact the analysis of this issue so retaining legal counsel to advise the organization on the transaction is highly recommended.  

In Q&A #117, we explained the various components that generally make up the transfer of a program from one nonprofit organization to another, including the transfer of cash, assignment or licensing of intellectual property, and the transfer of other tangible and intangible assets.

IRS Revenue Ruling 68-489 sets forth the main guidance concerning the distribution of funds from 501(c)(3) public charities to non-501(c)(3) organizations. This ruling provides that such distributions are permissible if the 501(c)(3) organization: (1) limits distributions to specific projects that further its own exempt purposes; (2) retains control and discretion as to the use of the funds; and (3) maintains records establishing that the funds were used for section 501(c)(3) purposes. Note that in the context of a 501(c)(3) private foundation, other rules relating to “expenditure responsibility” are also relevant.

While Revenue Ruling 68-489 appears to address a grant rather than the transfer of a program, the logic of the ruling suggests that a 501(c)(3) organization should be permitted to transfer a program and its related assets to a 501(c)(6) organization if the transaction adheres to these restrictions.  

For example, in Private Letter Ruling 200234071 the IRS cited Revenue Ruling 68-489 in approving a proposed transfer of a continuing legal education program and related educational activities from a 501(c)(3) organization to a 501(c)(6) bar association. Under the IRS-approved terms of the transaction, funds granted to the association were held in a restricted account for continuing legal education programs and related activities, and the relevant educational materials were provided to the association under a license agreement. Additionally, the association was required to provide the 501(c)(3) organization with annual reports detailing deposits and withdrawals from the account as well as the educational activities for which the cash and other assets were used. If the association failed to comply with these terms, the license to use the educational materials would be revoked and any remaining funds, plus net income earned thereon, would be returned to the 501(c)(3) organization.

Planning Tip – If your 501(c)(3) organization is considering making a grant or transferring a program to a non-501(c)(3) organization, the due diligence or “pre-grant inquiry” phase of the transaction is especially important. Document your organization’s efforts to ensure the recipient organization is capable of complying with the restrictions in the transaction agreement. This should include information relating to the recipient organization’s capacity, financial health, past history and staff experience, budget and accounting systems, and other factors. Make sure these findings are communicated to your organization’s Board and/or relevant committees and included in the applicable meeting minutes.

Keep in mind that IRS private letter rulings do not carry the weight of precedent and can be relied upon only by the taxpayer to whom they are addressed. However, private letter rulings like the one discussed above can highlight important issues and provide helpful clues as to the analysis and policy considerations the IRS is likely to consider in similar situations.

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