[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.509(a)-5]

[Page 136-138]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.509(a)-5  Special rules of attribution.

    (a) Retained character of gross investment income. (1) For purposes 
of determining whether an organization meets the not-more-than-one-third 
support test set forth in section 509(a)(2)(B), amounts received by such 
organization from:
    (i) An organization which seeks to be described in section 509(a)(3) 
by reason of its support of such organization; or
    (ii) A charitable trust, corporation, fund, or association described 
in section 501(c)(3) (including a charitable trust described in section 
4947(a)(1)) or a split interest trust described in section 4947(a)(2), 
which is required by its governing instrument or otherwise to 
distribute, or which normally does distribute, at least 25 percent of 
its adjusted net income (within the meaning of section 4942(f)) to such 
organization, and such distribution normally comprises at least 5 
percent of such distributee organization's adjusted net income,

will retain their character as gross investment income (rather than 
gifts or contributions) to the extent that such amounts are 
characterized as gross investment income in the possession of the 
distributing organization described in subdivision (i) or (ii) of this 
subparagraph or, if the distributing organization is a split interest 
trust described in section 4947(a)(2), to the extent that such amounts 
would be characterized as gross investment income attributable to 
transfers in trust after May 26, 1969, if such trust were a private 
foundation. For purposes of this section, all income which is 
characterized as gross investment income in the possession of the 
distributing organization shall be deemed to be distributed first by 
such organization and shall retain its character as such in the 
possession of the recipient of amounts described in this paragraph. If 
an organization described in subdivision (i) or (ii) of this 
subparagraph makes distributions to more than one organization, the 
amount of gross investment income deemed distributed shall be prorated 
among the distributees.
    (2) For purposes of subparagraph (1) of this paragraph, amounts paid 
by an organization to provide goods, services,

[[Page 137]]

or facilities for the direct benefit of an organization seeking section 
509(a)(2) status (rather than for the direct benefit of the general 
public) shall be treated in the same manner as amounts received by the 
latter organization. Such amounts will be treated as gross investment 
income to the extent that such amounts are characterized as gross 
investment income in the possession of the organization spending such 
amounts. For example, X is an organization described in subparagraph 
(1)(i) of this paragraph. It uses part of its funds to provide Y, an 
organization seeking section 509(a)(2) status, with certain services 
which Y would otherwise be required to purchase on its own. To the 
extent that the funds used by X to provide such services for Y are 
characterized as gross investment income in the possession of X, such 
funds will be treated as gross investment income received by Y.
    (3) An organization seeking section 509(a)(2) status shall file a 
separate statement with its return required by section 6033, setting 
forth all amounts received from organizations described in paragraph 
(a)(1) (i) or (ii) of this section.
    (b) Relationships created for avoidance purposes. (1) If a 
relationship between an organization seeking section 509(a)(3) status 
and an organization seeking section 509(a)(2) status:
    (i) Is established or availed of after October 9, 1969, and
    (ii) One of the purposes of establishing or utilizing such 
relationship is to avoid classification as a private foundation with 
respect to either organization, the character and amount of support 
received by the section 509(a)(3) organization will be attributed to the 
section 509(a)(2) organization for purposes of determining whether the 
latter meets the one-third support test and the not-more-than-one-third 
support test under section 509(a)(2). If a relationship described in 
this subparagraph is established or utilized by an organization seeking 
section 509(a)(3) status and two or more organizations seeking section 
509(a)(2) status, the amount of support received by the former 
organization will be prorated among the latter organizations and the 
character of each class of support (as defined in section 509(d)) will 
be attributed pro rata to each such organization. The provisions of this 
paragraph and of paragraph (a) of this section are not mutually 
exclusive.
    (2) In determining whether a relationship between one or more 
organizations seeking section 509(a)(2) status (hereinafter referred to 
as beneficiary organizations) and an organization seeking section 
509(a)(3) status (hereinafter referred to as the supporting 
organization) has been established or availed of to avoid classification 
as a private foundation (within the meaning of subparagraph (1) of this 
paragraph), all pertinent facts and circumstances, including the 
following, shall be taken into account as evidence that a relationship 
was not established or availed of to avoid classification as a private 
foundation:
    (i) The supporting organization is operated to support or benefit 
several specified beneficiary organizations.
    (ii) The beneficiary organization has a substantial number of dues-
paying members (in relation to the public it serves and the nature of 
its activities) and such members have an effective voice in the 
management of both the supporting and beneficiary organizations.
    (iii) The beneficiary organization is composed of several membership 
organizations, each of which has a substantial number of members (in 
relation to the public it serves and the nature of its activities), and 
such membership organizations have an effective voice in the management 
of the supporting and beneficiary organizations.
    (iv) The beneficiary organization receives a substantial amount of 
support from the general public, public charities, or governmental 
grants.
    (v) The supporting organization uses its funds to carry on a 
meaningful program of activities to support or benefit the beneficiary 
organization and such use would, if such supporting organization were a 
private foundation, be sufficient to avoid the imposition of any tax 
upon such organization under section 4942.
    vi) The supporting organization is not able to exercise substantial 
control

[[Page 138]]

or influence over the beneficiary organization by reason of the former's 
receiving support or holding assets which are disproportionately large 
in comparison with the support received or the assets held by the 
latter.
    (vii) Different persons manage the operations of the beneficiary and 
supporting organizations and each organization performs a different 
function.
    (3) The provisions of this paragraph may be illustrated by the 
following examples:

    Example 1. M, an organization described in section 509(a)(2), is a 
council composed of 10 learned societies. Each member society has a 
large membership of scholars interested in a particular academic area. 
In 1970 M established N, an organization seeking section 509(a)(3) 
status, for the purpose of carrying on research and study projects of 
interest to the member societies. The principal source of funds for N's 
activities is from foundation and government grants and contracts. The 
principal source of funds for M's activities after the creation of N is 
membership dues. M continued to maintain a wide variety of activities 
for its members, such as publishing periodicals and carrying on seminars 
and conferences. N is subject to complete control by the governing body 
of M. Under these circumstances, the relationship between these 
organizations is not one which is described in subparagraph (1) of this 
paragraph.
    Example 2. Q is a local medical research organization described in 
section 509(a)(2). Its fixed assets are negligible and it carries on 
research activities on a limited scale. It also makes a limited number 
of grants to scientists and doctors who are engaged in medical research 
of interest to Q. It receives support through small government grants 
and a few research contracts from private foundations. R is an 
organization described in section 501(c)(3). As of January 1, 1970, R 
was classified as a private foundation under section 509. It has a 
substantial endowment which it uses to make grants to various charitable 
and scientific organizations described in section 501(c)(3). During 
1970, R agrees to subsidize the research activities of Q. R amends its 
governing instrument to provide specifically that all of R's support 
will be used for research activities which are approved and supervised 
by Q. R also amends its bylaws to permit a minority of Q's board of 
directors to be members of R's governing body. R then gives timely 
notification under section 507(b)(1)(B)(ii) that R is terminating its 
private foundation status by meeting the requirements of section 
509(a)(3) by the end of the 12-month period described in section 
507(b)(1)(B)(i). For purposes of determining whether R has met the 
requirements of section 509(a)(3) by the end of the 12-month period, as 
well as determining Q's status under section 509(a)(2), the character 
and amount of support received by R will be attributed to Q.

    (c) Effect on organizations claiming section 509(a)(3) status. If an 
organization claiming section 509(a)(2) status fails to meet either the 
one-third support test or the not-more-than-one-third support test under 
section 509(a)(2) by reason of the application of the provisions of 
paragraph (a) or (b) of this section, and such organization is one of 
the specified organizations (within the meaning of section 509(a)(3)(A)) 
for whose support or benefit an organization claiming section 509(a)(3) 
status is operated, the organization claiming section 509(a)(3) status 
will not be considered to be operated exclusively to support or benefit 
one or more section 509(a) (1) or (2) organizations.

[T.D. 7212, 37 FR 21922, Oct. 17, 1972, as amended by T.D. 7290, 38 FR 
31834, Nov. 19, 1973; T.D. 7784, 46 FR 37890, July 23, 1981]