# For-Profit Subsidiaries of 501(c)(3) Nonprofits Under New York Law[^about] How a New York not-for-profit or education corporation that is a section 501(c)(3) parent keeps a wholly owned for-profit subsidiary separate, including a Delaware subsidiary doing business in New York, under New York veil-piercing, choice-of-law and related-party rules, and how New York and federal law treat funding the subsidiary, payments back to the parent and grants from an affiliated private foundation or supporting organization. ## When can a New York court hold a nonprofit liable for the debts of its wholly owned for-profit subsidiary? {#veil-piercing-standard} **Short answer.** Under New York law, piercing the veil to reach the parent requires a showing that the parent completely dominated the subsidiary in the transaction attacked and used that domination to commit a fraud or wrong that injured the plaintiff. [^morris-domination-plus-wrong] In *TNS Holdings, Inc. v. MKI Securities Corp.* the Court of Appeals refused to pierce where domination, even if assumed, had not resulted in some fraud or wrong. [^tns-domination-without-wrong] Ownership is never enough: *Billy v. Consolidated Machine Tool Corp.* holds that a parent's liability can never rest solely on its ownership of a controlling interest in the subsidiary. [^billy-ownership-never-enough] Veil piercing makes the parent liable derivatively for the subsidiary's obligations. It is distinct from the parent's direct liability for its own conduct: the Supreme Court in *United States v. Bestfoods* distinguished cases in which the wrong traces to the parent through its own personnel and management and the parent directly participates in it, [^bestfoods-direct-participant-distinguished] and held that in those cases the parent is directly liable for its own actions. [^bestfoods-directly-liable-own-actions] **Which state's law applies to a subsidiary incorporated elsewhere.** Several decisions applying New York choice-of-law rules look to the law of the state of incorporation. The Second Circuit took that approach in *Kalb, Voorhis & Co. v. American Financial Corp.* [^kalb-voorhis-state-of-incorporation] and applied Delaware law to a Delaware subsidiary in *Fletcher v. Atex, Inc.* [^fletcher-delaware-law-governs] The Appellate Division, First Department, did the same in 2013 in *Flame S.A. v. Worldlink International (Holding) Ltd.* [^flame-state-of-incorporation-rule] In 2026 the First Department in *Matter of UBS Securities LLC v. Dondero* analyzed a corporate veil-piercing claim under New York's test, applying its complete-domination element to the transactions attacked, [^ubs-dondero-new-york-elements] and its opinion does not discuss which state's law governed that claim. In a footnote, the court separately reserved, as not argued, the relevance of the place of formation of the limited partnerships involved, one of which was formed in Delaware, and whether a veil-piercing claim lies against them under New York law. [^ubs-dondero-place-of-formation-not-argued] No New York Court of Appeals decision found in our review resolves the choice-of-law question, and because the cited decisions apply the law of the state of incorporation while the First Department has analyzed a veil-piercing claim under New York's test without addressing choice of law, the conservative course is to brief the choice of law expressly and to structure the subsidiary so that it satisfies both the Delaware and the New York standards. For a Delaware subsidiary, Delaware's own standard, which requires that the corporate structure cause fraud or a similar injustice, is described in [the Delaware guide](/practice-guides/nonprofit-for-profit-subsidiaries/us/delaware#veil-piercing-standard). [^wallace-alter-ego-fraud-injustice] > [!NOTE] > **Practice note.** > > A subsidiary funded with too little capital for the obligations it is expected to incur gives a creditor the inadequate-capitalization factor that courts applying New York law weigh in deciding whether the subsidiary was dominated. [^passalacqua-capitalization-factor] Kelley Drye's 2008 advisory treats adequate capitalization and insurance as the most important protection, because both weaken an argument based on injustice. [^kelleydrye-capitalize-and-insure] ## Which separateness practices protect a New York nonprofit's for-profit subsidiary from veil piercing? {#separateness-practices} **Short answer.** Courts applying New York law look for the opposite of the domination factors listed by the Second Circuit in *Passalacqua*: observed formalities, adequate capitalization, limited overlap of officers, directors and staff, separate offices, real business discretion, arm's-length dealing and treatment as an independent profit center. [^passalacqua-domination-factors] **What does not support piercing by itself.** Several features common to nonprofit-owned subsidiaries do not, standing alone, let a court applying New York law disregard the subsidiary: - Ownership. *Billy v. Consolidated Machine Tool Corp.* holds that a parent's ownership of a controlling interest never supports liability by itself. [^billy-ownership-never-enough-separateness] - Domination without a resulting wrong. In *TNS Holdings, Inc. v. MKI Securities Corp.* the Court of Appeals refused to pierce where domination, even if assumed, had not resulted in some fraud or wrong. [^tns-domination-without-wrong-separateness] - Overlapping officers and directors. Overlap in ownership, officers, directors and personnel is one of the *Passalacqua* factors that tend to show domination, [^passalacqua-domination-factors] but under *Morris v. New York State Department of Taxation & Finance* domination must also be used to commit a fraud or wrong that injured the plaintiff, [^morris-domination-plus-wrong-separateness] and *United States v. Bestfoods* recognizes that officers and directors of both companies can change hats to represent each one separately. [^bestfoods-directors-change-hats] **Formalities for a Delaware subsidiary.** A Delaware board can act without a meeting by unanimous written consent filed with its minutes, [^dgcl-141f-unanimous-written-consent] [^dgcl-141f-consent-filed-with-minutes] and the parent, as sole stockholder, can act by written consent. [^dgcl-228a-stockholder-written-consent] [The Delaware guide](/practice-guides/nonprofit-for-profit-subsidiaries/us/delaware#separateness-practices) covers Delaware's formalities and Delaware decisions on cash management, overlapping boards and loose formalities. **What practitioners add.** Commentary on nonprofit-owned subsidiaries recommends a separate governing body with separate meetings and minutes, [^blt-separate-boards-and-minutes] less than complete overlap of directors and officers, [^blt-avoid-complete-overlap] and a written arm's-length agreement for shared facilities, services and employees that is followed in practice, with separate books, bank accounts and tax returns. [^venable-arms-length-shared-services] > [!NOTE] > **Practice note.** > > A Delaware or other out-of-state subsidiary doing business in New York must first be authorized under the Business Corporation Law. [^nybcl-1301a-authority-required] Until it is authorized and has paid the fees, taxes, penalties and interest owed, it cannot maintain an action or special proceeding in New York, [^nybcl-1312a-no-suit-until-authorized] although its contracts remain valid and it can defend itself. [^nybcl-1312b-contracts-remain-valid] ## Do New York's related-party rules apply to transactions between a nonprofit and its wholly owned subsidiary? {#new-york-related-party-rules} **Short answer.** A transaction between a New York nonprofit and its wholly owned subsidiary is not, on the statutory definitions, a related party transaction by itself, because the subsidiary is an affiliate and not a related party. [^npc-102-affiliate-definition] [^npc-102-related-party-definition] The Not-for-Profit Corporation Law defines an affiliate as an entity controlled by, or in control of, the corporation, which describes a wholly owned subsidiary. [^npc-102-affiliate-definition] A related party is a director, officer or key person of the corporation or of an affiliate, a relative of one, or an entity in which those individuals hold at least thirty-five percent (more than five percent of a partnership or professional corporation). [^npc-102-related-party-definition] A subsidiary owned by the nonprofit itself, rather than by those individuals, falls outside the entity branch. A related party transaction requires a related party with a financial interest in an arrangement in which the corporation or an affiliate participates. [^npc-102-related-party-transaction-definition] No New York decision or Attorney General guidance found in our review applies these definitions to a nonprofit and its wholly owned subsidiary; the conservative course for a significant intercompany arrangement is for the board to make the section 715 determination anyway. [^npc-715a-conservative] **When the rules do apply.** The definition excludes a transaction, or a related party's interest in it, that is de minimis; a transaction that the board or boards of similar organizations would not customarily review in the ordinary course of business and that is available to others on the same or similar terms; and a benefit provided to a related party solely as a member of a class the corporation intends to benefit as part of its mission, if that benefit is available to all similarly situated members of the class on the same terms. [^npc-102-related-party-transaction-definition] Outside those exclusions, an intercompany arrangement becomes a related party transaction when a related party has a financial interest in it, for example when a director or officer of either company is paid by reference to the transaction or owns a stake in a counterparty, because the directors and officers of an affiliate are themselves related parties. [^npc-102-related-party-definition] The board, or an authorized committee, must then determine that the transaction is fair, reasonable and in the corporation's best interest. [^npc-715a-fair-reasonable-best-interest] For a charitable corporation and a substantial financial interest, it must also consider alternatives, approve by a majority of those present and document the basis for approval at the time. [^npc-715b-substantial-interest-procedures] The interested related party may not take part in the deliberations or vote. [^npc-715h-no-participation] The Not-for-Profit Corporation Law applies to education corporations chartered under the Education Law, with the Education Law or a special act prevailing where they conflict. [^edn-216a-npcl-applies-education-corporations] Board procedure for these approvals is covered in [New York Nonprofit Governance](/practice-guides/nonprofit-governance/us/new-york), and Regents-chartered education corporations have [their own governance guide](/practice-guides/school-governance/us/new-york). Practitioner commentary written in 2015, before the 2016 amendments, also emphasized that the definition reaches arrangements in which an affiliate participates. [^dwt-affiliate-participant-trigger] ## Will the Internal Revenue Service treat a New York nonprofit's for-profit subsidiary's business as the parent's own activity? {#tax-attribution} **Short answer.** The Internal Revenue Service (IRS) ordinarily respects a taxable subsidiary formed for a valid business purpose and attributes its activities to the exempt parent only on clear and convincing evidence that the subsidiary is in reality an arm, agent or integral part of the parent. [^irs-cpe-arm-agent-integral-part] That standard comes from a 1986 IRS training text, which explains that a parent and an incorporated subsidiary are separate taxable entities while the subsidiary has a business purpose or carries on business. [^irs-cpe-attribution-barrier] The Supreme Court's tax cases point the same way. *Moline Properties, Inc. v. Commissioner* allows the corporate form to be disregarded for revenue purposes where it is a sham or unreal, [^moline-sham-or-unreal] and *National Carbide Corp. v. Commissioner* holds that complete ownership and the control that comes with it are no longer significant in determining taxability. [^national-carbide-ownership-not-significant] *National Carbide* also said that a true agent's relations with its principal must not depend on the fact that the principal owns it. [^national-carbide-true-agent] *Commissioner v. Bollinger* rejected a literal reading of that statement, because a corporate agent's relations with its owner always depend on ownership and that reading would invalidate every subsidiary-parent agency. [^bollinger-ownership-not-disqualifying] The Court also declined to hold that evidence of a genuine agency can consist only of arm's-length dealing plus an agency fee. [^bollinger-no-rigid-requirements] Separateness also works against the parent. In *Geisinger Health Plan v. Commissioner* the Third Circuit said that separately incorporated entities generally must qualify for exemption on their own merits, [^geisinger-separate-entities-own-merits] so a subsidiary cannot borrow the parent's exemption. **How the IRS has applied it.** In a 2016 private letter ruling, the IRS stated that only minimal business activities are needed for a corporation to be respected as a separate taxable entity, [^plr-201644019-moline-business-activity] and ruled that a subsidiary's activities would not be attributed to its exempt parent. [^plr-201644019-activities-not-attributed] The ruling rested on representations that the parent would not direct or take part in the subsidiary's day-to-day management and would exercise only the normal rights of a shareholder. [^plr-201644019-no-day-to-day-management] A private letter ruling may not be used or cited as precedent. [^usc-6110k3-ruling-not-precedent] No court decision found in our review applies the attribution standard to a for-profit corporate subsidiary of a section 501(c)(3) parent; the conservative course is to keep the parent out of the subsidiary's day-to-day management and limited to the normal rights of a shareholder, as the representations in the 2016 ruling did. [^plr-201644019-no-day-to-day-conservative] **Shared directors and officers.** Practitioner commentary reads the IRS's rulings as tolerating substantial director overlap if the parent stays out of day-to-day management and deals with the subsidiary at arm's length, [^venable-director-overlap-tolerated] and treats overlapping officers as the greater attribution risk, because officers run the business day to day. [^venable-officer-overlap-attribution] **Whether a subsidiary is needed at all.** A section 501(c)(3) organization may run a trade or business as a substantial part of its activities if the business furthers its exempt purposes and it is not operated primarily to carry on an unrelated business. [^usc-501c3-exemption-attribution] [^reg-1501c3-1-e1-business-primary-purpose] Douglas Mancino's 2008 paper for New York University's National Center on Philanthropy and the Law calls protecting exemption a largely mythical reason for a subsidiary, because public charities can earn substantial unrelated business income while their primary purpose remains exempt. [^mancino-exemption-protection-overstated] ## Can a New York 501(c)(3) nonprofit fund its for-profit subsidiary with equity, a loan or a grant? {#parent-funding} **Short answer.** A New York nonprofit parent can fund its subsidiary by buying shares or making a loan under its corporate powers, or by making a grant over which it retains control and discretion for exempt purposes, subject to federal limits on inurement and private benefit. [^npc-202a6-hold-shares] [^npc-202a10-lend-and-invest] [^rr68-489-control-and-discretion] The Treasury regulations deny exempt status to an organization whose net earnings inure to private individuals or that operates for private interests. [^reg-1501c3-1-c2-inurement] [^reg-1501c3-1-d1ii-private-benefit] Those corporate powers are exercised in furtherance of the corporation's purposes and subject to its certificate of incorporation and other statutes. [^npc-202a-powers-in-furtherance] Section 501(c)(3) itself exempts an organization operated exclusively for exempt purposes, including educational purposes, only if no part of its net earnings inures to the benefit of any private shareholder or individual. [^usc-501c3-exemption-funding] The parent also has to remain primarily engaged in exempt activities, with no more than an insubstantial part of its activities outside its exempt purposes. [^reg-1501c3-1-c1-operational-test] Incidental benefits to others are not prohibited private benefit, [^american-campaign-incidental-benefit] but the absence of inurement alone does not prove that an organization operates exclusively for exempt purposes. [^american-campaign-private-benefit-separate] Inurement concerns insiders: the Seventh Circuit in *United Cancer Council, Inc. v. Commissioner* describes it as siphoning a charity's earnings to its founder, board members, their families or anyone else fairly described as the equivalent of an owner or manager. [^united-cancer-council-insiders] **Equity.** Practitioner commentary treats a contribution in return for stock as an investment by the parent. [^blt-equity-contribution-is-investment] A corporation's gross income does not include a contribution to its capital. [^usc-118a-capital-contribution-excluded] When outside investors also hold stock, the same commentary warns that the charity must receive adequate value and must not subsidize them. [^blt-adequate-value-outside-investors] **Loans.** Interest the subsidiary pays the parent on a loan is a specified payment, included in the parent's unrelated business income to the extent it reduces the subsidiary's net unrelated income or increases its net unrelated loss; the [payments question](#payments-to-parent) gives more detail. [^usc-512b13c-loan-interest] [^usc-512b13a-loan-interest] **Grants.** A section 501(c)(3) organization may distribute funds to a nonexempt organization without jeopardizing its exemption if it retains control and discretion over their use for section 501(c)(3) purposes. [^rr68-489-control-and-discretion] In the ruling the IRS approved, the organization limited distributions to specific projects that furthered its own exempt purposes and kept records showing how the funds were used. [^rr68-489-specific-projects-and-records] Because the parent is the sole shareholder, a transfer it labels a grant may still be a shareholder contribution to capital; section 118(b) removes contributions by a governmental entity or civic group from the exclusion but keeps contributions made by a shareholder as such. [^usc-118b-shareholder-contribution-carve-back] The sources reviewed do not decide how a parent's grant to its wholly owned subsidiary is classified for the subsidiary's income tax; the conservative course is to document the transfer as a contribution to capital made in the parent's capacity as shareholder. [^usc-118a-capital-contribution-conservative] **Prudence under New York law.** In our review we found no statute, regulation or IRS ruling that fixes how much of its assets a public charity may invest in a subsidiary; the limits come from fiduciary standards. New York's prudent management statute governs institutional funds, a term that excludes program-related assets, [^npc-551e-institutional-fund] meaning assets held primarily to accomplish a programmatic purpose rather than for investment. [^npc-551h-program-related-asset] A subsidiary held for investment return with institutional funds is managed with the care of an ordinarily prudent person, [^npc-552b-prudence-standard] weighing listed factors that include an asset's special relationship or value to the institution's purposes, [^npc-552e1-investment-factors] and subject to the duty to diversify unless special circumstances justify otherwise. [^npc-552e4-diversification] A subsidiary held mainly to carry out a program falls outside that statute, but directors and officers still owe the general duty of care. [^npc-717a-duty-of-care] **Payments to the parent's disqualified persons through the subsidiary.** For a parent that is a public charity, section 4958 taxes excess benefit transactions of an applicable tax-exempt organization, a term that excludes private foundations. [^usc-4958e-applicable-organization] The covered recipients are disqualified persons: anyone who at any time in the five years before the transaction was in a position to exercise substantial influence over the organization's affairs, that person's family members, and 35-percent controlled entities. [^usc-4958f1-disqualified-person] An excess benefit transaction is one in which the organization directly or indirectly gives a disqualified person more than it receives in return. [^usc-4958c1-excess-benefit] Benefits a subsidiary provides are treated as provided by the parent when the parent owns more than 50 percent of the subsidiary's stock by vote or value, so salary or fees the subsidiary pays the parent's disqualified persons are tested as if the parent paid them. [^reg-53-4958-4-controlled-entity-benefits] A parent that is a private foundation is outside section 4958 and is governed by the self-dealing rules instead. [^usc-4958e-applicable-organization] > [!NOTE] > **Practice note.** > > A New York nonprofit that moves a large share of its assets, or assets essential to its purposes, into the subsidiary can need Attorney General or court approval, because the Attorney General's guidance applies no fixed percentage test to a disposition of all or substantially all assets. [^nyag-substantially-all-assets] ## How are dividends, interest, rent and royalties from a for-profit subsidiary taxed to its nonprofit parent? {#payments-to-parent} **Short answer.** Dividends from a subsidiary are generally excluded from its exempt parent's unrelated business taxable income, but interest, annuities, royalties and rent from a controlled subsidiary are included to the extent they reduce the subsidiary's net unrelated income or increase its net unrelated loss. [^usc-512b1-dividends-excluded] [^usc-512b13a-controlled-payments-taxed] [^usc-512b13c-specified-payment-defined] The dividend exclusion gives way when the parent's stock in the subsidiary is debt-financed property: income from debt-financed property is included under section 514 notwithstanding the exclusion. [^usc-512b4-debt-financed-override] Property is debt-financed when it is held to produce income and there is acquisition indebtedness with respect to it, [^usc-514b1-debt-financed-property] which includes debt the parent incurred to acquire the property. [^usc-514c1-acquisition-indebtedness] The controlled-entity rule overrides the usual exclusions for interest, annuities, royalties and rent, and includes those payments in the parent's gross income from an unrelated trade or business. [^usc-512b13a-controlled-payments-taxed] The parent's tax then applies to its unrelated business taxable income, which is that gross income less directly connected deductions. [^usc-512a1-ubti-after-deductions] Control of a corporation means owning more than 50 percent of its stock by vote or value, applying the constructive-ownership rules of section 318, so a wholly owned subsidiary is always controlled. [^usc-512b13d-control-more-than-50-percent] Under section 318, for example, a person owning 50 percent or more in value of a corporation's stock is treated as owning a proportionate share of the stock that corporation owns, which matters when the parent holds a lower-tier subsidiary through another one. [^usc-318a2c-attribution-from-corporations] For a taxable subsidiary, net unrelated income is the part of its taxable income that would be unrelated business taxable income if it were exempt and had the parent's exempt purposes. [^usc-512b13b-net-unrelated-income] When the subsidiary's business would be unrelated to the parent's purposes, rent it pays for the parent's space or a royalty it pays for the parent's name therefore reduces income that would be unrelated, and the payment is included in the parent's unrelated business income and taxed at corporate rates. [^usc-511a1-tax-at-corporate-rates] **The arm's-length exception is closed to new arrangements.** Section 512(b)(13)(E) limits the inclusion to the amount above an arm's-length payment, but only for payments under a binding written contract in effect on the date the subparagraph was enacted, or a renewal on substantially similar terms. [^usc-512b13e-grandfathered-contracts] That date was August 17, 2006. [^usc-512-enactment-date-2006] A subsidiary formed now has no such contract, so the full specified payment is included to the extent it reduces the subsidiary's net unrelated income or increases its net unrelated loss. **Reporting.** The parent reports every receipt or accrual of interest, annuities, royalties or rent from a controlled entity on Schedule R, regardless of amount. [^irs-schedule-r-specified-payments-reported] > [!NOTE] > **Practice note.** > > The Treasury regulation on controlled organizations has not been conformed to the current statute and still states an 80 percent control test, so a structure designed around that number misreads the current more-than-50-percent statutory test. [^reg-1512b-1-l4-outdated-80-percent] [^usc-512b13d-control-more-than-50-percent] ## Can an affiliated private foundation make a grant directly to a nonprofit's for-profit subsidiary? {#foundation-direct-grant} **Short answer.** A private foundation's grant to a for-profit subsidiary is a taxable expenditure unless the grant serves a charitable purpose and the foundation exercises expenditure responsibility over it. [^usc-4945d4-d5-taxable-expenditures] [^usc-4945h-expenditure-responsibility] Expenditure responsibility means reasonable efforts and adequate procedures to see that the grant is spent only for its purpose, to obtain full reports from the grantee and to report to the IRS. [^usc-4945h-expenditure-responsibility] The regulations call for a limited pre-grant inquiry [^reg-53-4945-5b2-pre-grant-inquiry] and a written commitment, signed by an officer or director of the grantee, to repay unused funds, report annually, keep records open to the foundation and avoid listed noncharitable uses, stating the grant's purposes. [^reg-53-4945-5b3-written-commitment-terms] Because the subsidiary is not a section 501(c)(3) organization, the grant must also be a direct charitable act or a program-related investment, or the foundation must be reasonably assured that the funds will be used exclusively for charitable purposes; on that last route, the subsidiary keeps the funds in a separate fund dedicated to charitable purposes. [^reg-53-4945-6c1-non-501c3-grantees] [^reg-53-4945-6c2-separate-fund] Practitioner commentary describes the same expenditure-responsibility requirement for grants to organizations other than public charities. [^morganlewis-er-for-non-public-charities] **Program-related investments.** A foundation can invest in the subsidiary instead of granting to it. An investment made primarily for charitable purposes, with no significant purpose of producing income or appreciation, is not a jeopardizing investment. [^usc-4944c-program-related-investment] It qualifies if it significantly furthers the foundation's exempt activities and would not have been made but for that relationship, [^reg-53-4944-3-but-for-test] and it is relevant whether profit-motivated investors would invest on the same terms. [^reg-53-4944-3-profit-investor-benchmark] One regulatory example concludes, on its facts, that a purchase of common stock in a for-profit business is a program-related investment even though the foundation may profit. [^reg-53-4944-3-example-3-common-stock] Practitioner commentary on the 2016 final regulations reads them as not requiring the foundation to sell stock once the business becomes profitable. [^stblaw-pri-no-sale-required] Program-related investments are grants for the taxable-expenditure rules, so expenditure responsibility still applies. [^reg-53-4945-4a2-pri-are-grants] **Control by the foundation's insiders.** A contribution to an organization controlled by the foundation or its disqualified persons does not count toward the foundation's required distributions, unless the exception in section 4942(g)(3) applies. [^usc-4942g1a-controlled-organization-excluded] That exception reaches only a contribution to a section 501(c)(3) organization that, by the end of its next taxable year, makes an equal qualifying distribution treated as out of corpus, with adequate records or other evidence of it given to the foundation; a taxable subsidiary cannot use it. [^usc-4942g3-redistribution-exception] The regulation's definition of qualifying distributions lists program-related investments among the amounts that can qualify but excludes any contribution to a controlled organization, so program-related investment status alone does not establish that a payment to a controlled subsidiary is a qualifying distribution, and the conservative course is to treat a program-related investment in a subsidiary the foundation or its disqualified persons control as not a qualifying distribution. [^reg-53-4942a-3a2i-definition] Control exists if those persons, by aggregating their votes or positions, can require or prevent the donee's expenditures, [^reg-53-4942a-3-control-test] and the controlled organization may be a nonexempt one. [^reg-53-4942a-3-nonexempt-controlled] Budgetary procedures alone do not create control. [^irs-budgetary-procedures-not-control] When the foundation's managers also sit on the parent's or the subsidiary's board, whether they can together direct the subsidiary's spending decides the point. **Self-dealing.** The parent, as a section 501(c)(3) organization, is not a disqualified person for self-dealing. [^reg-53-4946-1a8-charities-not-disqualified] The subsidiary may be a disqualified person on either of two grounds. It is one if the foundation's substantial contributors, managers, certain 20 percent owners and their family members own more than 35 percent of its total combined voting power, [^usc-4946a1e-35-percent-corporation] counting indirect stockholdings under the constructive-ownership rules, [^usc-4946a3-indirect-stockholdings] and it is also one if it is itself a substantial contributor to the foundation. [^usc-4946a1e-35-percent-corporation] Common affiliation with the parent does not by itself establish either ground. Self-dealing still includes any use of foundation assets for the benefit of a disqualified person, [^reg-53-4941d-2f1-benefit-to-disqualified-person] so a grant the subsidiary uses to pay a foundation manager or substantial contributor raises the issue. The regulation's incidental-benefit example for shared board members covers grants to public charities and supporting organizations, not to a for-profit grantee. [^reg-53-4941d-2f2-public-charity-example] **Tax to the subsidiary.** Since 2017, a contribution by a governmental entity or civic group, other than one made by a shareholder as such, is not a contribution to capital. [^usc-118b-civic-group-foundation-grant] No authority found in our review decides whether a private foundation is a civic group under this rule; the conservative course is to treat the foundation's grant as taxable income to the subsidiary. **If the affiliated funder is a public charity.** The [Type II supporting organization question](#type-ii-supporting-organization-funder) covers a funder that is a supporting organization of the parent. The private foundation rules on taxable expenditures and self-dealing do not apply, but the IRS expects a grant outside statutory expenditure responsibility to meet Revenue Ruling 68-489's control-and-discretion standards. [^irs-4945h-rr68-489-outside-er] A supporting organization must engage solely in activities that support or benefit its supported organizations, [^reg-1509a-4e1-supporting-org-operational] which makes a direct grant to the parent's taxable subsidiary difficult to justify. A supporting organization's grant, loan, compensation or similar payment to a person described in section 4958(c)(3)(B) is an excess benefit transaction in its full amount. [^usc-4958c3-supporting-org-grants] Those persons are the supporting organization's substantial contributors, their family members and entities more than 35 percent controlled by them. [^usc-4958c3b-persons-described] [^usc-4958f3-35-percent-controlled-entity] Section 509(a) defines a private foundation as a section 501(c)(3) organization other than the organizations described in its paragraphs (1) through (4). [^usc-509a-private-foundation-defined] An organization described in section 509(a)(1), (2) or (4) is excluded from substantial-contributor status for this rule, so a public-charity parent's own contributions to its supporting organization do not make the parent a substantial contributor. [^usc-4958c3cii-public-charity-exception] ## Does a private foundation avoid expenditure responsibility by routing a grant for a nonprofit's for-profit subsidiary through the nonprofit parent? {#pass-through-grant} **Short answer.** Routing a private foundation's grant through the parent does not avoid expenditure responsibility if the foundation earmarks the grant for the subsidiary or has an agreement under which it can cause the subsidiary to be selected. [^reg-53-4945-5a6i-earmarked-secondary-grantee] [^usc-4945d4a-public-charity-grantee] When either condition is met, the regulation treats the grant as made to the subsidiary, and the foundation can obtain the required reports from the subsidiary. [^reg-53-4945-5b1-secondary-grantee-reports] When neither is met, the grant is a grant to the parent, and it needs no expenditure responsibility only if the parent is an organization described in section 4945(d)(4)(A), such as a public charity described in section 509(a)(1) or (2); avoiding earmarking does not itself eliminate expenditure responsibility; a grant to a private-foundation parent still requires it unless the parent qualifies as an exempt operating foundation under section 4945(d)(4)(A)(iii). [^usc-4945d4a-public-charity-grantee] Practitioner commentary reads the rule to hold even if the foundation expects the subsidiary to benefit, provided the parent in fact controls the selection and makes it independently. [^morganlewis-intermediary-selection-control] **Restricted, earmarked and unrestricted grants.** These are different things. A grant restricted to one of the parent's own programs, or an unrestricted grant, belongs to the parent when the foundation neither names the subsidiary nor can cause its selection. [^reg-53-4945-5a6i-earmarked-secondary-grantee] A grant earmarked for the named subsidiary is, for the foundation's tax purposes, a grant to the subsidiary. [^reg-53-4945-5a6i-earmarked-secondary-grantee] If the parent then funds the subsidiary from its own resources, that onward transfer is the parent's own decision and is tested under the parent's rules, including the control and discretion required for a grant to a nonexempt organization. [^rr68-489-parent-onward-grant] **Conduit rulings.** Revenue Ruling 68-489 cites older IRS rulings on conduit gifts and describes them as addressing whether individuals may deduct contributions to a United States charity that sends funds to a foreign charitable organization. [^rr68-489-foreign-conduit-rulings] This guide does not rely on those rulings for a grant from one domestic organization through another. For a public-charity funder, no regulation comparable to the private foundation earmarking rule was found in our review; the conservative course is to leave the parent real control over the selection, as the earmarking rule requires for a private foundation. [^reg-53-4945-5a6i-earmarked-secondary-grantee] A funder that is a supporting organization of the parent is discussed in the [Type II supporting organization question](#type-ii-supporting-organization-funder). ## Can a Type II supporting organization fund a nonprofit parent's for-profit subsidiary directly or through the parent, and what tax limits apply? {#type-ii-supporting-organization-funder} **Short answer.** A Type II supporting organization may make an unrestricted grant to the supported organization (the parent), but a direct grant to the parent's taxable subsidiary risks failing the supporting-organization operational test, because the subsidiary is not among the permissible beneficiaries the regulation lists. [^reg-1509a-4e1-type-ii-solely-support] [^reg-1509a-4e1-type-ii-permissible-organizations] **What a Type II supporting organization is.** Section 509(a)(3) treats as a supporting organization, rather than a private foundation, an organization operated exclusively for the benefit of one or more specified public charities that is, among other options, supervised or controlled in connection with them, and that is not controlled by disqualified persons other than foundation managers and those public charities. [^usc-509a3-supporting-organization] The regulation requires common supervision or control for that relationship, with the supporting organization's control or management vested in the same persons who control or manage the supported organization. [^reg-1509a-4h1-common-control] The donor-control bar in section 509(f)(2)(A) denies the operated, supervised, or controlled by relationship and the operated in connection with relationship to an organization that accepts a gift or contribution from a person described in section 509(f)(2)(B). [^usc-509f2a-donor-control-bar] Those persons are anyone, other than an organization described in section 509(a)(1), (2) or (4), who directly or indirectly controls a supported organization's governing body, alone or together with family members and certain controlled entities, and those family members and 35-percent controlled entities. [^usc-509f2b-persons-described] The bar's text does not list the supervised-or-controlled-in-connection-with relationship, so this particular restriction does not apply to a Type II supporting organization, [^usc-509f2a-donor-control-bar] although section 509(a)(3)(C)'s separate limit on control by disqualified persons still does. [^usc-509a3-supporting-organization] **The operational test.** A supporting organization meets the operational test only if it engages solely in activities that support or benefit its supported organizations, [^reg-1509a-4e1-type-ii-solely-support] and any activity furthering another purpose defeats it. [^reg-1509a-4e1-type-ii-other-purpose] The permissible beneficiaries are the supported organization; members of its charitable class, including through another organization when the payment is in substance a grant to an individual; and section 501(c)(3) organizations, other than private foundations, that are operated, supervised, or controlled directly by or in connection with the supported organization, as well as organizations described in section 511(a)(2)(B), which are governmental colleges and universities and corporations wholly owned by them. [^reg-1509a-4e1-type-ii-charitable-class] [^reg-1509a-4e1-type-ii-permissible-organizations] [^usc-511a2b-state-colleges-and-subsidiaries] All support must be limited to those beneficiaries, [^reg-1509a-4e2-type-ii-limited-to-beneficiaries] and the taxable subsidiary of a private nonprofit parent is not on the list. No authority found in our review decides whether a grant to the subsidiary counts as support of the parent because the parent owns it; the conservative course is for the supporting organization to grant to the parent rather than to the subsidiary. **Excess benefit rules for every supporting organization.** Any grant, loan, compensation or similar payment by a supporting organization to a person described in section 4958(c)(3)(B), and any loan to a disqualified person other than an organization described in section 4958(c)(3)(C)(ii), is an excess benefit transaction in its full amount. [^usc-4958c3a-type-ii-automatic-excess-benefit] The persons described are the supporting organization's substantial contributors, their family members and entities more than 35 percent controlled by them. [^usc-4958c3b-type-ii-persons-described] [^usc-4958f3-type-ii-35-percent-entity] For this special rule, the parent, as an organization described in section 509(a)(1) or (2), is excluded from substantial-contributor status by section 4958(c)(3)(C)(ii). [^usc-4958c3cii-type-ii-exception] That exclusion covers only the listed organizations, so another contributor that is a section 501(c)(3) organization but not on the list, such as a private foundation, can be a substantial contributor. [^usc-4958c3cii-type-ii-exception] The special 35-percent test counts the holdings of substantial contributors and their family members. [^usc-4958c3b-type-ii-persons-described] [^usc-4958f3-type-ii-35-percent-entity] The parent's ownership does not count toward this special ownership threshold. A grant to the subsidiary is nevertheless automatically an excess benefit if the subsidiary is itself a substantial contributor to the supporting organization or satisfies the special more-than-35-percent controlled-entity test. [^usc-4958c3a-type-ii-automatic-excess-benefit] [^usc-4958c3b-type-ii-persons-described] [^usc-4958f3-type-ii-35-percent-entity] Loans reach further. A loan to any disqualified person of the supporting organization, other than an organization listed in section 4958(c)(3)(C)(ii), is automatically an excess benefit. [^usc-4958c3a-type-ii-automatic-excess-benefit] Whether the subsidiary is an ordinary disqualified person turns on the general definition. Under the general rules, a section 501(c)(3) organization is deemed not to be in a position to exercise substantial influence, [^reg-53-4958-3d1-type-ii-charities] and its holdings are not counted in deciding whether a corporation is a 35-percent controlled entity, [^reg-53-4958-3b2-type-ii-35-percent] so the parent's ownership alone does not make the subsidiary a disqualified person, although the subsidiary's other owners and facts still matter. Payments to the subsidiary outside the automatic rules remain subject to the ordinary excess-benefit test. [^usc-4958c1-type-ii-excess-benefit] The automatic rules also cover a grant, loan or compensation the supporting organization pays to its own substantial contributors, their family members or their controlled entities, or a loan to any of its other disqualified persons. [^usc-4958c3a-type-ii-automatic-excess-benefit] The disqualified persons of a supporting organization are also disqualified persons of the supported organization. [^usc-4958f1-type-ii-disqualified-persons] **A grant to the parent or to the subsidiary.** An unrestricted grant to the parent is a payment to the supported organization itself, [^reg-1509a-4e1-type-ii-solely-support] and the parent's later funding of its subsidiary is the parent's own decision under its own federal limits: the parent must remain operated exclusively for exempt purposes without inurement of its net earnings, [^usc-501c3-type-ii-parent-limits] and a grant from the parent to the subsidiary requires the parent to retain control and discretion over the funds. [^rr68-489-type-ii-parent-grant] The [parent-funding question](#parent-funding) gives more detail. The private foundation earmarking regulation applies by its terms to a grant by a private foundation. [^reg-53-4945-5a6i-type-ii] The operational-test regulation does look through an intermediary for grants to individuals, applying the private foundation standard for indirect grants to individuals. [^reg-1509a-4e1-type-ii-charitable-class] No regulation or other authority found in our review decides whether a grant restricted or earmarked through the parent for the subsidiary would be treated as the supporting organization's own grant to a non-permissible beneficiary; the conservative course is an unrestricted grant that leaves the parent discretion over its use. **Records.** Because the operational test turns on whom the supporting organization supports, the records that matter are a grant letter naming the parent as grantee and leaving the parent discretion over use, and minutes of the supporting organization's board tying each payment to support of the parent. [^reg-1509a-4e2-type-ii-limited-to-beneficiaries] ## What records show whether a grant belongs to the nonprofit parent or passes through to its subsidiary? {#grant-bookkeeping} **Short answer.** The records that show whether a grant belongs to the parent or passes through are the grant terms on purpose and selection of the recipient, the parent's records of its control over any onward grant, and its Form 990 reporting of agency funds and related-organization transactions. [^reg-53-4945-5b3-commitment-for-records] [^reg-53-4945-5a6i-bookkeeping] [^rr68-489-records-of-use] [^irs-schedule-d-agent-funds-explained] [^irs-schedule-r-part-v-transactions] Funds a nonprofit collects merely as an agent for another organization, without asserting any right to use them, are excluded from its Form 990 gross receipts and reported by the organization they belong to. [^irs-990-agent-gross-receipts] The parent explains any agent or intermediary arrangement it does not carry on its own balance sheet in Schedule D. [^irs-schedule-d-agent-funds-explained] For contributions recognized in the parent's net assets, donor restrictions determine classification as with or without donor restrictions, and donor restrictions can require funds to be used after a specified date, for a specified purpose, or both. [^irs-990-line-28-donor-restrictions] Whether and when a conditional grant is recognized at all is a separate accounting question that this guide does not address. A board designation does not create a donor restriction: funds without donor-imposed restrictions are reported as unrestricted regardless of board designations, [^irs-990-line-27-board-designations] and the board can reverse its own designation at any time. [^irs-schedule-d-board-designated-endowment] Each company keeps its own return. An organization may not file a consolidated Form 990 covering another organization with a different employer identification number, apart from listed exceptions. [^irs-990-no-consolidated-return] For Schedule R, owning more than 50 percent of a corporation's stock by vote or value is control, [^irs-schedule-r-control-more-than-50-percent] and transactions between the parent and its related organizations are reported in Part V. [^irs-schedule-r-part-v-transactions] The financial-statement rules for restricted net assets, agency transactions and consolidation are in the Financial Accounting Standards Board's Topic 958; this guide names them without quoting them, and the presentation under the current standard is an accounting judgment. **Grant terms that match the books.** For a private foundation grant subject to expenditure responsibility, the signed commitment already requires repayment of unused funds, annual reports, open records of receipts and expenditures and a stated purpose. [^reg-53-4945-5b3-commitment-for-records] For the parent's own onward grant to the subsidiary, the IRS ruling relied on specific projects, retained control and records showing use for exempt purposes. [^rr68-489-records-of-use] **Tax earmarking and accounting are separate questions.** For a private foundation, the earmarking regulation decides, for the foundation's tax purposes, whether the grant was made to the parent or to the subsidiary, whatever the grant is called. [^reg-53-4945-5a6i-bookkeeping] It does not decide whether the parent reports the funds as an agent, recognizes them as its own contribution, or classifies them as restricted; those are financial-reporting questions under the accounting standards and the Form 990 instructions, each answered on its own analysis. When a grant letter names the subsidiary as the ultimate recipient and the parent books the funds as its own revenue, both analyses deserve a fresh look. ## How is income taxed when a nonprofit runs some programs, services or events itself and its subsidiary bills others? {#splitting-activities} **Short answer.** Activities the subsidiary bills produce its own taxable income, while income from an activity the nonprofit runs itself is unrelated business income only if the activity is a regularly carried on trade or business not substantially related to its exempt purposes, subject to exceptions such as volunteer-run activities. [^usc-512a1-regularly-carried-on] [^usc-513a-unrelated-trade-exceptions] The rent, royalties or interest it pays the parent for space, the parent's name or a loan are included in the parent's unrelated business income under the controlled-entity rule to the extent they reduce the subsidiary's net unrelated income or increase its net unrelated loss. [^usc-512b13a-split-events] [^usc-512b13c-specified-payment-shared-resources] An activity is substantially related only if carrying it on has a substantial causal relationship to achieving exempt purposes, other than by raising money. [^reg-1513-1d2-substantially-related] Using the parent's facility for exempt functions does not make income from renting or running it commercially related; the activity producing the income must itself contribute importantly to exempt purposes. [^reg-1513-1d4iii-dual-use] Expenses of facilities or staff used for both exempt and unrelated activities are allocated between the two uses on a reasonable basis. [^irs-p598-dual-use-allocation] **Activities the subsidiary bills.** Rent, royalties and interest are specified payments, explained further in the [payments question](#payments-to-parent). [^usc-512b13c-specified-payment-shared-resources] Service fees and cost reimbursements are not on that list, so they are tested under the ordinary unrelated business rules: whether providing the services is a regularly carried on business, and whether it is substantially related to the parent's exempt purposes, depends on the facts. [^usc-512a1-regularly-carried-on] [^reg-1513-1d2-substantially-related] **Shared staff and services.** In a 2020 private letter ruling, the IRS concluded that an agreement under which an exempt organization supplied services to its subsidiary at cost would cause the organization to operate for private interests, on facts in which the subsidiary would establish and operate a political action committee. [^plr-202005020-cost-reimbursement] [^plr-202005020-pac-facts] That ruling is not precedent, [^usc-6110k3-cost-sharing-ruling-not-precedent] but it shows that cost-only sharing can be questioned when the subsidiary's work does not further the parent's purposes. Practitioner commentary recommends a written arm's-length agreement for shared facilities, services and employees, followed in practice, with separate books and bank accounts. [^venable-shared-resources-agreement] A clean split names which company contracts with each customer, invoices from that company's own account, and charges intercompany rent, royalties and services under the written agreement, so that each activity's income and costs sit on one set of books. [^venable-shared-resources-agreement] ## What do lawyers recommend to keep a New York nonprofit's for-profit subsidiary separate? {#separateness-checklist} **Short answer.** Practitioner commentary on nonprofit-owned and parent-owned subsidiaries recommends adequate capitalization, observed corporate formalities, separate books and bank accounts, and written arm's-length agreements for anything the two companies share. [^kelleydrye-capitalize-insure-checklist] [^blt-formalities-checklist] [^venable-financial-separation-checklist] The following list draws on that commentary and on the authorities cited in each item: 1. **Capital and insurance.** The subsidiary is capitalized and insured for the obligations it is expected to incur. [^kelleydrye-capitalize-insure-checklist] 2. **Its own board and records.** The subsidiary has its own governing body and meets or acts by written consent where its corporate law allows, as Delaware's does with unanimous consents filed with the minutes. [^blt-formalities-checklist] [^dgcl-141f-consent-checklist] [^dgcl-141f-consent-filed-checklist] 3. **Its own identity on paper.** It has its own employer identification number, bank accounts, books and tax returns, and does not commingle funds with the parent. [^irs-990-own-ein-checklist] [^venable-financial-separation-checklist] [^irs-990-no-consolidated-checklist] 4. **Its own staff, management and offices.** Overlap in officers, directors and personnel and shared office space are factors that courts applying New York law weigh as signs of domination. [^passalacqua-staffing-checklist] 5. **Less than complete overlap.** Some directors are independent of the parent, and the parent's officers do not run the subsidiary day to day. [^blt-overlap-checklist] [^venable-officer-overlap-checklist] 6. **Written intercompany agreements.** Shared facilities, equipment, supplies, services and employees are covered by a written arm's-length agreement that is followed in practice, [^venable-financial-separation-checklist] and a subsidiary that uses the parent's name has the trademark license terms in that agreement. [^venable-trademark-license-checklist] 7. **Consistent public descriptions.** Websites, filings and marketing describe the subsidiary as a separate company with its own management and assets. [^proskauer-consistent-public-descriptions] 8. **Authority in New York.** A subsidiary incorporated outside New York is authorized to do business in New York before it does business there. [^nybcl-1301a-checklist] 9. **Tax on payments upstream.** Rent, royalties and interest paid to the parent are budgeted as taxable to the parent to the extent they reduce the subsidiary's net unrelated income or increase its net unrelated loss. [^usc-512b13a-checklist] 10. **Pay to the parent's disqualified persons.** For a public-charity parent, compensation the subsidiary pays the parent's disqualified persons is reviewed as if the parent paid it. [^reg-53-4958-4-checklist] 11. **Foundation money.** A private foundation grant earmarked for the named subsidiary, or made under an agreement that lets the foundation cause the subsidiary's selection, is treated for that foundation's tax purposes as a grant to the subsidiary and documented with expenditure responsibility; a grant whose onward use the parent selects independently is the parent's. [^reg-53-4945-5a6i-checklist] [^usc-4945d4-checklist] 12. **Supporting-organization funder.** Because no authority found in our review treats a grant to the parent's subsidiary as support of the parent, a supporting organization of the parent takes the conservative course of granting to the parent rather than to the subsidiary, as explained in the [Type II supporting organization question](#type-ii-supporting-organization-funder). [^reg-1509a-4e1-checklist] [^reg-1509a-4e1-permissible-checklist] It pays no grant, loan or compensation to its own substantial contributors, their family members or their 35-percent controlled entities, [^usc-4958c3a-checklist] [^usc-4958c3b-checklist] [^usc-4958f3-checklist] and makes no loan to its other disqualified persons, apart from organizations listed in section 4958(c)(3)(C)(ii). [^usc-4958c3a-checklist] [^usc-4958c3cii-checklist] 13. **Related-party review.** An intercompany arrangement in which a director, officer or key person of either company has a financial interest, and which no statutory exclusion covers, goes to the board for the fair, reasonable and best-interest determination. [^npc-102-related-party-checklist] [^npc-102-related-party-transaction-checklist] [^npc-715a-checklist] [^about]: By Steven Obiajulu, J.D. Published by [openagreements.org](https://openagreements.org). Last reviewed 2026-10-08. License: CC BY 4.0. Steven Obiajulu, J.D. is admitted in New York. This article synthesizes New York primary law and is not legal advice. This article is for informational purposes only and does not create an attorney-client relationship. AI-authored research draft; not reviewed by counsel. Source excerpts and linked materials belong to their owners. CC BY 4.0. Cite as Steven Obiajulu, *For-Profit Subsidiaries of 501(c)(3) Nonprofits Under New York Law*, OpenAgreements (last updated October 8, 2026), https://openagreements.org/practice-guides/nonprofit-for-profit-subsidiaries/us/new-york. [^morris-domination-plus-wrong]: **Morris v. New York State Department of Taxation & Finance (N.Y. 1993)** — "Generally, however, piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiffs injury (see, Matter of Guptill Holding Corp. v State of New York, 33 AD2d 362, 364-365 , affd 31 NY2d 897 ; Lowendahl v Baltimore & Ohio R. R. Co., 247 App Div 144, 157 , affd 272 NY 360 ; American Protein Corp. v AB Volvo, 844 F2d 56, 60 [2d Cir 1988] [analyzing New York law and citing Lowendahl (supra)]; International Aircraft Trading Co. v Manufacturers Trust Co., 297 NY 285, 292 ; see generally, Presser, Piercing the Corporate Veil § 2.33 [3], at 2-304 — 2-313)." *Morris v. New York State Dep't of Taxation & Fin., 82 N.Y.2d 135, 141 (1993).* [^tns-domination-without-wrong]: **TNS Holdings, Inc. v. MKI Securities Corp. (N.Y. 1998)** — "Applying the ‘alter ego’ test here, plaintiffs have failed to show that, even if MKI dominated Batchnotice, that control resulted in some fraud or wrong mandating disregard of the corporate form in this case." *TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335, 339 (1998).* [^billy-ownership-never-enough]: **Billy v. Consolidated Machine Tool Corp. (N.Y. 1980)** — "But, such liability can never be predicated solely upon the fact of a parent corporation’s ownership of a controlling interest in the shares of its subsidiary." *Billy v. Consolidated Mach. Tool Corp., 51 N.Y.2d 152, 163 (1980).* [^bestfoods-direct-participant-distinguished]: **United States v. Bestfoods (U.S. 1998), derivative and direct liability** — "As Justice (then-Professor) Douglas noted almost 70 years ago, derivative liability cases are to be distinguished from those in which ‘the alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management’ and ‘the parent is directly a participant in the wrong complained of.’" *United States v. Bestfoods, 524 U.S. 51, 64 (1998).* [^bestfoods-directly-liable-own-actions]: **United States v. Bestfoods (U.S. 1998), direct liability** — "In such instances, the parent is directly liable for its own actions." *United States v. Bestfoods, 524 U.S. 51, 65 (1998).* [^kalb-voorhis-state-of-incorporation]: **Kalb, Voorhis & Co. v. American Financial Corp. (2d Cir. 1993)** — "The law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders: ‘Because a corporation is a creature of state law whose primary purpose is to insulate shareholders from legal liability, the state of incorporation has the greater interest in determining when and if that insulation is to be stripped away.’" *Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993).* [^fletcher-delaware-law-governs]: **Fletcher v. Atex, Inc. (2d Cir. 1995), choice of law** — "Because Atex was a Delaware corporation, Delaware law determines whether the corporate veil can be pierced in this instance." *Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995).* [^flame-state-of-incorporation-rule]: **Flame S.A. v. Worldlink International (Holding) Ltd. (N.Y. App. Div. 1st Dep't 2013)** — "The question of whether defendants’ corporate veils should be pierced will be determined by the laws of each defendant’s state of incorporation (see e.g. Klein v CAVI Acquisition, Inc., 57 AD3d 376, 377 [1st Dept 2008])." *Flame S.A. v. Worldlink Int'l (Holding) Ltd., 107 A.D.3d 436, 438 (1st Dep't 2013).* [^ubs-dondero-new-york-elements]: **Matter of UBS Securities LLC v. Dondero (N.Y. App. Div. 1st Dep't 2026), domination element** — "The well-pleaded allegations in the turnover petition adequately allege that Dondero exercised complete domination over the judgment debtors. The fulsome allegations relating to Dondero identify numerous badges of domination, including disregard of corporate formalities; overlap of ownership, officers and directors; common office space; limited discretion demonstrated by the corporations; and that the corporations were not treated as independent profit centers (see Cortlandt St. Recovery Corp. v Bonderman , 226 AD3d 103 , 105 [1st Dept 2024], affd 45 NY3d 990 [2025]; Tap Holdings, LLC v Orix Fin. Corp ., 109 AD3d 167 , 174 [1st Dept 2013]). The allegations suggest that Dondero exercised complete domination of the corporations in respect to the transactions attacked; i.e., the transactions employed to denude the judgment debtors of their assets and render them judgment proof." *Matter of UBS Sec. LLC v. Dondero, 2026 NY Slip Op 05460 (1st Dep't Sept. 24, 2026).* [^ubs-dondero-place-of-formation-not-argued]: **Matter of UBS Securities LLC v. Dondero (N.Y. App. Div. 1st Dep't 2026), footnote 1** — "We note that those arguments do not address the relevance (if any) of the place-of-formation of the limited partnerships (for HFP, Delaware, and for CDO Fund, Bermuda). Because the allegations in the turnover petition regarding the alter ego claim against Dondero relating to HFP and CDO Fund are cast in terms of piercing corporate veils, and in light of our concern for the informed, orderly development of the law, we decline at this juncture to consider the issue of whether, under New York law, a veil piercing claim lies against the limited partnerships HFP and CDO." *Matter of UBS Sec. LLC v. Dondero, 2026 NY Slip Op 05460, n.1 (1st Dep't Sept. 24, 2026).* [^wallace-alter-ego-fraud-injustice]: **Wallace ex rel. Cencom Cable Income Partners II, Inc. v. Wood (Del. Ch. 1999)** — "Piercing the corporate veil under the alter ego theory ‘requires that the corporate structure cause fraud or similar injustice.’" *Wallace ex rel. Cencom Cable Income Partners II, Inc. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999).* [^passalacqua-capitalization-factor]: **Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc. (2d Cir. 1991)** — "To determine whether these assertions are valid, the triers of fact are entitled to consider factors that would tend to show that defendant was a dominated corporation, such as: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own." *Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 139 (2d Cir. 1991).* [^kelleydrye-capitalize-and-insure]: **Kelley Drye, Protecting the Parent Corporation from Disregard of the Corporate Form (2008), capitalization** — "Properly capitalizing and insuring the subsidiary is by far the most important step to prevent a successful piercing argument (since doing so substantially weakens a potential argument based on alleged injustice)." *Philip D. Robben, Protecting the Parent Corporation from Disregard of the Corporate Form (Kelley Drye & Warren LLP, Sept. 22, 2008).* [^passalacqua-domination-factors]: **Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc. (2d Cir. 1991)** — "To determine whether these assertions are valid, the triers of fact are entitled to consider factors that would tend to show that defendant was a dominated corporation, such as: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own." *Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 139 (2d Cir. 1991).* [^billy-ownership-never-enough-separateness]: **Billy v. Consolidated Machine Tool Corp. (N.Y. 1980)** — "But, such liability can never be predicated solely upon the fact of a parent corporation’s ownership of a controlling interest in the shares of its subsidiary." *Billy v. Consolidated Mach. Tool Corp., 51 N.Y.2d 152, 163 (1980).* [^tns-domination-without-wrong-separateness]: **TNS Holdings, Inc. v. MKI Securities Corp. (N.Y. 1998)** — "Applying the ‘alter ego’ test here, plaintiffs have failed to show that, even if MKI dominated Batchnotice, that control resulted in some fraud or wrong mandating disregard of the corporate form in this case." *TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335, 339 (1998).* [^morris-domination-plus-wrong-separateness]: **Morris v. New York State Department of Taxation & Finance (N.Y. 1993)** — "Generally, however, piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiffs injury (see, Matter of Guptill Holding Corp. v State of New York, 33 AD2d 362, 364-365 , affd 31 NY2d 897 ; Lowendahl v Baltimore & Ohio R. R. Co., 247 App Div 144, 157 , affd 272 NY 360 ; American Protein Corp. v AB Volvo, 844 F2d 56, 60 [2d Cir 1988] [analyzing New York law and citing Lowendahl (supra)]; International Aircraft Trading Co. v Manufacturers Trust Co., 297 NY 285, 292 ; see generally, Presser, Piercing the Corporate Veil § 2.33 [3], at 2-304 — 2-313)." *Morris v. New York State Dep't of Taxation & Fin., 82 N.Y.2d 135, 141 (1993).* [^bestfoods-directors-change-hats]: **United States v. Bestfoods (U.S. 1998), dual officers and directors** — "This recognition that the corporate personalities remain distinct has its corollary in the ‘well established principle [of corporate law] that directors and officers holding positions with a parent and its subsidiary can and do ‘change hats’ to represent the two corporations separately, despite their common ownership.’" *United States v. Bestfoods, 524 U.S. 51, 69 (1998).* [^dgcl-141f-unanimous-written-consent]: **8 Del. C. § 141(f) — Board action by written consent** — "(f) Unless otherwise restricted by the certificate of incorporation or bylaws, (1) any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, or by electronic transmission, and (2) a consent may be documented, signed and delivered in any manner permitted by § 116 of this title." *Del. Code Ann. tit. 8, § 141(f).* [^dgcl-141f-consent-filed-with-minutes]: **8 Del. C. § 141(f) — Consents filed with the minutes** — "After an action is taken, the consent or consents relating thereto shall be filed with the minutes of the proceedings of the board of directors, or the committee thereof, in the same paper or electronic form as the minutes are maintained." *Del. Code Ann. tit. 8, § 141(f).* [^dgcl-228a-stockholder-written-consent]: **8 Del. C. § 228(a) — Stockholder action by written consent** — "(a) Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation in the manner required by this section." *Del. Code Ann. tit. 8, § 228(a).* [^blt-separate-boards-and-minutes]: **Levitt & Chiodini, Use of a For-Profit Subsidiary by a Nonprofit Organization (Business Law Today 2014), formalities** — "Corporate formalities must be observed to protect the separation of the entities. Each organization must have a separate governing body and should conduct separate board and committee meetings, with separate minutes taken." *David A. Levitt & Steven R. Chiodini, Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization, Business Law Today (ABA, June 18, 2014).* [^blt-avoid-complete-overlap]: **Levitt & Chiodini, Use of a For-Profit Subsidiary by a Nonprofit Organization (Business Law Today 2014), board overlap** — "While the nonprofit parent will be the only (or at least the controlling) equity holder of the for-profit subsidiary and therefore will control the for-profit’s governing body, there are reasons to avoid complete overlap in the directors and officers of the two entities." *David A. Levitt & Steven R. Chiodini, Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization, Business Law Today (ABA, June 18, 2014).* [^venable-arms-length-shared-services]: **Venable, Forming and Operating Subsidiaries and Related Entities (1999), shared resources** — "The parent and the subsidiary should enter into an arm's length written agreement covering all aspects of the shared facilities, equipment, supplies, services and employees. The agreement should, of course, be followed in practice. It is critical that strict financial separation be maintained (i.e., separate financial books and records, separate bank accounts, separate tax returns, and avoidance of any commingling of assets)." *George E. Constantine et al., Forming and Operating Subsidiaries and Related Entities: Maximizing the Benefits and Minimizing the Risks (Venable 1999).* [^nybcl-1301a-authority-required]: **N.Y. Business Corporation Law § 1301(a) — Authority required** — "(a) A foreign corporation shall not do business in this state until it has been authorized to do so as provided in this article." *N.Y. Bus. Corp. Law § 1301(a).* [^nybcl-1312a-no-suit-until-authorized]: **N.Y. Business Corporation Law § 1312(a) — Unauthorized foreign corporation may not sue** — "(a) A foreign corporation doing business in this state without authority shall not maintain any action or special proceeding in this state unless and until such corporation has been authorized to do business in this state and it has paid to the state all fees and taxes imposed under the tax law or any related statute, as defined in section eighteen hundred of such law, as well as penalties and interest charges related thereto, accrued against the corporation." *N.Y. Bus. Corp. Law § 1312(a).* [^nybcl-1312b-contracts-remain-valid]: **N.Y. Business Corporation Law § 1312(b) — Contracts remain valid** — "(b) The failure of a foreign corporation to obtain authority to do business in this state shall not impair the validity of any contract or act of the foreign corporation or the right of any other party to the contract to maintain any action or special proceeding thereon, and shall not prevent the foreign corporation from defending any action or special proceeding in this state." *N.Y. Bus. Corp. Law § 1312(b).* [^npc-102-affiliate-definition]: **N.Y. Not-for-Profit Corp. Law § 102(a)(19) — Affiliate** — "(19) An ‘affiliate’ of a corporation means any entity controlled by, or in control of, such corporation." *N.Y. Not-for-Profit Corp. Law § 102(a)(19).* [^npc-102-related-party-definition]: **N.Y. Not-for-Profit Corp. Law § 102(a)(23) — Related party** — "(23) ‘Related party’ means (i) any director, officer or key person of the corporation or any affiliate of the corporation; (ii) any relative of any individual described in clause (i) of this subparagraph; or (iii) any entity in which any individual described in clauses (i) and (ii) of this subparagraph has a thirty-five percent or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of five percent." *N.Y. Not-for-Profit Corp. Law § 102(a)(23).* [^npc-102-related-party-transaction-definition]: **N.Y. Not-for-Profit Corp. Law § 102(a)(24) — Related party transaction** — "(24) ‘Related party transaction’ means any transaction, agreement or any other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant, except that a transaction shall not be a related party transaction if: (i) the transaction or the related party's financial interest in the transaction is de minimis, (ii) the transaction would not customarily be reviewed by the board or boards of similar organizations in the ordinary course of business and is available to others on the same or similar terms, or (iii) the transaction constitutes a benefit provided to a related party solely as a member of a class of the beneficiaries that the corporation intends to benefit as part of the accomplishment of its mission which benefit is available to all similarly situated members of the same class on the same terms." *N.Y. Not-for-Profit Corp. Law § 102(a)(24).* [^npc-715a-conservative]: **N.Y. Not-for-Profit Corp. Law § 715(a) — Board determination** — "(a) No corporation shall enter into any related party transaction unless the transaction is determined by the board, or an authorized committee thereof, to be fair, reasonable and in the corporation's best interest at the time of such determination." *N.Y. Not-for-Profit Corp. Law § 715(a).* [^npc-715a-fair-reasonable-best-interest]: **N.Y. Not-for-Profit Corp. Law § 715(a) — Board determination** — "(a) No corporation shall enter into any related party transaction unless the transaction is determined by the board, or an authorized committee thereof, to be fair, reasonable and in the corporation's best interest at the time of such determination." *N.Y. Not-for-Profit Corp. Law § 715(a).* [^npc-715b-substantial-interest-procedures]: **N.Y. Not-for-Profit Corp. Law § 715(b) — Charitable corporations, substantial interest** — "(b) With respect to any related party transaction involving a charitable corporation and in which a related party has a substantial financial interest, the board of such corporation, or an authorized committee thereof, shall: (1) Prior to entering into the transaction, consider alternative transactions to the extent available; (2) Approve the transaction by not less than a majority vote of the directors or committee members present at the meeting; and (3) Contemporaneously document in writing the basis for the board or authorized committee's approval, including its consideration of any alternative transactions." *N.Y. Not-for-Profit Corp. Law § 715(b).* [^npc-715h-no-participation]: **N.Y. Not-for-Profit Corp. Law § 715(h) — Interested related party recused** — "(h) No related party may participate in deliberations or voting relating to a related party transaction in which he or she has an interest; provided that nothing in this section shall prohibit the board or authorized committee from requesting that a related party present information as background or answer questions concerning a related party transaction at a board or committee meeting prior to the commencement of deliberations or voting relating thereto." *N.Y. Not-for-Profit Corp. Law § 715(h).* [^edn-216a-npcl-applies-education-corporations]: **N.Y. Education Law § 216-a(4) — Not-for-Profit Corporation Law applies to education corporations** — "4. Except as provided in subdivisions 2 and 3 of this section, the not-for-profit corporation law applies to a domestic education corporation and an authorized foreign education corporation, provided that: a. If a provision of the not-for-profit corporation law conflicts with a provision of this chapter or of a special act by which an education corporation is formed, the provision of this chapter or of such special act shall prevail and the not-for-profit corporation law shall not apply in such case. If an applicable provision of this chapter or of such special act relates to a matter embraced in the not-for-profit corporation law but is not in conflict therewith, both provisions shall apply." *N.Y. Educ. Law § 216-a(4)(a).* [^dwt-affiliate-participant-trigger]: **Davis Wright Tremaine, Attorney General Guidance on Conflict of Interest Provisions (2015)** — "The Act defines a ‘related party transaction’ as any transaction, agreement or any other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant." *J.J. Harwayne Leitner, Coleen McGrath & Jean Tom, New York State Attorney General Issues Guidance on the Conflict of Interest and Whistleblower Policy Provisions of the New York Nonprofit Revitalization Act of 2013 (Davis Wright Tremaine LLP, June 2015).* [^irs-cpe-arm-agent-integral-part]: **IRS Exempt Organizations CPE Text (1986), For-Profit Subsidiaries of Tax-Exempt Organizations, attribution standard** — "Basically, once it is established that a taxable subsidiary was formed for a valid business purpose, the activities of such a subsidiary cannot be attributed to its parent unless the facts provide clear and convincing evidence that the subsidiary is in reality an arm, agent, or integral part of the parent." *IRS, Exempt Organizations Continuing Professional Education Technical Instruction Program for FY 1986, Topic E, For-Profit Subsidiaries of Tax-Exempt Organizations, § 2.B.* [^irs-cpe-attribution-barrier]: **IRS Exempt Organizations CPE Text (1986), For-Profit Subsidiaries of Tax-Exempt Organizations, separate entities** — "A parent's exempt status may be jeopardized if the commercial activities of its subsidiary can be considered to be, in fact, activities of the parent. However, where the subsidiary is incorporated (as is virtually always the case with taxable subsidiaries), there is a significant legal barrier to overcome before the commercial activities of a subsidiary may be attributed to its parent. The barrier arises because, for federal income tax purposes, a parent corporation and its subsidiary are separate taxable entities so long as the purposes for which the subsidiary is incorporated are the equivalent of business activities or the subsidiary subsequently carries on business activities." *IRS, Exempt Organizations Continuing Professional Education Technical Instruction Program for FY 1986, Topic E, For-Profit Subsidiaries of Tax-Exempt Organizations, § 2.A.* [^moline-sham-or-unreal]: **Moline Properties, Inc. v. Commissioner (U.S. 1943)** — "In general, in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal." *Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 439 (1943).* [^national-carbide-ownership-not-significant]: **National Carbide Corp. v. Commissioner (U.S. 1949), ownership and control** — "Complete ownership of the corporation, and the control primarily dependent upon such ownership — the important ingredients of the Southern Pacific case — are no longer of significance in determining taxability." *National Carbide Corp. v. Commissioner, 336 U.S. 422, 429 (1949).* [^national-carbide-true-agent]: **National Carbide Corp. v. Commissioner (U.S. 1949), true agency** — "If the corporation is a true agent, its relations with its principal must not be dependent upon the fact that it is owned by the principal, if such is the case." *National Carbide Corp. v. Commissioner, 336 U.S. 422, 437 (1949).* [^bollinger-ownership-not-disqualifying]: **Commissioner v. Bollinger (U.S. 1988), ownership and agency** — "Ultimately, the relations between a corporate agent and its owner-principal are always dependent upon the fact of ownership, in that the owner can cause the relations to be altered or terminated at any time. Plainly that is not what was meant, since on that interpretation all subsidiary-parent agencies would be invalid for tax purposes, a position which the National Carbide opinion specifically disavowed." *Commissioner v. Bollinger, 485 U.S. 340, 348 (1988).* [^bollinger-no-rigid-requirements]: **Commissioner v. Bollinger (U.S. 1988), no rigid requirements** — "We see no basis, however, for holding that unequivocal evidence can only consist of the rigid requirements (arm’s-length dealing plus agency fee) that the Commissioner suggests." *Commissioner v. Bollinger, 485 U.S. 340, 349 (1988).* [^geisinger-separate-entities-own-merits]: **Geisinger Health Plan v. Commissioner (3d Cir. 1994)** — "Generally, separately incorporated entities must qualify for tax exemption on their own merits." *Geisinger Health Plan v. Commissioner, 30 F.3d 494, 498 (3d Cir. 1994).* [^plr-201644019-moline-business-activity]: **IRS Private Letter Ruling 201644019 (2016), business activity standard** — "Only minimal business activities are needed for a corporation to be respected as a distinct taxable entity." *I.R.S. Priv. Ltr. Rul. 201644019 (Aug. 2, 2016; released Oct. 28, 2016).* [^plr-201644019-activities-not-attributed]: **IRS Private Letter Ruling 201644019 (2016), ruling** — "S is engaged in business activity that is sufficient to satisfy the business activity requirement of Moline Properties and therefore it will be respected as an entity separate from Organization and its activities will not be attributed to Organization." *I.R.S. Priv. Ltr. Rul. 201644019 (Aug. 2, 2016; released Oct. 28, 2016).* [^plr-201644019-no-day-to-day-management]: **IRS Private Letter Ruling 201644019 (2016), attribution representations** — "Organization represents that there is no understanding or agreement (oral or written) that Organization will direct or actively participate in the day-to-day management of S (or any S subsidiary or affiliate) or Partnership. Organization intends to exercise only the normal rights of a shareholder directly in S, or indirectly in any S subsidiary or affiliate, including but not limited to Partnership." *I.R.S. Priv. Ltr. Rul. 201644019 (Aug. 2, 2016; released Oct. 28, 2016).* [^usc-6110k3-ruling-not-precedent]: **26 U.S.C. § 6110(k)(3) — Written determinations not precedent** — "Unless the Secretary otherwise establishes by regulations, a written determination may not be used or cited as precedent." *26 U.S.C. § 6110(k)(3) (2024 ed.).* [^plr-201644019-no-day-to-day-conservative]: **IRS Private Letter Ruling 201644019 (2016), attribution representations** — "Organization represents that there is no understanding or agreement (oral or written) that Organization will direct or actively participate in the day-to-day management of S (or any S subsidiary or affiliate) or Partnership. Organization intends to exercise only the normal rights of a shareholder directly in S, or indirectly in any S subsidiary or affiliate, including but not limited to Partnership." *I.R.S. Priv. Ltr. Rul. 201644019 (Aug. 2, 2016; released Oct. 28, 2016).* [^venable-director-overlap-tolerated]: **Venable, Forming and Operating Subsidiaries and Related Entities (1999), director overlap** — "Even if most or all of the subsidiary's directors were directors or officers of the parent, the parent's tax exemption would not be jeopardized so long as other factors indicated that the parent was not involved in the day-to-day management of the subsidiary and dealt with the subsidiary at arm's length." *George E. Constantine et al., Forming and Operating Subsidiaries and Related Entities: Maximizing the Benefits and Minimizing the Risks (Venable 1999).* [^venable-officer-overlap-attribution]: **Venable, Forming and Operating Subsidiaries and Related Entities (1999), officer overlap** — "A more substantial problem would arise if officers of the parent were also officers of the subsidiary. In that scenario, it is more likely that the subsidiary's activities would be attributed to the parent because the overlap between officers tends to show that the parent is managing the subsidiary on a daily basis (since officers, as opposed to directors, are generally more involved in the day-to-day management of a corporation)." *George E. Constantine et al., Forming and Operating Subsidiaries and Related Entities: Maximizing the Benefits and Minimizing the Risks (Venable 1999).* [^usc-501c3-exemption-attribution]: **26 U.S.C. § 501(c)(3) — Charitable and educational organizations** — "(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." *26 U.S.C. § 501(c)(3) (2024 ed.).* [^reg-1501c3-1-e1-business-primary-purpose]: **26 C.F.R. § 1.501(c)(3)-1(e)(1) — Trade or business** — "An organization may meet the requirements of section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization's exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in section 513." *26 C.F.R. § 1.501(c)(3)-1(e)(1).* [^mancino-exemption-protection-overstated]: **Mancino, The Architecture of Charities' Commercial Activities (NYU National Center on Philanthropy and the Law, 2008)** — "In my view, this is more of a mythical reason to establish a subsidiary than a real reason, and often results in collateral, negative tax consequences which will be discussed later in this section. In fact, public charities can generate large amounts of income from UBI without jeopardizing their exempt status as long as they have an exempt primary purpose." *Douglas M. Mancino, The Architecture of Charities' Commercial Activities: Managing Complex Structures (NYU School of Law, National Center on Philanthropy and the Law, 2008 conference paper).* [^npc-202a6-hold-shares]: **N.Y. Not-for-Profit Corp. Law § 202(a)(6) — Shares and securities** — "(6) To purchase, take, receive, subscribe for, or otherwise acquire, own, hold, vote, employ, sell, lend, lease, exchange, transfer, or otherwise dispose of, mortgage, pledge, use and otherwise deal in and with, bonds and other obligations, shares, or other securities or interests issued by others, whether engaged in similar or different business, governmental, or other activities." *N.Y. Not-for-Profit Corp. Law § 202(a)(6).* [^npc-202a10-lend-and-invest]: **N.Y. Not-for-Profit Corp. Law § 202(a)(10) — Loans and investments** — "(10) To lend money, invest and reinvest its funds, and take and hold real and personal property as security for the payment of funds so loaned or invested." *N.Y. Not-for-Profit Corp. Law § 202(a)(10).* [^rr68-489-control-and-discretion]: **Rev. Rul. 68-489 — Distributions to nonexempt organizations** — "An organization will not jeopardize its exemption under section 501(c)(3) of the Code, even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for section 501(c)(3) purposes." *Rev. Rul. 68-489, 1968-2 C.B. 210.* [^reg-1501c3-1-c2-inurement]: **26 C.F.R. § 1.501(c)(3)-1(c)(2) — Inurement** — "An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals." *26 C.F.R. § 1.501(c)(3)-1(c)(2).* [^reg-1501c3-1-d1ii-private-benefit]: **26 C.F.R. § 1.501(c)(3)-1(d)(1)(ii) — Private interests** — "Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests." *26 C.F.R. § 1.501(c)(3)-1(d)(1)(ii).* [^npc-202a-powers-in-furtherance]: **N.Y. Not-for-Profit Corp. Law § 202(a) — Powers in furtherance of corporate purposes** — "(a) Each corporation, subject to any limitations provided in this chapter or any other statute of this state or its certificate of incorporation, shall have power in furtherance of its corporate purposes: (1) To have perpetual duration. (2) To sue and be sued in all courts and to participate in actions and proceedings, whether judicial, administrative, arbitrative or otherwise, in like cases as natural persons." *N.Y. Not-for-Profit Corp. Law § 202(a).* [^usc-501c3-exemption-funding]: **26 U.S.C. § 501(c)(3) — Charitable and educational organizations** — "(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." *26 U.S.C. § 501(c)(3) (2024 ed.).* [^reg-1501c3-1-c1-operational-test]: **26 C.F.R. § 1.501(c)(3)-1(c)(1) — Operational test** — "An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose." *26 C.F.R. § 1.501(c)(3)-1(c)(1).* [^american-campaign-incidental-benefit]: **American Campaign Academy v. Commissioner (T.C. 1989), incidental benefit** — "Occasional economic benefits flowing to persons as an incidental consequence of an organization pursuing exempt charitable purposes will not generally constitute prohibited private benefits." *American Campaign Academy v. Commissioner, 92 T.C. 1053, 1066 (1989).* [^american-campaign-private-benefit-separate]: **American Campaign Academy v. Commissioner (T.C. 1989), private benefit distinct** — "The absence of private inurement of earnings to the benefit of a private shareholder or individual does not, however, establish that the organization is operated exclusively for exempt purposes." *American Campaign Academy v. Commissioner, 92 T.C. 1053, 1068 (1989).* [^united-cancer-council-insiders]: **United Cancer Council, Inc. v. Commissioner (7th Cir. 1999)** — "A charity is not to siphon its earnings to its founder, or the members of its board, or their families, or anyone else fairly to be described as an insider, that is, as the equivalent of an owner or manager." *United Cancer Council, Inc. v. Commissioner, 165 F.3d 1173, 1176 (7th Cir. 1999).* [^blt-equity-contribution-is-investment]: **Levitt & Chiodini, Use of a For-Profit Subsidiary by a Nonprofit Organization (Business Law Today 2014), capitalization** — "The nonprofit parent must capitalize its subsidiary. A contribution in return for an equity interest is an investment." *David A. Levitt & Steven R. Chiodini, Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization, Business Law Today (ABA, June 18, 2014).* [^usc-118a-capital-contribution-excluded]: **26 U.S.C. § 118(a) — Contributions to capital** — "In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer." *26 U.S.C. § 118(a) (2024 ed.).* [^blt-adequate-value-outside-investors]: **Levitt & Chiodini, Use of a For-Profit Subsidiary by a Nonprofit Organization (Business Law Today 2014), outside investors** — "A charity must make sure that it receives adequate value in return for its contribution, and it must avoid using charitable assets to subsidize for-profit investors." *David A. Levitt & Steven R. Chiodini, Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization, Business Law Today (ABA, June 18, 2014).* [^usc-512b13c-loan-interest]: **26 U.S.C. § 512(b)(13)(C) — Specified payment** — "For purposes of this paragraph, the term ‘specified payment’ means any interest, annuity, royalty, or rent." *26 U.S.C. § 512(b)(13)(C) (2024 ed.).* [^usc-512b13a-loan-interest]: **26 U.S.C. § 512(b)(13)(A) — Payments from controlled entities** — "If an organization (in this paragraph referred to as the ‘controlling organization’) receives or accrues (directly or indirectly) a specified payment from another entity which it controls (in this paragraph referred to as the ‘controlled entity’), notwithstanding paragraphs (1), (2), and (3), the controlling organization shall include such payment as an item of gross income derived from an unrelated trade or business to the extent such payment reduces the net unrelated income of the controlled entity (or increases any net unrelated loss of the controlled entity)." *26 U.S.C. § 512(b)(13)(A) (2024 ed.).* [^rr68-489-specific-projects-and-records]: **Rev. Rul. 68-489 — Specific projects and records** — "The exempt organization ensured use of the funds for section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes. It retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for section 501(c)(3) purposes. Held, the distributions did not jeopardize the organization's exemption under section 501(c)(3) of the Code." *Rev. Rul. 68-489, 1968-2 C.B. 210.* [^usc-118b-shareholder-contribution-carve-back]: **26 U.S.C. § 118(b) — Contributions that are not contributions to capital** — "(b) Exceptions For purposes of subsection (a), except as provided in subsection (c), the term ‘contribution to the capital of the taxpayer’ does not include— (1) any contribution in aid of construction or any other contribution as a customer or potential customer, and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)." *26 U.S.C. § 118(b) (2024 ed.).* [^usc-118a-capital-contribution-conservative]: **26 U.S.C. § 118(a) — Contributions to capital** — "In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer." *26 U.S.C. § 118(a) (2024 ed.).* [^npc-551e-institutional-fund]: **N.Y. Not-for-Profit Corp. Law § 551(e) — Institutional fund** — "(e) ‘Institutional fund’ means a fund held by an institution. This term shall not include: (1) program-related assets; (2) a fund held for an institution by a trustee that is not an institution; or (3) a fund in which a beneficiary that is not an institution has an interest, other than an interest that could arise upon violation or failure of the purposes of the fund." *N.Y. Not-for-Profit Corp. Law § 551(e).* [^npc-551h-program-related-asset]: **N.Y. Not-for-Profit Corp. Law § 551(h) — Program-related asset** — "(h) ‘Program-related asset’ means an asset held by an institution not for investment under the terms of the gift instrument, but primarily to accomplish a programmatic purpose of the institution." *N.Y. Not-for-Profit Corp. Law § 551(h).* [^npc-552b-prudence-standard]: **N.Y. Not-for-Profit Corp. Law § 552(b) — Prudence standard** — "(b) In addition to complying with the duty of loyalty imposed by law other than this article, each person responsible for managing and investing an institutional fund shall manage and invest the fund in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." *N.Y. Not-for-Profit Corp. Law § 552(b).* [^npc-552e1-investment-factors]: **N.Y. Not-for-Profit Corp. Law § 552(e)(1) — Factors** — "(1) In managing and investing an institutional fund, the following factors, if relevant, must be considered: (A) general economic conditions; (B) the possible effect of inflation or deflation; (C) the expected tax consequences, if any, of investment decisions or strategies; (D) the role that each investment or course of action plays within the overall investment portfolio of the fund; (E) the expected total return from income and the appreciation of investments; (F) other resources of the institution; (G) the needs of the institution and the fund to make distributions and to preserve capital; and (H) an asset's special relationship or special value, if any, to the purposes of the institution." *N.Y. Not-for-Profit Corp. Law § 552(e)(1).* [^npc-552e4-diversification]: **N.Y. Not-for-Profit Corp. Law § 552(e)(4) — Diversification** — "(4) An institution shall diversify the investments of an institutional fund unless the institution prudently determines that, because of special circumstances, the purposes of the fund are better served without diversification." *N.Y. Not-for-Profit Corp. Law § 552(e)(4).* [^npc-717a-duty-of-care]: **N.Y. Not-for-Profit Corp. Law § 717(a) — Duty of care** — "(a) Directors, officers and key persons shall discharge the duties of their respective positions in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." *N.Y. Not-for-Profit Corp. Law § 717(a).* [^usc-4958e-applicable-organization]: **26 U.S.C. § 4958(e) — Applicable tax-exempt organization** — "(e) Applicable tax-exempt organization For purposes of this subchapter, the term ‘applicable tax-exempt organization’ means— (1) any organization which (without regard to any excess benefit) would be described in paragraph (3), (4), or (29) of section 501(c) and exempt from tax under section 501(a), and (2) any organization which was described in paragraph (1) at any time during the 5-year period ending on the date of the transaction. Such term shall not include a private foundation (as defined in section 509(a))." *26 U.S.C. § 4958(e) (2024 ed.).* [^usc-4958f1-disqualified-person]: **26 U.S.C. § 4958(f)(1) — Disqualified person** — "(1) Disqualified person The term ‘disqualified person’ means, with respect to any transaction— (A) any person who was, at any time during the 5-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization, (B) a member of the family of an individual described in subparagraph (A), (C) a 35-percent controlled entity, (D) any person who is described in subparagraph (A), (B), or (C) with respect to an organization described in section 509(a)(3) and organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of the applicable tax-exempt organization," *26 U.S.C. § 4958(f)(1) (2024 ed.).* [^usc-4958c1-excess-benefit]: **26 U.S.C. § 4958(c)(1)(A) — Excess benefit transaction** — "The term ‘excess benefit transaction’ means any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit." *26 U.S.C. § 4958(c)(1)(A) (2024 ed.).* [^reg-53-4958-4-controlled-entity-benefits]: **26 C.F.R. § 53.4958-4(a)(2)(ii) — Benefits provided through a controlled entity** — "An applicable tax-exempt organization may provide an excess benefit indirectly through the use of one or more entities it controls. For purposes of section 4958, economic benefits provided by a controlled entity will be treated as provided by the applicable tax-exempt organization. (B) Definition of control — (1) In general. For purposes of this paragraph, control by an applicable tax-exempt organization means— (i) In the case of a stock corporation, ownership (by vote or value) of more than 50 percent of the stock in such corporation;" *26 C.F.R. § 53.4958-4(a)(2)(ii)(A)–(B).* [^nyag-substantially-all-assets]: **New York Attorney General, Charities Bureau, Guide to Sales and Other Dispositions of Assets (2018)** — "There is no fixed numerical or arithmetic measure of ‘all or substantially all.’ Approval by the Attorney General or the court is required when the transaction involves a large proportion of the corporation’s total assets or when it may affect the ability of the corporation to carry out its purposes, regardless of the percentage of the corporation’s total assets that are the subject of the transaction." *N.Y. Att'y Gen., Charities Bureau, A Guide to Sales and Other Disposition of Assets Pursuant to Not-for-Profit Corporation Law §§ 510, 511 and 511-a (Dec. 2018).* [^usc-512b1-dividends-excluded]: **26 U.S.C. § 512(b)(1) — Dividends and interest excluded** — "There shall be excluded all dividends, interest, payments with respect to securities loans (as defined in subsection (a)(5)), amounts received or accrued as consideration for entering into agreements to make loans, and annuities, and all deductions directly connected with such income." *26 U.S.C. § 512(b)(1) (2024 ed.).* [^usc-512b13a-controlled-payments-taxed]: **26 U.S.C. § 512(b)(13)(A) — Payments from controlled entities** — "If an organization (in this paragraph referred to as the ‘controlling organization’) receives or accrues (directly or indirectly) a specified payment from another entity which it controls (in this paragraph referred to as the ‘controlled entity’), notwithstanding paragraphs (1), (2), and (3), the controlling organization shall include such payment as an item of gross income derived from an unrelated trade or business to the extent such payment reduces the net unrelated income of the controlled entity (or increases any net unrelated loss of the controlled entity)." *26 U.S.C. § 512(b)(13)(A) (2024 ed.).* [^usc-512b13c-specified-payment-defined]: **26 U.S.C. § 512(b)(13)(C) — Specified payment** — "For purposes of this paragraph, the term ‘specified payment’ means any interest, annuity, royalty, or rent." *26 U.S.C. § 512(b)(13)(C) (2024 ed.).* [^usc-512b4-debt-financed-override]: **26 U.S.C. § 512(b)(4) — Debt-financed property** — "(4) Notwithstanding paragraph (1), (2), (3), or (5), in the case of debt-financed property (as defined in section 514) there shall be included, as an item of gross income derived from an unrelated trade or business, the amount ascertained under section 514(a)(1), and there shall be allowed, as a deduction, the amount ascertained under section 514(a)(2)." *26 U.S.C. § 512(b)(4) (2024 ed.).* [^usc-514b1-debt-financed-property]: **26 U.S.C. § 514(b)(1) — Debt-financed property** — "(1) In general For purposes of this section, the term ‘debt-financed property’ means any property which is held to produce income and with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at any time during the taxable year (or, if the property was disposed of during the taxable year, with respect to which there was an acquisition indebtedness at any time during the 12-month period ending with the date of such disposition), except that such term does not include—" *26 U.S.C. § 514(b)(1) (2024 ed.).* [^usc-514c1-acquisition-indebtedness]: **26 U.S.C. § 514(c)(1) — Acquisition indebtedness** — "(1) General rule For purposes of this section, the term ‘acquisition indebtedness’ means, with respect to any debt-financed property, the unpaid amount of— (A) the indebtedness incurred by the organization in acquiring or improving such property; (B) the indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement; and (C) the indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement." *26 U.S.C. § 514(c)(1) (2024 ed.).* [^usc-512a1-ubti-after-deductions]: **26 U.S.C. § 512(a)(1) — Unrelated business taxable income** — "Except as otherwise provided in this subsection, the term ‘unrelated business taxable income’ means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b)." *26 U.S.C. § 512(a)(1) (2024 ed.).* [^usc-512b13d-control-more-than-50-percent]: **26 U.S.C. § 512(b)(13)(D) — Control** — "(D) Definition of control.—For purposes of this paragraph— (i) Control.—The term ‘control’ means— (I) in the case of a corporation, ownership (by vote or value) of more than 50 percent of the stock in such corporation, (II) in the case of a partnership, ownership of more than 50 percent of the profits interests or capital interests in such partnership, or (III) in any other case, ownership of more than 50 percent of the beneficial interests in the entity. (ii) Constructive ownership.—Section 318 (relating to constructive ownership of stock) shall apply for purposes of determining ownership of stock in a corporation. Similar principles shall apply for purposes of determining ownership of interests in any other entity." *26 U.S.C. § 512(b)(13)(D) (2024 ed.).* [^usc-318a2c-attribution-from-corporations]: **26 U.S.C. § 318(a)(2)(C) — Attribution from corporations** — "If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation." *26 U.S.C. § 318(a)(2)(C) (2024 ed.).* [^usc-512b13b-net-unrelated-income]: **26 U.S.C. § 512(b)(13)(B) — Net unrelated income of a taxable subsidiary** — "(B) Net unrelated income or loss.—For purposes of this paragraph— (i) Net unrelated income.—The term ‘net unrelated income’ means— (I) in the case of a controlled entity which is not exempt from tax under section 501(a), the portion of such entity's taxable income which would be unrelated business taxable income if such entity were exempt from tax under section 501(a) and had the same exempt purposes as the controlling organization, or (II) in the case of a controlled entity which is exempt from tax under section 501(a), the amount of the unrelated business taxable income of the controlled entity. (ii) Net unrelated loss.—The term ‘net unrelated loss’ means the net operating loss adjusted under rules similar to the rules of clause (i)." *26 U.S.C. § 512(b)(13)(B) (2024 ed.).* [^usc-511a1-tax-at-corporate-rates]: **26 U.S.C. § 511(a)(1) — Tax on unrelated business income** — "There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in section 512) of every organization described in paragraph (2) a tax computed as provided in section 11." *26 U.S.C. § 511(a)(1) (2024 ed.).* [^usc-512b13e-grandfathered-contracts]: **26 U.S.C. § 512(b)(13)(E) — Excess-payment rule for grandfathered contracts** — "(E) Paragraph to apply only to certain excess payments.— (i) In general.—Subparagraph (A) shall apply only to the portion of a qualifying specified payment received or accrued by the controlling organization that exceeds the amount which would have been paid or accrued if such payment met the requirements prescribed under section 482. (ii) Addition to tax for valuation misstatements.—The tax imposed by this chapter on the controlling organization shall be increased by an amount equal to 20 percent of the larger of— (I) such excess determined without regard to any amendment or supplement to a return of tax, or (II) such excess determined with regard to all such amendments and supplements. (iii) Qualifying specified payment.—The term ‘qualifying specified payment’ means a specified payment which is made pursuant to— (I) a binding written contract in effect on the date of the enactment of this subparagraph, or (II) a contract which is a renewal, under substantially similar terms, of a contract described in subclause (I)." *26 U.S.C. § 512(b)(13)(E) (2024 ed.).* [^usc-512-enactment-date-2006]: **26 U.S.C. § 512, editorial note — Enactment date of § 512(b)(13)(E)** — "The date of the enactment of this subparagraph, referred to in subsec. (b)(13)(E)(iii)(I), is the date of enactment of Pub. L. 109–280, which was approved Aug. 17, 2006." *26 U.S.C. § 512 note (References in Text) (2024 ed.).* [^irs-schedule-r-specified-payments-reported]: **IRS Instructions for Schedule R (Form 990) (Dec. 2024), Part V, line 2** — "All transactions described in line 1a, which includes all receipts or accruals of interest, annuities, royalties, or rent from a controlled entity under section 512(b)(13), regardless of amount." *IRS, Instructions for Schedule R (Form 990) (Rev. Dec. 2024), Part V, line 2.* [^reg-1512b-1-l4-outdated-80-percent]: **26 C.F.R. § 1.512(b)-1(l)(4) — Control (pre-1997 text)** — "(a) Stock corporation. In the case of an organization which is a stock corporation, the term control means ownership by an exempt organization of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of such corporation." *26 C.F.R. § 1.512(b)-1(l)(4)(i)(a).* [^usc-4945d4-d5-taxable-expenditures]: **26 U.S.C. § 4945(d)(4)–(5) — Taxable expenditures** — "(4) as a grant to an organization unless— (A) such organization— (i) is described in paragraph (1) or (2) of section 509(a), (ii) is an organization described in section 509(a)(3) (other than an organization described in clause (i) or (ii) of section 4942(g)(4)(A)), or (iii) is an exempt operating foundation (as defined in section 4940(d)(2)), or (B) the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or (5) for any purpose other than one specified in section 170(c)(2)(B)." *26 U.S.C. § 4945(d)(4)–(5) (2024 ed.).* [^usc-4945h-expenditure-responsibility]: **26 U.S.C. § 4945(h) — Expenditure responsibility** — "The expenditure responsibility referred to in subsection (d)(4) means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures— (1) to see that the grant is spent solely for the purpose for which made, (2) to obtain full and complete reports from the grantee on how the funds are spent, and (3) to make full and detailed reports with respect to such expenditures to the Secretary." *26 U.S.C. § 4945(h) (2024 ed.).* [^reg-53-4945-5b2-pre-grant-inquiry]: **26 C.F.R. § 53.4945-5(b)(2)(i) — Pre-grant inquiry** — "Before making a grant to an organization with respect to which expenditure responsibility must be exercised under this section, a private foundation should conduct a limited inquiry concerning the potential grantee. Such inquiry should be complete enough to give a reasonable man assurance that the grantee will use the grant for the proper purposes." *26 C.F.R. § 53.4945-5(b)(2)(i).* [^reg-53-4945-5b3-written-commitment-terms]: **26 C.F.R. § 53.4945-5(b)(3) — Written grant commitment** — "Except as provided in subparagraph (4) of this paragraph, in order to meet the expenditure responsibility requirements of section 4945(h), a private foundation must require that each grant to an organization, with respect to which expenditure responsibility must be exercised under this section, be made subject to a written commitment signed by an appropriate officer, director, or trustee of the grantee organization. Such commitment must include an agreement by the grantee: (i) To repay any portion of the amount granted which is not used for the purposes of the grant, (ii) To submit full and complete annual reports on the manner in which the funds are spent and the progress made in accomplishing the purposes of the grant, except as provided in paragraph (c)(2) of this section, (iii) To maintain records of receipts and expenditures and to make its books and records available to the grantor at reasonable times, and (iv) Not to use any of the funds: (a) To carry on propaganda, or otherwise to attempt, to influence legislation (within the meaning of section 4945(d)(1)), (b) To influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive (within the meaning of section 4945(d)(2)), (c) To make any grant which does not comply with the requirements of section 4945(d) (3) or (4), or (d) To undertake any activity for any purpose other than one specified in section 170(c)(2)(B). The agreement must also clearly specify the purposes of the grant." *26 C.F.R. § 53.4945-5(b)(3).* [^reg-53-4945-6c1-non-501c3-grantees]: **26 C.F.R. § 53.4945-6(c)(1) — Grants to noncharitable organizations** — "Since a private foundation cannot make an expenditure for a purpose other than a purpose described in section 170(c)(2)(B), a private foundation may not make a grant to an organization other than an organization described in section 501(c)(3) unless (i) The making of the grant itself constitutes a direct charitable act or the making of a program-related investment, or (ii) Through compliance with the requirements of subparagraph (2) of this paragraph, the grantor is reasonably assured that the grant will be used exclusively for purposes described in section 170(c)(2)(B)." *26 C.F.R. § 53.4945-6(c)(1).* [^reg-53-4945-6c2-separate-fund]: **26 C.F.R. § 53.4945-6(c)(2)(i) — Separate dedicated fund** — "(i) If a private foundation makes a grant which is not a transfer of assets pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization or reorganization to any organization (other than an organization described in section 501(c)(3) except an organization described in section 509(a)(4)), the grantor is reasonably assured (within the meaning of subparagraph (1)(ii) of this paragraph) that the grant will be used exclusively for purposes described in section 170(c)(2)(B) only if the grantee organization agrees to maintain and, during the period in which any portion of such grant funds remain unexpended, does continuously maintain the grant funds (or other assets transferred) in a separate fund dedicated to one or more purposes described in section 170(c)(2)(B). The grantor of a grant described in this paragraph must also comply with the expenditure responsibility provisions contained in sections 4945(d) and (h) and § 53.4945-5." *26 C.F.R. § 53.4945-6(c)(2)(i).* [^morganlewis-er-for-non-public-charities]: **Roady, Grant-Making Part I (Morgan Lewis, Rocky Mountain Tax Seminar for Private Foundations 2013), expenditure responsibility** — "A private foundation must exercise expenditure responsibility over grants made to organizations other than public charities in order for the grants not to be taxable expenditures under §4945(d)(4)." *Celia Roady, Grant-Making Part I: Routine Grants to Individuals and Public Charities (Morgan, Lewis & Bockius LLP, Rocky Mountain Tax Seminar for Private Foundations, Sept. 11, 2013).* [^usc-4944c-program-related-investment]: **26 U.S.C. § 4944(c) — Program-related investments** — "For purposes of this section, investments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(B), and no significant purpose of which is the production of income or the appreciation of property, shall not be considered as investments which jeopardize the carrying out of exempt purposes." *26 U.S.C. § 4944(c) (2024 ed.).* [^reg-53-4944-3-but-for-test]: **26 C.F.R. § 53.4944-3(a)(2)(i) — Primary purpose** — "An investment shall be considered as made primarily to accomplish one or more of the purposes described in section 170(c)(2)(B) if it significantly furthers the accomplishment of the private foundation's exempt activities and if the investment would not have been made but for such relationship between the investment and the accomplishment of the foundation's exempt activities." *26 C.F.R. § 53.4944-3(a)(2)(i).* [^reg-53-4944-3-profit-investor-benchmark]: **26 C.F.R. § 53.4944-3(a)(2)(iii) — Income purpose** — "In determining whether a significant purpose of an investment is the production of income or the appreciation of property, it shall be relevant whether investors solely engaged in the investment for profit would be likely to make the investment on the same terms as the private foundation." *26 C.F.R. § 53.4944-3(a)(2)(iii).* [^reg-53-4944-3-example-3-common-stock]: **26 C.F.R. § 53.4944-3(b), Example 3 — Common stock as a program-related investment** — "Accordingly, the purchase of the common stock is a program-related investment, even though Y may realize a profit if X is successful and the common stock appreciates in value." *26 C.F.R. § 53.4944-3(b), Example 3.* [^stblaw-pri-no-sale-required]: **Simpson Thacher, Final Regulations Providing Additional Examples of Program-Related Investments (2016)** — "The Final Regulations remove the sentence regarding the private foundation’s intention to liquidate the stock, thereby clarifying that a private foundation does not need to sell its stock in a business that becomes profitable for the investment to qualify as a PRI." *Simpson Thacher & Bartlett LLP, Final Regulations Providing Additional Examples of Program-Related Investments (Apr. 26, 2016).* [^reg-53-4945-4a2-pri-are-grants]: **26 C.F.R. § 53.4945-4(a)(2) — Loans and program-related investments are grants** — "Grants shall also include loans for purposes described in section 170(c) (2) (B) and ‘program related investments’ (such as investments in small businesses in central cities or in businesses which assist in neighborhood renovation)." *26 C.F.R. § 53.4945-4(a)(2).* [^usc-4942g1a-controlled-organization-excluded]: **26 U.S.C. § 4942(g)(1)(A) — Qualifying distributions** — "(1) In general For purposes of this section, the term ‘qualifying distribution’ means— (A) any amount (including that portion of reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in section 170(c)(2)(B), other than any contribution to (i) an organization controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as provided in paragraph (3), or" *26 U.S.C. § 4942(g)(1)(A) (2024 ed.).* [^usc-4942g3-redistribution-exception]: **26 U.S.C. § 4942(g)(3) — Contributions to section 501(c)(3) organizations** — "(3) Certain contributions to section 501(c)(3) organizations For purposes of this section, the term ‘qualifying distribution’ includes a contribution to a section 501(c)(3) organization described in paragraph (1)(A)(i) or (ii) if— (A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such section 501(c)(3) organization were a private foundation which is not an operating foundation), and (B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such organization." *26 U.S.C. § 4942(g)(3) (2024 ed.).* [^reg-53-4942a-3a2i-definition]: **26 C.F.R. § 53.4942(a)-3(a)(2)(i) — Qualifying distributions defined** — "Any amount (including program related investments, as defined in section 4944(c), and reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in section 170(c)(1) or (2)(B), other than any contribution to: (a) A private foundation which is not an operating foundation (as defined in section 4942(j)(3)), except as provided in paragraph (c) of this section; (b) An organization controlled (directly or indirectly) by the contributing private foundation or one or more disqualified persons with respect to such foundation, except as provided in paragraph (c) of this section; or" *26 C.F.R. § 53.4942(a)-3(a)(2)(i).* [^reg-53-4942a-3-control-test]: **26 C.F.R. § 53.4942(a)-3(a)(3) — Controlled organizations** — "For purposes of subparagraph (2)(i)(b) of this paragraph, an organization is ‘controlled’ by a foundation or one or more disqualified persons with respect to the foundation if any of such persons may, by aggregating their votes or positions of authority, require the donee organization to make an expenditure, or prevent the donee organization from making an expenditure, regardless of the method by which the control is exercised or exercisable." *26 C.F.R. § 53.4942(a)-3(a)(3).* [^reg-53-4942a-3-nonexempt-controlled]: **26 C.F.R. § 53.4942(a)-3(a)(3) — Controlled organization may be nonexempt** — "The ‘controlled’ organization need not be a private foundation; it may be any type of exempt or nonexempt organization including a school, hospital, operating foundation, or social welfare organization." *26 C.F.R. § 53.4942(a)-3(a)(3).* [^irs-budgetary-procedures-not-control]: **IRS, Private Foundations: Qualifying Distributions to Organizations Controlled by Disqualified Persons** — "If a foundation provides support to an organization and imposes budgetary procedures on that organization, this will not, of itself, constitute control of the donee." *IRS, Private Foundations: Qualifying Distributions to Organizations Controlled by Disqualified Persons (last reviewed June 27, 2026).* [^reg-53-4946-1a8-charities-not-disqualified]: **26 C.F.R. § 53.4946-1(a)(8) — Section 501(c)(3) organizations not disqualified persons for self-dealing** — "For purposes of section 4941 only, the term ‘disqualified person’ shall not include any organization which is described in section 501(c)(3) (other than an organization described in section 509(a)(4))." *26 C.F.R. § 53.4946-1(a)(8).* [^usc-4946a1e-35-percent-corporation]: **26 U.S.C. § 4946(a)(1) — Disqualified persons** — "(1) In general For purposes of this subchapter, the term ‘disqualified person’ means, with respect to a private foundation, a person who is— (A) a substantial contributor to the foundation, (B) a foundation manager (within the meaning of subsection (b)(1)), (C) an owner of more than 20 percent of— (i) the total combined voting power of a corporation, (ii) the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation, (D) a member of the family (as defined in subsection (d)) of any individual described in subparagraph (A), (B), or (C), (E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the total combined voting power," *26 U.S.C. § 4946(a)(1) (2024 ed.).* [^usc-4946a3-indirect-stockholdings]: **26 U.S.C. § 4946(a)(3) — Stockholdings** — "(3) Stockholdings For purposes of paragraphs (1)(C)(i) and (1)(E), there shall be taken into account indirect stockholdings which would be taken into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d)." *26 U.S.C. § 4946(a)(3) (2024 ed.).* [^reg-53-4941d-2f1-benefit-to-disqualified-person]: **26 C.F.R. § 53.4941(d)-2(f)(1) — Use of foundation assets for a disqualified person** — "The transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation shall constitute an act of self-dealing." *26 C.F.R. § 53.4941(d)-2(f)(1).* [^reg-53-4941d-2f2-public-charity-example]: **26 C.F.R. § 53.4941(d)-2(f)(2) — Incidental benefit example** — "For example, a grant by a private foundation to a section 509(a) (1), (2), or (3) organization will not be an act of self-dealing merely because such organization is located in the same area as a corporation which is a substantial contributor to the foundation, or merely because one of the section 509(a) (1), (2), or (3) organization's officers, directors, or trustees is also a manager of or a substantial contributor to the foundation." *26 C.F.R. § 53.4941(d)-2(f)(2).* [^usc-118b-civic-group-foundation-grant]: **26 U.S.C. § 118(b) — Contributions that are not contributions to capital** — "(b) Exceptions For purposes of subsection (a), except as provided in subsection (c), the term ‘contribution to the capital of the taxpayer’ does not include— (1) any contribution in aid of construction or any other contribution as a customer or potential customer, and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)." *26 U.S.C. § 118(b) (2024 ed.).* [^irs-4945h-rr68-489-outside-er]: **IRS, IRC Section 4945(h) — Expenditure Responsibility (issue snapshot)** — "If a grant to an organization is not subject to statutory expenditure responsibility, the grant must still meet the standards of Rev. Rul. 68-489." *IRS, IRC Section 4945(h) - Expenditure Responsibility, Issue Snapshot (last reviewed Mar. 19, 2026).* [^reg-1509a-4e1-supporting-org-operational]: **26 C.F.R. § 1.509(a)-4(e)(1) — Supporting organization operational test** — "A supporting organization will be regarded as operated exclusively to support one or more specified publicly supported organizations (hereinafter referred to as the operational test) only if it engages solely in activities which support or benefit the specified publicly supported organizations." *26 C.F.R. § 1.509(a)-4(e)(1).* [^usc-4958c3-supporting-org-grants]: **26 U.S.C. § 4958(c)(3)(A) — Supporting organizations** — "(3) Special rules for supporting organizations (A) In general In the case of any organization described in section 509(a)(3)— (i) the term ‘excess benefit transaction’ includes— (I) any grant, loan, compensation, or other similar payment provided by such organization to a person described in subparagraph (B), and (II) any loan provided by such organization to a disqualified person (other than an organization described in subparagraph (C)(ii)), and (ii) the term ‘excess benefit’ includes, with respect to any transaction described in clause (i), the amount of any such grant, loan, compensation, or other similar payment." *26 U.S.C. § 4958(c)(3)(A) (2024 ed.).* [^usc-4958c3b-persons-described]: **26 U.S.C. § 4958(c)(3)(B) — Persons described** — "(B) Person described A person is described in this subparagraph if such person is— (i) a substantial contributor to such organization, (ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or (iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting ‘persons described in clause (i) or (ii) of section 4958(c)(3)(B)’ for ‘persons described in subparagraph (A) or (B) of paragraph (1)’ in subparagraph (A)(i) thereof)." *26 U.S.C. § 4958(c)(3)(B) (2024 ed.).* [^usc-4958f3-35-percent-controlled-entity]: **26 U.S.C. § 4958(f)(3) — 35-percent controlled entity** — "(3) 35-percent controlled entity (A) In general The term ‘35-percent controlled entity’ means— (i) a corporation in which persons described in subparagraph (A) or (B) of paragraph (1) own more than 35 percent of the total combined voting power, (ii) a partnership in which such persons own more than 35 percent of the profits interest, and (iii) a trust or estate in which such persons own more than 35 percent of the beneficial interest. (B) Constructive ownership rules Rules similar to the rules of paragraphs (3) and (4) of section 4946(a) shall apply for purposes of this paragraph." *26 U.S.C. § 4958(f)(3) (2024 ed.).* [^usc-509a-private-foundation-defined]: **26 U.S.C. § 509(a) — Private foundation defined** — "(a) General rule For purposes of this title, the term ‘private foundation’ means a domestic or foreign organization described in section 501(c)(3) other than— (1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); (2) an organization which— (A) normally receives more than one-third of its support in each taxable year from any combination of— (i) gifts, grants, contributions, or membership fees, and (ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and (B) normally receives not more than one-third of its support in each taxable year from the sum of— (i) gross investment income (as defined in subsection (e)) and (ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511; (3) an organization which— (A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), (B) is— (i) operated, supervised, or controlled by one or more organizations described in paragraph (1) or (2), (ii) supervised or controlled in connection with one or more such organizations, or (iii) operated in connection with one or more such organizations, and (C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and (4) an organization which is organized and operated exclusively for testing for public safety." *26 U.S.C. § 509(a) (2024 ed.).* [^usc-4958c3cii-public-charity-exception]: **26 U.S.C. § 4958(c)(3)(C)(ii) — Exception from substantial-contributor status** — "(ii) Exception Such term shall not include— (I) any organization described in paragraph (1), (2), or (4) of section 509(a), and (II) any organization which is treated as described in such paragraph (2) by reason of the last sentence of section 509(a) and which is a supported organization (as defined in section 509(f)(3)) of the organization to which subparagraph (A) applies." *26 U.S.C. § 4958(c)(3)(C)(ii) (2024 ed.).* [^reg-53-4945-5a6i-earmarked-secondary-grantee]: **26 C.F.R. § 53.4945-5(a)(6)(i) — Grants through an intermediary** — "A grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (the secondary grantee) shall not be regarded as a grant by the private foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement, oral or written, whereby such grantor foundation may cause the selection of the secondary grantee by the organization to which it has given the grant. For purposes of this subdivision, a grant described herein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control, in fact, over the selection process and actually makes the selection completely independently of the private foundation." *26 C.F.R. § 53.4945-5(a)(6)(i).* [^usc-4945d4a-public-charity-grantee]: **26 U.S.C. § 4945(d)(4)–(5) — Taxable expenditures** — "(4) as a grant to an organization unless— (A) such organization— (i) is described in paragraph (1) or (2) of section 509(a), (ii) is an organization described in section 509(a)(3) (other than an organization described in clause (i) or (ii) of section 4942(g)(4)(A)), or (iii) is an exempt operating foundation (as defined in section 4940(d)(2)), or (B) the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or (5) for any purpose other than one specified in section 170(c)(2)(B)." *26 U.S.C. § 4945(d)(4)–(5) (2024 ed.).* [^reg-53-4945-5b1-secondary-grantee-reports]: **26 C.F.R. § 53.4945-5(b)(1) — Reports from a secondary grantee** — "In cases in which pursuant to paragraph (a)(6) of this section a grant is considered made to a secondary grantee rather than the primary grantee, the grantor foundation's obligation to obtain reports from the grantee pursuant to section 4945(h)(2) and this section will be satisfied if appropriate reports are obtained from the secondary grantee." *26 C.F.R. § 53.4945-5(b)(1).* [^morganlewis-intermediary-selection-control]: **Roady, Grant-Making Part I (Morgan Lewis 2013), intermediary selection** — "This rule applies even if the grantor foundation has reason to believe that certain organizations would derive benefits from the grant, provided that the original grantee organization exercises control, in fact, over the selection process and makes the selection independently of the grantor foundation." *Celia Roady, Grant-Making Part I: Routine Grants to Individuals and Public Charities (Morgan, Lewis & Bockius LLP, Rocky Mountain Tax Seminar for Private Foundations, Sept. 11, 2013).* [^rr68-489-parent-onward-grant]: **Rev. Rul. 68-489 — Distributions to nonexempt organizations** — "An organization will not jeopardize its exemption under section 501(c)(3) of the Code, even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for section 501(c)(3) purposes." *Rev. Rul. 68-489, 1968-2 C.B. 210.* [^rr68-489-foreign-conduit-rulings]: **Rev. Rul. 68-489 — Cross-references to conduit rulings** — "See also Revenue Ruling 67-149, C.B. 1967-1, 133, holding a charitable organization exempt under section 501(c)(3) where it provides financial assistance to other charitable organizations that are also exempt under section 501(c)(3); and Revenue Ruling 63-252, C.B. 1963-2, 101, and Revenue Ruling 66-79, C.B. 1966-1, 48, for requirements with respect to deductibility under section 170 of the Code of contributions by individuals to a charity organized in the United States that thereafter transmits some or all of its funds to a foreign charitable organization." *Rev. Rul. 68-489, 1968-2 C.B. 210.* [^reg-1509a-4e1-type-ii-solely-support]: **26 C.F.R. § 1.509(a)-4(e)(1) — Operational test** — "A supporting organization will be regarded as operated exclusively to support one or more specified publicly supported organizations (hereinafter referred to as the operational test) only if it engages solely in activities which support or benefit the specified publicly supported organizations." *26 C.F.R. § 1.509(a)-4(e)(1).* [^reg-1509a-4e1-type-ii-permissible-organizations]: **26 C.F.R. § 1.509(a)-4(e)(1) — Permissible beneficiary organizations** — "Similarly, an organization will be regarded as operated exclusively to support or benefit one or more specified publicly supported organizations even if it supports or benefits an organization, other than a private foundation, which is described in section 501(c)(3) and is operated, supervised, or controlled directly by or in connection with such publicly supported organizations, or which is described in section 511(a)(2)(B)." *26 C.F.R. § 1.509(a)-4(e)(1).* [^usc-509a3-supporting-organization]: **26 U.S.C. § 509(a)(3) — Supporting organizations** — "(3) an organization which— (A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), (B) is— (i) operated, supervised, or controlled by one or more organizations described in paragraph (1) or (2), (ii) supervised or controlled in connection with one or more such organizations, or (iii) operated in connection with one or more such organizations, and (C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and" *26 U.S.C. § 509(a)(3) (2024 ed.).* [^reg-1509a-4h1-common-control]: **26 C.F.R. § 1.509(a)-4(h)(1) — Supervised or controlled in connection with** — "(1) In order for a supporting organization to be supervised or controlled in connection with one or more publicly supported organizations, there must be common supervision or control by the persons supervising or controlling both the supporting organization and the publicly supported organizations to insure that the supporting organization will be responsive to the needs and requirements of the publicly supported organizations. Therefore, in order to meet such requirement, the control or management of the supporting organization must be vested in the same persons that control or manage the publicly supported organizations." *26 C.F.R. § 1.509(a)-4(h)(1).* [^usc-509f2a-donor-control-bar]: **26 U.S.C. § 509(f)(2)(A) — Organizations controlled by donors** — "(2) Organizations controlled by donors (A) In general For purposes of subsection (a)(3)(B), an organization shall not be considered to be— (i) operated, supervised, or controlled by any organization described in paragraph (1) or (2) of subsection (a), or (ii) operated in connection with any organization described in paragraph (1) or (2) of subsection (a), if such organization accepts any gift or contribution from any person described in subparagraph (B)." *26 U.S.C. § 509(f)(2)(A) (2024 ed.).* [^usc-509f2b-persons-described]: **26 U.S.C. § 509(f)(2)(B) — Persons described** — "(B) Person described A person is described in this subparagraph if, with respect to a supported organization of an organization described in subparagraph (A), such person is— (i) a person (other than an organization described in paragraph (1), (2), or (4) of section 509(a)) who directly or indirectly controls, either alone or together with persons described in clauses (ii) and (iii), the governing body of such supported organization, (ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or (iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting ‘persons described in clause (i) or (ii) of section 509(f)(2)(B)’ for ‘persons described in subparagraph (A) or (B) of paragraph (1)’ in subparagraph (A)(i) thereof)." *26 U.S.C. § 509(f)(2)(B) (2024 ed.).* [^reg-1509a-4e1-type-ii-other-purpose]: **26 C.F.R. § 1.509(a)-4(e)(1) — Any other purpose** — "However, an organization will not be regarded as operated exclusively if any part of its activities is in furtherance of a purpose other than supporting or benefiting one or more specified publicly supported organizations." *26 C.F.R. § 1.509(a)-4(e)(1).* [^reg-1509a-4e1-type-ii-charitable-class]: **26 C.F.R. § 1.509(a)-4(e)(1) — Charitable class and indirect payments** — "Such activities may include making payments to or for the use of, or providing services or facilities for, individual members of the charitable class benefited by the specified publicly supported organization. A supporting organization may also, for example, make a payment indirectly through another unrelated organization to a member of a charitable class benefited by the specified publicly supported organization, but only if such a payment constitutes a grant to an individual rather than a grant to an organization. In determining whether a grant is indirectly to an individual rather than to an organization the same standard shall be applied as in § 53.4945-4(a)(4) of this chapter." *26 C.F.R. § 1.509(a)-4(e)(1).* [^usc-511a2b-state-colleges-and-subsidiaries]: **26 U.S.C. § 511(a)(2)(B) — State colleges and universities** — "(B) State colleges and universities The tax imposed by paragraph (1) shall apply in the case of any college or university which is an agency or instrumentality of any government or any political subdivision thereof, or which is owned or operated by a government or any political subdivision thereof, or by any agency or instrumentality of one or more governments or political subdivisions. Such tax shall also apply in the case of any corporation wholly owned by one or more such colleges or universities." *26 U.S.C. § 511(a)(2)(B) (2024 ed.).* [^reg-1509a-4e2-type-ii-limited-to-beneficiaries]: **26 C.F.R. § 1.509(a)-4(e)(2) — Permissible activities** — "(2) Permissible activities. A supporting organization is not required to pay over its income to the publicly supported organizations in order to meet the operational test. It may satisfy the test by using its income to carry on an independent activity or program which supports or benefits the specified publicly supported organizations. All such support must, however, be limited to permissible beneficiaries in accordance with subparagraph (1) of this paragraph." *26 C.F.R. § 1.509(a)-4(e)(2).* [^usc-4958c3a-type-ii-automatic-excess-benefit]: **26 U.S.C. § 4958(c)(3)(A) — Supporting organizations** — "(3) Special rules for supporting organizations (A) In general In the case of any organization described in section 509(a)(3)— (i) the term ‘excess benefit transaction’ includes— (I) any grant, loan, compensation, or other similar payment provided by such organization to a person described in subparagraph (B), and (II) any loan provided by such organization to a disqualified person (other than an organization described in subparagraph (C)(ii)), and (ii) the term ‘excess benefit’ includes, with respect to any transaction described in clause (i), the amount of any such grant, loan, compensation, or other similar payment." *26 U.S.C. § 4958(c)(3)(A) (2024 ed.).* [^usc-4958c3b-type-ii-persons-described]: **26 U.S.C. § 4958(c)(3)(B) — Persons described** — "(B) Person described A person is described in this subparagraph if such person is— (i) a substantial contributor to such organization, (ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or (iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting ‘persons described in clause (i) or (ii) of section 4958(c)(3)(B)’ for ‘persons described in subparagraph (A) or (B) of paragraph (1)’ in subparagraph (A)(i) thereof)." *26 U.S.C. § 4958(c)(3)(B) (2024 ed.).* [^usc-4958f3-type-ii-35-percent-entity]: **26 U.S.C. § 4958(f)(3) — 35-percent controlled entity** — "(3) 35-percent controlled entity (A) In general The term ‘35-percent controlled entity’ means— (i) a corporation in which persons described in subparagraph (A) or (B) of paragraph (1) own more than 35 percent of the total combined voting power, (ii) a partnership in which such persons own more than 35 percent of the profits interest, and (iii) a trust or estate in which such persons own more than 35 percent of the beneficial interest. (B) Constructive ownership rules Rules similar to the rules of paragraphs (3) and (4) of section 4946(a) shall apply for purposes of this paragraph." *26 U.S.C. § 4958(f)(3) (2024 ed.).* [^usc-4958c3cii-type-ii-exception]: **26 U.S.C. § 4958(c)(3)(C)(ii) — Exception from substantial-contributor status** — "(ii) Exception Such term shall not include— (I) any organization described in paragraph (1), (2), or (4) of section 509(a), and (II) any organization which is treated as described in such paragraph (2) by reason of the last sentence of section 509(a) and which is a supported organization (as defined in section 509(f)(3)) of the organization to which subparagraph (A) applies." *26 U.S.C. § 4958(c)(3)(C)(ii) (2024 ed.).* [^reg-53-4958-3d1-type-ii-charities]: **26 C.F.R. § 53.4958-3(d)(1) — Section 501(c)(3) organizations lack substantial influence** — "(d) Persons deemed not to have substantial influence. A person is deemed not to be in a position to exercise substantial influence over the affairs of an applicable tax-exempt organization if that person is described in one of the following categories: (1) Tax-exempt organizations described in section 501(c)(3). This category includes any organization described in section 501(c)(3) and exempt from tax under section 501(a)." *26 C.F.R. § 53.4958-3(d)(1).* [^reg-53-4958-3b2-type-ii-35-percent]: **26 C.F.R. § 53.4958-3(b)(2)(i) — 35-percent controlled entities** — "(2) Thirty-five percent controlled entities — (i) In general. A person is a disqualified person with respect to any transaction with an applicable tax-exempt organization if the person is a 35-percent controlled entity. A 35-percent controlled entity is— (A) A corporation in which persons described in this section (except in paragraphs (b)(2) and (d) of this section) own more than 35 percent of the combined voting power; (B) A partnership in which persons described in this section (except in paragraphs (b)(2) and (d) of this section) own more than 35 percent of the profits interest;" *26 C.F.R. § 53.4958-3(b)(2)(i).* [^usc-4958c1-type-ii-excess-benefit]: **26 U.S.C. § 4958(c)(1)(A) — Excess benefit transaction** — "The term ‘excess benefit transaction’ means any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit." *26 U.S.C. § 4958(c)(1)(A) (2024 ed.).* [^usc-4958f1-type-ii-disqualified-persons]: **26 U.S.C. § 4958(f)(1) — Disqualified person** — "(1) Disqualified person The term ‘disqualified person’ means, with respect to any transaction— (A) any person who was, at any time during the 5-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization, (B) a member of the family of an individual described in subparagraph (A), (C) a 35-percent controlled entity, (D) any person who is described in subparagraph (A), (B), or (C) with respect to an organization described in section 509(a)(3) and organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of the applicable tax-exempt organization," *26 U.S.C. § 4958(f)(1) (2024 ed.).* [^usc-501c3-type-ii-parent-limits]: **26 U.S.C. § 501(c)(3) — Charitable and educational organizations** — "(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." *26 U.S.C. § 501(c)(3) (2024 ed.).* [^rr68-489-type-ii-parent-grant]: **Rev. Rul. 68-489 — Distributions to nonexempt organizations** — "An organization will not jeopardize its exemption under section 501(c)(3) of the Code, even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for section 501(c)(3) purposes." *Rev. Rul. 68-489, 1968-2 C.B. 210.* [^reg-53-4945-5a6i-type-ii]: **26 C.F.R. § 53.4945-5(a)(6)(i) — Grants through an intermediary** — "A grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (the secondary grantee) shall not be regarded as a grant by the private foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement, oral or written, whereby such grantor foundation may cause the selection of the secondary grantee by the organization to which it has given the grant. For purposes of this subdivision, a grant described herein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control, in fact, over the selection process and actually makes the selection completely independently of the private foundation." *26 C.F.R. § 53.4945-5(a)(6)(i).* [^reg-53-4945-5b3-commitment-for-records]: **26 C.F.R. § 53.4945-5(b)(3) — Grant commitment terms** — "Except as provided in subparagraph (4) of this paragraph, in order to meet the expenditure responsibility requirements of section 4945(h), a private foundation must require that each grant to an organization, with respect to which expenditure responsibility must be exercised under this section, be made subject to a written commitment signed by an appropriate officer, director, or trustee of the grantee organization. Such commitment must include an agreement by the grantee: (i) To repay any portion of the amount granted which is not used for the purposes of the grant, (ii) To submit full and complete annual reports on the manner in which the funds are spent and the progress made in accomplishing the purposes of the grant, except as provided in paragraph (c)(2) of this section, (iii) To maintain records of receipts and expenditures and to make its books and records available to the grantor at reasonable times, and (iv) Not to use any of the funds: (a) To carry on propaganda, or otherwise to attempt, to influence legislation (within the meaning of section 4945(d)(1)), (b) To influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive (within the meaning of section 4945(d)(2)), (c) To make any grant which does not comply with the requirements of section 4945(d) (3) or (4), or (d) To undertake any activity for any purpose other than one specified in section 170(c)(2)(B). The agreement must also clearly specify the purposes of the grant." *26 C.F.R. § 53.4945-5(b)(3).* [^reg-53-4945-5a6i-bookkeeping]: **26 C.F.R. § 53.4945-5(a)(6)(i) — Grants through an intermediary** — "A grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (the secondary grantee) shall not be regarded as a grant by the private foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement, oral or written, whereby such grantor foundation may cause the selection of the secondary grantee by the organization to which it has given the grant. For purposes of this subdivision, a grant described herein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control, in fact, over the selection process and actually makes the selection completely independently of the private foundation." *26 C.F.R. § 53.4945-5(a)(6)(i).* [^rr68-489-records-of-use]: **Rev. Rul. 68-489 — Specific projects and records** — "The exempt organization ensured use of the funds for section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes. It retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for section 501(c)(3) purposes. Held, the distributions did not jeopardize the organization's exemption under section 501(c)(3) of the Code." *Rev. Rul. 68-489, 1968-2 C.B. 210.* [^irs-schedule-d-agent-funds-explained]: **IRS Instructions for Schedule D (Form 990) (Dec. 2024), Part IV** — "If the organization acts as an agent, trustee, custodian, or other intermediary for funds payable to other organizations or individuals and hasn't reported those amounts on Form 990, Part X, as an asset or liability, check ‘Yes’ and provide an explanation of the arrangement in Part XIII." *IRS, Instructions for Schedule D (Form 990) (Rev. Dec. 2024), Part IV, lines 1a–1f.* [^irs-schedule-r-part-v-transactions]: **IRS Instructions for Schedule R (Form 990) (Dec. 2024), purpose of Part V** — "Part V requires information on transactions between the organization and related organizations (excluding disregarded entities)." *IRS, Instructions for Schedule R (Form 990) (Rev. Dec. 2024), Purpose of Schedule.* [^irs-990-agent-gross-receipts]: **IRS Instructions for Form 990 (2025), gross receipts when acting as an agent** — "If a local chapter of a section 501(c)(8) fraternal organization collects insurance premiums for its parent lodge and merely sends those premiums to the parent without asserting any right to use the funds or otherwise deriving any benefit from them, the local chapter doesn’t include the premiums in its gross receipts. The parent lodge reports them instead. The same treatment applies in other situations in which one organization collects funds merely as an agent for another." *IRS, Instructions for Form 990 (2025), Appendix B, Gross Receipts.* [^irs-990-line-28-donor-restrictions]: **IRS Instructions for Form 990 (2025), Part X, line 28** — "Donors’ restrictions may require that resources be used after a specified date (time restrictions), or that resources be used for a specified purpose (purpose restrictions), or both." *IRS, Instructions for Form 990 (2025), Part X, line 28.* [^irs-990-line-27-board-designations]: **IRS Instructions for Form 990 (2025), Part X, line 27** — "All funds without donor-imposed restrictions must be reported on line 27, regardless of the existence of any board designations or appropriations." *IRS, Instructions for Form 990 (2025), Part X, line 27.* [^irs-schedule-d-board-designated-endowment]: **IRS Instructions for Schedule D (Form 990) (Dec. 2024), Part V** — "Board-designated endowments or quasi-endowments result from an internal designation and are generally not donor-restricted and are classified as net assets without donor restrictions. The governing board has the right to decide at any time to expend such funds." *IRS, Instructions for Schedule D (Form 990) (Rev. Dec. 2024), Part V.* [^irs-990-no-consolidated-return]: **IRS Instructions for Form 990 (2025), no consolidated return** — "An organization may not file a ‘consolidated’ Form 990 to aggregate information from another organization that has a different employer identification number (EIN), unless it is filing a group return and reporting information from a subordinate organization or organizations, reporting information from a joint venture or disregarded entity (see Appendix E. Group Returns—Reporting Information on Behalf of the Group, and Appendix F. Disregarded Entities and Joint Ventures—Inclusion of Activities and Items, later), or as otherwise provided for in the Code, regulations, or official IRS guidance." *IRS, Instructions for Form 990 (2025), General Instructions, A. Who Must File.* [^irs-schedule-r-control-more-than-50-percent]: **IRS Instructions for Schedule R (Form 990) (Dec. 2024), definition of control** — "One or more persons (whether individuals or organizations) control a stock corporation if they own more than 50% of the stock (by voting power or value) of the corporation." *IRS, Instructions for Schedule R (Form 990) (Rev. Dec. 2024), Definition of Control.* [^usc-512a1-regularly-carried-on]: **26 U.S.C. § 512(a)(1) — Unrelated business taxable income** — "Except as otherwise provided in this subsection, the term ‘unrelated business taxable income’ means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b)." *26 U.S.C. § 512(a)(1) (2024 ed.).* [^usc-513a-unrelated-trade-exceptions]: **26 U.S.C. § 513(a) — Unrelated trade or business** — "(a) General rule The term ‘unrelated trade or business’ means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business— (1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or" *26 U.S.C. § 513(a) (2024 ed.).* [^usc-512b13a-split-events]: **26 U.S.C. § 512(b)(13)(A) — Payments from controlled entities** — "If an organization (in this paragraph referred to as the ‘controlling organization’) receives or accrues (directly or indirectly) a specified payment from another entity which it controls (in this paragraph referred to as the ‘controlled entity’), notwithstanding paragraphs (1), (2), and (3), the controlling organization shall include such payment as an item of gross income derived from an unrelated trade or business to the extent such payment reduces the net unrelated income of the controlled entity (or increases any net unrelated loss of the controlled entity)." *26 U.S.C. § 512(b)(13)(A) (2024 ed.).* [^usc-512b13c-specified-payment-shared-resources]: **26 U.S.C. § 512(b)(13)(C) — Specified payment** — "For purposes of this paragraph, the term ‘specified payment’ means any interest, annuity, royalty, or rent." *26 U.S.C. § 512(b)(13)(C) (2024 ed.).* [^reg-1513-1d2-substantially-related]: **26 C.F.R. § 1.513-1(d)(2) — Substantially related** — "Trade or business is related to exempt purposes, in the relevant sense, only where the conduct of the business activities has causal relationship to the achievement of exempt purposes (other than through the production of income); and it is substantially related, for purposes of section 513, only if the causal relationship is a substantial one." *26 C.F.R. § 1.513-1(d)(2).* [^reg-1513-1d4iii-dual-use]: **26 C.F.R. § 1.513-1(d)(4)(iii) — Dual use of facilities** — "In such cases, the mere fact of the use of the asset or facility in exempt functions does not, by itself, make the income from the commercial endeavor gross income from related trade or business. The test, instead, is whether the activities productive of the income in question contribute importantly to the accomplishment of exempt purposes." *26 C.F.R. § 1.513-1(d)(4)(iii).* [^irs-p598-dual-use-allocation]: **IRS Publication 598 (Rev. Mar. 2021), expenses attributable to dual use** — "When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis." *IRS, Publication 598, Tax on Unrelated Business Income of Exempt Organizations (Rev. Mar. 2021), ch. 4.* [^plr-202005020-cost-reimbursement]: **IRS Private Letter Ruling 202005020 (2020), shared services** — "The Agreement between Taxpayer and Subsidiary, in which Taxpayer provides services and other resources to Subsidiary, and Subsidiary reimburses Taxpayer for the costs incurred by Taxpayer in providing such services and resources, will cause Taxpayer to be operated for the benefit of private interests and will not further an exempt purpose, within the meaning of section 501(c)(3)." *I.R.S. Priv. Ltr. Rul. 202005020 (released Jan. 31, 2020).* [^plr-202005020-pac-facts]: **IRS Private Letter Ruling 202005020 (2020), facts** — "Subsidiary will establish and operate a political action committee within the meaning of section 527 (‘PAC’)." *I.R.S. Priv. Ltr. Rul. 202005020 (released Jan. 31, 2020).* [^usc-6110k3-cost-sharing-ruling-not-precedent]: **26 U.S.C. § 6110(k)(3) — Written determinations not precedent** — "Unless the Secretary otherwise establishes by regulations, a written determination may not be used or cited as precedent." *26 U.S.C. § 6110(k)(3) (2024 ed.).* [^venable-shared-resources-agreement]: **Venable, Forming and Operating Subsidiaries and Related Entities (1999), shared resources** — "The parent and the subsidiary should enter into an arm's length written agreement covering all aspects of the shared facilities, equipment, supplies, services and employees. The agreement should, of course, be followed in practice. It is critical that strict financial separation be maintained (i.e., separate financial books and records, separate bank accounts, separate tax returns, and avoidance of any commingling of assets)." *George E. Constantine et al., Forming and Operating Subsidiaries and Related Entities: Maximizing the Benefits and Minimizing the Risks (Venable 1999).* [^kelleydrye-capitalize-insure-checklist]: **Kelley Drye, Protecting the Parent Corporation from Disregard of the Corporate Form (2008), capitalization** — "Properly capitalizing and insuring the subsidiary is by far the most important step to prevent a successful piercing argument (since doing so substantially weakens a potential argument based on alleged injustice)." *Philip D. Robben, Protecting the Parent Corporation from Disregard of the Corporate Form (Kelley Drye & Warren LLP, Sept. 22, 2008).* [^blt-formalities-checklist]: **Levitt & Chiodini, Use of a For-Profit Subsidiary by a Nonprofit Organization (Business Law Today 2014), formalities** — "Corporate formalities must be observed to protect the separation of the entities. Each organization must have a separate governing body and should conduct separate board and committee meetings, with separate minutes taken." *David A. Levitt & Steven R. Chiodini, Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization, Business Law Today (ABA, June 18, 2014).* [^venable-financial-separation-checklist]: **Venable, Forming and Operating Subsidiaries and Related Entities (1999), shared resources** — "The parent and the subsidiary should enter into an arm's length written agreement covering all aspects of the shared facilities, equipment, supplies, services and employees. The agreement should, of course, be followed in practice. It is critical that strict financial separation be maintained (i.e., separate financial books and records, separate bank accounts, separate tax returns, and avoidance of any commingling of assets)." *George E. Constantine et al., Forming and Operating Subsidiaries and Related Entities: Maximizing the Benefits and Minimizing the Risks (Venable 1999).* [^dgcl-141f-consent-checklist]: **8 Del. C. § 141(f) — Board action by written consent** — "(f) Unless otherwise restricted by the certificate of incorporation or bylaws, (1) any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, or by electronic transmission, and (2) a consent may be documented, signed and delivered in any manner permitted by § 116 of this title." *Del. Code Ann. tit. 8, § 141(f).* [^dgcl-141f-consent-filed-checklist]: **8 Del. C. § 141(f) — Consents filed with the minutes** — "After an action is taken, the consent or consents relating thereto shall be filed with the minutes of the proceedings of the board of directors, or the committee thereof, in the same paper or electronic form as the minutes are maintained." *Del. Code Ann. tit. 8, § 141(f).* [^irs-990-own-ein-checklist]: **IRS Instructions for Form 990 (2025), Item D, EIN** — "Each organization (including a subordinate of a central organization) must have its own EIN. Use the EIN provided to the organization for filing its Form 990 and federal tax returns. An organization should never use the EIN issued to another organization, even if the organizations are related." *IRS, Instructions for Form 990 (2025), Item D. EIN.* [^irs-990-no-consolidated-checklist]: **IRS Instructions for Form 990 (2025), no consolidated return** — "An organization may not file a ‘consolidated’ Form 990 to aggregate information from another organization that has a different employer identification number (EIN), unless it is filing a group return and reporting information from a subordinate organization or organizations, reporting information from a joint venture or disregarded entity (see Appendix E. Group Returns—Reporting Information on Behalf of the Group, and Appendix F. Disregarded Entities and Joint Ventures—Inclusion of Activities and Items, later), or as otherwise provided for in the Code, regulations, or official IRS guidance." *IRS, Instructions for Form 990 (2025), General Instructions, A. Who Must File.* [^passalacqua-staffing-checklist]: **Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc. (2d Cir. 1991)** — "To determine whether these assertions are valid, the triers of fact are entitled to consider factors that would tend to show that defendant was a dominated corporation, such as: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own." *Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 139 (2d Cir. 1991).* [^blt-overlap-checklist]: **Levitt & Chiodini, Use of a For-Profit Subsidiary by a Nonprofit Organization (Business Law Today 2014), board overlap** — "While the nonprofit parent will be the only (or at least the controlling) equity holder of the for-profit subsidiary and therefore will control the for-profit’s governing body, there are reasons to avoid complete overlap in the directors and officers of the two entities." *David A. Levitt & Steven R. Chiodini, Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization, Business Law Today (ABA, June 18, 2014).* [^venable-officer-overlap-checklist]: **Venable, Forming and Operating Subsidiaries and Related Entities (1999), officer overlap** — "A more substantial problem would arise if officers of the parent were also officers of the subsidiary. In that scenario, it is more likely that the subsidiary's activities would be attributed to the parent because the overlap between officers tends to show that the parent is managing the subsidiary on a daily basis (since officers, as opposed to directors, are generally more involved in the day-to-day management of a corporation)." *George E. Constantine et al., Forming and Operating Subsidiaries and Related Entities: Maximizing the Benefits and Minimizing the Risks (Venable 1999).* [^venable-trademark-license-checklist]: **Venable, Forming and Operating Subsidiaries and Related Entities (1999), trademark license** — "If the parent's name is incorporated into the subsidiary, the terms of such a trademark license should be part of the written agreement discussed above." *George E. Constantine et al., Forming and Operating Subsidiaries and Related Entities: Maximizing the Benefits and Minimizing the Risks (Venable 1999).* [^proskauer-consistent-public-descriptions]: **Proskauer, Two Sides of a Different Coin: Separating Businesses and Subsidiaries for Liability Protection (2023)** — "For example, it could hire separate management for the subsidiary or separate the two entities’ assets, and then ensure those changes are reflected in securities filings and other publicly available information." *Proskauer Rose LLP, Two Sides of a Different Coin: Separating Businesses and Subsidiaries for Liability Protection, Minding Your Business blog (Aug. 18, 2023).* [^nybcl-1301a-checklist]: **N.Y. Business Corporation Law § 1301(a) — Authority required** — "(a) A foreign corporation shall not do business in this state until it has been authorized to do so as provided in this article." *N.Y. Bus. Corp. Law § 1301(a).* [^usc-512b13a-checklist]: **26 U.S.C. § 512(b)(13)(A) — Payments from controlled entities** — "If an organization (in this paragraph referred to as the ‘controlling organization’) receives or accrues (directly or indirectly) a specified payment from another entity which it controls (in this paragraph referred to as the ‘controlled entity’), notwithstanding paragraphs (1), (2), and (3), the controlling organization shall include such payment as an item of gross income derived from an unrelated trade or business to the extent such payment reduces the net unrelated income of the controlled entity (or increases any net unrelated loss of the controlled entity)." *26 U.S.C. § 512(b)(13)(A) (2024 ed.).* [^reg-53-4958-4-checklist]: **26 C.F.R. § 53.4958-4(a)(2)(ii) — Benefits provided through a controlled entity** — "An applicable tax-exempt organization may provide an excess benefit indirectly through the use of one or more entities it controls. For purposes of section 4958, economic benefits provided by a controlled entity will be treated as provided by the applicable tax-exempt organization. (B) Definition of control — (1) In general. For purposes of this paragraph, control by an applicable tax-exempt organization means— (i) In the case of a stock corporation, ownership (by vote or value) of more than 50 percent of the stock in such corporation;" *26 C.F.R. § 53.4958-4(a)(2)(ii)(A)–(B).* [^reg-53-4945-5a6i-checklist]: **26 C.F.R. § 53.4945-5(a)(6)(i) — Grants through an intermediary** — "A grant by a private foundation to a grantee organization which the grantee organization uses to make payments to another organization (the secondary grantee) shall not be regarded as a grant by the private foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement, oral or written, whereby such grantor foundation may cause the selection of the secondary grantee by the organization to which it has given the grant. For purposes of this subdivision, a grant described herein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control, in fact, over the selection process and actually makes the selection completely independently of the private foundation." *26 C.F.R. § 53.4945-5(a)(6)(i).* [^usc-4945d4-checklist]: **26 U.S.C. § 4945(d)(4)–(5) — Taxable expenditures** — "(4) as a grant to an organization unless— (A) such organization— (i) is described in paragraph (1) or (2) of section 509(a), (ii) is an organization described in section 509(a)(3) (other than an organization described in clause (i) or (ii) of section 4942(g)(4)(A)), or (iii) is an exempt operating foundation (as defined in section 4940(d)(2)), or (B) the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or (5) for any purpose other than one specified in section 170(c)(2)(B)." *26 U.S.C. § 4945(d)(4)–(5) (2024 ed.).* [^reg-1509a-4e1-checklist]: **26 C.F.R. § 1.509(a)-4(e)(1) — Operational test** — "A supporting organization will be regarded as operated exclusively to support one or more specified publicly supported organizations (hereinafter referred to as the operational test) only if it engages solely in activities which support or benefit the specified publicly supported organizations." *26 C.F.R. § 1.509(a)-4(e)(1).* [^reg-1509a-4e1-permissible-checklist]: **26 C.F.R. § 1.509(a)-4(e)(1) — Permissible beneficiary organizations** — "Similarly, an organization will be regarded as operated exclusively to support or benefit one or more specified publicly supported organizations even if it supports or benefits an organization, other than a private foundation, which is described in section 501(c)(3) and is operated, supervised, or controlled directly by or in connection with such publicly supported organizations, or which is described in section 511(a)(2)(B)." *26 C.F.R. § 1.509(a)-4(e)(1).* [^usc-4958c3a-checklist]: **26 U.S.C. § 4958(c)(3)(A) — Supporting organizations** — "(3) Special rules for supporting organizations (A) In general In the case of any organization described in section 509(a)(3)— (i) the term ‘excess benefit transaction’ includes— (I) any grant, loan, compensation, or other similar payment provided by such organization to a person described in subparagraph (B), and (II) any loan provided by such organization to a disqualified person (other than an organization described in subparagraph (C)(ii)), and (ii) the term ‘excess benefit’ includes, with respect to any transaction described in clause (i), the amount of any such grant, loan, compensation, or other similar payment." *26 U.S.C. § 4958(c)(3)(A) (2024 ed.).* [^usc-4958c3b-checklist]: **26 U.S.C. § 4958(c)(3)(B) — Persons described** — "(B) Person described A person is described in this subparagraph if such person is— (i) a substantial contributor to such organization, (ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or (iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting ‘persons described in clause (i) or (ii) of section 4958(c)(3)(B)’ for ‘persons described in subparagraph (A) or (B) of paragraph (1)’ in subparagraph (A)(i) thereof)." *26 U.S.C. § 4958(c)(3)(B) (2024 ed.).* [^usc-4958f3-checklist]: **26 U.S.C. § 4958(f)(3) — 35-percent controlled entity** — "(3) 35-percent controlled entity (A) In general The term ‘35-percent controlled entity’ means— (i) a corporation in which persons described in subparagraph (A) or (B) of paragraph (1) own more than 35 percent of the total combined voting power, (ii) a partnership in which such persons own more than 35 percent of the profits interest, and (iii) a trust or estate in which such persons own more than 35 percent of the beneficial interest. (B) Constructive ownership rules Rules similar to the rules of paragraphs (3) and (4) of section 4946(a) shall apply for purposes of this paragraph." *26 U.S.C. § 4958(f)(3) (2024 ed.).* [^usc-4958c3cii-checklist]: **26 U.S.C. § 4958(c)(3)(C)(ii) — Exception from substantial-contributor status** — "(ii) Exception Such term shall not include— (I) any organization described in paragraph (1), (2), or (4) of section 509(a), and (II) any organization which is treated as described in such paragraph (2) by reason of the last sentence of section 509(a) and which is a supported organization (as defined in section 509(f)(3)) of the organization to which subparagraph (A) applies." *26 U.S.C. § 4958(c)(3)(C)(ii) (2024 ed.).* [^npc-102-related-party-checklist]: **N.Y. Not-for-Profit Corp. Law § 102(a)(23) — Related party** — "(23) ‘Related party’ means (i) any director, officer or key person of the corporation or any affiliate of the corporation; (ii) any relative of any individual described in clause (i) of this subparagraph; or (iii) any entity in which any individual described in clauses (i) and (ii) of this subparagraph has a thirty-five percent or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of five percent." *N.Y. Not-for-Profit Corp. Law § 102(a)(23).* [^npc-102-related-party-transaction-checklist]: **N.Y. Not-for-Profit Corp. Law § 102(a)(24) — Related party transaction** — "(24) ‘Related party transaction’ means any transaction, agreement or any other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant, except that a transaction shall not be a related party transaction if: (i) the transaction or the related party's financial interest in the transaction is de minimis, (ii) the transaction would not customarily be reviewed by the board or boards of similar organizations in the ordinary course of business and is available to others on the same or similar terms, or (iii) the transaction constitutes a benefit provided to a related party solely as a member of a class of the beneficiaries that the corporation intends to benefit as part of the accomplishment of its mission which benefit is available to all similarly situated members of the same class on the same terms." *N.Y. Not-for-Profit Corp. Law § 102(a)(24).* [^npc-715a-checklist]: **N.Y. Not-for-Profit Corp. Law § 715(a) — Board determination** — "(a) No corporation shall enter into any related party transaction unless the transaction is determined by the board, or an authorized committee thereof, to be fair, reasonable and in the corporation's best interest at the time of such determination." *N.Y. Not-for-Profit Corp. Law § 715(a).* For repeat use, install the skill: `npx skills add open-agreements/open-agreements` (lawyer-reviewed agreement templates + 50-state practice guides).