Rev. Proc. 56-33

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to prescribe procedures for the issuance of rulings whether organizations described in section 501(c)(3) of the Internal Revenue Code of 1954 to which the provisions of section 503 of the Code are applicable, and employees' trusts which are qualified under section 401(a) of the Code and exempt under section 501(a) of the Code, will be held to have engaged in a prohibited transaction within the purview of section 503(c) of the Code upon engaging in certain acts.

SEC. 2. BACKGROUND.

.01 Section 503(c) of the Code sets forth six types of transactions which are prohibited to exempt organizations, inclusive of employees' trusts, as defined in section 1 hereof. Findings with respect to such transactions, to a considerable extent, require determinations which are primarily factual, e.g., adequacy of security, reasonable compensation, preferential treatment, purchases for more than, or sales for less than, adequate consideration in money or money's worth, and substantial diversion of income or corpus. Section 6 of Revenue Ruling 54-172, C. B. 1954-1, 394, states, in part, that rulings or determination letters ordinarily will not be issued in connection with income, profits, estate, and gift tax matters where the determination requested is primarily one of fact, e.g., (1) market value of property, (2) whether compensation is reasonable in amount, etc. In this connection, Revenue Procedure 56-12, C. B. 1956-1, 1029, in section 2.04, provides, in part, that:

The District Director of Internal Revenue is responsible for the issuance of determination letters within the contemplation of section 2.01 hereof. Such letters will not be issued, however, where the determination requested is primarily one of fact, such as the market value of property or the adequacy of security behind a loan. In such cases the determination will be made upon examination of the applicable tax returns. A favorable determination letter on an investment of trust funds in stock of the employer corporation will contain the statement: 'The opinion herein expressed, however, is conditioned on the purchase of such stock at a price not in excess of the fair market value thereof.' * * * Rulings and opinions pertaining to matters other than those under section 2.01 hereof, such as * * * determinations as to whether prohibited transactions are involved and as to unrelated business income, are issued through the National Office. * * *

.02 Investments by an exempt organization must be consistent with, and aid in effectuating, its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a) of the Code. Investments by an exempt employees' trust must be consistent with the primary purpose of such a trust, which is that it be maintained and operated for the exclusive benefit of employees or their beneficiaries. Toward these ends, the following requisites are to be observed: The cost must not exceed fair market value at the time of purchase, a fair return commensurate with the prevailing rate should be provided, sufficient liquidity should be maintained so as to permit distributions in accordance with the stated purposes, and the safeguards that a prudent investor would look to should exist. In issuing a determination letter with respect to investments of an employees' trust, the District Director passes upon compliance with such requisites except the issue of fair market value, since the letter is specifically conditioned on the purchase price not exceeding such value. This issue lies in the prohibited transactions area with respect to which the District Director does not issue determination letters. The National Office, however, does rule on some such matters under the circumstances set forth below.

SEC. 3. ADVANCE RULINGS.

.01 The National Office issues rulings on certain matters within the prohibited transaction area (1) if the transaction is prospective, or (2) if the transaction is consummated, it does not apply to a year for which a return has been filed or with respect to which the due date for filing a return has passed. Such rulings are limited to situations described in subsection .02 hereof.

.02 Where the question of value is involved, the National Office will pass upon issues whether prohibited transactions are involved only if there is a clear indication of value which can be established by reference to recognized sources, without requiring valuations or appraisals, such as the adequacy of security consisting of any or a combination of the following:

(a) A surety bond issued by a recognized surety company doing a surety bond business under applicable state law.

(b) An assignment of an insurance contract having a cash surrender value sufficient to cover the loan, interest, and possible costs of collection.

(c) A first mortgage on real property in an amount not in excess of 50% of its assessed value for local tax purposes.

(d) Collateral represented by securities listed on a recognized exchange of an aggregate value equal to twice the amount of the loan.

SEC. 4. NO ADVANCE RULINGS.

Advance rulings in prohibited transactions cases, except as provided for in section 3 hereof, will not be issued. However, a determination will be made upon examination of the applicable tax returns. Included in this "no ruling" area are such transactions as sales-and-lease-backs, gifts-and-lease-backs, and other rental transactions, of real or personal property, either directly or indirectly, with the creator or related or controlled interests.

SEC. 5. EFFECT ON OTHER DOCUMENTS.

Revenue Ruling 54-172, C. B. 1954-1, 394, and Revenue Procedure 56-12, C. B. 1956-1, 1029, are amplified to the extent herein set forth.