Private Foundations

Bond counsel’s opinion may rely on an opinion of borrower’s counsel regarding the tax-exempt status of a conduit borrower.  Frequently a paragraph such as the following is used to express reliance:

In rendering the opinion set forth in the first sentence of this paragraph, we have relied on the opinion of _______________________, counsel to the Borrower, that the Borrower has been determined to be an organization that is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended (the “Code”), by virtue of being an organization described in Section 501(c)(3) of the Code, and is not a “private foundation” as defined in Section 509(a) of the Code, and to such counsel’s knowledge after due investigation, the Borrower has not failed to file a report with the Internal Revenue Service or engaged in conduct inconsistent with its status as an exempt organization.

Why is it important to bond counsel’s opinion that borrower’s counsel opine on the private foundation status of the borrower?

For purposes of I.R.C. 103 and 141-150, it is not relevant that a borrower is or is not a private foundation.  For business purposes and continuing compliance reasons, however, it may be helpful to clarify the status of the organization.  If it turns out that the borrower is a private foundation, this may be grounds for implementing stricter continuing compliance covenants or conducting more detailed tax due diligence to make sure the borrower has procedures in place to satisfy all of the special limitations applicable to private foundations.

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