-CITE-
26 USC CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN
OTHER TAX-EXEMPT ORGANIZATIONS 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle D - Miscellaneous Excise Taxes
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
-HEAD-
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
-MISC1-
Subchapter Sec.(!1)
A. Private foundations 4940
B. Black lung benefit trusts 4951
C. Political expenditures of section 501(c)(3)
organizations 4955
D. Failure by certain charitable organizations to meet
certain qualification requirements 4958
E. Abatement of first and second tier taxes in certain
cases 4961
AMENDMENTS
1996 - Pub. L. 104-168, title XIII, Sec. 1311(c)(6), July 30,
1996, 110 Stat. 1478, struck out item for subchapter D "Abatement
of first and second-tier taxes in certain cases" and added items
for subchapters D and E.
1987 - Pub. L. 100-203, title X, Sec. 10712(c)(7), (9), Dec. 22,
1987, 101 Stat. 1330-467, substituted in chapter heading "AND
CERTAIN OTHER TAX-EXEMPT ORGANIZATIONS" for "BLACK LUNG BENEFIT
TRUSTS", struck out item for subchapter C "Abatement of first and
second tier taxes in certain cases", and added items for
subchapters C and D.
1984 - Pub. L. 98-369, div. A, title III, Sec. 305(b)(3), July
18, 1984, 98 Stat. 784, substituted "Abatement of first and second
tier taxes in certain cases" for "Abatement of second tier taxes
where there is correction during correction period" in item for
subchapter C.
1980 - Pub. L. 96-596, Sec. 2(c)(3), Dec. 24, 1980, 94 Stat.
3474, added item for subchapter C.
1978 - Pub. L. 95-227, Sec. 4(c)(2)(A), Feb. 10, 1978, 92 Stat.
22, in chapter heading inserted "; BLACK LUNG BENEFIT TRUSTS" after
"FOUNDATIONS", and added items for subchapters A and B.
1969 - Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83
Stat. 498, added chapter heading "PRIVATE FOUNDATIONS".
-SECREF-
CHAPTER REFERRED TO IN OTHER SECTIONS
This chapter is referred to in sections 170, 275, 509, 2055,
6104, 6161, 6211, 6212, 6213, 6214, 6344, 6405, 6501, 6503, 6511,
6512, 6684, 6862, 6871, 7422 of this title.
-FOOTNOTE-
(!1) Section numbers editorially supplied.
-End-
-CITE-
26 USC Subchapter A - Private Foundations 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle D - Miscellaneous Excise Taxes
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
Subchapter A - Private Foundations
-HEAD-
SUBCHAPTER A - PRIVATE FOUNDATIONS
-MISC1-
Sec.
4940. Excise tax based on investment income.
4941. Taxes on self-dealing.
4942. Taxes on failure to distribute income.
4943. Taxes on excess business holdings.
4944. Taxes on investments which jeopardize charitable
purpose.
4945. Taxes on taxable expenditures.
4946. Definitions and special rules.
4947. Application of taxes to certain nonexempt trusts.
4948. Application of taxes and denial of exemption with
respect to certain foreign organizations.
AMENDMENTS
1978 - Pub. L. 95-227, Sec. 4(c)(2)(A), Feb. 10, 1978, 92 Stat.
22, added subchapter A heading and designated sections 4940 to 4948
as subchapter A.
1969 - Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83
Stat. 498, added analysis of sections.
-SECREF-
SUBCHAPTER REFERRED TO IN OTHER SECTIONS
This subchapter is referred to in sections 4962, 7871 of this
title.
-End-
-CITE-
26 USC Sec. 4940 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle D - Miscellaneous Excise Taxes
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
Subchapter A - Private Foundations
-HEAD-
Sec. 4940. Excise tax based on investment income
-STATUTE-
(a) Tax-exempt foundations
There is hereby imposed on each private foundation which is
exempt from taxation under section 501(a) for the taxable year,
with respect to the carrying on its activities, a tax equal to 2
percent of the net investment income of such foundation for the
taxable year.
(b) Taxable foundations
There is hereby imposed on each private foundation which is not
exempt from taxation under section 501(a) for the taxable year,
with respect to the carrying on of its activities, a tax equal to -
(1) the amount (if any) by which the sum of (A) the tax imposed
under subsection (a) (computed as if such subsection applied to
such private foundation for the taxable year), plus (B) the
amount of the tax which would have been imposed under section 511
for the taxable year if such private foundation had been exempt
from taxation under section 501(a), exceeds
(2) the tax imposed under subtitle A on such private foundation
for the taxable year.
(c) Net investment income defined
(1) In general
For purposes of subsection (a), the net investment income is
the amount by which (A) the sum of the gross investment income
and the capital gain net income exceeds (B) the deductions
allowed by paragraph (3). Except to the extent inconsistent with
the provisions of this section, net investment income shall be
determined under the principles of subtitle A.
(2) Gross investment income
For purposes of paragraph (1), the term "gross investment
income" means the gross amount of income from interest,
dividends, rents, payments with respect to securities loans (as
defined in section 512(a)(5)), and royalties, but not including
any such income to the extent included in computing the tax
imposed by section 511.
(3) Deductions
(A) In general
For purposes of paragraph (1), there shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred for the production or collection of gross investment
income or for the management, conservation, or maintenance of
property held for the production of such income, determined
with the modifications set forth in subparagraph (B).
(B) Modifications
For purposes of subparagraph (A) -
(i) The deduction provided by section 167 shall be allowed,
but only on the basis of the straight line method of
depreciation.
(ii) The deduction for depletion provided by section 611
shall be allowed, but such deduction shall be determined
without regard to section 613 (relating to percentage
depletion).
(4) Capital gains and losses
For purposes of paragraph (1) in determining capital gain net
income -
(A) There shall be taken into account only gains and losses
from the sale or other disposition of property used for the
production of interest, dividends, rents, and royalties, and
property used for the production of income included in
computing the tax imposed by section 511 (except to the extent
gain or loss from the sale or other disposition of such
property is taken into account for purposes of such tax).
(B) The basis for determining gain in the case of property
held by the private foundation on December 31, 1969, and
continuously thereafter to the date of its disposition shall be
deemed to be not less than the fair market value of such
property on December 31, 1969.
(C) Losses from sales or other dispositions of property shall
be allowed only to the extent of gains from such sales or other
dispositions, and there shall be no capital loss carryovers.
(5) Tax-exempt income
For purposes of this section, net investment income shall be
determined by applying section 103 (relating to State and local
bonds) and section 265 (relating to expenses and interest
relating to tax-exempt income).
(d) Exemption for certain operating foundations
(1) In general
No tax shall be imposed by this section on any private
foundation which is an exempt operating foundation for the
taxable year.
(2) Exempt operating foundation
For purposes of this subsection, the term "exempt operating
foundation" means, with respect to any taxable year, any private
foundation if -
(A) such foundation is an operating foundation (as defined in
section 4942(j)(3)),
(B) such foundation has been publicly supported for at least
10 taxable years,
(C) at all times during the taxable year, the governing body
of such foundation -
(i) consists of individuals at least 75 percent of whom are
not disqualified individuals, and
(ii) is broadly representative of the general public, and
(D) at no time during the taxable year does such foundation
have an officer who is a disqualified individual.
(3) Definitions
For purposes of this subsection -
(A) Publicly supported
A private foundation is publicly supported for a taxable year
if it meets the requirements of section 170(b)(1)(A)(vi) or
509(a)(2) for such taxable year.
(B) Disqualified individual
The term "disqualified individual" means, with respect to any
private foundation, an individual who is -
(i) a substantial contributor to the foundation,
(ii) 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, or
(iii) a member of the family of any individual described in
clause (i) or (ii).
(C) Substantial contributor
The term "substantial contributor" means a person who is
described in section 507(d)(2).
(D) Family
The term "family" has the meaning given to such term by
section 4946(d).
(E) Constructive ownership
The rules of paragraphs (3) and (4) of section 4946(a) shall
apply for purposes of subparagraph (B)(ii).
(e) Reduction in tax where private foundation meets certain
distribution requirements
(1) In general
In the case of any private foundation which meets the
requirements of paragraph (2) for any taxable year, subsection
(a) shall be applied with respect to such taxable year by
substituting "1 percent" for "2 percent".
(2) Requirements
A private foundation meets the requirements of this paragraph
for any taxable year if -
(A) the amount of the qualifying distributions made by the
private foundation during such taxable year equals or exceeds
the sum of -
(i) an amount equal to the assets of such foundation for
such taxable year multiplied by the average percentage payout
for the base period, plus
(ii) 1 percent of the net investment income of such
foundation for such taxable year, and
(B) such private foundation was not liable for tax under
section 4942 with respect to any year in the base period.
(3) Average percentage payout for base period
For purposes of this subsection -
(A) In general
The average percentage payout for the base period is the
average of the percentage payouts for taxable years in the base
period.
(B) Percentage payout
The term "percentage payout" means, with respect to any
taxable year, the percentage determined by dividing -
(i) the amount of the qualifying distributions made by the
private foundation during the taxable year, by
(ii) the assets of the private foundation for the taxable
year.
(C) Special rule where tax reduced under this subsection
For purposes of this paragraph, if the amount of the tax
imposed by this section for any taxable year in the base period
is reduced by reason of this subsection, the amount of the
qualifying distributions made by the private foundation during
such year shall be reduced by the amount of such reduction in
tax.
(4) Base period
For purposes of this subsection -
(A) In general
The term "base period" means, with respect to any taxable
year, the 5 taxable years preceding such taxable year.
(B) New private foundations, etc.
If an organization has not been a private foundation
throughout the base period referred to in subparagraph (A), the
base period shall consist of the taxable years during which
such foundation has been in existence.
(5) Other definitions
For purposes of this subsection -
(A) Qualifying distribution
The term "qualifying distribution" has the meaning given such
term by section 4942(g).
(B) Assets
The assets of a private foundation for any taxable year shall
be treated as equal to the excess determined under section
4942(e)(1).
(6) Treatment of successor organizations, etc.
In the case of -
(A) a private foundation which is a successor to another
private foundation, this subsection shall be applied with
respect to such successor by taking into account the experience
of such other foundation, and
(B) a merger, reorganization, or division of a private
foundation, this subsection shall be applied under regulations
prescribed by the Secretary.
-SOURCE-
(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83
Stat. 498; amended Pub. L. 94-455, title XIX, Sec. 1901(b)(33)(N),
Oct. 4, 1976, 90 Stat. 1802; Pub. L. 95-345, Sec. 2(a)(4), Aug. 15,
1978, 92 Stat. 481; Pub. L. 95-600, title V, Sec. 520(a), Nov. 6,
1978, 92 Stat. 2884; Pub. L. 98-369, div. A, title III, Secs.
302(a), 303(a), July 18, 1984, 98 Stat. 779, 781; Pub. L. 99-514,
title XIII, Sec. 1301(j)(6), title XVIII, Sec. 1832, Oct. 22, 1986,
100 Stat. 2658, 2851.)
-MISC1-
AMENDMENTS
1986 - Subsec. (c)(5). Pub. L. 99-514, Sec. 1301(j), substituted
"(relating to State and local bonds)" for "(relating to interest on
certain governmental obligations)".
Subsec. (e)(2). Pub. L. 99-514, Sec. 1832, added subpar. (B) and
struck out former subpar. (B) and concluding provision which read
as follows:
"(B) the average percentage payout for the base period equals
or exceeds 5 percent.
In the case of an operating foundation (as defined in section
4942(j)(3)), subparagraph (B) shall be applied by substituting '3
1/3 percent' for '5 percent'."
1984 - Subsec. (d). Pub. L. 98-369, Sec. 302(a), added subsec.
(d).
Subsec. (e). Pub. L. 98-369, Sec. 303(a), added subsec. (e).
1978 - Subsec. (a). Pub. L. 95-600 substituted "2 percent" for "4
percent".
Subsec. (c)(2). Pub. L. 95-345 inserted provision relating to
payments with respect to securities loans.
1976 - Subsec. (c). Pub. L. 94-455 substituted "capital gain net
income" for "net capital gain" in par. (1) after "investment income
and the", and in par. (4) after "par. (1) in determining".
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by section 1301(j)(6) of Pub. L. 99-514 applicable to
bonds issued after Aug. 15, 1986, except as otherwise provided, see
sections 1311 to 1318 of Pub. L. 99-514, set out as an Effective
Date; Transitional Rules note under section 141 of this title.
Amendment by section 1832 of Pub. L. 99-514 effective, except as
otherwise provided, as if included in the provisions of the Tax
Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment
relates, see section 1881 of Pub. L. 99-514, set out as a note
under section 48 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Section 302(c)(1) of Pub. L. 98-369 provided that: "The amendment
made by subsection (a) [amending this section] shall apply to
taxable years beginning after December 31, 1984."
Section 303(b) of Pub. L. 98-369 provided that: "The amendment
made by subsection (a) [amending this section] shall apply to
taxable years beginning after December 31, 1984."
EFFECTIVE DATE OF 1978 AMENDMENTS
Section 520(b) of Pub. L. 95-600 provided that: "The amendment
made by the first section of this Act [probably meaning section
520(a), which amended this section] shall apply to taxable years
beginning after September 30, 1977."
Amendment by Pub. L. 95-345 applicable with respect to amounts
received after Dec. 31, 1976, as payments with respect to
securities loans (as defined in section 512(a)(5) of this title),
and transfers of securities, under agreements described in section
1058 of this title, occurring after such date, see section 2(e) of
Pub. L. 95-345, set out as a note under section 509 of this title.
EFFECTIVE DATE
Section 101(k) of Pub. L. 91-172, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided:
"(1) In general. - Except as otherwise provided in this
subsection and subsection (l) [set out as a note below] the
amendments made by this section [enacting this section and sections
507 to 509, 4941 to 4848, 6056, 6684, and 6685 of this title,
amending sections 101, 170, 501, 503, 542, 663, 681, 878, 884,
1443, 2039, 2517, 4057, 4221, 4253, 4294, 5214, 6033, 6034, 6043,
6104, 6161, 6201, 6211 to 6214, 6344, 6501, 6503, 6511, 6512, 6601,
6652, 6653, 6659, 6676, 6677, 6679, 6682, 7207, 7422, and 7454 of
this title, repealing section 504 of this title, and enacting
provisions set out as notes under this section and section 1 of
this title] shall take effect on January 1, 1970.
"(2) Provisions effective for taxable years beginning after
december 31, 1969. - The following provisions shall apply to
taxable years beginning after December 31, 1969:
"(A) Sections 4940, 4942, 4943, and 4948 of the Internal
Revenue Code of 1986 [formerly I.R.C. 1954] (as added by this
section), and
"(B) The amendments made by subsection (d) [enacting section
6056 of this title, and amending sections 6033 and 6652 of this
title] and paragraphs (3), (15), (16), (20), (21), (30), (31),
(32), (33), (34), (35), and (61) of subsection (j) [amending
sections 501, 542, 878, 884, 6033, 6034, and 6043 of this title
and repealing section 504 of this title].
"(3) Sections 508(a), (b), and (c). - Sections 508 (a),(b), and
(c) of the Internal Revenue Code of 1986 (as added by this section)
shall take effect on October 9, 1969."
SAVINGS PROVISION
Section 101(l) of Pub. L. 91-172, as amended by Pub. L. 93-490,
Sec. 4(a), Oct. 26, 1974, 88 Stat. 1467; Pub. L. 94-455, title
XIII, Secs. 1301(a), 1309(a), Oct. 4, 1976, 90 Stat. 1713, 1729;
Pub. L. 95-600, title VII, Sec. 703(f), Nov. 6, 1978, 92 Stat.
2940; Pub. L. 98-369, div. A, title III, Sec. 314(b)(1), July 18,
1984, 98 Stat. 787; Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100
Stat. 2095, provided that:
"(1) References to internal revenue code provisions. - Except as
otherwise expressly provided, references in the following
paragraphs of this subsection are to sections of the Internal
Revenue Code of 1986 [formerly I.R.C. 1954] as amended by this
section.
"(2) Section 4941. - Section 4941 shall not apply to -
"(A) any transaction between a private foundation and a
corporation which is a disqualified person (as defined in section
4946), pursuant to the terms of securities of such corporation in
existence at the time acquired by the foundation, if such
securities were acquired by the foundation before May 27, 1969;
"(B) the sale, exchange, or other disposition of property which
is owned by a private foundation on May 26, 1969 (or which is
acquired by a private foundation under the terms of a trust which
was irrevocable on May 26, 1969, or under the terms of a will
executed on or before such date, which are in effect on such date
and at all times thereafter), to a disqualified person, if such
foundation is required to dispose of such property in order not
to be liable for tax under section 4943 (relating to taxes on
excess business holdings) applied, in the case of a disposition
before January 1, 1977, without taking section 4943(c)(4) into
account and it receives in return an amount which equals or
exceeds the fair market value of such property at the time of
such disposition or at the time a contract for such disposition
was previously executed in a transaction which would not
constitute a prohibited transaction (within the meaning of
section 503(b) or the corresponding provisions of prior law);
"(C) the leasing of property or the lending of money or other
extension of credit between a disqualified person and a private
foundation pursuant to a binding contract in effect on October 9,
1969 (or pursuant to renewals of such a contract), until taxable
years beginning after December 31, 1979, if such leasing or
lending (or other extension of credit) remains at least as
favorable as an arm's-length transaction with an unrelated party
and if the execution of such contract was not at the time of such
execution a prohibited transaction (within the meaning of section
503(b) or the corresponding provisions of prior law);
"(D) the use of goods, services, or facilities which are shared
by a private foundation and a disqualified person until taxable
years beginning after December 31, 1979, if such use is pursuant
to an arrangement in effect before October 9, 1969, and such
arrangement was not a prohibited transaction (within the meaning
of section 503(b) or the corresponding provisions of prior law)
at the time it was made and would not be a prohibited transaction
if such section continued to apply;
"(E) the use of property in which a private foundation and a
disqualified person have a joint or common interest, if the
interests of both in such property were acquired before October
9, 1969; and
"(F) the sale, exchange, or other disposition (other than by
lease) of property which is owned by a private foundation to a
disqualified person if -
"(i) such foundation is leasing substantially all of such
property under a lease to which subparagraph (C) applies,
"(ii) the disposition to such disqualified person occurs
before January 1, 1978, and
"(iii) such foundation receives in return for the disposition
to such disqualified person an amount which equals or exceeds
the fair market value of such property at the time of the
disposition or at the time (after June 30, 1976) a contract for
the disposition was previously executed in a transaction which
would not constitute a prohibited transaction (within the
meaning of section 503(b) or any corresponding provision of
prior law).
"(3) Section 4942. - In the case of organizations organized
before May 27, 1969, section 4942 shall -
"(A) for all purposes other than the determination of the
minimum investment return under section 4942(j)(3)(B)(ii), for
taxable years beginning before January 1, 1972, apply without
regard to section 4942(e) (relating to minimum investment
return), and for taxable years beginning in 1972, 1973, and 1974,
apply with an applicable percentage (as prescribed in section
4942(e)(3)) which does not exceed 4 1/2 percent, 5 percent, and
5 1/2 percent, respectively;
"(B) not apply to an organization to the extent its income is
required to be accumulated pursuant to the mandatory terms (as in
effect on May 26, 1969, and at all times thereafter) of an
instrument executed before May 27, 1969, with respect to the
transfer of income producing property to such organization,
except that section 4942 shall apply to such organization if the
organization would have been denied exemption if section 504(a)
had not been repealed by this Act, or would have had its
deductions under section 642(c) limited if section 681(c) had not
been repealed by this Act. In applying the preceding sentence, in
addition to the limitations contained in section 504(a) or 681(c)
before its repeal, section 504(a)(1) or 681(c)(1) shall be
treated as not applying to an organization to the extent its
income is required to be accumulated pursuant to the mandatory
terms (as in effect on January 1, 1951, and at all times
thereafter) of an instrument executed before January 1, 1951,
with respect to the transfer of income producing property to such
organization before such date, if such transfer was irrevocable
on such date;
"(C) apply to a grant to a private foundation described in
section 4942(g)(1)(A)(ii) which is not described in section
4942(g)(1)(A)(i), pursuant to a written commitment which was
binding on May 26, 1969, and at all times thereafter, as if such
grant is a grant to an operating foundation (as defined in
section 4942(j)(3)), if such grant is made for one or more of the
purposes described in section 170(c)(2)(B) and is to be paid out
to such private foundation on or before December 31, 1974;
"(D) apply, for purposes of section 4942(f), in such a manner
as to treat any distribution made to a private foundation in
redemption of stock held by such private foundation in a business
enterprise as not essentially equivalent to a dividend under
section 302(b)(1) if such redemption is described in paragraph
(2)(B) of this subsection;
"(E) not apply to an organization which is prohibited by its
governing instrument or other instrument from distributing
capital or corpus to the extent the requirements of section 4942
are inconsistent with such prohibition; and
"(F) apply, in the case of an organization described in
paragraph (4)(A) of this subsection,
"(i) by applying section 4942(e) without regard to the stock
to which paragraph (4)(A)(ii) of this subsection applies,
"(ii) by applying section 4942(f) without regard to dividend
income for such stock, and
"(iii) by defining the distributable amount as the sum of the
amount determined under section 4942(d) (after the application
of clauses (i) and (ii)), and the amount of the dividend income
from such stock.
With respect to taxable years beginning after December 31, 1971,
subparagraphs (B) and (E) shall apply only during the pendency of
any judicial proceeding by the private foundation which is
necessary to reform, or to excuse such foundation from compliance
with, its governing instrument or any other instrument (as in
effect on May 26, 1969) in order to comply with the provisions of
section 4942, and in the case of subparagraph (B) for all periods
after the termination of such judicial proceeding during which the
governing instrument or any other instrument does not permit
compliance with such provisions.
"(4) Section 4943. -
"(A) In the case of a private foundation -
"(i) which was incorporated before January 1, 1951;
"(ii) substantially all of the assets of which on May 26,
1969, consist of more than 90 percent of the stock of an
incorporated business enterprise which is licensed and
regulated, the sales or contracts of which are regulated, and
the professional representatives of which are licensed, by
State regulatory agencies in at least 10 States; and
"(iii) which acquired such stock solely by gift, devise, or
bequest, section 4943(c)(4)(A)(i) shall be applied with respect
to the holdings of such foundation in such incorporated
business enterprise as if it did not contain the phrase ', but
in no event shall the percentage so substituted be more than 50
percent', and section 4943(c)(4)(D) shall not apply with
respect to such holdings. For purposes of the preceding
sentence, stock of such enterprise in a trust created before
May 27, 1969, of which the foundation is the remainder
beneficiary shall be deemed to be held by such foundation on
May 26, 1969, if such foundation held (without regard to such
trust) more than 20 percent of the stock of such enterprise on
May 26, 1969.
"(B) Subparagraph (A) shall apply to a private foundation only
if -
"(i) the foundation does not purchase any stock or other
interest in the enterprise described in subparagraph (A) after
May 26, 1969, and does not acquire any stock or other interest
in any other business enterprise which constitutes excess
business holdings under section 4943; and
"(ii) in the last 5 taxable years ending on or before
December 31, 1970, the foundation expends substantially all of
its adjusted net income (as defined in section 4942(f)) for the
purpose or function for which it is organized and operated.
"(C) For purposes of section 4943(c)(6), the term 'purchase'
does not include an exchange which is described in paragraph
(2)(B) of this subsection and which is pursuant to a plan for
disposition of excess business holdings.
"(5) Section 4945. - Section 4945(d)(4) and (h) shall not apply
to a grant which is described in paragraph (3)(C) of this
subsection.
"(6) Section 508(e). - Section 508(e) shall not apply to require
inclusion in governing instruments of any provisions inconsistent
with this subsection.
"(7) Section 509(a). - In the case of any trust created under the
terms of a will or a codicil to a will executed on or before March
30, 1924, by which the testator bequeathed all of the outstanding
common stock of a corporation in trust, the income of which trust
is to be used principally for the benefit of those from time to
time employed by the corporation and their families, the trustees
of which trust are elected or selected from among the employees of
such corporation, and which trust does not own directly any stock
in any other corporation, if the trust makes an irrevocable
election under this paragraph within one year after the date of the
enactment of this Act [Dec. 30, 1969], such trust shall be treated
as not being a private foundation for purposes of the Internal
Revenue Code of 1986 but shall be treated for purposes of such Code
as if it were not exempt from tax under section 501(a) for any
taxable year beginning after the date of the enactment of this Act
[Dec. 30, 1969] and before the date (if any) on which such trust
has complied with the requirements of section 507 for termination
of the status of an organization as a private foundation.
"(8) Certain redemptions. - For purposes of applying section
302(b)(1) to the determination of the amount of gross investment
income under sections 4940 and 4948(a), any distribution made to a
private foundation in redemption of stock held by such private
foundation in a business enterprise shall be treated as not
essentially equivalent to a dividend, if such redemption is
described in paragraph (2)(B) of this subsection."
[Section 314(b)(2) of Pub. L. 98-369 provided that: "The
amendment made by paragraph (1) [amending section 101(4)(A)(iii) of
Pub. L. 91-172, set out above] shall apply as if included in
section 101(l)(4) of the Tax Reform Act of 1969 [Pub. L. 91-172]."]
[Section 1301(b) of Pub. L. 94-455 provided that: "The amendments
made by subsection (a) [enacting subpar. (F) of section 101(2) of
Pub. L. 91-172, set out above] shall apply to dispositions after
the date of the enactment of this Act [Oct. 4, 1976] in taxable
years ending after such date."]
[Section 1309(b) of Pub. L. 94-455 provided that: "The amendment
made by this section [amending section 101(2)(B) of Pub. L. 91-172,
set out above] shall apply to dispositions made after the date of
enactment of this Act [Oct. 4, 1976]."]
[Section 4(b) of Pub. L. 93-490 provided that: "The amendment
made by this section [enacting subpar. (F) of section 101(3) of
Pub. L. 91-172, set out above] shall apply to taxable years
beginning after December 31, 1971."]
DETERMINATION OF OPERATING FOUNDATION STATUS FOR CERTAIN PURPOSES
Pub. L. 100-647, title VI, Sec. 6204, Nov. 10, 1988, 102 Stat.
3730, provided that: "For purposes of section 302(c)(3) of the
Deficit Reduction Act of 1984 [Pub. L. 98-369, set out below], a
private foundation which constituted an operating foundation (as
defined in section 4942(j)(3) of the Internal Revenue Code of 1986)
for its last taxable year ending before January 1, 1983, shall be
treated as constituting an operating foundation as of January 1,
1983."
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by subtitle
A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or
title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an
amendment to any plan, such plan amendment shall not be required to
be made before the first plan year beginning on or after Jan. 1,
1989, see section 1140 of Pub. L. 99-514, as amended, set out as a
note under section 401 of this title.
PUBLIC SUPPORT REQUIREMENT NOT APPLICABLE TO CERTAIN EXISTING
FOUNDATIONS
Section 302(c)(3) of Pub. L. 98-369 provided that: "A foundation
which was an operating foundation (as defined in section 4942(j)(3)
of the Internal Revenue Code of 1954) as of January 1, 1983, shall
be treated as meeting the requirements of section 4940(d)(2)(B) of
such Code (as added by subsection (a))."
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 41, 4942, 4945, 4948,
6212, 6501, 6655 of this title.
-End-
-CITE-
26 USC Sec. 4941 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle D - Miscellaneous Excise Taxes
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
Subchapter A - Private Foundations
-HEAD-
Sec. 4941. Taxes on self-dealing
-STATUTE-
(a) Initial taxes
(1) On self-dealer
There is hereby imposed a tax on each act of self-dealing
between a disqualified person and a private foundation. The rate
of tax shall be equal to 5 percent of the amount involved with
respect to the act of self-dealing for each year (or part
thereof) in the taxable period. The tax imposed by this paragraph
shall be paid by any disqualified person (other than a foundation
manager acting only as such) who participates in the act of
self-dealing. In the case of a government official (as defined in
section 4946(c)), a tax shall be imposed by this paragraph only
if such disqualified person participates in the act of
self-dealing knowing that it is such an act.
(2) On foundation manager
In any case in which a tax is imposed by paragraph (1), there
is hereby imposed on the participation of any foundation manager
in an act of self-dealing between a disqualified person and a
private foundation, knowing that it is such an act, a tax equal
to 2 1/2 percent of the amount involved with respect to the act
of self-dealing for each year (or part thereof) in the taxable
period, unless such participation is not willful and is due to
reasonable cause. The tax imposed by this paragraph shall be paid
by any foundation manager who participated in the act of
self-dealing.
(b) Additional taxes
(1) On self-dealer
In any case in which an initial tax is imposed by subsection
(a)(1) on an act of self-dealing by a disqualified person with a
private foundation and the act is not corrected within the
taxable period, there is hereby imposed a tax equal to 200
percent of the amount involved. The tax imposed by this paragraph
shall be paid by any disqualified person (other than a foundation
manager acting only as such) who participated in the act of
self-dealing.
(2) On foundation manager
In any case in which an additional tax is imposed by paragraph
(1), if a foundation manager refused to agree to part or all of
the correction, there is hereby imposed a tax equal to 50 percent
of the amount involved. The tax imposed by this paragraph shall
be paid by any foundation manager who refused to agree to part or
all of the correction.
(c) Special rules
For purposes of subsections (a) and (b) -
(1) Joint and several liability
If more than one person is liable under any paragraph of
subsection (a) or (b) with respect to any one act of
self-dealing, all such persons shall be jointly and severally
liable under such paragraph with respect to such act.
(2) $10,000 limit for management
With respect to any one act of self-dealing, the maximum amount
of the tax imposed by subsection (a)(2) shall not exceed $10,000,
and the maximum amount of the tax imposed by subsection (b)(2)
shall not exceed $10,000.
(d) Self-dealing
(1) In general
For purposes of this section, the term "self-dealing" means any
direct or indirect -
(A) sale or exchange, or leasing, of property between a
private foundation and a disqualified person;
(B) lending of money or other extension of credit between a
private foundation and a disqualified person;
(C) furnishing of goods, services, or facilities between a
private foundation and a disqualified person;
(D) payment of compensation (or payment or reimbursement of
expenses) by a private foundation to a disqualified person;
(E) transfer to, or use by or for the benefit of, a
disqualified person of the income or assets of a private
foundation; and
(F) agreement by a private foundation to make any payment of
money or other property to a government official (as defined in
section 4946(c)), other than an agreement to employ such
individual for any period after the termination of his
government service if such individual is terminating his
government service within a 90-day period.
(2) Special rules
For purposes of paragraph (1) -
(A) the transfer of real or personal property by a
disqualified person to a private foundation shall be treated as
a sale or exchange if the property is subject to a mortgage or
similar lien which the foundation assumes or if it is subject
to a mortgage or similar lien which a disqualified person
placed on the property within the 10-year period ending on the
date of the transfer;
(B) the lending of money by a disqualified person to a
private foundation shall not be an act of self-dealing if the
loan is without interest or other charge (determined without
regard to section 7872) and if the proceeds of the loan are
used exclusively for purposes specified in section 501(c)(3);
(C) the furnishing of goods, services, or facilities by a
disqualified person to a private foundation shall not be an act
of self-dealing if the furnishing is without charge and if the
goods, services, or facilities so furnished are used
exclusively for purposes specified in section 501(c)(3);
(D) the furnishing of goods, services, or facilities by a
private foundation to a disqualified person shall not be an act
of self-dealing if such furnishing is made on a basis no more
favorable than that on which such goods, services, or
facilities are made available to the general public;
(E) except in the case of a government official (as defined
in section 4946(c)), the payment of compensation (and the
payment or reimbursement of expenses) by a private foundation
to a disqualified person for personal services which are
reasonable and necessary to carrying out the exempt purpose of
the private foundation shall not be an act of self-dealing if
the compensation (or payment or reimbursement) is not
excessive;
(F) any transaction between a private foundation and a
corporation which is a disqualified person (as defined in
section 4946(a)), pursuant to any liquidation, merger,
redemption, recapitalization, or other corporate adjustment,
organization, or reorganization, shall not be an act of
self-dealing if all of the securities of the same class as that
held by the foundation are subject to the same terms and such
terms provide for receipt by the foundation of no less than
fair market value;
(G) in the case of a government official (as defined in
section 4946(c)), paragraph (1) shall in addition not apply to
-
(i) prizes and awards which are subject to the provisions
of section 74(b) (without regard to paragraph (3) thereof),
if the recipients of such prizes and awards are selected from
the general public,
(ii) scholarships and fellowship grants which would be
subject to the provisions of section 117(a) (as in effect on
the day before the date of the enactment of the Tax Reform
Act of 1986) and are to be used for study at an educational
organization described in section 170(b)(1)(A)(ii),
(iii) any annuity or other payment (forming part of a
stock-bonus, pension, or profit-sharing plan) by a trust
which is a qualified trust under section 401,
(iv) any annuity or other payment under a plan which meets
the requirements of section 404(a)(2),
(v) any contribution or gift (other than a contribution or
gift of money) to, or services or facilities made available
to, any such individual, if the aggregate value of such
contributions, gifts, services, and facilities to, or made
available to, such individual during any calendar year does
not exceed $25,
(vi) any payment made under chapter 41 of title 5, United
States Code, or
(vii) any payment or reimbursement of traveling expenses
for travel solely from one point in the United States to
another point in the United States, but only if such payment
or reimbursement does not exceed the actual cost of the
transportation involved plus an amount for all other
traveling expenses not in excess of 125 percent of the
maximum amount payable under section 5702 of title 5, United
States Code, for like travel by employees of the United
States; and
(H) the leasing by a disqualified person to a private
foundation of office space for use by the foundation in a
building with other tenants who are not disqualified persons
shall not be treated as an act of self-dealing if -
(i) such leasing of office space is pursuant to a binding
lease which was in effect on October 9, 1969, or pursuant to
renewals of such a lease;
(ii) the execution of such lease was not a prohibited
transaction (within the meaning of section 503(b) or any
corresponding provision of prior law) at the time of such
execution; and
(iii) the terms of the lease (or any renewal) reflect an
arm's-length transaction.
(e) Other definitions
For purposes of this section -
(1) Taxable period
The term "taxable period" means, with respect to any act of
self-dealing, the period beginning with the date on which the act
of self-dealing occurs and ending on the earliest of -
(A) the date of mailing a notice of deficiency with respect
to the tax imposed by subsection (a)(1) under section 6212,
(B) the date on which the tax imposed by subsection (a)(1) is
assessed, or
(C) the date on which correction of the act of self-dealing
is completed.
(2) Amount involved
The term "amount involved" means, with respect to any act of
self-dealing, the greater of the amount of money and the fair
market value of the other property given or the amount of money
and the fair market value of the other property received; except
that, in the case of services described in subsection (d)(2)(E),
the amount involved shall be only the excess compensation. For
purposes of the preceding sentence, the fair market value -
(A) in the case of the taxes imposed by subsection (a), shall
be determined as of the date on which the act of self-dealing
occurs; and
(B) in the case of the taxes imposed by subsection (b), shall
be the highest fair market value during the taxable period.
(3) Correction
The terms "correction" and "correct" mean, with respect to any
act of self-dealing, undoing the transaction to the extent
possible, but in any case placing the private foundation in a
financial position not worse than that in which it would be if
the disqualified person were dealing under the highest fiduciary
standards.
-SOURCE-
(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83
Stat. 499; amended Pub. L. 94-455, title XIX, Secs. 1901(b)(8)(H),
1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1795, 1834; Pub. L. 96-596,
Sec. 2(a)(1)(A), (B), (2)(A), (3)(A), Dec. 24, 1980, 94 Stat. 3469,
3471; Pub. L. 96-608, Sec. 5, Dec. 28, 1980, 94 Stat. 3553; Pub. L.
99-234, title I, Sec. 107(c), Jan. 2, 1986, 99 Stat. 1759; Pub. L.
99-514, title I, Sec. 122(a)(2)(A), title XVIII, Sec. 1812(b)(1),
Oct. 22, 1986, 100 Stat. 2110, 2833; Pub. L. 100-647, title I, Sec.
1001(d)(1)(A), Nov. 10, 1988, 102 Stat. 3350.)
-REFTEXT-
REFERENCES IN TEXT
The date of the enactment of the Tax Reform Act of 1986, referred
to in subsec. (d)(2)(G)(ii), is the date of enactment of Pub. L.
99-514, which was approved Oct. 22, 1986.
-MISC1-
AMENDMENTS
1988 - Subsec. (d)(2)(G)(ii). Pub. L. 100-647 amended cl. (ii)
generally. Prior to amendment, cl. (ii) read as follows:
"scholarships and fellowship grants which are subject to the
provisions of section 117(a) and are to be used for study at an
educational organization described in section 170(b)(1)(A)(ii),".
1986 - Subsec. (d)(2)(B). Pub. L. 99-514, Sec. 1812(b)(1),
inserted "(determined without regard to section 7872)" after
"without interest or other charge".
Subsec. (d)(2)(G)(i). Pub. L. 99-514, Sec. 122(a)(2)(A), inserted
"(without regard to paragraph (3) thereof)" after "section 74(b)".
Subsec. (d)(2)(G)(vii). Pub. L. 99-234 substituted "5702" for
"5702(a)".
1980 - Subsec. (b)(1). Pub. L. 96-596, Sec. 2(a)(1)(A),
substituted "taxable period" for "correction period".
Subsec. (d)(2)(H). Pub. L. 96-608 added subpar. (H).
Subsec. (e)(1)(B), (C). Pub. L. 96-596, Sec. 2(a)(2)(A), added
subpar. (B) and redesignated former subpar. (B) as (C).
Subsec. (e)(2)(B). Pub. L. 96-596, Sec. 2(a)(1)(B), substituted
"taxable period" for "correction period".
Subsec. (e)(4). Pub. L. 96-596, Sec. 2(a)(3)(A), struck out par.
(4) which defined correction period, with respect to any act of
self-dealing, as the period beginning with the date on which the
act of self-dealing occurs and ending 90 days after the date of
mailing of a notice of deficiency with respect to the tax imposed
by subsec. (b)(1) of this section under section 6212 of this title,
extended by any period in which the deficiency cannot be assessed
under section 6213(a) of this title and any other period which the
Secretary determines is reasonable and necessary to bring about
correction of the act of self-dealing.
1976 - Subsec. (d)(2)(G)(ii). Pub. L. 94-455, Sec. 1901(b)(8)(H),
substituted "educational organization described in section
170(b)(1)(A)(ii)" for "educational institution described in section
151(e)(4)" after "study at an".
Subsec. (e)(4). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out
"or his delegate" after "Secretary".
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by Pub. L. 100-647 effective, except as otherwise
provided, as if included in the provision of the Tax Reform Act of
1986, Pub. L. 99-514, to which such amendment relates, see section
1019(a) of Pub. L. 100-647, set out as a note under section 1 of
this title.
EFFECTIVE DATE OF 1986 AMENDMENTS
Amendment by section 122(a)(2)(A) of Pub. L. 99-514 applicable to
prizes and awards granted after Dec. 31, 1986, see section 151(c)
of Pub. L. 99-514, set out as a note under section 1 of this title.
Amendment by section 1812(b)(1) of Pub. L. 99-514 effective,
except as otherwise provided, as if included in the provisions of
the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such
amendment relates, see section 1881 of Pub. L. 99-514, set out as a
note under section 48 of this title.
Amendment by Pub. L. 99-234 effective (1) on effective date of
regulations to be promulgated not later than 150 days after Jan. 2,
1986, or (2) 180 days after Jan. 2, 1986, whichever occurs first,
see section 301(a) of Pub. L. 99-234, set out as a note under
section 5701 of Title 5, Government Organization and Employees.
EFFECTIVE DATE OF 1980 AMENDMENT
For effective date of amendment by Pub. L. 96-596 with respect to
any first tier tax and to any second tier tax, see section 2(d) of
Pub. L. 96-596, set out as an Effective Date note under section
4961 of this title.
SAVINGS PROVISION
Exceptions to applicability of section, see section 101(l)(2) of
Pub. L. 91-172, set out as a note under section 4940 of this title.
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by subtitle
A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or
title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an
amendment to any plan, such plan amendment shall not be required to
be made before the first plan year beginning on or after Jan. 1,
1989, see section 1140 of Pub. L. 99-514, as amended, set out as a
note under section 401 of this title.
TAX ON SELF-DEALING NOT TO APPLY TO CERTAIN STOCK PURCHASES
Pub. L. 98-369, div. A, title III, Sec. 312, July 18, 1984, 98
Stat. 786, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100
Stat. 2095, provided that:
"(a) General Rule. - Section 4941 of the Internal Revenue Code of
1986 [formerly I.R.C. 1954] (relating to taxes on self-dealing)
shall not apply to the purchase during 1978 of stock from a private
foundation (and to any note issued in connection with such
purchase) if -
"(1) consideration for such purchase equaled or exceeded the
fair market value of such stock,
"(2) the purchaser of such stock did not make any contribution
to such foundation at any time during the 5-year period ending on
the date of such purchase,
"(3) the aggregate contributions to such foundation by the
purchaser before such date were less than $10,000 and less than 2
percent of the total contributions received by the foundation as
of such date, and
"(4) such purchase was pursuant to the settlement of litigation
involving the purchaser.
"(b) Statute of Limitations. - If credit or refund of any
overpayment of tax resulting from subsection (a) is prevented at
any time before the close of the 1-year period beginning on the
date of the enactment of this Act [July 18, 1984] by the operation
of any law or rule of law, refund or credit of such overpayment
may, nevertheless, be made or allowed if claim therefor is filed
before the close of such 1-year period."
APPLICABILITY TO DETERMINATION OF STATUS AS SUBSTANTIAL CONTRIBUTOR
FOR PURPOSES OF TAXES ON SELF-DEALING OF CONTRIBUTIONS MADE PRIOR
TO OCTOBER 9, 1969
Determination of status as substantial contributor within section
507(d)(2) of this title for purposes of applying this section, see
section 3 of Pub. L. 95-170, set out as a note under section 507 of
this title.
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 508, 4946, 4947, 4962,
4963, 6213, 7422, 7454 of this title.
-End-
-CITE-
26 USC Sec. 4942 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle D - Miscellaneous Excise Taxes
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
Subchapter A - Private Foundations
-HEAD-
Sec. 4942. Taxes on failure to distribute income
-STATUTE-
(a) Initial tax
There is hereby imposed on the undistributed income of a private
foundation for any taxable year, which has not been distributed
before the first day of the second (or any succeeding) taxable year
following such taxable year (if such first day falls within the
taxable period), a tax equal to 15 percent of the amount of such
income remaining undistributed at the beginning of such second (or
succeeding) taxable year. The tax imposed by this subsection shall
not apply to the undistributed income of a private foundation -
(1) for any taxable year for which it is an operating
foundation (as defined in subsection (j)(3)), or
(2) to the extent that the foundation failed to distribute any
amount solely because of an incorrect valuation of assets under
subsection (e), if -
(A) the failure to value the assets properly was not willful
and was due to reasonable cause,
(B) such amount is distributed as qualifying distributions
(within the meaning of subsection (g)) by the foundation during
the allowable distribution period (as defined in subsection
(j)(2)),
(C) the foundation notifies the Secretary that such amount
has been distributed (within the meaning of subparagraph (B))
to correct such failure, and
(D) such distribution is treated under subsection (h)(2) as
made out of the undistributed income for the taxable year for
which a tax would (except for this paragraph) have been imposed
under this subsection.
(b) Additional tax
In any case in which an initial tax is imposed under subsection
(a) on the undistributed income of a private foundation for any
taxable year, if any portion of such income remains undistributed
at the close of the taxable period, there is hereby imposed a tax
equal to 100 percent of the amount remaining undistributed at such
time.
(c) Undistributed income
For purposes of this section, the term "undistributed income"
means, with respect to any private foundation for any taxable year
as of any time, the amount by which -
(1) the distributable amount for such taxable year, exceeds
(2) the qualifying distributions made before such time out of
such distributable amount.
(d) Distributable amount
For purposes of this section, the term "distributable amount"
means, with respect to any foundation for any taxable year, an
amount equal to -
(1) the sum of the minimum investment return plus the amounts
described in subsection (f)(2)(C), reduced by
(2) the sum of the taxes imposed on such private foundation for
the taxable year under subtitle A and section 4940.
(e) Minimum investment return
(1) In general
For purposes of subsection (d), the minimum investment return
for any private foundation for any taxable year is 5 percent of
the excess of -
(A) the aggregate fair market value of all assets of the
foundation other than those which are used (or held for use)
directly in carrying out the foundation's exempt purpose, over
(B) the acquisition indebtedness with respect to such assets
(determined under section 514(c)(1) without regard to the
taxable year in which the indebtedness was incurred).
(2) Valuation
(A) In general
For purposes of paragraph (1)(A), the fair market value of
securities for which market quotations are readily available
shall be determined on a monthly basis. For all other assets,
the fair market value shall be determined at such times and in
such manner as the Secretary shall by regulations prescribe.
(B) Reductions in value for blockage or similar factors
In determining the value of any securities under this
paragraph, the fair market value of such securities (determined
without regard to any reduction in value) shall not be reduced
unless, and only to the extent that, the private foundation
establishes that as a result of -
(i) the size of the block of such securities,
(ii) the fact that the securities held are securities in a
closely held corporation, or
(iii) the fact that the sale of such securities would
result in a forced or distress sale,
the securities could not be liquidated within a reasonable
period of time except at a price less than such fair market
value. Any reduction in value allowable under this subparagraph
shall not exceed 10 percent of such fair market value.
(f) Adjusted net income
(1) Defined
For purposes of subsection (j), the term "adjusted net income"
means the excess (if any) of -
(A) the gross income for the taxable year (determined with
the income modifications provided by paragraph (2)), over
(B) the sum of the deductions (determined with the deduction
modifications provided by paragraph (3)) which would be allowed
to a corporation subject to the tax imposed by section 11 for
the taxable year.
(2) Income modifications
The income modifications referred to in paragraph (1)(A) are as
follows:
(A) section 103 (relating to State and local bonds) shall not
apply,
(B) capital gains and losses from the sale or other
disposition of property shall be taken into account only in an
amount equal to any net short-term capital gain for the taxable
year;
(C) there shall be taken into account -
(i) amounts received or accrued as repayments of amounts
which were taken into account as a qualifying distribution
within the meaning of subsection (g)(1)(A) for any taxable
year;
(ii) notwithstanding subparagraph (B), amounts received or
accrued from the sale or other disposition of property to the
extent that the acquisition of such property was taken into
account as a qualifying distribution (within the meaning of
subsection (g)(1)(B)) for any taxable year; and
(iii) any amount set aside under subsection (g)(2) to the
extent it is determined that such amount is not necessary for
the purposes for which it was set aside; and
(D) section 483 (relating to imputed interest) shall not
apply in the case of a binding contract made in a taxable year
beginning before January 1, 1970.
(3) Deduction modifications
The deduction modifications referred to in paragraph (1)(B) are
as follows:
(A) no deduction shall be allowed other than all the ordinary
and necessary expenses paid or incurred for the production or
collection of gross income or for the management, conservation,
or maintenance of property held for the production of such
income and the allowances for depreciation and depletion
determined under section 4940(c)(3)(B), and
(B) section 265 (relating to expenses and interest relating
to tax-exempt interest) shall not apply.
(4) Transitional rule
For purposes of paragraph (2)(B), the basis (for purposes of
determining gain) of property held by a private foundation on
December 31, 1969, and continuously thereafter to the date of its
disposition, shall be deemed to be not less than the fair market
value of such property on December 31, 1969.
(g) Qualifying distributions defined
(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
(B) any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes described in
section 170(c)(2)(B).
(2) Certain set-asides
(A) In general
For all taxable years beginning on or after January 1, 1975,
subject to such terms and conditions as may be prescribed by
the Secretary, an amount set aside for a specific project which
comes within one or more purposes described in section
170(c)(2)(B) may be treated as a qualifying distribution if it
meets the requirements of subparagraph (B).
(B) Requirements
An amount set aside for a specific project shall meet the
requirements of this subparagraph if at the time of the
set-aside the foundation establishes to the satisfaction of the
Secretary that the amount will be paid for the specific project
within 5 years, and either -
(i) at the time of the set-aside the private foundation
establishes to the satisfaction of the Secretary that the
project is one which can better be accomplished by such
set-aside than by immediate payment of funds, or
(ii)(I) the project will not be completed before the end of
the taxable year of the foundation in which the set-aside is
made,
(II) the private foundation in each taxable year beginning
after December 31, 1975 (or after the end of the fourth
taxable year following the year of its creation, whichever is
later), distributes amounts, in cash or its equivalent, equal
to not less than the distributable amount determined under
subsection (d) (without regard to subsection (i)) for
purposes described in section 170(c)(2)(B) (including but not
limited to payments with respect to set-asides which were
treated as qualifying distributions in one or more prior
years), and
(III) the private foundation has distributed (including but
not limited to payments with respect to set-asides which were
treated as qualifying distributions in one or more prior
years) during the four taxable years immediately preceding
its first taxable year beginning after December 31, 1975, or
the fifth taxable year following the year of its creation,
whichever is later, an aggregate amount, in cash or its
equivalent, of not less than the sum of the following: 80
percent of the first preceding taxable year's distributable
amount; 60 percent of the second preceding taxable year's
distributable amount; 40 percent of the third preceding
taxable year's distributable amount; and 20 percent of the
fourth preceding taxable year's distributable amount.
(C) Certain failures to distribute
If, for any taxable year to which clause (ii)(II) of
subparagraph (B) applies, the private foundation fails to
distribute in cash or its equivalent amounts not less than
those required by such clause and -
(i) the failure to distribute such amounts was not willful
and was due to reasonable cause, and
(ii) the foundation distributes an amount in cash or its
equivalent which is not less than the difference between the
amounts required to be distributed under clause (ii)(II) of
subparagraph (B) and the amounts actually distributed in cash
or its equivalent during that taxable year within the
correction period (as defined in section 4963(e)),
such distribution in cash or its equivalent shall be treated
for the purposes of this subparagraph as made during such year.
(D) Reduction in distribution amount
If, during the taxable years in the adjustment period for
which the organization is a private foundation, the foundation
distributes amounts in cash or its equivalent which exceed the
amount required to be distributed under clause (ii)(II) of
subparagraph (B) (including but not limited to payments with
respect to set-asides which were treated as qualifying
distributions in prior years), then for purposes of this
subsection the distribution required under clause (ii)(II) of
subparagraph (B) for the taxable year shall be reduced by an
amount equal to such excess.
(E) Adjustment period
For purposes of subparagraph (D), with respect to any taxable
year of a private foundation, the taxable years in the
adjustment period are the taxable years (not exceeding 5)
beginning after December 31, 1975, and immediately preceding
the taxable year.
In the case of a set-aside which satisfies the requirements of
clause (i) of subparagraph (B), for good cause shown, the period
for paying the amount set aside may be extended by the Secretary.
(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.
(4) Limitation on administrative expenses allocable to making of
contributions, gifts, and grants
(A) In general
The amount of the grant administrative expenses paid during
any taxable year which may be taken into account as qualifying
distributions shall not exceed the excess (if any) of -
(i) .65 percent of the sum of the net assets of the private
foundation for such taxable year and the immediately
preceding 2 taxable years, over
(ii) the aggregate amount of grant administrative expenses
paid during the 2 preceding taxable years which were taken
into account as qualifying distributions.
(B) Grant administrative expenses
For purposes of this paragraph, the term "grant
administrative expenses" means any administrative expenses
which are allocable to the making of qualified grants.
(C) Qualified grants
For purposes of this paragraph, the term "qualified grant"
means any contribution, gift, or grant which is a qualifying
distribution.
(D) Net asset
For purposes of this paragraph, the term "net assets" means,
with respect to any taxable year, the excess determined under
subsection (e)(1) for such taxable year.
(E) Transitional rule
In the case of any preceding taxable year which begins before
January 1, 1985, the amount of the grant administrative
expenses taken into account under subparagraph (A)(ii) shall
not exceed .65 percent of the net assets of the private
foundation for such taxable year.
(F) Termination
This paragraph shall not apply to taxable years beginning
after December 31, 1990.
(h) Treatment of qualifying distributions
(1) In general
Except as provided in paragraph (2), any qualifying
distribution made during a taxable year shall be treated as made
-
(A) first out of the undistributed income of the immediately
preceding taxable year (if the private foundation was subject
to the tax imposed by this section for such preceding taxable
year) to the extent thereof,
(B) second out of the undistributed income for the taxable
year to the extent thereof, and
(C) then out of corpus.
For purposes of this paragraph, distributions shall be taken into
account in the order of time in which made.
(2) Correction of deficient distributions for prior taxable
years, etc.
In the case of any qualifying distribution which (under
paragraph (1)) is not treated as made out of the undistributed
income of the immediately preceding taxable year, the foundation
may elect to treat any portion of such distribution as made out
of the undistributed income of a designated prior taxable year or
out of corpus. The election shall be made by the foundation at
such time and in such manner as the Secretary shall by
regulations prescribe.
(i) Adjustment of distributable amount where distributions during
prior years have exceeded income
(1) In general
If, for the taxable years in the adjustment period for which an
organization is a private foundation -
(A) the aggregate qualifying distributions treated (under
subsection (h)) as made out of the undistributed income for
such taxable year or as made out of corpus (except to the
extent subsection (g)(3) with respect to the recipient private
foundation or section 170(b)(1)(E)(ii) applies) during such
taxable years, exceed
(B) the distributable amounts for such taxable years
(determined without regard to this subsection),
then, for purposes of this section (other than subsection (h)),
the distributable amount for the taxable year shall be reduced by
an amount equal to such excess.
(2) Taxable years in adjustment period
For purposes of paragraph (1), with respect to any taxable year
of a private foundation the taxable years in the adjustment
period are the taxable years (not exceeding 5) beginning after
December 31, 1969, and immediately preceding the taxable year.
(j) Other definitions
For purposes of this section -
(1) Taxable period
The term "taxable period" means, with respect to the
undistributed income for any taxable year, the period beginning
with the first day of the taxable year and ending on the earlier
of -
(A) the date of mailing of a notice of deficiency with
respect to the tax imposed by subsection (a) under section
6212, or
(B) the date on which the tax imposed by subsection (a) is
assessed.
(2) Allowable distribution period
The term "allowable distribution period" means, with respect to
any private foundation, the period beginning with the first day
of the first taxable year following the taxable year in which the
incorrect valuation (described in subsection (a)(2)) occurred and
ending 90 days after the date of mailing of a notice of
deficiency (with respect to the tax imposed by subsection (a))
under section 6212 extended by -
(A) any period in which a deficiency cannot be assessed under
section 6213(a), and
(B) any other period which the Secretary determines is
reasonable and necessary to permit a distribution of
undistributed income under this section.
(3) Operating foundation
For purposes of this section, the term "operating foundation"
means any organization -
(A) which makes qualifying distributions (within the meaning
of paragraph (1) or (2) of subsection (g)) directly for the
active conduct of the activities constituting the purpose or
function for which it is organized and operated equal to
substantially all of the lesser of -
(i) its adjusted net income (as defined in subsection (f)),
or
(ii) its minimum investment return; and
(B)(i) substantially more than half of the assets of which
are devoted directly to such activities or to functionally
related businesses (as defined in paragraph (4)), or to both,
or are stock of a corporation which is controlled by the
foundation and substantially all of the assets of which are so
devoted.
(ii) which normally makes qualifying distributions (within
the meaning of paragraph (1) or (2) of subsection (g)) directly
for the active conduct of the activities constituting the
purpose or function for which it is organized and operated in
an amount not less than two-thirds of its minimum investment
return (as defined in subsection (e)), or
(iii) substantially all of the support (other than gross
investment income as defined in section 509(e)) of which is
normally received from the general public and from 5 or more
exempt organizations which are not described in section
4946(a)(1)(H) with respect to each other or the recipient
foundation; not more than 25 percent of the support (other than
gross investment income) of which is normally received from any
one such exempt organization; and not more than half of the
support of which is normally received from gross investment
income.
Notwithstanding the provisions of subparagraph (A), if the
qualifying distributions (within the meaning of paragraph (1) or
(2) of subsection (g)) of an organization for the taxable year
exceed the minimum investment return for the taxable year, clause
(ii) of subparagraph (A) shall not apply unless substantially all
of such qualifying distributions are made directly for the active
conduct of the activities constituting the purpose or function
for which it is organized and operated.
(4) Functionally related business
The term "functionally related business" means -
(A) a trade or business which is not an unrelated trade or
business (as defined in section 513), or
(B) an activity which is carried on within a larger aggregate
of similar activities or within a larger complex of other
endeavors which is related (aside from the need of the
organization for income or funds or the use it makes of the
profits derived) to the exempt purposes of the organization.
(5) Certain elderly care facilities
For purposes of this section (but no other provisions of this
title), the term "operating foundation" includes any organization
which, on May 26, 1969, and at all times thereafter before the
close of the taxable year, operated and maintained as its
principal functional purpose facilities for the long-term care,
comfort, maintenance, or education of permanently and totally
disabled persons, elderly persons, needy widows, or children but
only if such organization meets the requirements of paragraph
(3)(B)(ii).
-SOURCE-
(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83
Stat. 502; amended Pub. L. 94-455, title XIII, Secs. 1302(a),
1303(a), 1310(a), title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90
Stat. 1713, 1715, 1729, 1834; Pub. L. 95-600, title V, Sec. 522(a),
Nov. 6, 1978, 92 Stat. 2885; Pub. L. 96-596, Sec. 2(a)(1)(C),
(2)(B), (3)(B), (4)(A), Dec. 24, 1980, 94 Stat. 3469-3472; Pub. L.
97-34, title VIII, Sec. 823(a), Aug. 13, 1981, 95 Stat. 351; Pub.
L. 97-448, title I, Sec. 108(b), Jan. 12, 1983, 96 Stat. 2391; Pub.
L. 98-369, div. A, title III, Secs. 304(a), (b), 305(b)(4),
314(a)(1), (2), July 18, 1984, 98 Stat. 782-784, 787; Pub. L.
99-514, title XIII, Sec. 1301(j)(6), Oct. 22, 1986, 100 Stat.
2658.)
-MISC1-
AMENDMENTS
1986 - Subsec. (f)(2)(A). Pub. L. 99-514 substituted "(relating
to State and local bonds)" for "(relating to interest on certain
governmental obligations)".
1984 - Subsec. (a)(2)(B). Pub. L. 98-369, Sec. 314(a)(1),
substituted "subsection (j)(2)" for "subsection (j)(4)".
Subsec. (d)(1). Pub. L. 98-369, Sec. 304(b), substituted "the sum
of the minimum investment return plus the amounts described in
subsection (f)(2)(C), reduced by" for "the minimum investment
return reduced by".
Subsec. (f)(1). Pub. L. 98-369, Sec. 314(a)(2), substituted
"subsection (j)" for "subsection (d)".
Subsec. (g)(1)(A). Pub. L. 98-369, Sec. 304(a)(2), substituted
"including that portion of reasonable and necessary administrative
expenses" for "including administrative expenses".
Subsec. (g)(2)(C)(ii). Pub. L. 98-369, Sec. 305(b)(4),
substituted "section 4963(e)" for "section 4962(e)".
Subsec. (g)(4). Pub. L. 98-369, Sec. 304(a)(1), added par. (4).
1983 - Subsec. (j)(3)(A)(i). Pub. L. 97-448 substituted "or" for
"and" at the end.
1981 - Subsec. (d)(1). Pub. L. 97-34, Sec. 823(a)(1), struck out
"or the adjusted net income (whichever is higher)" after "return".
Subsec. (j)(3). Pub. L. 97-34, Sec. 823(a)(2), (3), inserted in
subpar. (A) "the lesser of" after "substantially all of",
designated existing provisions as cl. (i), added cl. (ii), and
inserted provision respecting applicability of subpar. (A)(ii).
1980 - Subsec. (b). Pub. L. 96-596, Sec. 2(a)(1)(C), substituted
"taxable period" for "correction period".
Subsec. (g)(2)(C)(ii). Pub. L. 96-596, Sec. 2(a)(4)(A),
substituted "the correction period (as defined in section 4962(e))"
for "the initial correction period provided in subsection (j)(2)".
Subsec. (j)(1). Pub. L. 96-596, Sec. 2(a)(2)(B), substituted
provision ending the taxable period on the earlier of the date of
mailing of a notice of deficiency with respect to the tax imposed
by subsec. (a) of this section under section 6212 of this title or
the date on which the tax imposed by subsec. (a) of this section is
assessed for provision ending the taxable period on the date of
mailing the notice of deficiency with respect to a tax imposed by
subsec. (a) of this section under section 6212 of this title.
Subsec. (j)(2). Pub. L. 96-596, Sec. 2(a)(3)(B)(i), (iii),
redesignated par. (4) as (2) and struck out former par. (2), which
defined correction period, with respect to any private foundation
for any taxable year, as the period beginning with the first day of
the taxable year and ending 90 days after the date of mailing a
notice of deficiency with respect to the tax imposed by subsec. (b)
of this section under section 6212 of this title, extended by any
period in which a deficiency cannot be assessed under section
6213(a) of this title and any other period which the Secretary
determines is reasonable and necessary to permit a distribution of
undistributed income.
Subsec. (j)(3)(B)(i). Pub. L. 96-596, Sec. 2(a)(3)(B)(ii),
substituted "paragraph (4)" for "paragraph (5)".
Subsec. (j)(4) to (6). Pub. L. 96-596, Sec. 2(a)(3)(B)(iii),
(iv), redesignated pars. (5) and (6) as (4) and (5), respectively.
1978 - Subsec. (j)(6). Pub. L. 95-600 added par. (6).
1976 - Subsec. (a)(2)(C). Pub. L. 94-455, Sec. 1906(b)(13)(A),
struck out "or his delegate" after "Secretary".
Subsec. (e). Pub. L. 94-455, Sec. 1303(a), among other changes,
substituted provisions establishing a fixed percentage rate to be
used in computing the minimum investment return for any private
foundation for provisions establishing a variable applicable
percentage rate of 7 percent in 1970 and an applicable rate to be
determined by the Secretary after 1970, for use in computing the
minimum investment return for any private foundation and inserted
provisions relating to reduction in value for blockage or similar
factors.
Subsec. (f)(2)(D). Pub. L. 94-455, Sec. 1310(a), added subpar.
(D).
Subsec. (g)(2). Pub. L. 94-455, Sec. 1302(a), among other
changes, inserted reference to all taxable years beginning on or
after Jan. 1, 1975, requirement that the project will not be
completed before the end of the taxable year of the foundation in
which the set-aside is made, and subpars. (C) to (E).
Subsecs. (h)(2), (j)(2)(B). Pub. L. 94-455, Sec. 1906(b)(13)(A),
struck out "or his delegate" after "Secretary".
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to bonds issued after Aug.
15, 1986, except as otherwise provided, see sections 1311 to 1318
of Pub. L. 99-514, set out as an Effective Date; Transitional Rules
note under section 141 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Section 304(c) of Pub. L. 98-369 provided that: "The amendments
made by this section [amending this section] shall apply to taxable
years beginning after December 31, 1984."
Amendment by section 305(b)(4) of Pub. L. 98-369 applicable to
taxable events occurring after Dec. 31, 1984, see section 305(c) of
Pub. L. 98-369, set out as an Effective Date note under section
4962 of this title.
Section 314(a)(4) of Pub. L. 98-369 provided that: "The
amendments made by this subsection [amending this section and
section 6501 of this title] shall take effect on the date of the
enactment of this Act [July 18, 1984].".
EFFECTIVE DATE OF 1983 AMENDMENT
Amendment by Pub. L. 97-448 effective, except as otherwise
provided, as if it had been included in the provision of the
Economic Recovery Tax Act of 1981, Pub. L. 97-34, to which such
amendment relates, see section 109 of Pub. L. 97-448, set out as a
note under section 1 of this title.
EFFECTIVE DATE OF 1981 AMENDMENT
Section 823(b) of Pub. L. 97-34 provided that: "The amendments
made by this section [amending this section] shall apply to taxable
years beginning after December 31, 1981."
EFFECTIVE DATE OF 1980 AMENDMENT
For effective date of amendment by Pub. L. 96-596 with respect to
any first tier tax and to any second tier tax, see section 2(d) of
Pub. L. 96-596, set out as an Effective Date note under section
4961 of this title.
EFFECTIVE DATE OF 1978 AMENDMENT
Section 522(b) of Pub. L. 95-600 provided that: "The amendment
made by subsection (a) [amending this section] shall apply to
taxable years beginning after December 31, 1969."
EFFECTIVE DATE OF 1976 AMENDMENT
Section 1302(c) of Pub. L. 94-455 provided that: "The amendments
made by this section [amending this section and section 6501 of
this title] shall apply to taxable years beginning after December
31, 1974."
Section 1303(b) of Pub. L. 94-455 provided that: "The amendment
made by this section [amending this section] applies to taxable
years beginning after December 31, 1975."
Section 1310(b) of Pub. L. 94-455 provided that: "The amendments
made by this section [amending this section] shall apply to taxable
years ending after the date of the enactment of this Act [Oct. 4,
1976]."
SAVINGS PROVISION
Applicability of section to organizations organized before May
27, 1969, see section 101(l)(3) of Pub. L. 91-172, set out as a
note under section 4940 of this title.
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 150, 170, 508, 2055,
2503, 4940, 4943, 4948, 4963, 6110, 6213, 6501, 7422, 7428 of this
title.
-End-
-CITE-
26 USC Sec. 4943 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle D - Miscellaneous Excise Taxes
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
Subchapter A - Private Foundations
-HEAD-
Sec. 4943. Taxes on excess business holdings
-STATUTE-
(a) Initial tax
(1) Imposition
There is hereby imposed on the excess business holdings of any
private foundation in a business enterprise during any taxable
year which ends during the taxable period a tax equal to 5
percent of the value of such holdings.
(2) Special rules
The tax imposed by paragraph (1) -
(A) shall be imposed on the last day of the taxable year, but
(B) with respect to the private foundation's holdings in any
business enterprise, shall be determined as of that day during
the taxable year when the foundation's excess holdings in such
enterprise were the greatest.
(b) Additional tax
In any case in which an initial tax is imposed under subsection
(a) with respect to the holdings of a private foundation in any
business enterprise, if, at the close of the taxable period with
respect to such holdings, the foundation still has excess business
holdings in such enterprise, there is hereby imposed a tax equal to
200 percent of such excess business holdings.
(c) Excess business holdings
For purposes of this section -
(1) In general
The term "excess business holdings" means, with respect to the
holdings of any private foundation in any business enterprise,
the amount of stock or other interest in the enterprise which the
foundation would have to dispose of to a person other than a
disqualified person in order for the remaining holdings of the
foundation in such enterprise to be permitted holdings.
(2) Permitted holdings in a corporation
(A) In general
The permitted holdings of any private foundation in an
incorporated business enterprise are -
(i) 20 percent of the voting stock, reduced by
(ii) the percentage of the voting stock owned by all
disqualified persons.
In any case in which all disqualified persons together do not
own more than 20 percent of the voting stock of an incorporated
business enterprise, nonvoting stock held by the private
foundation shall also be treated as permitted holdings.
(B) 35 percent rule where third person has effective control of
enterprise
If -
(i) the private foundation and all disqualified persons
together do not own more than 35 percent of the voting stock
of an incorporated business enterprise, and
(ii) it is established to the satisfaction of the Secretary
that effective control of the corporation is in one or more
persons who are not disqualified persons with respect to the
foundation,
then subparagraph (A) shall be applied by substituting 35
percent for 20 percent.
(C) 2 percent de minimis rule
A private foundation shall not be treated as having excess
business holdings in any corporation in which it (together with
all other private foundations which are described in section
4946(a)(1)(H)) owns not more than 2 percent of the voting stock
and not more than 2 percent in value of all outstanding shares
of all classes of stock.
(3) Permitted holdings in partnerships, etc.
The permitted holdings of a private foundation in any business
enterprise which is not incorporated shall be determined under
regulations prescribed by the Secretary. Such regulations shall
be consistent in principle with paragraphs (2) and (4), except
that -
(A) in the case of a partnership or joint venture, "profits
interest" shall be substituted for "voting stock", and "capital
interest" shall be substituted for "nonvoting stock",
(B) in the case of a proprietorship, there shall be no
permitted holdings, and
(C) in any other case, "beneficial interest" shall be
substituted for "voting stock".
(4) Present holdings
(A)(i) In applying this section with respect to the holdings of
any private foundation in a business enterprise, if such
foundation and all disqualified persons together have holdings in
such enterprise in excess of 20 percent of the voting stock on
May 26, 1969, the percentage of such holdings shall be
substituted for "20 percent," and for "35 percent" (if the
percentage of such holdings is greater than 35 percent), wherever
it appears in paragraph (2), but in no event shall the percentage
so substituted be more than 50 percent.
(ii) If the percentage of the holdings of any private
foundation and all disqualified persons together in a business
enterprise (or if the percentage of the holdings of the private
foundation in such enterprise) decreases for any reason, clause
(i) and subparagraph (D) shall, except as provided in the next
sentence, be applied for all periods after such decrease by
substituting such decreased percentage for the percentage held on
May 26, 1969, but in no event shall the percentage substituted be
less than 20 percent. For purposes of the preceding sentence, any
decrease in percentage holdings attributable to issuances of
stock (or to issuances of stock coupled with redemptions of
stock) shall be disregarded so long as -
(I) the net percentage decrease disregarded under this
sentence does not exceed 2 percent, and
(II) the number of shares held by the foundation is not
affected by any such issuance or redemption.
(iii) The percentage substituted under clause (i), and any
percentage substituted under subparagraph (D), shall be applied
both with respect to the voting stock and, separately, with
respect to the value of all outstanding shares of all classes of
stock.
(iv) In the case of any merger, recapitalization, or other
reorganization involving one or more business enterprises, the
application of clauses (i), (ii), and (iii) shall be determined
under regulations prescribed by the Secretary.
(B) Any interest in a business enterprise which a private
foundation holds on May 26, 1969, if the private foundation on
such date has excess business holdings, shall (while held by the
foundation) be treated as held by a disqualified person (rather
than by the private foundation) -
(i) during the 20-year period beginning on such date, if the
private foundation and all disqualified persons have more than
a 95 percent voting stock interest on such date,
(ii) except as provided in clause (i), during the 15-year
period beginning on such date, if the foundation and all
disqualified persons have more than a 75 percent voting stock
interest (or more than a 75 percent profits or beneficial
interest in the case of any unincorporated enterprise) on such
date or more than a 75 percent interest in the value of all
outstanding shares of all classes of stock (or more than a 75
percent capital interest in the case of a partnership or joint
venture) on such date, or
(iii) during the 10-year period beginning on such date, in
any other case.
(C) The 20-year, 15-year, and 10-year periods described in
subparagraph (B) for the disposition of excess business holdings
shall be suspended during the pendency of any judicial proceeding
by the private foundation which is necessary to reform, or to
excuse such foundation from compliance with, its governing
instrument or any other instrument (as in effect on May 26, 1969)
in order to allow disposition of such holdings.
(D)(i) If, at any time during the second phase, all
disqualified persons together have holdings in a business
enterprise in excess of 2 percent of the voting stock of such
enterprise, then subparagraph (A)(i) shall be applied by
substituting for "50 percent" the following: "50 percent, of
which not more than 25 percent shall be voting stock held by the
private foundation".
(ii) If, immediately before the close of the second phase,
clause (i) of this subparagraph did not apply with respect to a
business enterprise, then for all periods after the close of the
second phase subparagraph (A)(i) shall be applied by substituting
for "50 percent" the following: "35 percent, or if at any time
after the close of the second phase all disqualified persons
together have had holdings in such enterprise which exceed 2
percent of the voting stock, 35 percent, of which not more than
25 percent shall be voting stock held by the private foundation".
(iii) For purposes of this subparagraph, the term "second
phase" means the 15-year period immediately following the
20-year, 15-year, or 10-year period described in subparagraph
(B), whichever applies, as modified by subparagraph (C).
(E) Clause (ii) of subparagraph (B) shall not apply with
respect to any business enterprise if before January 1, 1971, one
or more individuals who are substantial contributors (or members
of the family (within the meaning of section 4946(d)) of one or
more substantial contributors) to the private foundation and who
on May 26, 1969, held more than 15 percent of the voting stock of
the enterprise elect, in such manner as the Secretary may by
regulations prescribe, not to have such clause (ii) apply with
respect to such enterprise.
(5) Holdings acquired by trust or will
Paragraph (4) (other than subparagraph (B)(i)) shall apply to
any interest in a business enterprise which a private foundation
acquires under the terms of a trust which was irrevocable on May
26, 1969, or under the terms of a will executed on or before such
date, which are in effect on such date and at all times
thereafter, as if such interest were held on May 26, 1969, except
that the 15-year and 10-year periods prescribed in clauses (ii)
and (iii) of paragraph (4)(B) shall commence with respect to such
interest on the date of distribution under the trust or will in
lieu of May 26, 1969.
(6) 5-year period to dispose of gifts, bequests, etc.
Except as provided in paragraph (5), if, after May 26, 1969,
there is a change in the holdings in a business enterprise (other
than by purchase by the private foundation or by a disqualified
person) which causes the private foundation to have -
(A) excess business holdings in such enterprise, the interest
of the foundation in such enterprise (immediately after such
change) shall (while held by the foundation) be treated as held
by a disqualified person (rather than by the foundation) during
the 5-year period beginning on the date of such change in
holdings; or
(B) an increase in excess business holdings in such
enterprise (determined without regard to subparagraph (A)),
subparagraph (A) shall apply, except that the excess holdings
immediately preceding the increase therein shall not be
treated, solely because of such increase, as held by a
disqualified person (rather than by the foundation).
In any case where an acquisition by a disqualified person would
result in a substitution under clause (i) or (ii) of subparagraph
(D) of paragraph (4), the preceding sentence shall be applied
with respect to such acquisition as if it did not contain the
phrase "or by a disqualified person" in the material preceding
subparagraph (A).
(7) 5-year extension of period to dispose of certain large gifts
and bequests
The Secretary may extend for an additional 5-year period the
period under paragraph (6) for disposing of excess business
holdings in the case of an unusually large gift or bequest of
diverse business holdings or holdings with complex corporate
structures if -
(A) the foundation establishes that -
(i) diligent efforts to dispose of such holdings have been
made within the initial 5-year period, and
(ii) disposition within the initial 5-year period has not
been possible (except at a price substantially below fair
market value) by reason of such size and complexity or
diversity of such holdings,
(B) before the close of the initial 5-year period -
(i) the private foundation submits to the Secretary a plan
for disposing of all of the excess business holdings involved
in the extension, and
(ii) the private foundation submits the plan described in
clause (i) to the Attorney General (or other appropriate
State official) having administrative or supervisory
authority or responsibility with respect to the foundation's
disposition of the excess business holdings involved and
submits to the Secretary any response received by the private
foundation from the Attorney General (or other appropriate
State official) to such plan during such 5-year period, and
(C) the Secretary determines that such plan can reasonably be
expected to be carried out before the close of the extension
period.
(d) Definitions; special rules
For purposes of this section -
(1) Business holdings
In computing the holdings of a private foundation, or a
disqualified person (as defined in section 4946) with respect
thereto, in any business enterprise, any stock or other interest
owned, directly or indirectly, by or for a corporation,
partnership, estate, or trust shall be considered as being owned
proportionately by or for its shareholders, partners, or
beneficiaries. The preceding sentence shall not apply with
respect to an income or remainder interest of a private
foundation in a trust described in section 4947(a)(2), but only
if, in the case of property transferred in trust after May 26,
1969, such foundation holds only an income interest or only a
remainder interest in such trust.
(2) Taxable period
The term "taxable period" means, with respect to any excess
business holdings of a private foundation in a business
enterprise, the period beginning on the first day on which there
are excess holdings and ending on the earlier of -
(A) the date of mailing of a notice of deficiency with
respect to the tax imposed by subsection (a) under section 6212
in respect of such holdings, or
(B) the date on which the tax imposed by subsection (a) in
respect of such holdings is assessed.
(3) Business enterprise
The term "business enterprise" does not include -
(A) a functionally related business (as defined in section
4942(j)(4)), or
(B) a trade or business at least 95 percent of the gross
income of which is derived from passive sources.
For purposes of subparagraph (B), gross income from passive
sources includes the items excluded by section 512(b)(1), (2),
(3), and (5), and income from the sale of goods (including
charges or costs passed on at cost to purchasers of such goods or
income received in settlement of a dispute concerning or in lieu
of the exercise of the right to sell such goods) if the seller
does not manufacture, produce, physically receive or deliver,
negotiate sales of, or maintain inventories in such goods.
(4) Disqualified person
The term "disqualified person" (as defined in section 4946(a))
does not include a plan described in section 4975(e)(7) with
respect to the holdings of a private foundation described in
paragraphs (4) and (5) of subsection (c).
-SOURCE-
(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83
Stat. 507; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A),
Oct. 4, 1976, 90 Stat. 1834; Pub. L. 96-596, Sec. 2(a)(1)(D),
(2)(C), (3)(C), (4)(B), Dec. 24, 1980, 94 Stat. 3469-3472; Pub. L.
98-369, div. A, title III, Secs. 307(a), 308(a), 309(a), 310(a),
314(c)(1), July 18, 1984, 98 Stat. 784, 785, 787.)
-MISC1-
AMENDMENTS
1984 - Subsec. (c)(4)(A)(ii). Pub. L. 98-369, Sec. 308(a),
substituted "For purposes of the preceding sentence, any decrease
in percentage holdings attributable to issuances of stock (or to
issuances of stock coupled with redemptions of stock) shall be
disregarded so long as (I) the net percentage decrease disregarded
under this sentence does not exceed 2 percent, and (II) the number
of shares held by the foundation is not affected by any such
issuance or redemption" for "For purposes of this clause, any
decrease in percentage holdings attributable to issuances of stock
(or to issuances of stock coupled with redemptions of stock) shall
be determined only as of the close of each taxable year of the
private foundation unless the aggregate of the percentage decreases
attributable to the issuances of stock (or such issuances and
redemptions) during such taxable year equals or exceeds 1 percent".
Subsec. (c)(4)(B)(i). Pub. L. 98-369, Sec. 309(a), substituted
"the private foundation and all disqualified persons have" for "the
private foundation has".
Subsec. (c)(6). Pub. L. 98-369, Sec. 310(a), inserted following
subpar. (B) "In any case where an acquisition by a disqualified
person would result in a substitution under clause (i) or (ii) of
subparagraph (D) of paragraph (4), the preceding sentence shall be
applied with respect to such acquisition as if it did not contain
the phrase 'or by a disqualified person' in the material preceding
subparagraph (A)."
Subsec. (c)(7). Pub. L. 98-369, Sec. 307(a), added par. (7).
Subsec. (d)(4). Pub. L. 98-369, Sec. 314(c)(1), added par. (4).
1980 - Subsec. (b). Pub. L. 96-596, Sec. 2(a)(1)(D), substituted
"taxable period" for "correction period".
Subsec. (d)(2). Pub. L. 96-596, Sec. 2(a)(2)(C), substituted
provision ending the taxable period on the earlier of the date of
mailing of a notice of deficiency with respect to the tax imposed
by subsec. (a) of this section under section 6212 of this title in
respect to such holdings or the date on which the tax imposed by
subsec. (a) of this section in respect to such holdings is assessed
for provision ending the taxable period on the date of mailing the
notice of deficiency with respect to a tax imposed by subsec. (a)
of this section under section 6212 of this title in respect to such
holdings.
Subsec. (d)(3), (4). Pub. L. 96-596, Sec. 2(a)(3)(C), (4)(B),
redesignated par. (4) as (3), and in subpar. (A) of par. (3) as so
redesignated, substituted "section 4942(j)(4)" for "section
4942(j)(5)", and struck out par. (3), which defined correction
period, with respect to excess business holdings of a private
foundation in a business enterprise, as the period ending 90 days
after the date of mailing of a notice of deficiency with respect to
the tax imposed by subsec. (b) of this section under section 6212
of this title, extended by any period in which a deficiency cannot
be assessed under section 6213(a) of this title and any other
period which the Secretary determines is reasonable and necessary
to permit orderly disposition of such excess business holdings.
1976 - Subsecs. (c), (d). Pub. L. 94-455 struck out "or his
delegate" after "Secretary" wherever appearing.
EFFECTIVE DATE OF 1984 AMENDMENT
Section 307(b) of Pub. L. 98-369, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
"(1) In general. - The amendment made by subsection (a) [amending
this section] shall apply to business holdings with respect to
which the 5-year period described in section 4943(c)(6) of the
Internal Revenue Code of 1986 [formerly I.R.C. 1954] ends on or
after November 1, 1983.
"(2) Transitional rule. - Any plan submitted to the Secretary of
the Treasury or his delegate on or before the 60th day after the
date of the enactment of this Act [July 18, 1984] shall be treated
as submitted before the close of the initial 5-year period referred
to in section 4943(c)(7)(B) of the Internal Revenue Code of 1986
(as added by subsection (a))."
Section 308(b) of Pub. L. 98-369 provided that: "The amendment
made by subsection (a) [amending this section] shall apply to
increases and decreases occurring after the date of the enactment
of this Act [July 18, 1984]."
Section 309(b) of Pub. L. 98-369 provided that: "The amendment
made by subsection (a) [amending this section] shall take effect as
if included in the amendment made by section 101(b) of the Tax
Reform Act of 1969 [section 101(b) of Pub. L. 91-172 which enacted
this section]."
Section 310(b) of Pub. L. 98-369 provided that: "The amendment
made by subsection (a) [amending this section] shall apply to
acquisitions after the date of the enactment of this Act [July 18,
1984]."
Section 314(c)(2) of Pub. L. 98-369 provided that: "The amendment
made by paragraph (1) [amending this section] shall apply with
respect to taxable years beginning after the date of the enactment
of this Act [July 18, 1984]."
EFFECTIVE DATE OF 1980 AMENDMENT
For effective date of amendment by Pub. L. 96-596 with respect to
any first tier tax and to any second tier tax, see section 2(d) of
Pub. L. 96-596, set out as an Effective Date note under section
4961 of this title.
SAVINGS PROVISION
Applicability of section to private foundations, see section
101(l)(4) of Pub. L. 91-172, set out as a note under section 4940
of this title.
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 150, 508, 537, 4946,
4947, 4963, 6213, 7422 of this title.
-End-
-CITE-
26 USC Sec. 4944 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle D - Miscellaneous Excise Taxes
CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
Subchapter A - Private Foundations
-HEAD-
Sec. 4944. Taxes on investments which jeopardize charitable purpose
-STATUTE-
(a) Initial taxes
(1) On the private foundation
If a private foundation invests any amount in such a manner as
to jeopardize the carrying out of any of its exempt purposes,
there is hereby imposed on the making of such investment a tax
equal to 5 percent of the amount so invested for each year (or
part thereof) in the taxable period. The tax imposed by this
paragraph shall be paid by the private foundation.
(2) On the management
In any case in which a tax is imposed by paragraph (1), there
is hereby imposed on the participation of any foundation manager
in the making of the investment, knowing that it is jeopardizing
the carrying out of any of the foundation's exempt purposes, a
tax equal to 5 percent of the amount so invested for each year
(or part thereof) in the taxable period, unless such
participation is not willful and is due to reasonable cause. The
tax imposed by this paragraph shall be paid by any foundation
manager who participated in the making of the investment.
(b) Additional taxes
(1) On the foundation
In any case in which an initial tax is imposed by subsection
(a)(1) on the making of an investment and such investment is not
removed from jeopardy within the taxable period, there is hereby
imposed a tax equal to 25 percent of the amount of the
investment. The tax imposed by this paragraph shall be paid by
the private foundation.
(2) On the management
In any case in which an additional tax is imposed by paragraph
(1), if a foundation manager refused to agree to part or all of
the removal from jeopardy, there is hereby imposed a tax equal to
5 percent of the amount of the investment. The tax imposed by
this paragraph shall be paid by any foundation manager who
refused to agree to part or all of the removal from jeopardy.
(c) Exception for program-related investments
For purposes of this section, investments, the primary purpose of
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