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-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