What You Should Know About Your Private Foundation.htm

What You Should Know About Your Private Foundation

DISCLAIMER: The following is a brief, perhaps over-simplistic, overview of some of the more frequently asked questions concerning outright contributions to charities. This memorandum should not be relied upon in any given situation without first consulting your tax advisor. The law in this area changes frequently, and I have not necessarily undertaken to keep this memo current, since that would be a full-time job.

There Are Two Primary Types Of Charitable Organizations?	Charitable organizations can be roughly divided into two main categories: (a) public charities, and (b) private foundations. Each type of charity can be further divided. The categories into which a charity falls largely depends upon its operations and sources of support. Although there are many kinds of nonprofit organizations, this memo is concerned with organizations defined in IRC^[1] §501(c)(3) and §170(b)(1)(B).
What is a 501(c)(3) Organization?	A 501(c)(3) organization is an charitable organization exempt from income tax that is described in the IRC as follows:
	Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.^[2]
What Is A Private Foundation?	A Private Foundation is defined in IRC §509(a) by exclusion. The definition is broad, complicated and convoluted. Churches, schools, governmental units, hospitals and certain broadly supported public charities are excluded from the definition, but, with a few exceptions (most notably for churches), a charity — no matter what its true nature — will be treated as a Private Foundation unless it notifies the IRS that it is not.
How is the IRS Notified That An Organization is Not a Private Foundation?	Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1024, Application for Recognition of Exemption Under Section 501(a) are used to notify the IRS of an organization’s intent to claim exempt status, whether as a private foundation or as a public charity.
What Is A Private Foundation, In Layman’s Terms?	Although it is dangerous to be imprecise here, I will attempt a brief explanation. As indicated above, virtually all charities (other than churches) are private foundations unless the IRS has been notified to the contrary. Further, notification notwithstanding, a charity will generally be a private foundation unless it is a public charity; i.e., one that is broadly supported by contributions from the general public, rather than from one or two families only.
What Exactly Does the Statute Say?	If you are a lawyer or a CPA, read on. Otherwise, you may wish to skip a reading of the statute itself, unless you want a flavor for what those of us who are lawyers are up against in this area. Specifically, the statute (509(a)) defines a Private Foundation, in the manner quoted by the statute immediately below, as any §501(c)(3) organization other than—
	(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)^[3] [§170(b)(1)(A)(i)-(vi), quoted in full in the footnote, describes churches, schools, hospitals, governmental entities, community chests, and certain organizations that normally receive a substantial part of its support from the general public.];
	(2) an organization which -- (A) normally receives more than one-third of its support in each taxable year from any combination of --
	(i) gifts, grants, contributions, or membership fees, and (ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent [1%] of the organization's support in such taxable year,
	from persons other than [I] disqualified persons (as defined in section 4946) with respect to the organization, [II] from governmental units described in section 170(c)(1), or [III] from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and
	(B) normally receives not more than one-third of its support in each taxable year from the sum of --
	(i) gross investment income (as defined in subsection (e)) and (ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511;
	(3) an organization which -- (A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2),
	(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and (C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and
	(4) an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).
What is a Public Charity?	The term “public charity” is used here to denote a nonprivate foundation, i.e., any 501(c)(3) organization that is not a Private Foundation.
What are the Major Categories of Public Charities?	There are several broad categories, described in particular above, of organizations that are nonprivate Foundations (public charities): • Organizations described in IRC §170(b)(1)(A)(i)-(v). I.e., churches, schools, hospitals, governmental entities and community chests. • Publicly supported organizations described in IRC §170(b)(1)(A)(vi) (i.e., §509(a)(1)) or §509(a)(2), or both.
Are There Any Other Organizations that Are Treated as if they Were Private Foundations?	Yes. Certain charitable trusts that are not exempt under §501(c)(3), but that have no noncharitable beneficiaries and for which a charitable deduction was allowed, are treated as Private Foundations.^[4] Also certain split-interest trusts having both charitable and noncharitable beneficiaries are treated as if they were Private Foundations for many purposes.^[5]
What are the Principal Disadvantages of Being Classified as a Private Foundation?	• Private foundations (other than “exempt operating foundations”) are subject to a 2% (reduced to 1% under certain circumstances) tax on net investment income.^[6] (As income taxes go, 2% if pretty minimal. Nevertheless, in this case it includes capital gains, and it can add up.)
	• Private foundations are subject to a number of complicated rules that prohibit and tax various forms of self-dealing.^[7] Acts of self-dealing include, loans, payment of excessive compensation, furnishing of goods, services, or facilities, direct or indirect sale or exchanges between the private foundation and a “disqualified person.” The term disqualified person includes a substantial contributor to the foundation, a foundation manager, certain family members, and entities in which they have a substantial interest.
	• A private nonoperating foundations is required to distribute an amount at least equal to 5% of the value of the foundation’s assets not used directly in carrying out its exempt function, less acquisition indebtedness under 514(c)(1) (its minimum investment return).^[8]
	• If the 5% minimum distribution requirement is not met, a private nonoperating foundation is subject to a 15% excise tax to the extent of the amount required to have been distributed.^[9]
	• Private foundations are subject to rules restricting “excess business holdings.”^[10] Excess business holdings in a corporation or partnership are defined as any excess over 20% (or in some cases 35%) of voting interest reduced by the percentile voting interest held by disqualified persons, and subject to a de minimis rule permitting 2% holdings in any event. • Private foundations are subject to rules prohibiting certain “jeopardy” or high risk investments that jeopardize the charitable purpose of the organization, e.g., puts, calls and straddles.^[11]
	• Private foundations are subject to certain limitations on the expenditure of foundation funds, such as payments to persons or entities other than qualified public charities.^[12] A public charity can make grants to a private foundation, but a private foundation cannot make a grant to another private foundation unless it exercises “expenditure authority,” which can be very burdensome. • Private foundations are subject to a tax when the Private Foundation status terminates.^[13]
	• The deductions for contributions to nonoperating Private Foundations are limited to 30% of the taxpayer’s contribution base, instead of 50%.^[14] • The reporting requirements for Private Foundations are more onerous than in the case of a public charity.^[15] • Private foundations are subject to a number of “governing instrument” requirements, not applicable to public charities.^[16] Basically, the governing instruments (articles and bylaws) of a Private Foundation must prohibit the organization from engaging in the types of activities, described above, that would generate an excise tax.
	• Private foundations that make grants to other Private Foundations not controlled by the granting foundation are not allowed a qualifying distribution deduction in computing the foundation's undistributed income unless the grant is redistributed by the recipient of the grant.^[17]. • Grants from a Private Foundation to another Private Foundation are required to exercise of “expenditure responsibility” in order to avoid the tax on taxable expenditures.^[18]
Are There any Advantages to Being Classified as a Private Operating Foundation?	Yes. • Private operating foundations are exempt from the minimum distribution requirements.^[19] • The deductions for contributions to operating Private Foundations are deductible up to 50% of the taxpayer’s contribution base, as in the case of a public charity.^[20]
	• “Exempt” private operating foundations are not liable for the tax on net investment income.^[21]
Is a 501(c)(3) Organization Presumed to be a Private Foundation?	In general, yes, unless it notifies the IRS that it is not a Private Foundation. There is an exception for churches and certain public charities.^[22]
Once an Organization Becomes a Private Foundation, How Long Must it Remain a Private Foundation?	A Private Foundation remains a Private Foundation until its status as a Private Foundation is terminated under IRC §507.^[23]
Are the Organizations that Qualify For the Income, Estate and Gift Tax Deductions All the Same?	Unfortunately, there are a very few §170(c) organizations (charities for income tax purposes) that do not qualify for the §2055(a) estate tax deduction or the §2522(a) gift tax deduction. The example most frequently cited is that of certain nonprofit cemeteries.^[24] On the other hand, some organizations qualify for the estate tax deduction but not the income tax deduction; e.g., foreign charities qualify under §2055(a) but not §170(c).
What is Undistributed Income For Purposes of Computing the Amount Required to Be Distributed By a Private Foundation?	A nonoperating private foundation must make qualifying distributions each year equal to its “undistributed income” (a term of art) or be subject to a 15% excise tax on the undistributed amount.^[25] If not corrected, the 15% tax becomes 100%.^[26] Undistributed income for this purpose means the amount by which the “distributable amount” for such taxable year, exceeds the “qualifying distributions.”^[27] The distributable amount generally means the 5% minimum investment return plus certain adjustments.^[28].
What is a Qualifying Distribution?	In order to avoid the excise tax on undistributed income, a private foundation must make “qualifying distributions” equal to its distributable amount (i.e., 5% of the value of its assets not used to carry out its exempt function). Qualifying distributions are defined by IRC §4942(g) and generally mean distributions to other public charities and operating private foundations, provided the distributee is not “controlled (directly or indirectly) by the [donor] foundation or one or more disqualified persons.” Direct expenditures for charitable purposes also qualify, as do accounting and legal fees and other administration expenses. A qualifying distribution also includes “any amount paid to acquire an asset used (or held for use) directly in carrying out one or more [of the private foundation’s charitable] purposes.”^[29]
When Must a Qualifying Distribution Be Made In Order to Avoid the Tax?	The statute itself tells us that the tax is not due until the end of the year following the year in which the “distributable amount” was computed. The tax is 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.”^[30]
How Are the Foundation’s Assets Valued For Purposes of Determining the Minimim Investment Return?	Valuation is discussed in Treas. Reg. §53.4942-2(c) which defines the “minimum investment return.” (c) Minimum investment return. (1) In general. For purposes of paragraph (b) of this section, the “minimum investment return” for any private foundation for any taxable year is the amount determined by multiplying -- (i) The excess of the aggregate fair market value of all assets of the foundation, other than those described in subparagraph (2) or (3) of this paragraph, over the amount of the acquisition indebtedness with respect to such assets (determined under section 514(c)(1), but without regard to the taxable year in which the indebtedness was incurred), by (ii) The applicable percentage (as defined in subparagraph (5) of this paragraph) for such year.
	For purposes of subdivision (i) of this subparagraph, the aggregate fair market value of all assets of the foundation shall include the average of the fair market values on a monthly basis of securities for which market quotations are readily available (within the meaning of subparagraph (4)(i)(a) of this paragraph), the average of the foundation's cash balances on a monthly basis (less the cash balances excluded from the computation of the minimum investment return by operation of subparagraph (3)(iv) of this paragraph), and the fair market value of all other assets (except those assets described in subparagraph (2) or (3) of this paragraph) for the period of time during the year for which such assets are held by the foundation. Any determination of the fair market value of an asset required pursuant to the provisions of this subparagraph shall be made in accordance with the rules of subparagraph (4) of this paragraph. [Emphasis added.]
	The regulations continue in this vein for many pages. Although the valuation regulations are complex, an accountant will be able to help figure these values. In the case of publicly traded securities, though the procedures are very detailed, the computation is mechanical and straight forward.
Is There Any Relief Afforded If An Under-distribution is the Result of a Good Faith Reasonable Valuation Error?	The statute offers protection in the case of good faith mistakes in valuation: (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.^[31] [Emphasis added.]
	The (j)(2) allowable distribution period is— (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.^[32]
	Although the statute gives the foundation up to a year after the year in which the distributable amount is to be determined, it is best to make the distributions as early as possible, in order to allow time to correct any computational errors. Although there is an exception, described above, in the case of a good faith valuation error, this is the only exception. A computational error made for any other reason would not be excepted.
If a Private Foundation Makes Qualifying Distributions in Excess of the Distributable Amount, May the Excess Be Carried Over and Credited in Future Years.	If a private nonoperating foundation makes qualifying distributions in excess of that required to avoid the penalty tax under §4942 in a given year, the excess may be used to reduce the distributable amount for the next 5 succeeding years.^[33]
What is Net Investment Income For Purposes of Computing the 2% Tax?	IRC §4940 imposes a 2% tax on the “net investment income” of private foundations, other than “exempt operating private foundations.” For this purpose, the term net investment income means the amount by which the sum of gross investment income and capital gain net income exceeds “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.”^[34]
How Often Must the 2% Tax on Net Investment Income be Paid?	IRC §6655 requires that the 2% excise tax on the “net investment income” be paid quarterly.
Under What Circumstances Will the 2% Tax on Net Investment Income Be Reduced to 1%.	Under IRC §4940(e), the tax on net investment income on private foundations which meet certain distribution requirements is reduced from 2% to 1%.
Who is a Disqualified Person?	The definition of a disqualified person with respect to a Private Foundation is defined in IRC §4946(a)(1). The full statutory definition is as follows. Note that it includes relatives of the donor. Sec. 4946(a)(1) Definitions and special rules. (1) In general. For purposes of this subchapter, the term “disqualified person” means, with respect to a Private Foundation, a person who is --
	(A) a substantial contributor to the foundation, (B) a foundation manager (within the meaning of subsection (b)(1)), (C) an owner of more than 20 percent of -- (i) the total combined voting power of a corporation, (ii) the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation,
	(D) a member of the family (as defined in subsection (d)) of any individual described in subparagraph (A), (B), or (C), (E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the total combined voting power,
	(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the profits interest, (G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent of the beneficial interest,
	(H) only for purposes of section 4943, a Private Foundation -- (i) which is effectively controlled (directly or indirectly) by the same person or persons who control the Private Foundation in question, or (ii) substantially all of the contributions to which were made (directly or indirectly) by the same person or persons described in subparagraph (A), (B), or (C), or members of their families (within the meaning of subsection (d)), who made (directly or indirectly) substantially all of the contributions to the Private Foundation in question, and (I) only for purposes of section 4941, a government official (as defined in subsection (c)).
Who is a Substantial Contributor?	IRC §507(d)(2) defines a “substantial contributor” as follows: [T]he term “substantial contributor” means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term “substantial contributor” also means the creator of the trust.
	Since 2% of $250,000 is $5000, the 2% alternative only applies if contributions are greater than $250,000. For example, if the total contributions to a private foundation were $1 million in any given year, anyone contributing $20,000 or less would not be a substantial contributor (an insubstantial contributor?).
Who is a Foundation Manager?	IRC §4946(b) defines a foundation manager as follows: (b) Foundation manager. For purposes of this subchapter, the term “foundation manager” means, with respect to any Private Foundation -- (1) an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation), and (2) with respect to any act (or failure to act), the employees of the foundation having authority or responsibility with respect to such act (or failure to act).
What is a Taxable Expenditure?	Private Foundations are prohibited from making “taxable expenditures.” A taxable expenditure is defined by IRC §4945(d) as follows: (d) Taxable expenditure. For purposes of this section, the term “taxable expenditure” means any amount paid or incurred by a private foundation -- (1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning of subsection (e),
	(2) except as provided in subsection (f), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive, (3) as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of subsection (g),
	(4) as a grant to an organization unless -- (A) such organization is described in paragraph (1), (2), or (3) of section 509(a) or is an exempt operating foundation (as defined in section 4940(d)(2)), or (B) the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or (5) for any purpose other than one specified in section 170(c)(2)(B).
	The restrictions imposed by §4945(d)(4) generally prohibit a private foundation from making a grant to another private foundation unless the donor is an “operating private foundation” or unless the grantor private foundation exercises “expenditure responsibility” to see that the grant is spent solely for the purposes for which made.
What is the Penalty For Making a Taxable Expenditure?	IRC §4945(a)&(b) impose taxes both on the foundation and its managers for making a taxable expenditure. The tax upon the foundation is 10% of the amount involved, and the tax upon the foundation managers is 2.5%. Additional taxes of up to 100% of the amount involved may be levied if the expenditure is not corrected.
	(a) Initial taxes. (1) On the foundation. There is hereby imposed on each taxable expenditure (as defined in subsection (d)) a tax equal to 10 percent of the amount thereof. The tax imposed by this paragraph shall be paid by the private foundation. (2) On the management. There is hereby imposed on the agreement of any foundation manager to the making of an expenditure, knowing that it is a taxable expenditure, a tax equal to 2 1/2 percent of the amount thereof, unless such agreement is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who agreed to the making of the expenditure.
	(b) Additional taxes. (1) On the foundation. In any case in which an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such expenditure is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount of the expenditure. 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 correction, there is hereby imposed a tax equal to 50 percent of the amount of the taxable expenditure. 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 subsection (a)(2) or (b)(2) with respect to the making of a taxable expenditure, all such persons shall be jointly and severally liable under such paragraph with respect to such expenditure. (2) Limit for management. With respect to any one taxable expenditure, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000.^[35]
Are There Any Taxes Other Than Those Imposed By §4945 For Flagrant Violations of the Taxable Expenditure Rules?	IRC §6684 imposes an additional penalty equal to the taxes imposed under any section of Chapter 42 “by reason of any act or failure to act which is not due to reasonable cause and either— “(1) such person has theretofore been liable for tax under such chapter, or “(2) such act or failure to ace is both willful and flagrant.”^[36]
To Whom May a Private Foundation Make a Gift?	As indicated above, a private foundation is restricted in its ability to make grants. First of all, the foundation can only make a gift for a charitable purpose. Specifically, a private foundation is prohibited from making any expenditure for any purpose other than one specified in IRC §170(c)(2)(B)^[37]; i.e., a private foundation may only make gifts to organizations that are “organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.” Public charities face similar restrictions. However, in addition, and unlike a public charity, a private foundation may only make donations to public charities^[38] *and to private operating foundations, unless* it exercises “expenditure responsibility” after the gift is made.** Re-phrased in the positive: if the private foundation is willing to exercise expenditure responsibility, it may make a grant to an organization that is “organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes . . . . ” even though that organization is not a public charity described in IRC §509(a)(1), (2) or (3).
What is Expenditure Responsibility?	A distribution by a private nonoperating foundation to another private foundation is a prohibited taxable expenditure unless the distributing foundation exercises “expenditure responsibility.” For this purpose expenditure responsibility is defined in IRC §4945(h) as meaning “that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures -- (1) to see that the grant is spent solely for the purpose for which made, (2) to obtain full and complete reports from the grantee on how the funds are spent, and (3) to make full and detailed reports with respect to such expenditures to the Secretary.”^[39]
Is the Granting of a Scholarship or Award a Taxable Expenditure?	Yes, a granting of a scholarship or award by a private foundation is a taxable expenditure, unless the IRC §4945(g) exception applies. IRC §4945(g) provides the following: (g) Individual grants. Subsection (d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary, if it is demonstrated to the satisfaction of the Secretary that --
	(1) the grant constitutes a scholarship or fellowship grant 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 is to be used for study at an educational organization described in section 170(b)(1)(A)(ii), (2) the grant constitutes a prize or award which is subject to the provisions of section 74(b) (without regard to paragraph (3) thereof), if the recipient of such prize or award is selected from the general public, or (3) the purpose of the grant is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.
What Does “Approved in Advance by the Secretary” Mean?	Forms 1023 and 1024 are used to notify the IRS of an organization’s intent to claim exempt status, whether as a private foundation or as a public charity, and to ask for approval of an individual grant procedure.
What Acts of Self-Dealing Are Prohibited Between a Grantor or Other Disqualified Person and a Private Foundation?	Acts of self-dealing under IRC §4941(d)(1) include, with some exceptions,^[40] “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.”
Is a Private Foundation Subject to Excise Tax For Excess Business Holdings?	Yes. A Private foundation is subject to the excise tax described in IRC §4943 prohibiting “excess business holdings.” A Private Foundation, together with all disqualified persons with respect to it, is prohibited from holding more than 20% of the voting interests of a business. If the business is acquired by testamentary or intervivos gift, the foundation is given a 5 year grace period in which to dispose of the excess business holdings.
Is a Private Foundation Prohibited From Holding Assets That Could Jeopardize the Carrying Out of its Exempt Purpose?	Yes. The regulations cite the following as examples of investments that could jeopardize the carrying out of the foundation’s exempt purpose— Trading in securities on margin, trading in commodity futures, investments in working interests in oil and gas wells, the purchase of 'puts,' 'calls,' and 'straddles,' the purchase of warrants and of selling short.^[41]
Can a Private Foundation Be Subjected to an Excise Tax on Taxable Expenditures?	Yes. A “taxable expenditure” made by a Private Foundation is subject to an excise tax under IRC §4945. As indicated above and repeated here for emphasis, the term “taxable expenditure,” for purposes of IRC §4945, means, with some exceptions, any amount paid or incurred by a Private Foundation— (1) to carry on propaganda, or otherwise to attempt, to influence legislation; (2) to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive; (3) as a grant to an individual for travel, study, or other similar purposes by such individual; (4) as a grant to an organization unless -- (A) such organization is a public charity described in paragraph (1), (2), or (3) of IRC §509(a) or is an exempt operating foundation (as defined in § 4940(d)(2)), or (B) the Private Foundation exercises expenditure responsibility with respect to such grant; or (5) for any purpose other than one specified in IRC §170(c)(2)(B). The restrictions imposed by item (4) above generally prohibit a private foundation from making a grant to another private foundation unless the donor is an “operating private foundation” or unless the grantor private foundation exercises “expenditure responsibility” to see that the grant is spent solely for the purposes for which made.
What Are 50% Charities?	Organizations described in IRC §170(b)(1)(A) are “50% charities.” These include certain— (a) Churches.^[42] (b) Schools.^[43] (c) Hospitals.^[44] (d) Governmental Units.^[45] (e) Publicly Supported Organizations.^[46] This very important class of charitable organization includes organizations that normally receive a substantial part of its support from the general public or a governmental unit. Typical examples are museums, libraries, organizations providing facilities for the performing arts, the Red Cross, etc. (This could, but would not necessarily, include an organization —see (h) below— that is not a private foundation by virtue of 509(a)(2), because it normally receives one-third of its support from the general public.) (f) Operating Private Foundations.^[47] (g) Two Types of Nonoperating Private Foundations:^[48] Private Distributing Foundations,^[49] Private Foundations Maintaining a Common Fund.^[50]

	(h) An Organization that Would be a Private Foundation but for the fact that it qualifies under IRC §509(a)(2) (meeting the “one-third support test”) or Under IRC §509(a)(3) (qualifying as supporting organizations).^[51] The deduction allowed an individual donor who makes a contribution to a “50% charity” is limited to 50% of the donor’s contribution base. If the contribution is other than cash, other limits may further reduce the size of the deduction.
What Are 30% Charities?	30% charities are charitable organizations that are not “50% charities.” The deduction allowed an individual donor who makes a contribution to a “30% charity” is limited to 30% of the donor’s contribution base. If the contribution is other than cash, other limits may further reduce the size of the deduction.
What Does the Term Contribution Base Mean?	IRC §170(b)(1)(F) defines “contribution base” as “adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under section 172).” Adjusted gross income (herein sometimes abbreviated to AGI) is defined by IRC §62 as “gross income” less certain listed deductions. “Gross income,” in turn, is defined by IRC §61 as “all income from whatever source derived.” (Thousands and thousands of tax cases have now interpreted this phrase in a myriad of contexts.)
If a Contribution Exceeds The Contribution Base Percentage Limitation, May the Deduction Be Carried Over to Future Years?	If the donor’s contributions exceed the relevant percentage limitation (50%, 30% or 20% of the contribution base), the excess can be carried over for five years.^[52] 5 years
How Are the Limitations Computed When Gifts to More than One Type of Charity Are Made During the Year?	As you can imagine, if gifts are made to more than one type (50%, 30% and/or 20%) charities during the year, things can get more involved. The IRC sets up an ordering scheme, under which contributions to public charities are considered first. Therefore, if a taxpayer has made both 50% and 30% contributions during the year, the 30% deductions may not exceed the amount of the 50% limitation remaining after taking into account the contributions made to public charities during the year.^[53] 20% contributions are considered last of all.^[54]
What is the Practical Effect of the Ordering Rules?	Taking the 50% gifts into account first (instead of last) makes it harder to utilize the 30% and 20% gifts. For example, if the 50% gifts made up 30% of the contribution base, then if there were any 30% gifts, they would not be deductible in the year made.
How Do the 50%, 30% and 20% Limits Interact With the 5 Year Carryforward Period?	The 50%, 30% and 20% limits are separate but inclusive limitations. The 30% and 20% limits are not in addition to the 50% limit. Where the limitations are exceeded and the excess is carried over, subsequent gifts are taken into account first when applying the 50% limit. The limitations in succeeding years are applied in the following order— (1) current gifts of 50% property; (2) carryover gifts of 50% property (oldest first); (3) current gifts of 30% property; (4) carryover gifts of 30% property (oldest first); (5) current gifts of 20% property; and (6) carryover gifts of 20% property (oldest first).^[55]
Can a Donor Elect to Have the 50% Ceiling Apply to Gift to a 30% Public Charity?	Yes, but there is a price. A donor may elect to have the 50% limit apply, instead of the 30% ceiling, in the case of a gift of appreciated property to a 30% public charity.^[56] However, if this election is made, the 170(e) reduction rules operate to reduce the contribution for deduction purposes by 100% of the long-term capital gain attributable to the gift.^[57] The trade off is that the charitable deduction for the reduced amount is increased from 30% to 50% of the taxpayer donor’s contribution base.
When Might it be Desirable to Have the 50% Ceiling Apply to Gift to a 30% Public Charity?	If the built-in gain was small, and AGI was also small, it might be worth forgoing the deduction for the built in gain, in order to be able to take a deduction in excess of 30% of AGI.
Are There Special Rules that Limit Deductions For Property Other Than Cash?	If property other than cash is donated, there are a number of special rules and limitations that can reduce the size of the income tax deduction. IRC §170(b)(1)(C) and §170(e) contains a number of special reduction rules, for which there are, however, a number of exceptions.
What Special Limits Apply to the Contribution of Appreciated Long Term Capital Gain Property to a 50% Charity?	IRC §170(b)(1)(C) limits the deduction for contributions of long term capital gain property to 50% charities to no more than 30% of the donor’s contribution base.
What Special Limits Apply to the Contribution of Appreciated Long Term Capital Gain Property to a 30% Charity?	IRC §170(b)(1)(D) generally limits the deduction for contributions of long term capital gain property to 30% charities to no more than 20% of the donor’s contribution base. Unlike contributions of appreciated property to public charities, in the case of 20% contributions no election available to reduce the amount of the contribution to the donor's basis in the property in return for an increased percentage limitation.
What Special Limits Apply to the Contribution of Appreciated Short Term Capital Gain Property ?	No deduction is allowed for “the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value”^[58] (i.e., no deduction is available for the unrealized ordinary income and short term capital gain portion of the gift).
What Special Limits Apply to the Contribution of Unrelated Use Tangible Personal Property?	In the case of a contribution of tangible personal property no deduction is allowed for the amount of unrealized gain that would have been long term capital gain if the property had been sold for its fair market value, “if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501.”^[59]
What Special Limits Apply to the Contribution of Long Term Capital Gain Property to a Private Foundation?	In the case of a contribution of long term capital gain property to or for the use of a private foundation (other than a private operating foundation) no deduction is allowed for the amount of gain that would have been long term capital gain if the property had been sold for its fair market value,”^[60] subject to a special exception^[61] for contributions of qualified appreciated stock.
Can a Donor Receive a Deduction for the Built-in Gain Attributable to Appreciated Stock Contributed to a Private Foundation?	IRC §170(e)(5) provides that a taxpayer is entitled to an income tax deduction for the appreciation in long term publicly traded stock (“qualified appreciated stock”) contributed to a private foundation (up to 20% of the taxpayer’s contribution base^[62]). For many years, this was a special rule that was scheduled to expire. It was extended several times, and finally, in the 1998 Taxpayer’s Relief Act, was made permanent.
What is “Qualified Appreciated Stock”?	IRC §170(e)(5)(B) defines “qualified appreciated stock” as stock of a corporation “for which (as of the date of the contribution) market quotations are readily available on an established securities market, and which is capital gain property.”
Is there a Limit on How Much Publicly Traded Stock Can be Contributed to a Private Foundation and Still Have the Built-in Gain Qualify For a Deduction?	IRC §170(e)(5)(C) provides that the donor (together with members of the donor’s family) contributes more than 10% of the value of all outstanding stock in the corporation, the excess will not be considered “qualified appreciated stock.” This is not likely to be an every-day occurrence in the case of stock which is commonly tradable on an established securities market.
Will the Donor Recognize Gain or Loss on the Contribution of Property Other Than Cash to a Public Charity or Private Foundation?	One of the primary advantages of making a gift to charity (including a gift to a Private Foundation) is that the donor does not generally recognize gain on the transfer.^[63]
Can Income Earmarked and Set-Aside For Charitable Purposes Qualify As If Actually Distributed?	Occasionally, the IRS has approved, particularly in the case of a new organization, the setting aside of funds to be used, say, to build a facility to carry on the foundation’s exempt functions, treating the set-aside as a distribution.^[64]
What is Unrelated Business Taxable Income (UBTI)?	Unrelated business taxable income is income from an unrelated trade or business (regularly carried on) that is not substantially related to the performance of a tax exempt organization’s exempt purposes.
How is An Unrelated Trade or Business Defined Under the IRC?	IRC §512(a) provides: Except as otherwise provided in this subsection, the term “unrelated business taxable income” means the gross income derived by any organization from any unrelated trade or business (as defined in section 513 ) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b) .
What is an Unrelated Trade or Business?	IRC §513(a) provides: The term “unrelated trade or business” means, in the case of any organization subject to the tax imposed by section 511 , any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B) , to the exercise or performance of any purpose or function described in section 501(c)(3) ), except that such term does not include any trade or business—
What is Not UBTI?	(1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or (2) which is carried on, in the case of an organization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B) , by the organization primarily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or
	(3) which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.
Is Unrelated Debt-Financed Income UBTI?	Yes. The income from debt financed property gives rise to UBTI under IRC §514.
What is the Most Common Source of Unplanned For UBTI?	UBTI or debt financed income can arise if the trust borrows money^[65] or holds mortgaged property.^[66] This is often overlooked until noticed by the tax preparer at tax time.
Is There an Exception from UBTI for Certain Mortgages?	There is an important exception where a mortgage is placed on the property more than 5 years prior to the transfer to the charity and where the transferor owned the property for more than 5 years. This exception will apply for 10 years after the transfer. Where property subject to a mortgage is acquired by an organization by bequest or devise, the indebtedness secured by the mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of the acquisition. If an organization acquires property by gift subject to a mortgage which was placed on the property more than 5 years before the gift, which property was held by the donor more than 5 years before the gift, the indebtedness secured by such mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of such gift. This subparagraph shall not apply if the organization, in order to acquire the equity in the property by bequest, devise, or gift, assumes and agrees to pay the indebtedness secured by the mortgage, or if the organization makes any payment for the equity in the property owned by the decedent or the donor.^[67]
What Happens if a Charitable Organization Receives Unrelated Business Taxable Income (UBTI)?	A charitable organization is taxed on any UBTI.
Why Might a Grantor or Contributor Be Concerned Whether a Charity is a Public Charity or a Private Foundation?	Whether or not a recipient organization is a private foundation or a public charity can affect a contributor in a number of ways. The nature of the recipient will affect the percentage limitations on income tax deductibility; it will determine the size of the deduction in the case of a contribution of appreciated property; and will also affect the carryover rules.^[68] If the donor is a private foundation, the tax status of the recipient organization is of even more importance, since a private foundation cannot make a gift to a nonoperating private foundation unless it is willing to undertake the burden of the “expenditure responsibility rules.”^[69]
What is a Private Operating Foundation?	An operating foundation is a special hybrid type of private foundation that receives special tax treatment not available to other nonoperating private foundations. Operating foundations typically use their assets and income directly in the active conduct and furtherance of the foundation’s charitable operations, rather than for the purpose of making grants to other charities. To be classified as a private operating foundation, the organization must first meet an “income test,” and next must meet one of three alternative tests: (1) the “asset test”, (2) the “endowment test,” or (3) the “support test.”^[70]
	The term “operating foundation” is defined in IRC §4942(j)(3) as follows: “the term ‘operating foundation’ means any organization -- (A) which makes qualifying distributions^[71] (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^[72] of the lesser of -- (i) its adjusted net income (as defined in subsection (f)), or (ii) its minimum investment return^[73]; and (B) (i) [The Asset Test]^[74] 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) [The Endowment Test]^[75] 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) [The Support Test]^[76] 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.”^[77] [Emphasis added.]
What Are the Advantages of Being Classified as a Private Operating Foundation?	It is usually better to be classified as a public charity than as a private foundation, but it is better to be classified as an operating private foundation than as a nonoperating private foundation. Operating private foundations are “50% Charities” for purposes of the income tax deduction under IRC §170(b)(1)(A).^[78] The 15% excise tax on undistributed income does not apply to operating private foundations.^[79]
What Periods Are Used to Test For Compliance With the Operating Private Foundation Rules?	The period for testing compliance under the operating private foundation tests is the year in question, plus the three preceding years.^[80] There are special rules for new organizations.^[81]
What is an “Exempt” Operating Private Foundation?	An exempt operating foundation is an operating foundation that meets four additional tests. An exempt operating foundation, is an operating foundation that (1) has been publicly supported for 10 years or more, (2) does not have a disqualified person as an officer, (3) has a governing board that is broadly representative of the general public and (4) has a governing body comprised of persons no more than 25% of which are disqualified persons.
	An exempt operating foundation is described in IRC §4940(d)(2)as follows:
	(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.
What is the Primary Advantage To Being Classified as An Exempt Operating Foundation.	An exempt operating foundation is exempt from the §4940 excise tax on investment income.^[82] In addition, another private foundation making a grant to a private operating foundation is relieved of expenditure responsibility with respect to the grant.^[83]
How Does the IRS Treat a Nonexempt Charitable Trust?	Under IRC §4947(a), a trust (including a split-interest trust) devoted to certain religious or charitable type purposes, but which is not exempt from taxation under section 501(a), shall be treated for most purposes as a private foundation, unless it would qualify as a public charity. (There are certain exceptions applicable to estates and living trusts of decedent’s during the distribution and winding up periods.^[84])
Is There an Appraisal Requirement in the Case of a Gift To Charity of Property Other Than Cash Worth Over $5000?	If a donor claims a deduction in excess of $5000 for a donation of property other than money or publicly traded securities to a charitable organization, the income tax charitable deduction will not be allowed unless the donor complies with the detailed appraisal requirements of Treas. Reg. §1.170A-13(c). These requirements are reported on Form 8283 and are too lengthy and detailed to be described here.
Must the Donee Charity File a Special Return If Donated Property is Sold Within Two Years of Receipt?	If the donee charitable organization disposes of property given by a donor for whom the qualified appraisal rules (described in Treas. Reg. §1.170A-13(c)) applied, the donee organization must file a Form 8282 with the IRS and must give a copy to the donor.^[85] The form is due no later than 125 days after the property has been disposed of.^[86] There are some exceptions for property worth less than $500.^[87]
Does the IRC Require a Charitable Organization to Maintain Books and Records?	IRC §6001 requires charitable organizations, as well as all other taxpayers, to maintain books and records adequate to file returns and comply with IRS regulations and sufficient to substantiate all reported information.^[88] Although the regulations may only require that tax records be maintained for three years,^[89] an exempt organization should keep its records indefinitely, in case the IRS attempts to revoke the organization’s exempt status retroactively to the date it was formed.
Are There Any Special Reporting Requirements Applicable to Private Foundations?	This memorandum is not intended to cover all of the filing, reporting and notice requirements applicable to private foundations, but a few of the more obvious requirements will be mentioned. Most organizations exempt from tax under 501(a) (including 501(c)(3) organizations and exempt trusts) are required to file an annual information return/report using Form 990. A public charity is required to attach Schedule A to the Form 990. A similar rule applies to nonexempt charitable organizations and trusts. A private foundation is required (instead) to file Form 990-PF. A form 990-EZ is available in some cases (if the charity has gross receipts of less than $100,000 and assets less than $.5 million). If the organization has at least $1000 of unrelated business taxable income (UBTI), it must file a form 990-T.
What is the Penalty For Failure to File the Annual Report?	The penalty for failing to file the annual report is $10 per day, not to exceed the lesser of $5,000 or 5% of the organization's gross receipts for the year with respect to any one return.^[90] The penalty is due only if demanded by the IRS and may be waived for reasonable cause.^[91] In addition, if taxes are due, there may be interest owed and a late filing penalty.^[92]
Who is Responsible For Seeing To It That the Reporting Requirements Are Timely Met?	The organizations board and officers are generally responsible for seeing to it that the reporting and filing requirements are timely met each year, perhaps with the assistance of the organization’s accountant. This is not a matter that will be monitored by outside legal counsel.
Who Pays the Penalty Tax?	If, after notice and demand by the IRS, the return is not filed, the $10 per day penalty is owed by the person or persons responsible.^[93] The “responsible person” for purposes of the penalty means any officer, director, trustee, employee, or other individual having a duty to comply with the demand.^[94]
When is the Annual Report Due?	The annual report (Form 990) is due on or before the 15th day of the fifth month following the close of the organization's annual accounting period.^[95] For a calendar year organization, the return would be due on May 15th.
Where is the Annual Report Filed?	The form is filed with the IRS Service Center for the organization’s principal office.
How Does an Organization Apply for an Extension of Time to File the Annual Report?	Form 2758 is the form to use to request an Application for Extension of Time to file the annual report.^[96]
Are Any Private Foundations Exempt From Filing the Form 990-PF?	All private foundations, regardless of size, must file the Form 990-PF (and the Form 4720 if applicable): there are no exemptions.
Does A Private Foundation Have to Publish an Annual Notice in a Newspaper?	Before 2000, there was such a requirement, but that burdensome and largely ceremonial act is no longer mandated. This requirement, previously found in §6104(d), was eliminated in 2000.
Are There Any Public Inspection Requirements Applicable to Private Foundations?	§6104(d)(1) now provides: (1) In general. In the case of an organization described in subsection (c) or (d) of section 501 and exempt from taxation under section 501(a) or an organization exempt from taxation under section 527(a) —
	(A) a copy of— (i) the annual return filed under section 6033 (relating to returns by exempt organizations) or section 6012(a)(6) (relating to returns by political organizations) by such organization, (ii) if the organization filed an application for recognition of exemption under section 501 or notice of status under section 527(i) , the exempt status application materials or any notice materials of such organization, and (iii) the reports filed under section 527(j) (relating to required disclosure of expenditures and contributions) by such organization,
	shall be made available by such organization for inspection during regular business hours by any individual at the principal office of such organization and, if such organization regularly maintains 1 or more regional or district offices having 3 or more employees, at each such regional or district office, and (B) upon request of an individual made at such principal office or such a regional or district office, a copy of such annual return, reports, and exempt status application materials or such notice materials shall be provided to such individual without charge other than a reasonable fee for any reproduction and mailing costs. The request described in subparagraph (B) must be made in person or in writing. If such request is made in person, such copy shall be provided immediately and, if made in writing, shall be provided within 30 days.
Must a Copy of the 990-PF and 4720 be Filed With the State Attorney General?	If the private foundation is a domestic private foundation, it must file a copy of the Form 990-PF (and the Form 4720 if applicable) with the Attorney General of any state where the principal office is located, where the organization was incorporated, and of any state where the organization reports.^[97]
When is the Form 4720 Required to be Filed?	Form 4720 is required to be filed if there have been any violations of the many restrictions affecting private foundations (self-dealing, excess business holdings, failure to make minimum distributions, etc.) that would generate an excise tax under Ch. 41 or 42 of the IRC.^[98]
What Other Federal Tax Reporting Forms Might a Charitable Organization Be Required to File?	A charitable organization will have to file many of the same forms that any other business would have to file, including FICA, FUTA and Federal Income Tax wage withholding forms. For example, a Form 8300 is required to be filed if the organization is engaged in a trade or business and receives cash exceeding $10,000 in one or more related transactions.
What State Reporting Forms Might a Charitable Organization Be Required to File?	After formation, a Texas Nonprofit Corporation is required to complete a Texas Taxpayer Questionnaire. This form will ordinarily be mailed by the Comptroller of Public Accounts to the organization shortly after incorporation. Until the charitable organization receives an exemption, it is required to file and pay the Texas Corporation Franchise Tax. A refund should be available, after the exemption is obtained. Article 1396-9.01 requires that a report be filed with the Texas Secretary of State every four years. If the charitable organization has employees, it must file with the Texas Workforce Commission a properly completed Texas Workforce Commission Status Report. A Texas Franchise Tax Public Information Report must be completed and filed with the Texas Comptroller of Public Accounts, even if no franchise tax is owing.
What Rights Does the Public Have to Inspect the Application For Exemption of a Charitable Organization at the IRS National Office?	IRC §6104(a)(1) requires that the application for determination that a §501(c) or (d) organization is exempt from tax under 501(a), together with all supporting documents, shall be open to public inspection at the national office of the IRS.
What Rights Does the Public Have to Require a Charitable Organization to Allow Inspection of the Application For Exemption?	IRC §6104(e)2) provides that in the case of a 501(c) or (d) organization exempt from tax under 501(a), a copy of the organization’s application for exemption “(together with a copy of any papers submitted in support of such application and any letter or other document issued by the Internal Revenue Service with respect to such application) shall be made available by the organization for inspection during regular business hours by any individual at the principal office of the organization and, if the organization regularly maintains 1 or more regional or district offices having 3 or more employees, at each such regional or district office (and, upon request of an individual made at such principal office or such a regional or district office, a copy of the material requested to be available for inspection . . shall be provided . . to such individual without charge other than reasonable fee for any reproduction and mailing costs).”
What Rights Does the Public Have to Inspect the Application For Exemption of a Charitable Organization at the IRS District Office?	The various returns that are required to be filed by exempt organizations (e.g., Forms 990, 990-PF and 1041-A) together with the names and addresses of such organizations and trusts, are available for public inspection in the office of the district director in which the principal place of business of the organization is located and in the National Office or the IRS.^[99] The procedures are found in Treas. Reg. §301.6104(b)-1(d). Copies can be obtained by mail using IRS Form 4506-A.
What Rights Does the Public Have to Require a Private Foundation to Allow Inspection of its Annual Return?	IRC §6104(d) provides that the annual return/report required to be filed by a private foundation under §6033 (Form 990-PF) “shall be made available by the foundation managers for inspection at the principal office of the foundation during regular business hours by any citizen on request made within 180 days after the date of the publication of notice [see below] of its availability.” See Treas. Reg. §301.6104(d)-1(a).
What Are the Penalties For Failure to Make Disclosure of the Annual Return or of the Application For Exemption?	In the case of a failure to comply with the requirements regarding public inspection of annual returns, IRC §6652(c)(1)(C) provides a $20 per day penalty, not to exceed $10,000. In the case of a failure to comply with the requirements regarding public inspection of the exemption application, IRC §6652(c)(1)(D) provides a $20 per day penalty, with no limit.

^[1]All references herein to the “IRC” are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

^[3]Compare IRC §509(a)(9)(2) with §170(b)(1)(A)(vi). Both have public support tests, but §509(a)(9)(2) is much harder to meet.

§170(b)(1)(A)(i)-(vi) describes the following:

(i) a church or a convention or association of churches,

(ii) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on,

(iii) an organization the principal purpose or functions of which are the providing of medical or hospital care or medical education or medical research, if the organization is a hospital, or if the organization is a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and during the calendar year in which the contribution is made such organization is committed to spend such contributions for such research before January 1 of the fifth calendar year which begins after the date such contribution is made,

(iv) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public, and which is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or which is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions,

(v) a governmental unit referred to in subsection (c)(1),

(vi) an organization referred to in subsection (c)(2) [i.e., a charitable organization] which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from the general public . . . [Emphasis added.]

^[22]IRC §508(c). Treas. Reg.. §1.508-1(b). Rev. Proc. 72-50, 1972-2 C.B. 830.

^[24]Rev. Rul. 76-307, 1976-2 C.B. 56; Rev. Rul. 77-385, 1977-2 C.B. 331.

^[33]IRC §4942(j). Treas. Reg. §53.4942(a)-3(e)(1) and (3).

^[38] That is, charitable organizations described in IRC §509(a)(1),(2) or (3).

^[46]IRC §170(b)(1)(A)(vi). IRC §170(b)(1)(A)(vi) and Treas. Reg. § 1.170A-9(e)(2).

^[47]IRC §170(b)(1)(A)(vii) and 170(b)(1)(E)(i). IRC §4942(j)(3).

^[53]170(b)(1)(C)(iii)IRC §170(b)(1)(C)(iii).

^[55]IRC §170(b)(1)(C)(ii), (D)(ii), and (d)(1).

^[63]Campbell v. Prothro, 209 F.2d 331 (5th Cir, 1954). Rev. Rul. 57-506, 1957-2 C.B. 65.

^[64]Treas. Reg. §53.4942(a)-3(a)(3)(iii). GCM 39442 (10/3/85). TAM 9108001. Treas. Reg. §53.4942(b)-1(b)(1). Treas. Reg. §53.4942(b)-1(b)(2)(i)&(ii). PLR 8709013.

^[65]See IRC §§512-513 and Treas. Reg. §1.664-1(c).

^[72]Substantially all generally means 85% or more. Treas. Reg. §53.4942(b)-1(c).

^[80]Treas. Reg. §53.4942(b)-3(a). Cf., TAM 9108001.

^[84]Treas. Reg. §1.641(b)-3(a) and §53.4947-1(b)(2).

^[85]IRC §6050L. See also 1984 Blue Book at 502-511.

^[90]IRC §6652(c)(1)(A). Procedures for abatement are found in Treas. Reg. §301.6652-2(a), (f).

^[97]IRC §6033(c)(3), Treas. Reg. §1.6033-3(c).

^[99]IRC §6104(b); Treas. Reg. §301.6104(b)-1(a)(1), (2).