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Tax on Net Investment Income: Capital Gains and Losses

In figuring the tax on net investment income, a private foundation must include any capital gains and losses from the sale or other disposition of property held for investment purposes or for the production of income.  This includes capital gain dividends re­ceived from a regulated investment company.  If the foundation sells or otherwise disposes of property used in the production of income that is subject to the unrelated business income tax, any gain or loss from the sale of that property must be included in net investment income, but only to the extent that it is not included in figuring the tax on unrelated business income.  Property is treated as held for investment purposes even though the property is disposed of by the foun­dation immediately upon its receipt, if it is the kind of property that generally produces interest, dividends, rents, royalties, or capital gains through appreciation.

Property used for exempt purposes.  Any gain or loss from the sale or other disposition of property used for the exempt purposes of the foundation is not included in figuring the tax on net investment income.  If the foundation uses property for its exempt purposes, but also inci­dentally receives income from the property that is subject to the net investment income tax, any gain or loss from the sale or other disposition of the property would not be subject to the tax.  For example, if a tax-exempt private foundation maintains historic buildings that are open for public inspection, but it requires a number of employees to live in these buildings and charges rent, the rent is subject to the tax on net invest­ment income, but any gain or loss resulting from the sale of these buildings is not subject to the tax.

However, if a private foundation uses prop­erty both for exempt purposes and (other than incidentally) for investment purposes, (for exam­ple, a building in which the foundation’s charita­ble and investment activities are carried on) that part of the gain or loss from the sale or other disposition of the property that is allocable to the investment use of the property must be taken into account in figuring the tax on net investment income.

Losses.  Capital losses from the sale or other disposition of investment property may be sub­tracted from capital gains incurred in the sale or disposition of other investment property during the same tax year, but only to the extent of the gains.  If the capital losses are greater than the capital gains, the excess may not be subtracted from gross investment income, nor may the losses be carried back or forward to other tax years regardless of whether the foundation is a corporation or a trust.

Basis.  The basis for determining gain from the sale or other disposition of property is the greater of:

  1. The fair market value of the property on December 31,1969, plus or minus all adjustments after 1969 and before the date of disposition if the property was held by the private foundation on that date and continuously thereafter until disposition, or
  2. The basis of the property on the date of disposition under normal basis rules (actual basis).

For purposes of determining gain on prop­erty acquired by gift after December 31, 1969, the basis of the property is its basis in the hands of the donor at the time of the gift.

Normal basis rules are used in determining a loss on disposition.  For purposes of determining a loss, the basis of property acquired by gift is the lesser of the donor’s basis at the time of the gift or the fair market value at the time of the gift.  The rules that generally apply to dispositions of property are used to calculate gain or loss.

Securities listed on recognized stock ex­change.  The fair market value for figuring ba­sis for determining gain on the sale or exchange of stocks and bonds traded on a stock ex­change, in an over-the-counter market, or other­wise, is the mean between the highest and lowest quoted selling prices on the valuation date.


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Page Last Reviewed or Updated: 29-Apr-2014