7.27.14  Tax on Net Investment Income of Private Foundations

7.27.14.1  (02-26-1999)
Overview

  1. This section contains procedures on tax on net investment income of private foundations.

  2. Before the Tax Reform Act of 1969, the investment income of private foundations qualifying as exempt organizations was not subject to any tax. Many exempt organizations were taxed on their unrelated business income, but this tax does not apply to investment income.

  3. Acting on the conclusion that private foundations should share some of the burden of paying the cost of government, especially the cost of a more extensive and vigorous enforcement of tax laws relating to exempt organizations, the Congress imposed an excise tax on the investment income of private foundations.

    1. Rev. Rul. 84–169, 1984–1 C.B. 216, concludes that IRC 4940 imposes an excise tax rather than an income tax. Unless an income tax treaty provides otherwise, excise taxes in general or the IRC 4940(a) excise tax in particular will not be treated as a covered tax under that United States income tax treaty.

7.27.14.2  (02-26-1999)
Imposition and Payment of IRC 4940 Excise Tax

  1. A 2% excise tax is imposed each taxable year on the net investment income of an exempt private foundation. The tax is reduced to 1% for private foundations meeting the distribution requirements described in text below. See IRM 7.27.14.3, concerning the definition of net investment income.

  2. The tax is reported on the form the foundation is required to file under IRC 6033 and is paid annually at the time prescribed for filing its annual return regardless of whether any extension for filing is granted.

7.27.14.2.1  (02-26-1999)
Taxable Private Foundation

  1. An excise tax of 2% is also imposed on taxable private foundations. A taxable private foundation is simply a private foundation which does not have exempt status.

    Example:

    A private foundation which fails to take the necessary steps to reform its governing instrument as required by IRC 508(e) would lose exempt status and become a taxable private foundation. Also, an IRC 4947(a)(1) trust treated as a private foundation is subject to this tax. See Reg. 53.4947–1.

7.27.14.2.1.1  (02-26-1999)
Computing IRC 4940 Tax

  1. The tax on taxable private foundations is equal to the amount (if any) by which the sum of the 2% tax on investment income, computed as if the foundation were exempt from taxation under IRC 501(a) for the taxable year, plus the amount of unrelated business income tax which would have been imposed for such taxable year if the foundation had been exempt from taxation under IRC 501(a), exceeds, the tax imposed under subtitle A on such foundation for the taxable year.

  2. Stated otherwise, if the sum of a 2% excise tax on investment income and the tax on unrelated business income (applied to a taxable private foundation as if it were exempt) exceeds the regular income tax, then the taxable private foundation must pay the amount of this excess. This ensures that a private foundation cannot reduce its tax liability by losing its exempt status. The tax is paid annually at the time the organization is required to pay income taxes imposed under subtitle A.

7.27.14.2.2  (02-26-1999)
Exempt Operating Foundation

  1. The Deficit Reduction Act of 1984 added IRC 4940(d) which provides an exemption from the excise tax on net investment income for exempt operating foundations, effective for taxable years beginning after December 31, 1984. It is possible that a private foundation may qualify for this exemption in one taxable year and not in another.

  2. An "exempt operating foundation" is any private operating foundation (as defined in IRC 4942(j)(3)) that:

    1. either has been publicly supported (IRC 170(b)(1)(A)(vi) or 509(a)(2)) for at least 10 taxable years or has qualified as an operating foundation as of January 1, 1983, or during its last taxable year ending before such date and

    2. has a governing body that, at all times during the taxable year, (i) consists of individuals at least 75% of whom are not disqualified individuals and (ii) is broadly representative of the general public, and

    3. does not have an officer who is a disqualified individual at any time during the taxable year.

7.27.14.2.2.1  (02-26-1999)
Disqualified Individual

  1. A "disqualified individual" is an individual who is, with respect to any private foundation:

    1. a substantial contributor to the foundation as defined in IRC 507(d)(2)),

    2. an owner of more than 20% of either the total combined voting power of a corporation, the profit interest of a partnership, or the beneficial interest of a trust or unincorporated enterprise, where the corporation, partnership, trust or enterprise is a substantial contributor to the foundation, or

    3. a member of the family of any individual described in a. or b. For purposes of this provision, the term "family" includes only an individual’s spouse, ancestors, lineal descendants, and spouses of lineal descendants. The constructive ownership rules (IRC 4946(a)(3) and (4)) apply in determining ownership in a corporation, partnership and trust for the purpose of defining "disqualified individual."

7.27.14.2.3  (02-26-1999)
Reduction in Tax for Private Foundations Meeting Certain Distribution Requirements

  1. The Deficit Reduction Act of 1984, as amended by the Tax Reform Act of 1986, added IRC 4940(e) which, effective for taxable years beginning after December 31, 1984, reduces the excise tax on net investment income of a private foundation from 2% to 1% if the amount of the qualifying distributions made by the foundation during such taxable year equals or exceeds the sum of —

    1. an amount equal to the foundation’s assets for such taxable year multiplied by the average percentage payout for the base period; plus

    2. one percent of the foundation’s net investment income for such year. In addition, the rate reduction is not available if the foundation was liable for tax under IRC 4942 with respect to any year in the base period.

7.27.14.2.3.1  (02-26-1999)
Foundation’s Assets

  1. The amount of a foundation’s assets is determined under IRC 4942(e)(1) and, therefore, equals the excess of the —

    1. aggregate fair market value of all assets of the foundation other than those that are used (or held for use) directly in carrying out the foundation’s exempt purposes, over

    2. acquisition indebtedness with respect to such assets (determined under IRC 514(c)(1) without regard to the taxable year in which the indebtedness was incurred).

7.27.14.2.3.2  (02-26-1999)
Percentage Payout

  1. A foundation’s percentage payout for a base-period year is determined by dividing the —

    1. amount of the foundation’s qualifying distributions made during the taxable year by

    2. foundation’s assets for the taxable year.

  2. The average percentage payout is the average of the percentage payouts for each of the taxable years in the base period.

7.27.14.2.3.3  (02-26-1999)
Base Period

  1. The base period for a particular year generally consists of the five taxable years preceding such taxable year. If an organization has not been a private foundation for five years, its base period consists of the taxable years during which the foundation has existed.

7.27.14.2.3.4  (02-26-1999)
Qualifying Distribution

  1. The term "qualifying distribution" has the meaning given such term by IRC 4942(g).

  2. For any base period year in which the IRC 4940 tax was reduced under the provisions of IRC 4940(e), the amount of qualifying distributions to be taken into consideration for that base-period year will be reduced by the amount of the tax reduction for that year.

7.27.14.2.3.5  (02-26-1999)
Successor Organizations

  1. When a private foundation is a successor to another foundation, it must take into account the experience of its predecessor in applying these provisions.

7.27.14.2.3.6  (02-26-1999)
Example

  1. A private nonoperating foundation has assets of $100,000 in the taxable year in question. Qualifying distributions for the taxable year equal $5,500, and net investment income is $10,000. The data for the base period years are:

    Figure 7.27.14-1

    Qualifying
    Distribution
    4940(e) Tax Reduction Assets 4942
    Tax
    YEAR 1 $5,000 0 100,000 0
    YEAR 2 $7,000 0 140,000 0
    YEAR 3 $6,100 100 100,000 0
    YEAR 4 $8,000 0 120,000 0
    YEAR 5 $4,000 0 100,000 0
    STEP 1 Determine if there was liability for tax under IRC 4942 for any year in the base period. Although the percentage for year 5 is less than 5%, no liability was incurred because the foundation carried over excess qualifying distributions under IRC 4942(i).
    STEP 2 Since there was no liability, compute the percentage payout for each year, as follows:
        YEAR 1 $5000/$100,000 = 5%
        YEAR 2 $7,000/$140,000 = 5%
        YEAR 3 ($6100–$100)/$100,000 = 6%
        YEAR 4 $8000/$120,000 = 6 2/3%
        YEAR 5 $4000/$100,000 = 4%
    STEP 3 Average the percentage payout figures, with the result in this case being 5.333%.
    STEP 4 Multiply the 5.333% average payout by the foundation’s assets for the current year. $100,000 x 5.333% $5,333.
    STEP 5 Add 1% of the net investment income for the taxable year to this figure. 1% x $10,000 = $100; $100 + $5,333 = $5,433.
    SOLUTION Because qualifying distributions for the taxable year ($5,500) exceed $5,433, the foundation qualifies for the IRC 4940(e) reduction.

7.27.14.3  (02-26-1999)
Net Investment Income

  1. The net investment income of a private foundation is defined as the amount by which its gross investment income and net capital gain exceed allowable deductions.

  2. In computing net investment income, no exclusions or deductions from gross investment income or credits against the IRC 4940 tax are allowable except those provided in IRC 4940 and the applicable regulations. Subtitle A principles, to the extent applicable to IRC 4940 definitions, are utilized in the computation.

  3. Tax-exempt income and the expenses and interest related to such income are excluded in computing the base of the excise tax.

  4. In computing net investment income the Service has held that a private foundation —

    1. must include in the year received any capital gain from a regulated investment company described in IRC 851. See Rev. Rul. 73–320, 1973–2 C.B. 385.

    2. must apportion the audit fees it paid between its investment and exempt activities in order to deduct the former expense in computing net investment income. See Rev. Rul. 75–410, 1975–2 C.B. 446.

    3. may deduct its amortizable bond premium to the extent that it would be deductible under IRC 171 in computing its net investment income. See Rev. Rul. 76–248, 1976–1 C.B. 353.

7.27.14.4  (02-26-1999)
Gross Investment Income

  1. Gross investment income means the gross amount of income from interest, dividends, rents and royalties (including overriding royalties) received by a private foundation from all sources; however, any such income is excluded from the base of the excise tax to the extent it is included in computing the tax on unrelated business income imposed under IRC 511.

    Example:

    Rents taxable as unrelated business taxable income pursuant to IRC 512(b)(3) would not be subject to IRC 4940 excise tax. Interest, dividends, rents and royalties derived from assets devoted to charitable activities are included in gross investment income. Therefore, for example, interest received on a student loan would be included in the gross investment income of a private foundation making such loan.

  2. In computing gross investment income unrelated business income taxable under IRC 641(a) is not includible in the gross investment income of an IRC 4947(a)(1) nonexempt charitable trust. See Rev. Rul. 74–497, 1974–2 C.B. 383.

  3. A private foundation could not deduct or otherwise take into account interest it paid on a loan in computing gross investment income where the loan was in turn loaned to another IRC 501(c)(3) organization for the latter’s exempt purposes. See Rev. Rul. 74–579, 1974–2 C.B. 383.

  4. A private foundation derives investment income when it redeems Series E U.S. savings bonds received from the estate of the purchaser, when neither the estate nor the purchaser elected to report as income the periodic increases in bond value. See Rev. Rul. 80–118, 1980–1 C.B. 254.

7.27.14.4.1  (02-26-1999)
Exclusion of Income From IRC 4947 Trusts

  1. Distributions received from a non-exempt charitable trust described in IRC 4947(a)(1) are excluded from a private foundation’s income for purposes of IRC 4940 tax. Such trusts are treated as organizations described in IRC 501(c)(3) and are themselves subject to IRC 4940 excise tax unless they qualify as other than private foundations under IRC 509.

  2. Also excluded from a private foundation’s income for purposes of the IRC 4940 tax are distributions received from split-interest (charitable and noncharitable beneficiaries) trusts unless the distributions are attributable to transfers in trust made by a split-interest trust after May 26, 1969. This exception for distributions from post-May 26, 1969 transfers in trust prevents use of the split-interest trust to shelter investment income from the IRC 4940 tax.

7.27.14.4.2  (02-26-1999)
Non-Dividend Treatment of Certain Distributions in Redeeming Stock

  1. A major objective of private foundation law is to discourage excess business holdings by private foundations. See IRC 4943.

  2. In order to encourage stock redemptions as a method for reducing the business holdings of foundations, distributions made to a private foundation by a disqualified person (as defined in IRC 4946(a)) in redemption of foundation-owned stock are not treated as dividends.

  3. The following conditions must be satisfied.

    Figure 7.27.14-2

      1. The redemption must be of stock which was:
      (a) Owned by a private foundation on May 26, 1969, or
      (b) Acquired by a private foundation under the terms of: A trust which was irrevocable on May 26, 1969, or will be executed on or before May 26, 1969, the terms of which are in effect on such date and at all times thereafter, or would have passed under such a will but before that time actually passes under a trust which would have met the test of this Section but for the fact that the trust was revocable (but was not in fact revoked);
      2. The foundation must be required to dispose of the property in order not to be liable for tax under IRC 4943; and
      3. The foundation must receive in return an amount which equals or exceeds the fair market value of such property at the time of such disposition or at a time a contract for such disposition was previously executed in a transaction which would not constitute a prohibited transaction (within the meaning of IRC 503(b) or the corresponding provisions of prior law).

  4. In the case of a disposition before January 1, 1975, IRC 4943 is applied without taking IRC 4943(c)(4) into account. Consequently, the fact that the percentage of permitted holdings is enlarged with respect to holdings on May 26, 1969, does not operate to negate the character of such holdings as excess business holdings for purposes of non-dividend treatment of corporate distributions in redemptions thereof.

  5. A distribution which otherwise qualifies under IRC 302 as a distribution in part or full payment in exchange for stock is not treated as essentially equivalent to a dividend because it does not meet the requirements of (1) above.

7.27.14.5  (02-26-1999)
Deductions From Gross Investment Income

  1. In determining net investment income, a private foundation may deduct from its gross investment income 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 below.

    1. Such expenses include that portion of a private foundation’s operating expenses which is paid or incurred for the production or collection of gross investment income.

    2. Taxes paid or incurred under IRC 4940 are not paid or incurred for the production of gross investment income. In Lettie Pate Whitehead Foundation v. U.S., 606 F.2d 534 (5th Cir. 1979), a foundation which was a charitable remainder beneficiary of a trust was denied a deduction for the trustee’s termination fee because it was a liability of the trust, not the foundation.

  2. Operating expenses include:

    • compensation of officers

    • other salaries and wages of employees

    • interest, rent, and taxes upon property used in the operations of the foundation

  3. Where a private foundation’s officers or employees engage in activities on behalf of the foundation both for investment and exempt purposes, compensation and salaries paid to such officers and employees must be allocated between the investment and exempt activities.

    1. In Julia R. & Estelle L. Foundation v. Commissioner, 598 F.2d 755 (2d Cir. 1979) , the court of Appeals for the Second Circuit held that a foundation was not entitled to deduct its entire administrative expenses without allocating between its investment activities and its distribution activities.

    2. Expenses which are taken into account in computing the tax imposed under IRC 511 are not deductible for purposes of computing the tax imposed by IRC 4940.

  4. Where only a portion of property is used to produce income subject to the excise tax imposed by IRC 4940, and the remainder is used for exempt purposes, the deductions must be apportioned between the exempt and nonexempt purposes.

  5. Any amounts paid or incurred for purposes other than the production or collection of gross investment income or the management, conservation, or maintenance of property held for the production of such income, are not allowable as a deduction under IRC 4940. Thus, for example, the deductions under the following Code sections are not allowable:

    1. The charitable deduction provided by IRC 170 and 642(c);

    2. The net operating loss deduction provided by IRC 172; and

    3. The special deductions provided by part VIII, subchapter B, Chapter 1 of the Code (special deductions for corporations).

7.27.14.5.1  (02/26/99)
Deduction Modifications

  1. The following are modifications of the deductions otherwise allowable with respect to gross investment income:

    1. The depreciation deduction is allowed, but only on the basis of the straight line method provided in IRC 167(b)(1). Use of the accelerated cost recovery system of IRC 168 is not permitted.

    2. The depletion deduction is allowed but is determined without regard to IRC 613, relating to percentage depletion.

    3. The basis for purposes of the deduction allowed for depreciation or depletion is basis as determined under the normal basis rules of part II of subchapter O of Chapter 1, without regard to IRC 4940(c)(4)(B) , or IRC 362(c) . Thus, a private foundation must reduce the cost or other substituted or transferred basis by an amount equal to the straight line depreciation or cost depletion, without regard to whether the foundation deducted such depreciation or depletion during the period prior to its first taxable year beginning after December 31, 1969. However, where a private foundation has previously taken depreciation or depletion deductions in excess of the amount which would have been taken had the straight line or cost method been employed, such excess depreciation or depletion is also taken into account to reduce basis. The excess was not taken into consideration when a private foundation used the percentage depletion method to record depletion on its books and records but took no deduction for depletion because it paid no income tax. See Rev. Rul. 79–200, 1979–1 C.B. 364. If the facts necessary to determine the basis of property in the hands of the donor or last preceding owner by whom it was acquired by gift are unknown to a donee private foundation, then the original basis to such foundation of such property is determined under the rules of Reg. 1.1015–1(a)(3).

    4. A deduction for expenses paid or incurred in any taxable year for the production of gross investment income earned as an incident to a charitable function may not be greater than the income earned from such charitable function which is includible in gross investment income for such year. For example, in a taxable year where rental income is incidentally realized from historic buildings held open to the public, deductions paid or incurred in such year for the production of such income are limited to the amount of rental income from such buildings includible as gross investment income. However, rental income and admission fees must be distinguished because income from admission fees does not constitute rents received for the use of a portion of a building. Consequently, in Historic House Museum Corp., 70 T.C. 12 (1978), the Tax Court disallowed the maintenance expenses and taxes a private foundation incurred in keeping an historic house (an exempt function) in computing the foundation’s net investment income for purposes of IRC 4940 tax because the admission fees did not constitute rents received within the meaning of Reg. 53.4940–1(e)(2)(iv)

7.27.14.6  (02-26-1999)
Capital Gains and Losses

  1. For purposes of IRC 4940, capital gains and losses from the sale or other disposition of property of the type which generally produces interest, dividends, rents and royalties is taken into account in determining net capital gain.

    1. The type of property is determinative, not the use made of the property by the foundation or the possibility of the particular property actually paying out interest, dividends, rents or royalties. See Zemurray Foundation v. U.S., 755 F.2d 404 (5th Cir. 1983).

    2. Also, property used to produce income subject to the tax imposed under IRC 511 is taken into account in determining net capital gain. If gain or loss from the sale of an item of property is taken into account in computing IRC 511 tax, such gain or loss is excluded from computation of IRC 4940 tax.

7.27.14.6.1  (02-26-1999)
Gifts of Investment Property

  1. For taxable years beginning after December 31, 1972, property is treated as held for investment purposes even though such property is disposed of by the foundation immediately upon its receipt, if it is property of a type which generally produces interest, dividends, rents, royalties, or capital gains through appreciation.

    Example:

    Rental real estate, stock, bonds, mineral interests, mortgages, and securities.

  2. Reg. 53.4940–1(f) (1) was held to be a permissible interpretation of the statute by the Tax Court in Ruth E. and Ralph Friedman Foundation, Inc. v. Commissioner, 71 T.C. 40 (1978) and the Federal Circuit in Greenacre Foundation v. U.S., 762 F.2d 965 (Fed. Cir. 1985).

    1. The Tax Court also held that Reg. 53.4940–1(f)(2)(i)(B), which provides that the basis of donated stock is the basis in the hands of the donors, is valid.

    2. However, Rev. Rul. 74–404, 1974–2 C.B. 382, held that the capital gain realized by an exempt private foundation from the sale of stock donated to it during its taxable years 1970 through 1972 and immediately disposed of upon receipt will not be taken into account for purposes of the tax on net investment income.

7.27.14.6.2  (02-26-1999)
Exceptions

  1. Gains and losses from the sale or other disposition of property used for the exempt purposes of a private foundation are excluded from the determination of net capital gain, even when the foundation incidentally derives income from such property which is subject to the tax imposed by IRC 4940.

    Example:

    If a tax-exempt private foundation maintains buildings of an historical nature and keeps them open for public inspection but requires a number of employees to live in these buildings, charging them rent, the rent would be subject to the tax imposed by IRC 4940(a), but any gain or loss resulting from the sale of such property would not be subject to such tax. However, if the foundation were to dispose of a building in which it conducted both its exempt and non-exempt activities, that portion of any gain or loss from such disposition which is allocable to the investment use of such property must be taken into account in computing net capital gain.

  2. Capital gains and losses from the sale or other disposition of property held by a private foundation as program-related investments (as defined in IRC 4944(c)) are not taken into account in determining net capital gain.

  3. A distribution of property for purposes described in IRC 170(c)(1) or 170(c)(2)(B) is not treated as a "sale or other disposition of property." Accordingly, if a private foundation distributes an item of property as a qualifying distribution under IRC 4942, the distribution will have no effect on investment income.

7.27.14.7  (02-26-1999)
Basis Rules

  1. The basis to be used in determining gain from the sale or other disposition of property is the greater of:

    1. Fair market value of December 31, 1969, plus or minus all adjustments thereafter until the date of disposition under the rules of Part II subchapter O of Chapter 1 of the Code, provided that the property was held by the foundation on December 31, 1969, and continuously thereafter to the date of disposition.

    2. Basis as determined under the rules of Part II of subchapter O of Chapter 1 of the Code; however, the special modification rules on deductions for depreciation and depletion apply (see IRC 4940(c)(3)(B)) and the zero basis rule of IRC 362(c) does not apply.

  2. For purposes of determining loss, the basis rules under Part II of subchapter O of Chapter 1 of the Code apply subject to the special modification rules on deductions for depreciation and depletion (see IRC 4940(c)(3)(B)) and without regard to the zero basis rule of IRC 362(c)

7.27.14.8  (02-26-1999)
Treatment of Capital Losses

  1. For purposes of computing net investment income, capital losses from the sale or other disposition of property may be subtracted from capital gains during the same taxable year but only to the extent of such gains.

  2. If capital losses exceed capital gains in a particular taxable year —

    1. the excess may not be deducted from gross investment income under IRC 4940(c)(3) in that year;

    2. nor may such excess be used to reduce gains in either prior or future taxable years, regardless of whether the foundation is a corporation or a trust. See examples in Reg. 53.4940–1(f)(4), illustrating the rules on capital gains and losses in computing net investment income.

7.27.14.8.1  (02-26-1999)
Special Rules

  1. The net capital gain on the sale of a listed common stock purchased before December 31, 1969, is the difference between the selling price and the greater of either the foundation’s basis in the stock, or the mean average of the highest and lowest quotations on December 31, 1969, plus or minus subsequent adjustment to the date of sale. See Rev. Rul. 74–403, 1974–2 C.B. 381.

  2. Appreciated stock distributed to a private foundation in 1971, in satisfaction of a specific bequest and a percentage of the residuary estate of an individual who died in 1967, will be considered held by the foundation on December 31, 1969, and the basis of the stock for purposes of computing capital gain includible in net investment income will be the fair market value of the stock as of December 31, 1969. See Rev. Rul. 76–424, 1976–2 C.B. 367.

7.27.14.9  (02-26-1999)
Digests of Published Rulings and Procedures

  1. Investment income; capital gain dividends from a regulated investment company. Capital gain dividends received by a private foundation from a regulated investment company described in IRC 851 are includible in the foundation’s net investment income in the year received for purposes of determining the excise taxes imposed by IRC 4940 (a), but are excluded from the foundation’s adjusted net income for purposes of IRC 4942(f), Regs. 53.4940–1, 53.4942(a)–2. Rev. Rul. 73–320, 1973–2 C.B. 385.

  2. Investment income; Canadian foundation. A Canadian private foundation, exempt from the Canadian income tax and exempt from U.S. income tax under IRC 501(c)(3), is also exempt from the tax imposed on gross investment income by IRC 4948(a) by virtue of Article X of the U.S.-Canada Income Tax Convention. See Reg. 53.4948–1; Rev. Rul. 74–183, 1974–1 C.B. 328.

  3. Investment income; capital gain computation; sale of listed stock. For purposes of computing a private foundation’s tax on net investment income, the net capital gain on the sale of a listed common stock purchased before December 31, 1969 is the difference between the selling price and the greater of the —

    1. foundation’s basis in the stock, or

    2. mean average of the highest and lowest quotations on December 31, 1969 plus or minus subsequent adjustment to the date of sale. See Reg. 53.4940–1; Rev. Rul. 74–403, 1974–2 C.B. 381.

  4. Investment income; capital gain from sale of donated stock. Capital gain realized by an exempt private foundation from the sale of stock donated to it during its taxable years 1970 through 1972 and immediately disposed of upon receipt will not be taken into account for purposes of the tax on net investment income. See Reg. 53.4940–1; Rev. Rul. 74–404, 1974–2 C.B. 382.

  5. Charitable trusts; nonexempt; investment income; unrelated income. Unrelated business income taxable under IRC 641(a) is not includible in the gross investment income of IRC 4947(a)(1) nonexempt charitable trust in determining the tax on its investment income. See Reg. 53.4940–1; Rev. Rul. 74–497, 1974–2 C.B. 383.

  6. Investment income; interest paid for funds reloaned interest free. An exempt private foundation that obtained a loan from a commercial lending institution, made an interest-free temporary construction loan to an exempt university, made no attempt to collect the loan, and forgave a portion of it, may not deduct or otherwise take into account the interest it paid for its loan in computing its net investment income. See Reg. 53.4940–1; Rev. Rul. 74–579, 1974–2 C.B. 383.

  7. Investment income; audit fees. Audit fees paid by an exempt private foundation must be apportioned between its investment and exempt activities and only that portion of the fees attributable to the investment activities is deductible in computing the foundation’s net investment income. See Reg. 53.4940–1; Rev. Rul. 75–410, 1975–2 C.B. 446.

  8. Investment and adjusted net income; amortizable bond premium deduction. An exempt private foundation that amortizes bond premium pursuant to IRC 171 may deduct the amortized amount in computing its net investment income and its adjusted net income. See Regs. 53.4940–1, 53.4942(a)–2; Rev. Rul. 76–248, 1976–1 C.B. 353.

  9. Investment income; Belgian foundation. A Belgian private foundation, whose only business activities in the U.S. are investments from which it derives interest income, is not exempt from the excise tax on gross investment income. See Regs. 1.881–2, 1.894–1, (IRC 881, 894, 4940, 4948); Rev. Rul. 76–330, 1976–2 C.B. 488.

  10. Investment income; basis; residuary interest in pre-1969 estate. Appreciated stock distributed to a private foundation in 1971, in satisfaction of a specific bequest and a percentage of the residuary estate of an individual who died in 1967, will be considered held by the foundation on December 31, 1969, and the basis of the stock for purposes of computing capital gain includible in net investment income will be the fair market value of the stock as of December 31, 1969. See Reg. 53.4940–1; Rev. Rul. 76–424, 1976–2 C.B. 367.

  11. Investment income; basis of depletable property. An exempt private foundation that, prior to 1970, was not subject to tax and claimed no depletion deduction on its royalty interest in oil and gas properties recorded depletion on its books using the percentage method. The foundation need only decrease its original basis in the properties by the amount of the cost depletion allowable, and not the percentage depletion show on its books, for purposes of determining the net investment income under IRC 4940. See Reg. 53.4940–1; Rev. Rul. 79–200, 1979–1 C.B. 364.

  12. Investment income; U.S. savings bonds; unreported interest. A private foundation derived interest income upon redemption of Series E U.S. savings bonds that were received from the estate of the purchaser. The interest is includible in the computation of gross investment income if neither the individual nor the estate elected to report as income the periodic increases in bond value. See Reg. 53.4940–1; Rev. Rul. 80–118, 1980–1 C.B. 254.

  13. Private foundations; tax on investment income. The tax imposed under IRC 4940(a) is an excise tax and not an income tax. Unless an income tax treaty provides otherwise, excise taxes in general or the IRC 4940 (a) excise tax in particular will not be treated as a covered tax under that United States income tax treaty. See Reg. 53.4940–1; Rev. Rul. 84 169, 1984–2 C.B. 216.


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