7.27.16  Taxes on Foundation Failure to Distribute Income

7.27.16.1  (04-01-1999)
Overview

  1. Before the Tax Reform Act of 1969, there was little legal pressure on private foundations to distribute income to charity. Prior law provided that a private foundation would lose its exemption if its aggregate accumulated income was unreasonable in amount or duration for carrying out its exempt purposes.

  2. The unreasonable accumulation of income limitation proved largely ineffective. Since reasonableness or unreasonableness is essentially a subjective determination, and since the only available sanction—loss of exempt status—was often viewed as unduly harsh, the prior law was rarely applied. As a result, while the creator of a private foundation may have received immediate and substantial tax benefits from his or her contribution, charity may have received no benefit whatever or very belated benefit. Congress responded to this situation by establishing minimum income distribution requirements for private foundations.

7.27.16.1.1  (04-01-1999)
Statute

  1. IRC 4942 is one of the private foundation excise tax provisions passed in the Tax Reform Act of 1969. IRC 4942 provides that private foundations are required to distribute a current return to charity for taxable years beginning after December 31, 1969. During the early years after the Reform Act, a foundation was required to distribute the greater of a its adjusted net income or minimum investment return on assets held for production of income. However, section 823 of Public Law 97–34 reduced the required payout for private foundations so that they must distribute only their minimum investment return statuatorily defined as 5%, effective for taxable years beginning after December 31, 1981. In computing the amount a private foundation must actually distribute for exempt purposes, the minimum investment return is subject to certain adjustments, described later in this Section. Failure to make timely distributions of income at the required level will give rise to excise taxes, and, if the failure is willful or flagrant, to additional penalty taxes, including a possible termination tax.

7.27.16.2  (04-01-1999)
General Rules Governing Required Distributions

  1. IRC 4942 and the applicable regulations contain an extensive set of rules governing required income distributions by private foundations. Generally, the rules require the following:

    1. A private foundation, other than an operating foundation, is required to distribute its "distributable amount" for each taxable year beginning after December 31, 1969. Distributable amount means a private foundation’s "minimum investment return" (an imputed return on investment assets), reduced by any taxes imposed under subtitle A and IRC 4940.

    2. The required distributions must be "qualifying distributions." In general , a qualifying distribution is any expenditure or grant, and certain set-asides of income, for charitable, educational, religious, etc., purposes. (IRC 170(c)(2)(B) purposes). Certain conditions and restrictions apply to distributions to controlled organizations or to other private foundations.

    3. The difference at any time between the distributable amount for a taxable year and the amount of the qualifying distributions made with respect to that distributable amount constitutes "undistributed income" of the taxable year.

    4. The basic thrust of IRC 4942 is to require a private foundation to distribute the distributable amount of each taxable year by the end of the succeeding taxable year. To the extent that a private foundation holds undistributed income of a taxable year at the beginning of the second succeeding taxable year, it is subject to an initial excise tax equal to 15 percent of the amount of that undistributed income.

    5. After imposition of the initial excise tax on undistributed income of a specific taxable year, remedial distributions must be made. Additional excise taxes (100 percent of undistributed income) are imposed on any undistributed income of the pertinent taxable year remaining at the close of the correction period (taxable period for taxes assessed after December 24, 1980).

7.27.16.3  (04-01-1999)
Undistributed Income

  1. The term "undistributed income" is defined in IRC 4942(c). With respect to any private foundation for any taxable year as of any time, "undistributed income" is the amount by which the distributable amount (defined in IRC 4942(d)) for such taxable year exceeds the qualifying distributions (defined in IRC 4942(g)) previously made out of such distributable amount.

7.27.16.3.1  (04-01-1999)
Distributable Amount Defined

  1. The "distributable amount" concept is pivotal to IRC 4942. It is the amount which, when reduced by the qualifying distributions, equals the amount of "undistributed income" taxable under IRC 4942(a). See IRC 4942(d). Section 823 of Public Law 97–34 set the required payout for private foundations so that they must distribute only their minimum investment return, reduced by any taxes imposed under subtitle A and IRC 4940 and increased by certain payments from split interest trusts effective for taxable years beginning after December 31, 1981. Although section 823 of P.L. 97–34 failed to add back applicable modifications described in IRC 4942(f)(2)(C), the Deficit Reduction Act of 1984 increases the minimum payout amount by these modifications effective for taxable years beginning after December 31, 1984. Thus distributable amount includes:

    1. amounts received or accrued as repayments of amounts which were taken into account as a qualifying distribution for any taxable year;

    2. amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of such property was taken into account as a qualifying distribution for any taxable year; and

    3. any amount set aside under IRC 4942(g)(2) to the extent it is determined that such amount is not necessary for the purposes for which it was set aside.

  2. The distributable amount of a taxable year is subject to adjustment for excess distributions made during certain prior taxable years.

7.27.16.3.2  (04-01-1999)
Qualifying Distributions Defined

  1. "Qualifying distribution" is another crucial concept under IRC 4942. It is the amount subtracted from the distributable amount in computing the amount of "undistributed income" taxable under IRC 4942(a).

  2. IRC 4942(g) defines "qualifying distributions" . In general and without regard to the specific limitations discussed below, a "qualifying distribution" means an amount paid to accomplish one or more purposes described in IRC 170(c)(2)(B), an amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in IRC 170(c)(2)(B), or an amount set aside for a specific project that comes within one or more purposes described in IRC 170(c)(2)(B).

7.27.16.4  (04-01-1999)
Computation of Minimum Investment Return

  1. The minimum investment return of a private foundation for any taxable year is the amount determined by multiplying the excess of the aggregate fair market value of all assets of the foundation (other than those described in (3) below) over the amount of the acquisition indebtedness with respect to such assets (determined under IRC 514(c)(1), but without regard to the taxable year in which the indebtedness was incurred), by the applicable percentage for such year. For years beginning after December 31, 1975, the applicable percentage is five percent. Reg. 53.4942(a)–2(c)(5).

  2. The aggregate fair market value of all assets of the foundation includes—

    1. The average of the fair market values on a monthly basis of securities for which market quotations are readily available,

    2. The average of the foundation’s cash balances on a monthly basis, and

    3. The fair market value of all other assets except those described in (3) below for the period during the taxable year for which such assets are held by the foundation.

  3. Certain Assets Excluded. Reg. 53.4942(a)–2(c)(2) specifically excludes the following categories of assets from the determination of the minimum investment return:

    1. Any future interest (such as a vested or contingent remainder, whether legal or equitable) of a foundation in the income or corpus of any real or personal property until all intervening interests in, and rights to the actual possession or enjoyment of such property have expired, or, although not actually reduced to the foundation’s possession, has been constructively received by the foundation;

    2. The assets of an estate until the assets are distributed to the foundation or, due to a prolonged period of administration, such estate is considered terminated for income tax purposes by operation of Reg. 1.641(b)–3(a);

    3. Any present interest of a foundation in any trust created and funded by another person. See, however, Reg. 53.4942(a)–2(b)(2) concerning additions to the distributable amount for certain income distributions from trusts described in IRC 4947(a)(2);

    4. Any pledge to the foundation of money or property; and

    5. Any assets used (or held for use) directly in carrying out the foundation’s exempt purpose.

  4. Reg. 53.4942(a)–2(c)(3)(i) provides the following guidance concerning assets used (or held for use) in carrying out the exempt purpose.

    1. Used (or held for use). An asset is "used (or held for use) directly in carrying out the foundation’s exempt purpose" only if the asset is actually used by the foundation in carrying out its charitable, educational, or other similar (IRC 170(c)(2)(B)) purpose which gives rise to the exempt status of the foundation, or if the foundation owns the asset and establishes to the satisfaction of the Service that its immediate use for such exempt purpose is not practical (based on the facts and circumstances of the particular case) and that definite plans exist to commence such use within a reasonable period of time.

    2. Whether a particular asset is used (or held for use) directly by the foundation to carry out exempt functions is a question of fact. For example, management of a foundation’s endowment fund is not a direct implementation of its exempt function. Consequently, an office building used for the purpose of providing offices for employees managing the endowment fund is not being used (or held for use) directly by the foundation to carry out its exempt functions. Similarly, assets held for production of income or for investment are not held for carrying out the foundation’s exempt functions even though the income from such assets is used to carry out exempt functions.

    3. Dual use assets. Where property is used both for exempt purposes and for other purposes, if the exempt purposes use represents 95 percent or more of the total use, the property shall be considered to be used exclusively for exempt purposes. If the exempt use represents less than 95 percent, a reasonable allocation between exempt and non-exempt use must be made for purposes of minimum investment return computation.

    4. Temporary Lease of Property Acquired for Exempt Use. Property acquired by the foundation to be used for exempt purposes may be considered as used (or held for use) directly to carry out exempt purposes even though the property is leased, in whole or in part, for a limited period of time during which arrangements are made for its conversion to the use for which it was acquired, provided such income producing use does not exceed a reasonable period of time. Generally, one year is deemed to be a reasonable period of time for such purpose. Income derived under such lease is includible in the foundation’s adjusted net income. If the income producing use exceeds a reasonable period of time, the property, thereafter, will not be deemed to be used for exempt purposes. Further, if acquisition of the property had been treated as a qualifying distribution of a prior year, the value of the property is added to the adjusted net income computation for the taxable year in which the income producing use becomes unreasonable in length of time. If, subsequently, the property is used directly for exempt purposes, a qualifying distribution of its then fair market value will be deemed to have been made.

7.27.16.4.1  (04-01-1999)
Illustrations of Exempt Purpose Assets

  1. Reg. 53.4942(a)–2(c)(3)(ii) illustrates when assets are used (or held for use) in carrying out exempt purposes with the following examples:

    1. Administrative assets, such as office equipment and supplies which are used by employees or consultants of the foundation, to the extent such assets are devoted to and used directly in the administration of the foundation’s charitable, educational or other similar exempt activities;

    2. Real estate or the portion thereof used by the foundation directly in its charitable, educational or other similar activities;

    3. Physical facilities used in exempt activities such as paintings owned by the foundation which are on public display, fixtures and equipment in classrooms, research facilities and related equipment which, under the facts and circumstances, serve a useful purpose in the conduct of such activities;

    4. Any interest in a functionally related business as defined in Reg. 53.4942(a)–2(c)(3)(iii) or in a program-related investment as defined in IRC 4944(c);

    5. The reasonable cash balances necessary to cover current administrative expenses and other normal and current disbursements directly connected with exempt activity; and

    6. Any property leased by a foundation in carrying out its charitable, educational or other similar exempt purpose at no cost (or at a nominal rent) to the lessee or for a program-related purpose (within the meaning of IRC 4944(c)), such as the leasing of renovated apartments to low-income tenants at a low rental as part of the lessor-foundation’s program for rehabilitating a blighted portion of a community.

  2. Two revenue rulings provide additional examples of exempt purpose assets. Rev. Rul. 74–498, 1974–2 C.B. 387, describes a collection of paintings loaned under an active loan program for exhibition in museums, universities and similar institutions. Rev. Rul. 75–207, 1975–1 C.B. 361, describes an island preserved in its natural state and to which access is limited to invited researchers.

7.27.16.4.2  (04-01-1999)
Functionally Related Businesses

  1. A "functionally related business" is defined in IRC 4942(j)(5) as—

    1. A trade or business which is not an unrelated trade or business as defined in IRC 513, or

    2. An activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the charitable, educational, or other similar exempt purpose of the organization.

  2. Reg. 53.4942(a)–2(c)(3)(iii) provides the following examples of functionally related business:

    1. Example (1). X, a private foundation, maintains a community of historic value which is open to the general public. For the convenience of the public, X, through a wholly owned, separately incorporated, taxable entity, maintains a restaurant and hotel in such community. Such facilities are within the larger aggregate of activities which makes available for public enjoyment the various buildings of historic interest and which is related to X’s exempt purpose. Thus, the operation of the restaurant and hotel under such circumstances constitutes a functionally related business.

    2. Example (2). Y, a private foundation, as part of its medical research program under section 501(c) (3), publishes a medical journal in carrying out its exempt purpose. Space in the journal is sold for commercial advertising. Notwithstanding the fact that the advertising activity may be subject to the tax imposed by section 511, such activity is within a larger complex of endeavors which makes available to the scientific community and the general public developments with respect to medical research and is therefore a functionally related business.

  3. In Rev. Rul. 76–85, 1976–1 C.B. 357, the Service ruled that because a trade or business in which substantially all of the work is performed without compensation is a functionally related business, a foundation may exclude its interest in the business from the computation of its minimum investment return.

7.27.16.4.3  (04-01-1999)
Cash Held for Charitable Activities

  1. For purposes of determining the amount of the exclusion from the minimum investment return base for cash needed to cover current administrative expenses and other normal and current disbursements directly connected with the foundation’s charitable, educational, or other similar exempt activities, the necessary cash amount is generally deemed to be an amount equal to one and one-half percent of the fair market value of the minimum investment return base without regard to this exclusion. If the Service is satisfied that a greater amount is needed for current expenses and disbursements, then an additional amount may be excluded from the fair market value of the minimum investment return base. Reg. 53.4942(a)–2(c)(3)(iv).

  2. All remaining cash balances, including amounts necessary to pay any tax imposed by IRC 511 or Chapter 42 of the Code, except IRC 4940 tax, are included in the minimum investment return base.

  3. In Rev. Rul. 75–392, 1975–2 C.B. 447, the Service concluded that a private foundation whose average cash balance during the tax year represented one percent of the fair market value of its minimum investment return base may exclude an amount equal to one and one-half percent of the fair market value. Under the regulations, this amount is considered a reasonable cash balance even though it exceeds the actual average cash balance.

7.27.16.4.4  (04-01-1999)
Valuation of Assets

  1. Valuation of assets in the minimum investment return looks at:

    — Securities marketable and otherwise

    — Real and personal property

7.27.16.4.4.1  (04-01-1999)
Readily Marketable Securities

  1. Fair Market Value Based on Readily Available Market Quotations. A private foundation may use any reasonable method to determine the fair market value on a monthly basis of securities for which market quotations are readily available, as long as such method is consistently used. Market quotations are readily available if a security is:

    1. Listed on NASDAQ, the New York Stock Exchange, the American Stock Exchange, or any city or regional exchange in which quotations appear on a daily basis, including foreign securities listed on a recognized foreign national or regional exchange;

    2. Regularly traded in a national or regional over-the-counter market, for which published quotations are available; or

    3. Locally traded, for which quotations can readily be obtained from established brokerage firms.

  2. Examples of Reasonable Valuation Methods for Readily Marketable Securities. Reg. 53.4942(a)–2(c)(4)(i)(d) provides various examples of reasonable valuation methods for readily marketable securities. These include consistently valuing a security—

    1. on the last day of each trading month based upon the quoted closing price;

    2. by taking the mean of the closing prices on the first and last trading days of each month;

    3. by taking the mean of the highest and lowest quoted prices on the last trading day of each month;

    4. by taking the mean of the bid and asked prices on the first day of each month.

  3. A reduction is available for listed securities for blockage or similar factors under IRC 4942(e)(2)(B). The allowable reduction is limited to ten percent of the value as determined above. The value is reduced to the extent that the private foundation shows that as a result of:

    1. The size of the block of securities;

    2. The fact that the securities are in a closely held corporation; or

    3. The fact that the sale of the securities would result in a forced or distress sale, the securities could not be liquidated within a reasonable period of time except at a price less than the value determined without regard to any reduction in value.

  4. Commonly accepted methods of valuation must be used in appraising assets. Valuations made in accordance with the principles stated in the regulations under IRC 2031 are acceptable methods of valuation.

  5. Computer Pricing System. Readily marketable securities which are held in trust for, or on behalf of, a foundation by a bank or other financial institution which values such securities periodically by use of a computer, may be valued by the use of the computer pricing system, provided the Service has accepted such computer pricing system as a valid method for valuing securities for Federal estate tax purposes. Reg. 53.4942(a)–2(c)(4)(i)(c).

  6. Cash. The amount of a foundation’s cash balances for purposes of the minimum investment return base is determined by valuing cash on a monthly basis taking the average of the amount of cash on hand as of the first and last days of each month. Reg. 53.4942(a)–2(c)(4)(ii).

  7. Common Trust Funds. Valuation of a foundation’s participating interest in a common trust fund (as defined in IRC 584) on the basis of the average of the valuations reported to the foundation during its taxable year will ordinarily constitute an acceptable method of valuation where the common trust fund is established and administered under a plan providing for the periodic valuation of participating interests during the fund’s taxable year and the reporting of such valuation to participants. Reg. 53.4942(a)–2(c)(4)(iii).

  8. Other Assets. The fair market value of assets other than those described in (1) through (5) above such as unlisted securities, shall be determined annually except that valuations of real property may be determined on either an annual basis, or on the five-year basis described below. The determination of value of assets (except real property which must be evaluated by an independent, non-disqualified person) may be made by employees of the private foundation or any other person, without regard to whether such person is a disqualified person with respect to the foundation. Except as provided below, valuations of assets, if accepted by the Service, are valid only for the taxable year for which made. A new valuation is required for succeeding taxable years. Reg. 53.4942(a)–2(c)(4)(iv)(a).

  9. Unlisted securities of a controlled corporation. If a private foundation owns voting stock of an issuer of unlisted securities and has, or together with disqualified persons or another private foundation has, effective control of the issuer, then to the extent that the issuer’s assets consist of shares of listed securities, the assets shall be valued as described in (1) above, including any allowable reduction for blockage or similar factors.

7.27.16.4.4.2  (04-01-1999)
Valuation of Real Property Interests

  1. Five-year determinations. The value of any interest in real property may be determined on a five-year basis, i.e., for the taxable year of the valuation and four succeeding taxable years, provided the determination is made by means of a certified, independent appraisal made in writing by a qualified person who is neither a disqualified person with respect to, nor an employee of, the private foundation and provided further that the valuation made falls within the range of reasonable values for the appraised property. Reg. 53.4942(a)–2(c)(4)(iv)(b).

  2. Certified appraisal. The appraisal is certified only if it contains a statement at the end thereof that in the opinion of the appraiser the values placed on the assets appraised were determined in accordance with valuation principles regularly employed in making appraisals of such property using all reasonable valuation methods. The foundation must retain a copy of the appraisal in its records.

  3. Replacement of five-year determinations. Any five-year determination of value may be replaced during the five-year period by another five-year valuation made in accordance with the requirements for five-year valuations, or an annual valuation made in accordance with the requirements described in IRM 7.27.16.4.4.3 below. The most recent valuation must be used in computing the foundation’s minimum investment return.

  4. The five-year valuation must be made no later than the last day of the first taxable year for which such new valuation is applicable.

  5. Presumptive validity of five-year valuation. Five-year valuations of real-property interest, if properly made in accordance with the above-described rules, will not be disturbed by the Service during the five-year period for which applicable even if the actual fair market value of the property changes during such period.

  6. Methods of valuation. Commonly accepted methods of valuation must be used in making an appraisal of an interest in real property. Valuations made in accordance with the principles stated in the regulations under IRC 2031 constitute acceptable methods of valuation. Appraisal, for purposes of determining the value of a real property interest, means a determination of fair market value and is not to be construed in a technical sense peculiar to particular property or interests therein such as, for example, mineral interests in real property. Reg. 53.4942(a)–2(c)(4)(iv)(c).

  7. Definition of "securities." The term "securities" includes but is not limited to, common and preferred stocks, bonds, and mutual fund shares. Reg. 53.4942(a)–2(c)(4)(v).

7.27.16.4.4.3  (04-01-1999)
Valuation Date

  1. Assets which are required to be valued on an annual basis may be valued as of any day in the private foundation’s taxable year to which such valuation applies, provided the foundation follows a consistent practice of valuing such asset as of such date in all taxable years.

    1. A valuation of an interest in real property may be made as of any day in the first taxable year of the private foundation to which such valuation is to be applied. Reg. 53.4942(a)–2(c)(4)(vi).

  2. Assets held for less than a taxable year. If an asset in the minimum investment return base has been held for only part of a taxable year, it is taken into account in determining the minimum investment return by multiplying its fair market value by a fraction, the numerator of which is the number of days in such taxable year that the foundation held the asset and the denominator of which is the number of days in such taxable year. Reg. 53.4942(a)–2(c)(4)(vii).

7.27.16.4.5  (04-01-1999)
Applicable Percentage

  1. Except as to private foundations in existence before May 27, 1969, for purposes of determining the minimum investment return the applicable percentage is five percent for taxable years beginning after December 31, 1975. See Reg. 53.4942(a)–2(c)(5)(c).

  2. In the case of a taxable year shorter than 12 months, the applicable percentage for the taxable year is computed by multiplying the applicable percentage for the calendar year on which the short taxable year began by a fraction the numerator of which is the number of days in the short taxable year and the denominator of which is 365. Reg. 53.4942(a)–2(c)(5)(iii).

7.27.16.5  (04-01-1999)
Qualifying Distributions

  1. Distributions or expenditures that are creditable against a private foundation’s obligation to distribute its distributable amount are referred to as "qualifying distributions" . Reg. 53.4942(a)–3(a)(2) defines the term "qualifying distribution" as:

    1. Any amount paid by a private foundation to accomplish one or more purposes described in IRC 170(c)(2)(B), or 170(c)(1). That is to say, amounts paid to accomplish charitable, religious, educational, etc., purposes or amounts contributed to a governmental unit for exclusively public purposes.

    2. Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in IRC 170(c)(2)(B) or IRC 170(c)(1).

    3. Any amount set aside which meets the criteria for set-asides.

    4. Included in amounts paid for one or more purposes described in IRC 170(c)(2)(B), or 170(c)(1), are amounts paid for program-related investments, as defined in IRC 4944(c). Also included is that portion of reasonable and necessary expenses, direct and indirect, that a foundation incurs in implementing these purposes. See Reg. 53.4942(a)-3(a)(8), Example (1). Direct expenses, those which can be specifically identified with a particular activity, include, among other things, compensation and travel expenses of employees and officers; the cost of materials and supplies; and fees paid to outside firms and individuals. Indirect (overhead) expenses are not specifically identifiable with a particular activity. They relate to the direct costs incurred in conducting the activity. Examples of indirect expenses are occupying expenses; supervisory and clerical compensation; repair, rental and maintenance of equipment; expenses of other departments, such as accounting, personnel, and payroll that serve the department or function that incurs the direct expenses of conducting an exempt activity.

    5. If a foundation awards scholarships, grants or other payments to individuals as a part of an active program in which the foundation maintains some significant involvement, then such scholarships, grants or other payments and related administrative expenses are considered direct charitable activities. Examples of active programs and a definition of the term "significant involvement" are contained in Reg. 53.4942(b)–1(b)(2). Additional examples are contained in Reg. 53.4942(b)–1(d). Merely reviewing grant applications, interviewing or testing applicants, selecting grantees and performing other related administrative actions do not constitute a significant involvement in an individual grant program.

    6. In determining whether any expenditure is for the direct active conduct of a charitable activity, the definitions and special rules of IRC 4942(j)(3) and the related regulations (which define an operating foundation) generally apply. However, except for expenses related to "significant involvement" grants, grant administrative expenses do not constitute expenditures directly for the active conduct of charitable activities even though they are treated as such for purposes of IRC 4942(j)(3). If a foundation maintains some significant involvement in an individual grant program, both the grants and the related grant administrative expenses (and qualified set-asides for such purposes) are expenses of a direct charitable activity. Direct charitable activities also include all qualifying distributions that consist of amounts paid or set aside to acquire assets used in the conduct of the foundation’s charitable activities, including its grant programs whether or not the foundation maintained a significant involvement in such programs.

    7. Examples of expenditures for direct charitable activities include, among others, amounts paid or set aside to acquire or maintain the operating assets of a museum, library, or historic site or to operate any such facility; to provide goods, shelter, or clothing to indigents or disaster victims if the foundation maintains some significant involvement in the activity rather then merely making grants to the recipients; to conduct educational conferences and seminars; to operate a home for the aged or disabled; to conduct scientific, historic, public policy, or other research with significance beyond the foundation’s grant program and which does not constitute a proscribed attempt to influence legislation; to publish and disseminate the results of such research, reports of educational conferences, or similar educational material; to support the service of foundation staff on boards or advisory committees of other charitable organizations or on public commissions or task forces; to provide technical advice or assistance to a governmental body, a governmental committee or subdivision of either in response to a written request by the governmental body, committee or subdivision; and to conduct performance in the performing arts.

    8. Expenses paid in connection with providing direct technical assistance to grantees are also considered direct charitable activities. Such assistance must have significance beyond the purposes of the grants made to those grantees and must not consist merely of monitoring or advising the grantees in their use of the grant funds. Technical assistance involves the furnishing of expert advice and related assistance regarding, for example, compliance with governmental regulations; reducing operating costs or increasing program accomplishments; fundraising methods; and maintaining complete and accurate financial records.

    9. Other qualifying distributions include, for example, expenses attributable to soliciting grants or contributions to the foundation; preparing Form 990–PF; publishing the required newspaper notice to inform the public that the return is available for inspection upon request; making the return available for public inspection or providing copies; and publishing an annual report that is available to the public and for non-operating foundations the IRC 4940 tax on net investment income (or IRC 4948 tax on gross investment income in the case of a foreign operating foundation).

    10. For taxable years beginning after December 31, 1990, grant administrative expenses must be "reasonable and necessary" to count as qualifying distributions.

7.27.16.6  (04-01-1999)
Distributions to Another Private Foundation or to a Controlled IRC 501(c)(3) Organization

  1. General. By and large, private foundations other than operating foundations carry on their charitable activity in an indirect manner by making grants to individuals or to other organizations directly engaged in charitable activities. If, therefore, one private foundation, A, distributes income to another foundation, B, the stream of funds devoted to active and direct charity will not, in the ordinary case, be increased. In a related but different vein, if private foundation A distributes income to an organization which A or its disqualified persons (see IRC 4946) control, the common control may serve to unduly delay use of the income in active charity. To insure that distributions of private foundation income flow promptly into the stream of funds sustaining direct charitable activity, IRC 4942 imposes strict requirements on distributions to another private foundation or to a controlled organization. Income distributed to another private foundation or to a controlled organization may be counted as a qualifying distribution of the contributor only if the recipient places an equivalent amount in the active charitable stream within twelve months after the taxable year in which the contribution is received. This and other conditions of the "12-month pass-through" are discussed in IRM 7.27.16.7 below.

  2. Meaning of Controlled Organization. "Controlled organization" , for purposes of IRC 4942, means an organization controlled (directly or indirectly) by the contributing private foundation or one or more disqualified persons (as defined in IRC 4946) with respect to the contributing foundation. An organization is "controlled" by a foundation or one or more disqualified persons with respect to the foundation if any of such persons may, by aggregating their votes or positions of authority, require the donee organization to make an expenditure, or prevent the donee organization from making an expenditure. "Control" is determined without regard to any conditions imposed upon the donee such as a restriction on the manner in which the distribution is to be used unless the restriction is described in Reg. 1.507–2(a)(8). In general, it is the donee, not the distribution, which must be controlled for the limitation to apply. Thus the imposition of budgetary control is not "control" within the meaning of this paragraph. The "controlled" organization may be any type of exempt or nonexempt organization. Reg. 53.4942(a)–3(a)(3).

  3. When a private foundation with a carryover of excess qualifying distributions, transfers all its assets to a private foundation controlled by the same persons who controlled the transferor, the transferee may reduce its distributable amount by the transferor’s carryover. Rev. Rul. 78–387, 1978–2 C.B. 270.

7.27.16.6.1  (04-01-1999)
Accounting Principles Applicable to Qualifying Distributions

  1. An organization’s qualifying distributions will be determined solely on the cash receipts and disbursements method of accounting. Reg. 53.4942(a)–3(a)(1).

7.27.16.6.2  (04-01-1999)
Value of Property Distribution

  1. The amount of a qualifying distribution of property is the fair market value of the property on the date the qualifying distribution is made. Reg. 53.4942(a)–3(a)(1).

7.27.16.6.3  (04-01-1999)
Funds Borrowed for Exempt Purposes

  1. Reg. 53.4942(a)–3(a)(4) describes the treatment of a private foundation’s repayment of funds borrowed to make charitable expenditures. Such a payment ordinarily is not a qualifying distribution; only the distribution or expenditure of the borrowed funds for charitable, etc., purposes is treated as a qualifying distribution.

  2. Interest paid with respect to borrowed funds is treated as a deduction from gross income in the taxable year in which it is paid. Reg. 53.4942(a)–3(a)(4)(iii).

7.27.16.6.4  (04-01-1999)
Changes in Use of an Asset

  1. If an asset not used (or held for use) for exempt of purposes is subsequently converted to such a use, the foundation may treat the conversion as a qualifying distribution. The amount of the qualifying distribution is the fair market value of the asset as of the date of its conversion. Fair market value is determined by making a valuation of the asset as of the conversion date in accordance with the valuation rules discussed above. Reg. 53.4942(a)–3(a)(5).

  2. The correct conversion date of real property converted from nonexempt to exempt uses is the date the foundation adopts and immediately proceeds to implement a plan for the exempt use, even though the actual conversion is not completed until the following year. Rev. Rul. 78–102, 1978–1 C.B. 379.

7.27.16.6.5  (04-01-1999)
Certain Foreign Organizations

  1. Distributions for IRC 170(c)(2)(B) purposes to a foreign organization which has not received a ruling or determination letter that it is an organization described in IRC 509(a)(1), (2), or (3) or 4942(j)(3) will be treated as a distribution to an organization so described if the distributing foundation has made a good faith determination that the donee organization is described in one or another of these Code provisions. Reg. 53.4942(a)–3(a)(6)(i).

  2. A "good faith determination" that a foreign organization is described in IRC 509(1), (2), or (3) or 4942(j)(3) ordinarily would be considered as made where the determination is based on an affidavit of the donee organization or an opinion of counsel of either the donor or the donee organization. The affidavit must set forth sufficient facts on the operation and support of the donee for the Service to determine that the donee would be likely to qualify as an organization described in IRC 509(a)(1), (2), or (3) or 4942(j)(3).

  3. A "foreign organization" is defined as an organization not described in IRC 170(c)(2)(A). Reg. 53.4942(a)–3(a)(6)(ii).

7.27.16.6.6  (04-01-1999)
Payment of Tax

  1. Payment of any tax imposed under Chapter 42 of the Code is not treated as a qualifying distribution. Reg. 53.4942(a)–3(a)(7).

7.27.16.6.7  (04-01-1999)
Examples of Qualifying Distributions

  1. Reg. 53.4942(a)–3(a)(8) illustrates qualifying distributions with the following examples:

    1. Example (1). M, a private foundation which uses the calendar year as the taxable year, makes the following payments in 1970: (i) a payment of $44,000 to five employees for conducting a foundation program of educational grants for research and study; (ii) $20,000 for various items of overhead, 10 percent of which is attributable to the activities of the employees mentioned in payment (i) of this example and the other 90 percent of which is attributable to administrative expenses which were not paid to accomplish any IRC 170(c)(1) or (2)(B) purpose; and (iii) a $100,000 general purpose grant paid to an educational institution described in IRC 170(b)(1)(A)(ii) which is not controlled by M or any disqualified persons with respect to M. Payments (i) and (ii) of this example are qualifying distributions to the extent of $46,000 ($44,000 of salaries and 10 percent of the overhead, both of which are reasonable administrative expenses paid to accomplish IRC 170(c)(1) or (2)(B) purposes). Payment (iii) of this example is also a qualifying distribution, since it is a contribution for IRC 170(c)(2)(B) purposes to an organization which is not described in Reg. 53.4942(a)–3(a)(2)(i)(a) or (b). The other 90 percent of payment (ii) of this example may constitute items of deduction under Reg. 53.4942(a)–2(d)(1)(ii) if such items otherwise qualify.

    2. Example (2). On February 21, 1972, N, a private foundation which uses the calendar year as the taxable year, pays $500,000 for real property on which it plans to build hospital facilities to be used for medical care and education. The real property produces no income and the hospital facilities will not be constructed until 1974 according to the set-aside plan submitted to and approved by the Service pursuant to Reg. 53.4942(a)–3(b). The purchase of the land is a qualifying distribution under Reg. 53.4942(a)–3(a)(2)(ii). If, however, the property were used to produce rental income for more than a reasonable period of time before construction of the hospital is begun, then as of the time such rental use becomes unreasonable (i) such purchase would no longer be deemed to constitute a qualifying distribution under Reg. 53.4942(a)–3(a)(2)(ii) and (ii) the amount of the qualifying distribution would be included in N’s gross income. See Reg. 53.4942(a)–2(c)(3)(i) and (d)(2)(iii)(b).

    3. Example (3). In 1971, X, a private foundation engaged in holding paintings and exhibiting them to the public, purchases an additional building to be used to exhibit the paintings. Such expenditure is a qualifying distribution under subparagraph (2)(ii) of this paragraph. In 1975, X sells the building. Under Reg. 53.4942(a)–2(d)(2)(iii)(b), all of the proceeds of the sale (less direct costs of the sale) are included in X’s gross income for 1975.

    4. Example (4). In January 1969, M, a private foundation which uses the calendar year as the taxable year, borrows $10 million to give to N, a private college, for the construction of a science center. M borrowed the money from X, a commercial bank. M is to repay X at the rate of $1.1 million per year ($1 million principal plus $0.1 million interest) for 10 years beginning in January 1973. M distributed $5 million of the borrowed funds to N in February 1969, and the other $5 million in March 1970. M files a statement with the form it is required to file under IRC 6033 for 1973 which contains the information required by Reg. 53.4942(a)–3(a)(4)(ii)(b). Pursuant to M’s election, each repayment of loan principal constitutes a qualifying distribution in the year of repayment. Accordingly, the distribution of $5 million to N in March 1970 will not be treated as a qualifying distribution. Each payment of interest ($0.1 million annually) with respect to M’s loan from X is treated as a deduction under Reg. 53.4942(a)–2(d)(1)(ii) in the taxable year in which it is made.

    5. Example (5). Private foundation Y engages in providing care for the aged. Y makes a distribution of cash to H, a hospital described in IRC 170(b)(1)(A)(iii) which is not controlled by Y or any disqualified person with respect to Y. The distribution is made subject to the conditions that H will invest the money as a separate fund which will bear a name commemorating the creator of Y and will use the income from such fund only for H’s exempt hospital purposes which relate to care for the aged. Under these circumstances, the distribution from Y to H is a qualifying distribution pursuant to Regs 53.4942(a)–3(a)(2)(i).

  2. In addition, several revenue rulings contain Service determinations regarding classification of payments as qualifying distributions.

    1. In Rev. Rul. 74–560, 1974–2 C.B. 389, the Service ruled that a private foundation may not treat as a qualifying distribution an amount equal to straight-line depreciation on a building it constructed for charitable purposes.

    2. In Rev. Rul. 75–495, 1975–2 C.B. 449, the Service considered legal fees paid in a suit brought to determine the proper beneficiary of a portion of a private foundation’s net income. Because the payment was a reasonable and necessary administrative expense, it met the requirements for classification as a qualifying distribution.

    3. In Rev. Rul. 78–90, 1978–1 C.B. 380, the Service ruled that low-interest loans made to blind persons to enable them to establish themselves in business serve charitable purposes and accordingly are qualifying distributions.

  3. In H. Fort Flowers Foundation, Inc., 72 T.C. 399 (1979), the court agreed with the Service that a private foundation’s use of its income to restore to corpus an amount earlier contributed to a university was not a qualifying distribution.

7.27.16.6.8  (04-01-1999)
Set-Asides

  1. Certain amounts of income set aside, rather than currently distributed, for one or more purposes described in IRC 170(c)(2)(B) or IRC 170(c)(1), may be treated as qualifying distributions.

    1. Under IRC 4942(g)(2) and Reg. 53.4942(a)–3(b), as they existed prior to a change resulting from the Tax Reform Act of 1976, a set-aside was treated as a qualifying distribution only if it was approved in advance by IRS. To obtain such approval, IRC 4942(g)(2) required a private foundation to establish that the set-aside would be paid for the specific project within five years and to establish the "suitability" of the set-aside to achieve the goals of the specific project (suitability test).

    2. While the rules for advance approval remain unchanged, IRC 4942(g)(2), as amended by the Tax Reform Act of 1976, effective for set-asides made in taxable years beginning after December 31, 1974, provides an alternative means of treating a set-aside as a qualifying distribution under which a private foundation must distribute minimum amounts of cash during specific test years (cash distribution test).

    3. The legislative history of the Tax Reform Act of 1976 states that the cash-distribution test was intended to alleviate a situation which was unforeseen at the time of the 1969 Act, that is, the case of new foundations or certain existing foundations whose assets are suddenly multiplied many times over, which find it impossible to meet the IRC 4942 payout requirements in their early years if their set-aside programs under the suitability test did not receive timely advance Service approval. There are two major advantages to the cash distribution test. First, the set-aside need not be approved in advance by IRS. Second, the private foundation need not establish that the project for which the amount is set-aside can be better accomplished by the set-aside than by the immediate payment of funds.

7.27.16.6.8.1  (04-01-1999)
Suitability Test

  1. Under Reg. 53.4942(a)–3(b)(1) and (2), a set-aside may be treated as a qualifying distribution only if, at the time of the set-aside, the private foundation shows the Service that:

    1. The set-aside amount will actually be paid for the specific project within 60 months from the date of the first set-aside; and

    2. The project is one which can be better accomplished by such set-aside than by the immediate payment of funds.

  2. Specific Project defined. Under Reg. 53.4942(a)–3(b)(2), the term "specific project" includes, but is not limited to, situations where relatively long-term grants or expenditures must be made in order to assure the continuity of particular charitable projects or program-related investments or where grants are made as part of a matching-grant program. "Specific project" may include, for example, a plan:

    1. To erect a building to house a direct charitable, educational or other similar exempt activity of the foundation, such as a museum building in which paintings are to be hung, even though the exact location and architectural plans have not been finalized;

    2. To purchase an additional group of paintings offered for sale only as a unit which requires an expenditure of more than one year’s income; or

    3. To fund a specific research program which is of sufficient magnitude to require an accumulation prior to commencement of the research, even though not all of the details of the program have been finalized.

7.27.16.6.8.2  (04-01-1999)
Revenue Rulings

  1. In Rev. Rul. 75–511, 1975–2 C.B. 450, a foundation whose primary activity was the making of renewable scholarships and fixed sum research grants was unable to show that its grant-making program could be better accomplished by the use of set-asides than by the immediate payments of funds.

  2. Rev. Rul. 75–511 in quoting the applicable regulations, further states that specific projects of the kind that might qualify for a set-aside are those involving relatively long-term grants or expenditures that must be made in order to assure the continuity of particular charitable projects; for example, a plan to fund a specific research program which is of such magnitude as to require an accumulation of funds prior to commencement of the research. The ruling also states that the foundation’s grant-making program is regularly carried on as part of its normal ongoing charitable activities. In most instances, the foundation had been able to fund these activities out of current income, and it had given no compelling reasons why it could not continue to fund its grant-making program in this manner. Under these circumstances, the ruling concluded that the foundation had not shown that its grant-making program could be better accomplished by the use of set-asides than by the immediate payment of funds. However, while this conclusion is still correct under the suitability test, this factual situation could now qualify under the cash distribution test, assuming the other parts of that test are satisfied, because the foundation need not show that its grant-making program could be better accomplished by the use of set-asides than by the immediate payment of funds.

  3. In Rev. Rul. 77–7, 1977–1 C.B. 354, the term “specific project’’ was held to include a building project to be undertaken by a public charity unrelated to the foundation making the set aside.

  4. In Rev. Rul. 74–450, 1974–2 C.B. 388, an operating foundation’s conversion of a portion of newly acquired land into an extension of an existing wildlife sanctuary and the remainder into a public park under a four-year construction contract, under which payments were made mainly during the last two years, was held to constitute a "specific project" .

  5. Rev. Rul. 74–450 further states that entering into the above contract would commit the organization to a major project costing substantially more than the foundation’s total available income on an annual basis, notwithstanding the fact that a major part of the required disbursement would not fall due until after the entire project was well along towards completion. Therefore, the project is one which can be better accomplished by a set-aside than by the immediate payment of funds.

7.27.16.6.8.3  (04-01-1999)
Advance Approval

  1. According to Reg. 53.4942(a)–3(b)(7), a private foundation must apply for approval of a set-aside under the suitability test before the end of the taxable year in which the amount is set-aside. The regulations provide that the request for advance approval of a set-aside under the suitability test must be sent to the National Office and include:

    1. A statement describing the nature and purposes of the specific project and the amount of the set-aside for which approval is requested;

    2. A statement describing the amounts and approximate dates of any planned additions to the set-aside after its initial establishment;

    3. A statement of the reasons why the project can be better accomplished by a set-aside than by the immediate payment of funds;

    4. A detailed description of the project including estimated costs, sources of any future funds expected to be used for completion of the project, and the location(s) (general or specific) of any physical facilities to be acquired or constructed as part of the project; and

    5. A statement by an appropriate foundation manager (as defined in IRC 4946(b)) that the amounts to be set aside will actually be paid for the specific project within a specified period of time that ends not more than 60 months after the date of the first set-aside, or a statement showing good cause why the period for paying the amount set aside should be extended (including a showing that the proposed project could not be divided into two or more projects covering periods of no more than 60 months each) and setting forth the extension of time required.

7.27.16.6.8.4  (04-01-1999)
Cash Distribution

  1. In General. The cash distribution test is satisfied if:

    1. The specific project for which the amount is set aside will not be completed before the end of the taxable year in which the set-aside is made;

    2. The private foundation actually distributes in cash or its equivalent for an IRC 170(c)(1) or (2)(B) purpose (a charitable purpose) the "start-up period minimum amount" during the foundation’s "start-up period" (both phrases are defined below); and

    3. The private foundation actually distributes in cash or its equivalent for a charitable purpose, the "full-payment period minimum amount" in each taxable year of the foundation’s "full-payment period" (both phrases are described below).

    4. For purposes of these tests, an amount set-aside will be treated as distributed in the year in which actually paid and not in the year in which set aside.

7.27.16.6.8.5  (04-01-1999)
Minimum Distribution Required During Start-Up Period

  1. For private foundations created before January 1, 1972, the "start-up period" is the four taxable years preceding the taxable year beginning in 1976. For foundations created after December 31, 1971 (or for organizations that first become foundations after that date), the "start-up period" is the four taxable years following the taxable year in which the foundation was created or became a foundation. For these purposes, a foundation will be considered created in the taxable year in which its distributable amount (IRC 4942(d)) first exceeds $500.

  2. Start-up period minimum amount. This is the amount that a foundation must distribute in its start-up period and cannot be less than the sum of:

    1. 20% of its distributable amount for the first taxable year of the start-up period,

    2. 40% of its distributable amount for the second taxable year of the start-up period,

    3. 60% of its distributable amount for the third taxable year of the start-up period, and

    4. 80% of its distributable amount for the fourth taxable year of the start-up period.

  3. The above requirement means that the total amount must be distributed before the end of the start-up period, and is not a requirement that any portion of this amount be distributed in any particular year of the start-up period.

  4. Examples. Reg. 53.4942(a)–3(b)(4)(iv) provides the following examples to illustrate this principle:

    1. Example (1). F, a private foundation created on January 1, 1975, uses the calendar year as its taxable year. The start-up period for F is January 1, 1976, through December 31, 1979. F has distributable amounts under section 4942(d) for taxable years 1976 through 1979 in the following amounts: 1976, $100,000; 1977, $120,000; 1978, $150,000; 1979, $200,000. F’s start-up period minimum amount is the sum of the following amounts: 20% of $100,000 ($20,000); 40% of $120,000 ($48,000); 60% of $150,000 ($90,000); and 80% of $200,000 ($160,000); which equals $318,000. Thus, F is required to actually distribute at least $318,000 in cash or its equivalent during the start-up period.

    2. Example (2). F, a private foundation created in 1969, uses the calendar year as its taxable year. F’s start-up period is the calendar years 1972 through 1975. F makes two cash distributions in 1972. The first distribution is made on account of a set-aside made in 1969. Under IRC 4942(g), that distribution is treated as a qualifying distribution made in 1969. The second distribution is treated under IRC 4942(h) as made out of F’s undistributed income for 1971. In addition, F makes a cash distribution in 1976 that is treated under IRC 4942(h) as made out of F’s undistributed income for 1975. In determining whether F had distributed its start-up period minimum amount within the start-up period, the 1972 distributions are both taken into account because they were actually made during F’s start-up period. The 1976 distribution is not taken into account, however, because that distribution was not actually made during F’s start-up period.

  5. Exception. Generally, only a distribution made during the start-up period is taken into account in determining whether a foundation has distributed the start-up period minimum amount. However, in the case of a foundation created after December 31, 1971 (or which first became a foundation after that date), a distribution made during the taxable year in which it was created (the year preceding the first taxable year of its start-up period) may be treated as a distribution made during the start-up period. In addition, a distribution actually made within 5 1/2 months after the end of the start-up period will be treated as a distribution made during the start-up period if:

    1. The foundation was unable to determine its distributable amount for the fourth taxable year of the start-up period until after it ended, and

    2. The foundation actually made distributions before the end of the start-up period based on a reasonable estimate of its distributable amount for the fourth taxable year of the start-up period.

7.27.16.6.8.6  (04-01-1999)
Minimum Distribution Required During Full-Payment Period

  1. A private foundation’s full-payment period is defined as each taxable year that begins after the end of the start-up period. During this period, it must distribute in cash or equivalent 100% of its distributable amount (IRC 4942(d)) with respect to the taxable year (without regard to IRC 4942(i)).

  2. For taxable years beginning after December 31, 1975, if a foundation distributes more than the full-payment period minimum amount for a taxable year, the excess can be carried forward to reduce the full-payment period minimum amount for the next 5 taxable years (referred to as an "adjustment period" ). An excess distribution made in one taxable year must be completely applied to future years before another excess distribution can be taken into account.

  3. Generally, only a distribution made during a taxable year of the full-payment period may be taken into account in determining whether a foundation has distributed the full payment period minimum amount for a taxable year. The regulations provide the following examples to illustrate this principle:

    1. Example (1). F, a private foundation created on January 1, 1973, uses the calendar year as its taxable year. F has a start-up period of January 1, 1974, through December 31, 1977, and a full-payment period that includes every taxable year beginning after December 31, 1977. F’s distributable amount (as determined under section 4942(d)) for 1978 is $500,000. Thus, F’s full-payment minimum amount for 1978 is $500,000. During 1978 F distributes $100,000 in cash to Charity X and $400,000 in cash to Charity Y on account of a set-aside made in 1973. F has distributed its full-payment period minimum amount for 1978 because it has made actual cash distributions during that year which total $500,000. However, F has made qualifying distributions (as determined under IRC 4942(g)) with respect to 1978 of only $100,000. In order to avoid liability for the tax on undistributed income under IRC 4942(a), F must distribute or set-aside an additional $400,000 before January 1, 1980.

    2. Example (2). Assume the facts as stated in Example (1) except that in 1978 F makes cash distributions totaling $600,000. Since the total cash distributions made in 1978 ($600,000) exceed the full-payment period minimum amount for 1978 ($500,000), there exists a $100,000 excess which must be used by F to reduce its full-payment period minimum amounts for the years 1979–1983 (the taxable years in the adjustment period with respect to the 1978 excess). Therefore, if F’s distributable amount (as determined under section 4942(d)) for 1979 is $500,000, F’s full-payment period minimum amount for 1979 is $400,000 ($ 500,000–$ 100,000).

7.27.16.6.8.7  (04-01-1999)
Failure to Distribute Minimum Amounts

  1. If a foundation fails to distribute the start-up period minimum amount during the start-up period or the full-payment period minimum amount during the full-payment period, then any set-aside made during either period that was not approved in advance under the suitability test will not be treated as a qualifying distribution. In addition, any set-aside made after the taxable year in which the failure to distribute took place will not be treated as a qualifying distribution unless it is approved under the suitability test. Thus, in this situation a deficiency may be assessed under IRC 4942(a). In addition, IRC 6501(n)(3) provides a special rule with respect to the period within which a deficiency may be assessed.

  2. However, Reg. 53.4942(a)–3(b)(6) provides that if the failure to distribute the full-payment period minimum amount was not willful and was due to reasonable cause, the foundation will be allowed to correct the failure to distribute. Correction by distribution of cash must occur during the correction period as defined in IRC 4963(e), determined with respect to the earliest taxable event (IRC 4963(e)(2)(A)) that would result if the failure to distribute were not corrected. This distribution to correct is treated as made during the taxable year in which the failure to distribute occurred. If the failure to distribute is due to the fact that the full-payment period minimum amount could only be determined after the end of the taxable year, no "willful failure to distribute" will occur if the foundation makes an additional distribution within 5 1/2 months after the end of the taxable year.

7.27.16.6.8.8  (04-01-1999)
Cash Distribution Test

  1. Approval and Information Requirements. Prior approval of a set-aside under the cash-distribution test is not required. Instead, for taxable years ending after April 2, 1984, the foundation must attach the following information to its annual information return for the taxable year in which the set aside is made:

    1. A statement describing the nature and purposes of the specific project for which amounts are to be set aside;

    2. A statement that the amount set aside will be paid for the specific project within a specified period not to exceed 60 months;

    3. A statement that the project will not be completed before the end of the taxable year in which the set-aside is made;

    4. A statement showing the distributable amounts determined under IRC 4942(d) for any past taxable years in the private foundation’s start-up and full-payment periods; and

    5. A statement showing the aggregate amount of actual payments made in cash for charitable purposes during each taxable year in the foundation’s start-up and full-payment period. This statement should include a detailed description of any payments that are to be treated as distributed during a taxable year prior to the taxable year in which such payments were actually made (Under Reg. 54.4942(a)–3(b)(4)(iv) and (6)(ii)) and, in addition, should explain the circumstances that justify the application of those rules.

      Note:

      For the five taxable years following the year in which the amount is set-aside, this attachment must include the statements required in (d) and (e).

7.27.16.6.8.9  (04-01-1999)
Evidence of Set-Asides

  1. A set-aside that is approved under the suitability test or which satisfies the cash distribution test need only be noted as a bookkeeping entry on the foundation’s books of account signifying a pledge or obligation to be paid at a future date(s). Rev. Rul. 78–148, 1978–1 380, held that a foundation, that otherwise meets the requirements for a set-aside under the suitability test, may make a set-aside by means of a bookkeeping entry, consisting of the amount by which its minimum investment return for its immediately preceding taxable year exceeds its adjusted net income for that year. Any amount which is set aside will be taken into account for purposes of determining the foundation’s minimum investment return under Reg. 53.4942(a)–2(c)(1), and any income attributable to the set-aside is taken into account in computing adjusted net income under Reg. 53.4942(a)–2(d).

  2. If the suitability test or cash distribution test is otherwise satisfied, the 60 month period for paying the amount set-aside may, for good cause shown, be extended.

7.27.16.6.8.10  (04-01-1999)
Contingent Set-Asides

  1. In the event a foundation is involved in litigation and cannot distribute assets or income because of a court order, the foundation may seek and obtain a contingent set-aside. The amount of the set-aside would be limited to that portion of the foundation’s distributable amount which is attributable to the assets or income that are held pursuant to court order and which, but for the court order precluding the distribution, would have been distributed. In the event that the litigation encompasses more than one taxable year, the foundation may seek additional contingent set-asides. These amounts must be distributed by the last day of the taxable year following the taxable year in which the litigation is terminated.

7.27.16.7  (04-01-1999)
Twelve-Month Pass-Through

  1. Under Reg. 53.4942(a)–3(c)(1), a contribution to a controlled IRC 501(c)(3) organization or to a private foundation which is not an operating foundation will be treated as a qualifying distribution in the year in which it is made, if:

    1. The donee organization, in turn, makes a distribution equal to the full amount of such contribution not later than the close of the first taxable year after the taxable year in which it received the contribution; and

    2. The donee organization’s distribution of the contribution is a qualifying distribution which is treated under IRC 4942(h) as a distribution out of the donee’s corpus (or would be so treated if the donee were a private foundation which is not an operating foundation); and

    3. The private foundation making the contribution obtains adequate records or other sufficient evidence from the donee organization which: shows that the donee organization has made a qualifying distribution of the contribution; describes the names and addresses of the recipients thereof; and shows that as to the donee the distribution is treated as made out of corpus under IRC 4942(h) or would be so treated if the donee were a private foundation which is not an operating foundation. This condition in effect requires that the donee organization have no undistributed income with respect to the taxable year of its compensatory qualifying distribution since, under IRC 4942(h), distributions may be allocated to corpus only after undistributed income of that year has been exhausted.

  2. Use of pass-through for administrative expense. "Qualifying distributions" include expenditures for reasonable administrative expenses. If the donee expends the contribution for an administrative expense which is part of an IRC 170(c)(1) or 170(c)(2)(B) expenditure and cannot reasonably account separately for the contribution, the donee’s statement setting forth the purpose for which the expenditure was made and that the amount was distributed as a corpus distribution will satisfy the requirements of (1)(c) above.

  3. Distribution requirements. Not later than the close of the first taxable year after the taxable year of receipt of any contribution described in this section, the donee organization must distribute an amount equivalent in value to such contribution. The compensating distribution must be attributable to the donee’s corpus; thus, the donee must first distribute any undistributed income for the prior taxable year. Reg. 53.4942(a)–3(c)(2)(i).

  4. Failed pass-through. If a donee organization fails to entirely redistribute pass-throughs of a prior taxable year by the close of the succeeding taxable year, any redistributions are deemed made pro rata out of all pass-throughs received in the prior taxable year regardless of any earmarking by the donee. A failed pass-through is taken back into gross income of the donor foundation in the first taxable year succeeding the donee’s first taxable year following donee’s taxable year of receipt. Reg. 53.4942(a)–3(c)(2)(i).

  5. Value of contribution. The fair market value of contributed property is determined as of the date of the contribution. Such fair market value must be used in determining whether an amount equal in value to the contribution has been redistributed. Reg. 53.4942(a)–3(c)(2)(i).

  6. Characterizing donee’s qualifying distribution. In determining whether the donee of a pass-through has made compensating distributions out of its corpus in the taxable year succeeding the contribution, characterization of the origin of the donee’s qualifying distributions in such succeeding taxable year is made at the end thereof. Unless the donee organization has made an election under either Reg. 53.4942(a)–3(d)(2) or Reg. 53.4942(a)–3(c)(2)(iv) to vary the normal treatment of qualifying distributions, amounts distributed in the succeeding taxable year are allocated first to undistributed income of the donee’s prior taxable year, then to undistributed income of its current taxable year, and then to corpus. Once it is determined that a qualifying distribution is attributable to corpus, such distribution is charged to pass-through contributions received in the donee’s immediately preceding taxable year. Reg. 53.4942(a)–3(c)(2)(ii).

7.27.16.7.1  (04-01-1999)
Applying Prior Corpus Distributions

  1. The pass-through distribution requirement may be satisfied under an election to treat distributions out of corpus in certain prior taxable years as a current distribution out of corpus. Reg. 53.4942(a)–3(c)(2)(iv). This treatment of prior distributions from corpus may be applied, at the election of the foundation, in satisfaction of pass-through requirements both with respect to a contribution from another foundation and a contribution from an individual made under the provisions of IRC 170(b)(1)(E)(iii). To be available for treatment as a current distribution out of corpus, the prior distribution out of corpus—

    1. Must have been distributed as a distribution out of corpus under the provisions of IRC 4942(h);

    2. Must not have been availed of for any other purpose, for example, in satisfaction of redistribution requirements on some other contribution;

    3. Must have occurred within the preceding five years; and

    4. May not be later availed of for any other purpose.

  2. The election to treat a prior distribution out of corpus as a current distribution out of corpus is made by attaching a statement to the return the foundation is required to file under IRC 6033 with respect to the taxable year for which the election is to apply. The statement must contain a statement by an appropriate foundation manager, within the meaning of IRC 4946(b)(1), that the foundation is making an election under the provisions of Reg. 53.4942(a)–3(c)(2)(iv), and that the distribution is made out of the undistributed income of a prior taxable year(s) which was treated under Reg. 4942(a)–3(d)(1)(iii) as a distribution out of corpus. See Reg. 301.9100–1 with regard to an extension of time for making certain elections.

  3. Reg. 53.4942(a)–3(c)(3) illustrates the pass-through requirements with the following examples:

    1. Example (1). In 1972 M, a private foundation, makes a contribution out of 1971 income to X, another private foundation which is not an operating foundation. The contribution is the only one received by X in 1972. In 1973, X makes a qualifying distribution to an art museum maintained by an operating foundation in an amount equal to the amount of the contribution received from M. X also distributes all of its undistributed income for 1972 and 1973 for other purposes described in IRC 170(c)(2)(B). Under Reg. 53.4942(a)–3(d), the distribution to the museum is treated as a distribution out of corpus. Thus, M’s contribution to X is a qualifying distribution out of M’s 1971 income provided M obtains adequate records or other sufficient evidence from X showing the nature and amount of the distribution made by X, the identity of the recipient, and the fact that the distribution is treated as made out of corpus. If X’s qualifying distributions during 1973 had been equal only to M’s contribution to X and X’s undistributed income for 1972, X could have made an election under Reg. 53.4942(a)–3(d)(2) to treat the amount distributed in excess of its 1972 undistributed income as a distribution out of corpus and in that manner satisfied the pass-through distribution requirements.

    2. Example (2). Assume the facts stated in example (1), except that X is a private college described in section 170(b)(1)(A)(ii) which is controlled by disqualified persons with respect to M and that the records which X furnishes to M show that the distribution would have been treated as made out of corpus if X were a private non-operating foundation. Under these circumstances, the result is the same as in Example (1).

    3. Example (3). Assume the facts stated in example (1), except that X makes a distribution to the museum equal only to one-half of the contribution from M, that the remainder of such contribution is added to X’s funds and used to pay charitable administrative expenses, and that the records obtained by M from X are not sufficient to show the amounts distributed or the identities of the recipients of the distributions. The contribution by M to X will be a qualifying distribution only to the extent that M can obtain (i) other sufficient evidence (such as statements from officers or employees of X or from the museum) showing the facts required by Reg. 53.4942(a)–3(c)(1) and (ii) a statement from X setting forth that the remainder of the contribution was used for charitable administrative expenses which constituted qualifying distributions described in Reg. 53.4942(a)–3(a)(2)(i).

    4. Example (4). X and Y are private non-operating foundations. A is an exempt organization which is not described in IRC 501(c)(3) but which supervises and conducts a program described in IRC 170(c)(2)(B). Y, but not X, controls A within the meaning of Reg. 53.4942(a)–3(a)(3). In 1972, X and Y each makes a grant to A of $100, specifically designated for use in the operation of A’s IRC 170(c)(2)(B) program. X has made a qualifying distribution to A because the distribution is one described in Reg. 53.4942(a)–3(a)(2)(i). However, because A is controlled by Y, Y’s grant of $100 to A does not constitute a qualifying distribution. Furthermore, because A is not an exempt organization described in IRC 501(c)(3), Y’s grant to A does not constitute a qualifying distribution.

    5. Example (5). N, a private non-operating foundation, had distributable amounts of $100 in 1970 and $125 in 1971. In 1970 N received total contributions of $540: $150 from Y, a public charity; $70 from Z, a private foundation; $140 from Q, a private foundation, subject to the requirement that N earmark the amount and distribute it before distributing Z’s contribution; and, $180 from R, also a private foundation. However, R specifically instructed N that such contribution did not have to be redistributed because R already had made enough qualifying distributions to avoid all IRC 4942 taxes. N is not controlled by Y, Z, Q, or R and N made no qualifying distributions in 1970. By the close of 1971, N had made qualifying distributions of $420, earmarking $140 as having been a distribution of Q’s contribution, but had made no election under Reg. 53.4942(a)–3(d)(2) to have any amount distributed which was in excess of N’s 1970 undistributed income treated as distributed out of corpus. Therefore, the first $225 of qualifying distributions made in 1971 (the sum of $100 and $125, N’s distributable amounts for 1970 and 1971, respectively) are treated as amounts described in Reg. 53.4942(a)-3(d) (1) (i) and (ii). Since Y’s contribution is a contribution from a public charity and does not have to be "redistributed" and since R specifically instructed N that its contribution need not be "redistributed" , the remaining $195 of qualifying distributions will be treated as distributed pro rata from Z’s and Q’s contributions, regardless of N’s earmarking. Accordingly, of Z’s original qualifying distribution of $70 only $65 ($195 multiplied by $70, Z’s contribution, over $210, the total ($70 plus $140) of Z’s and Q’s contributions) will be treated as redistributed by N. Similarly, of Q’s original qualifying distribution of $140 only $130 ($195 multiplied by $140 over $210) will be treated as redistributed by N. Thus, Z’s gross income for 1972 will be increased by $5 ($70 less the $65 actually redistributed), and Q’s gross income for 1972 will be increased by $10 ($140 less the $130 actually redistributed).

7.27.16.7.2  (04-01-1999)
Transfer by Donee to Secondary Recipient

  1. Reg. 53.4942(a)–3(c)(4) provides that where a private foundation makes a distribution to organization X which in turn uses that distribution to make a distribution to organization Y, the latter distribution is not to be regarded as a contribution by the private foundation to organization Y if the private foundation does not earmark the use of the contribution for any named secondary recipient and does not retain power to cause the selection of the secondary recipient by organization X. This rule of non-attribution applies even though the contributing foundation has reason to believe that certain organizations will benefit from its contribution so long as the original donee organization exercises control in fact over the selection process and actually makes the selection completely independently of the contributing foundation.

7.27.16.7.3  (04-01-1999)
Set-Aside by Donee

  1. An amount contributed by a private foundation to another private foundation that, in the taxable year following the year in which it received the contribution, established an approved set-aside in the amount of the contribution and made a valid election to treat the entire amount of the set-aside as a distribution out of corpus may be treated by the donor foundation as a qualifying distribution. Rev. Rul. 78–45, 1978–1 C.B. 378.

7.27.16.8  (04-01-1999)
Treatment of Qualifying Distributions

  1. Whenever a qualifying distribution is made, it becomes necessary to determine the taxable year against which the amount involved is to be credited, since a private foundation may have undistributed income from one or more years, or may have no undistributed income. IRC 4942(h) and Reg. 53.4942(a)–3(d)(1) provide that the amount of any qualifying distribution is treated as made out of—

    1. First, any undistributed income of the immediately preceding taxable year (if the private foundation was subject to the initial excise tax of IRC 4942(a) for such year) to the extent thereof;

    2. Second, out of the undistributed income for the taxable year to the extent thereof;

    3. Then out of corpus.

  2. Reg. 53.4942(a)–3(d)(3) illustrates the treatment of qualifying distributions.

7.27.16.8.1  (04-01-1999)
Election as to Treatment of Certain Qualifying Distributions

  1. If a private foundation has no undistributed income for the immediately preceding taxable year, a qualifying distribution made in its current taxable year would normally be treated as made out of the undistributed income of the current taxable year, to the extent thereof, and then out of corpus. If no undistributed income remains with respect to the preceding taxable year, a private foundation may elect to vary the normal crediting sequence so as to credit a qualifying distribution in the current taxable year to a taxable year or years prior to the immediately preceding taxable year, or to corpus.

  2. The availability of this election is of particular significance where an under-distribution has occurred with respect to a prior taxable year and the taxable period remains open with respect to that year.

  3. Reg. 53.4942(a)–3(d)(3) illustrates the effect of an election with the following example: M, a private foundation which uses the calendar year as the taxable year, has undistributed income of $300 for 1971, $200 for 1972, and $400 for 1973. On January 14, 1973, M makes its first qualifying distribution in 1973 when it makes an approved set-aside of $700 for construction of a hospital. On February 24, 1973, a notice of deficiency with respect to the excise taxes imposed by IRC 4942(a) and (b) in regard to M’s undistributed income for 1971 is mailed to M under IRC 6212(a). M notifies the Service in writing on March 20, 1973, that it is making an election under Reg. 53.4942(a)–3(d)(2), and that its distribution of January 14th (to the extent it exceeds undistributed income for 1972) is to be applied first against undistributed income for 1971. Thus, under these facts and circumstances, an initial excise tax of $45 (15 percent of $300) is imposed by IRC 4942(a). Since M made the election described above, the $300 of undistributed income for 1971 is treated as distributed during the correction period (as defined in Reg. 53.4942(a)–1(c)(3)), and therefore no additional excise tax will be imposed. In addition, $200 ($700 minus $500) of the $700 qualifying distribution is treated as made out of undistributed income for 1973.

7.27.16.8.2  (04-01-1999)
Method of Making Election

  1. Reg. 53.4942(a)–3(d)(2) provides that an election to vary the normal sequence for treatment of qualifying distributions is made by filing a statement with the Service during the taxable year in which such qualifying distribution is made or by attaching a statement to the return required to be filed by the foundation with respect to the taxable year in which the qualifying distribution was made. Rev. Proc. 74–41, 1974–2 C.B. 495. The statement must contain a declaration by a foundation manager that the foundation is making an IRC 4942(h) election and must specify whether the distribution is made out of the undistributed income of a designated prior taxable year (or years) or is made out of corpus. An election made during the taxable year in which the qualifying distribution is made may be revoked in whole or in part by the filing of a revocation statement with the foundation’s annual return for the taxable year in which the qualifying distribution was made.

7.27.16.9  (04-01-1999)
Carryover of Excess Qualifying Distributions

  1. Under IRC 4942(i) and Reg. 53.4942(a)–3(e), if a private foundation makes excess qualifying distributions in any taxable year in which it is subject to IRC 4942(a) initial tax, the excess distribution may be used to reduce distributable amounts in any taxable year of the adjustment period— the five taxable years immediately following the taxable years in which the excess distribution occurred.

7.27.16.9.1  (04-01-1999)
Reduction of Distributable Amount

  1. The distributable amount for a taxable year in the adjustment period is reduced to the extent of the lesser of—

    1. the excess of qualifying distributions made in prior taxable years to which such adjustment period applies, or

    2. the remaining undistributed income at the close of such taxable year after applying any qualifying distributions made in such taxable year to the distributable amount for such taxable year (determined without regard to this paragraph).

  2. If during any taxable year of the adjustment period there is created another excess of qualifying distributions, such excess is not taken into account until any earlier excess of qualifying distributions has been completely applied against distributable amounts during its adjustment period.

7.27.16.9.2  (04-01-1999)
Excess Qualifying Distributions

  1. An excess qualifying distribution is a distribution of either undistributed income or corpus with respect to a taxable year beginning after December 31, 1969 (other than an amount distributed out of corpus in satisfaction of pass-through requirements described in IRM 7.27.16.7 or under the election described in IRM 7.27.16.8. that exceeds the distributable amount for that taxable year.

7.27.16.9.3  (04-01-1999)
Adjustment Period

  1. The taxable years in the adjustment period are the five taxable years immediately following the taxable year in which an excess of qualifying distributions is created. Thus, an excess cannot be carried over beyond five succeeding taxable years. If at the time when it is carrying an excess of qualifying distributions, a foundation ceases to be subject to the IRC 4942(a) excise tax, for example, by qualifying as an operating foundation, the excesses are extinguished for purposes of this section even if the organization again becomes subject to IRC 4942(a) tax. See Reg. 53.4942(a)–3(e)(4) which provides examples illustrating the application of the carryover provisions.

  2. Rev. Rul. 78–387, 1978–2 C.B. 270, describes a private foundation that transferred all its assets to another private foundation controlled by the same persons who controlled the transferor foundation. The transferor had a carryover of excess qualifying distributions. Under Reg. 1.507–3(a)(9)(i) the controlled transferee is treated as if it were the transferor. Accordingly, it may reduce its distributable amount by the transferor’s carryover.

7.27.16.10  (04-01-1999)
Digests of Published Rulings

  1. Capital gain dividends; exclusion from adjusted net income.— Since IRC 4942(f)(2)(B) requires inclusion of only net short-term capital gains, and IRC 852(b)(3)(B) treats all capital gain dividends as long-term regardless of the period for which the capital assets giving rise to the gain were held by the regulated investment company, such capital gain dividends received by a private foundation from a regulated investment company are excluded from the foundation’s adjusted net income in the year received for purposes of IRC 4942. Rev. Rul. 73–320, 1973–2 C.B. 385.

  2. Change in accounting period.—A private foundation that made a valid election to change its accounting period, which resulted in a short taxable year, and that had undistributed income at the end of its prior taxable year must distribute the income before the close of the short taxable year to avoid the taxes imposed by IRC 4942. Rev. Rul. 74–315, 1974–2 C.B.

  3. Minimum investment return; paintings.—A collection of paintings, owned by a private foundation formed to further the arts, that is loaned under an active loan program for exhibition in museums, universities, and similar institutions is being used directly in carrying out the foundation’s exempt purposes within the meaning of IRC 4942(e)(1)(A), and the value of the paintings is excludable in computing the foundation’s minimum investment return. Rev. Rul. 74–498, 1974–2 C.B. 387.

  4. Qualifying distribution; depreciation—For its fiscal year after 1970, a private foundation may not treat as a qualifying distribution under IRC 4942(g)(1)(B) an amount equal to straight-line depreciation on a building it constructed for charitable purposes described in IRC 170(c)(2)(B). Rev. Rul. 74-560, 1974–2 C.B. 389.

  5. Set-asides; conversion of newly acquired land to exempt purpose use.— An operating private foundation’s conversion of a portion of its newly acquired land into an extension of its existing wildlife sanctuary and the remainder into a public park under a four-year construction contract under which payments are mainly during the last two years constitutes a "specific project" , and the foundation’s set-aside of all its excess earnings for four years, for which it files a timely justifying application with the Service, will be treated as a qualifying distribution under IRC 4942(g)(2). Rev. Rul. 74–450, 1974–2 C.B. 388.

  6. Minimum investment return; island.— The value of an island, owned by a private foundation dedicated to preserving the natural ecosystems and historical and archaeological remains on the island that has no residential use and to which present access is limited to invited public and private researchers, may be excluded from the foundation’s minimum investment return. Rev. Rul. 75–207, 1975–1 C.B. 361.

  7. Redemption of stock.— The redemption of stock from a private foundation to the extent necessary for the foundation to avoid the excess business holdings tax under IRC 4943 is a sale or exchange not equivalent to a dividend under IRC 302(b)(1). Accordingly, the proceeds will not be included in adjusted net income. Rev. Rul. 75–336, 1975–2 C.B. 110.

  8. Cash balances; exclusion from minimum investment return.— In determining its minimum investment return, a private foundation whose average cash balances during the taxable year represented one percent of the fair market value of its assets may exclude an amount equal to one and one-half percent of its assets’ fair market value as reasonable cash balances used or held for use directly in carrying out its exempt purpose. Rev. Rul. 75–392, 1975–2 C.B. 447.

  9. Deferred incentive compensation; exclusion from adjusted net income.— For purposes of IRC 4942, a private foundation receiving annual payments, as beneficiary of a decedent’s deferred incentive compensation income plan, includes each payment as gross income to the extent that it exceeds the amount attributable to the value of the right to receive the payment on the decedent’s date of death. Rev. Rul. 75–442, 1975–2 C.B. 448.

  10. Repayment of loan principal; exclusion from adjusted net income.— Repayments of principal received by a private foundation in taxable years beginning after 1969 on loans made in prior years to individuals for charitable purposes are not includable in its gross income to determine its adjusted net income. However, payments of interest on such loans are includable. Rev. Rul. 75–443, 1975–2 C.B. 449.

  11. Legal fees; qualifying distributions.— Legal fees not excessive in amount, paid by an exempt charitable trust in a suit to determine the proper beneficiary of a portion of its net income, are qualifying distributions under IRC 4942(g)(1). Rev. Rul. 75–495, 1975–2 C.B. 449.

  12. Set-aside for renewal of scholarships.— A private foundation, whose primary activity is the making of renewable scholarships and fixed-sum research grants that normally run for three years, for which payments have been made annually from current income, may not treat set-aside amounts representing the maximum for each grantee from which the annual payments will be made as qualifying distributions. Rev. Rul. 75–511, 1975–2 C.B. 450.

  13. Functionally related business; exclusion from minimum investment return.— In determining its minimum investment return, a private foundation need not take into account assets used in a trade or business for which substantially all the work is performed without compensation. Rev. Rul. 76–85, 1976–1 C.B. 357.

  14. Amortized bond premiums; deductions from gross income in computing adjusted net income.— An exempt private foundation that amortizes bond premiums pursuant to IRC 171 may deduct the amortized amount in computing its adjusted net income. Rev. Rul. 76–248, 1976–1 C.B. 353.

  15. Set-asides; endowment of building project of unrelated public charity.— The accumulation of set-aside funds to endow a specific building project of an unrelated public charity is a "specific project" . Rev. Rul. 77–7, 1977–1 C.B. 354.

  16. Required accumulations; inclusion in undistributed income.— Amounts accumulated by a private foundation created in 1968 to award scholarships to qualified individuals from a specific high school, such accumulations being required by the trust instrument, do not reduce the amount required to be distributed under IRC 4942, even though a probate court of competent jurisdiction denied the trustee’s request to be excused from compliance with the provision of the trust requiring the accumulation. Rev. Rul. 77–74, 1977–1 C.B. 352.

  17. Repayment of loan principal; exclusion from adjusted net income.— A private foundation that made an interest-free loan from corpus to a public charity in a year in which its distribution requirements had been met and that continued to meet the distribution requirements during the five-year adjustment period, without use of the excess qualifying distributions created by the loan is not required to include in its gross income repayments on the loan and may return the payments to corpus. Rev. Rul. 77–252, 1977–2 C.B. 390.

  18. Set-aside by transferee private foundation; qualifying distribution.— An amount contributed by a private foundation to another private foundation that, in the taxable year following the taxable year in which it received the contribution, established an approved set-aside in the amount of the contribution and made a valid election to treat the entire amount of the set-aside as a distribution out of corpus may be treated by the donor foundation as a qualifying distribution. Rev. Rul. 78–45, 1978–1 C.B. 378.

  19. Low-interest loan to blind persons; qualifying distribution.— Low interest rate loans by a private foundation established to aid the blind in securing employment, that are made to blind persons who desire to establish themselves in business but who are unable to obtain funds through commercial sources constitute program related investments under IRC 4944(c) and are also qualifying distributions. Rev. Rul. 78–90, 1978–1 C.B. 380.

  20. Conversion of real property to exempt use; qualifying distribution.— The correct conversion date of real property converted by a private operating foundation from nonexempt to exempt uses, for purposes of treating the conversion as a qualifying distribution under Reg. 53.4942(a)–3(a)(5), is the date the foundation adopts and immediately proceeds to implement a plan for the exempt use of the property, even though the actual conversion is not completed until the following year. Rev. Rul. 78–102, 1978–1 C.B. 379.

  21. Set-aside of amount by which minimum investment return exceeds adjusted net income.— A private foundation may set aside under IRC 4942(g)(2), by means of a bookkeeping entry, the amount by which its minimum investment return for its immediately preceding taxable year exceeds its adjusted net income for that year. Rev. Rul. 78–148, 1978–1 C.B. 380.

  22. Transfer to controlled private foundation.— A private foundation that had a carryover of excess qualifying distributions transferred all its assets to another private foundation that was controlled by the same persons who controlled the first foundation. The transferee foundation may reduce its distributable amount by such carryover. Rev. Rul . 78–387, 1978–2 C.B. 270.

  23. Qualifying distributions; retention of control.— A private foundation agreed to help fund a museum to be built by a public charity but, in order to retain control of the funds and receive income therefrom during the 3 year period before construction was to begin, deferred payment on the commitment. The amount set aside may not be treated as a qualifying distribution under section 4942(g). §53.4942(a)–3. Rev. Rul. 79–319, 1979–2 C.B. 388.

  24. Qualifying distributions; second distribution of same asset.— A private foundation that has made a qualifying distribution equal to the purchase price of an asset donates the asset to a publicly supported charity, it will be allowed a second qualifying distribution to the extent that the fair market value of the asset on the date of contribution exceeds the amount of the first qualifying distribution. Rev. Rul. 79–375, 1979–2 C.B. 389.

  25. Qualifying distributions; contributions to exempt cemetery company.— An unrestricted contribution made by a private foundation to an exempt cemetery company that is not described in section 170(c)(2)(B) is not a qualifying distribution within the meaning of section 4942(g) and is a taxable expenditure within the meaning of section 4945(d)(5). Rev. Rul. 80–97, 1980–1 C.B. 257.

  26. Minimum investment return; computation; portion of office building commercially used.— A private foundation owns a building, a portion of which is used directly in carrying out its exempt purposes, with the remainder leased to commercial tenants. The percentage of exempt use of the building, for purposes of determining the foundation’s minimum investment return under section 4942(e), should be determined by dividing the fair rental value of that portion of the building used for exempt purposes by the fair rental value of the entire building. Rev. Rul. 83–137, 1982–2 C.B. 303.


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