An asset is used (or held for use) for exempt purposes only if it is actually used by the foundation in carrying on the charitable, educational, or similar function that gives rise to its exempt status, or if the foundation owns the asset and establishes to the satisfaction of the Service that its immediate use in exempt functions is not practical and that definite plans exist to begin the use within a reasonable period of time.
Assets held for the production of income or for investment (for example, stocks, bonds, interest-bearing notes, endowment funds, or generally, leased real estate) are not considered used or held for use for exempt purposes even though the income from those assets is used to carry out an exempt purpose. Whether an asset is held for the production of income or for investment rather than used or held for use directly by the foundation for exempt purposes is a factual question. For example, an office building used to provide offices for employees engaged in managing endowment funds for the foundation is not considered an asset used for exempt purposes.
However, where property is used both for exempt and nonexempt purposes, the property will be considered as being used entirely for exempt purposes if at least 95 percent of its total use is for exempt purposes. But, if less than 95 percent of its total use is for exempt purposes, a reasonable allocation must be made between exempt and nonexempt use. Property acquired by the foundation to be used for an exempt purpose will be considered an asset used for exempt purposes even though all or part of the property is leased for a limited and reasonable time (generally no more than one year) while arrangements are made to convert it to use for exempt purposes.
Where the income-producing use continues beyond a reasonable time, the property will not be considered an asset used for exempt purposes. Instead, at the time the income-producing use becomes unreasonable, the property will be considered disposed of to the extent the acquisition was taken into account as a qualifying distribution. If the property is later used by the foundation for exempt purposes, a qualifying distribution in an amount equal to its fair market value at that time will be considered to have been made at the time the exempt use begins.
Assets used for exempt purposes include:
- Administrative assets, such as office equipment and supplies, used by foundation employees and consultants to the extent these assets are devoted to and used directly in the administration of exempt activities,
- Real estate or the part of a building used by the foundation directly in its exempt activities,
- Physical facilities used in exempt activities such as paintings or other works of art owned by the foundation on public display, classroom fixtures and equipment, and research facilities and related equipment which, under the facts and circumstances, serve a useful purpose in the conduct of the exempt activities,
- Any interest in a functionally related business, or in a program-related investment,
- The reasonable cash balances necessary to cover current administrative expenses and other normal and current disbursements directly connected with the foundation's charitable, educational, or other similar exempt activities, and
- Any property leased by a foundation in carrying out its exempt purpose at no cost, or at a nominal rent, to the lessee or for a program-related purpose 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 area of a community.