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Income Modifications - Adjusted Net Income of Private Operating Foundations

Only the following modifications are allowed in calculating a foundation's adjusted net income, for purposes of qualification as a private operating foundation:

  1. Interest on government obligations normally excluded under section 103 of the Code is included in gross income.
  2. When reporting capital gains and losses from the sale or other disposition of prop­erty, only net short-term capital gains are included in gross income. Long-term capi­tal gains or losses are not included. Neither are net section 1231 gains in­cluded. But net section 1231 losses may be included in the computation if the losses are otherwise deductible under these rules. Any net short-term capital loss may not be deducted for the year in which it occurs. This loss may not be carried back or carried over to earlier or later tax years regardless of whether the foundation is a corporation or a trust. Capital gain dividends received from a regulated invest­ment company are excluded from the foundation’s adjusted net income.
  3. Gross income includes:
    a.  Amounts received or accrued as repay­ments of amounts taken into account as qualifying distributions for any tax year,
    b.  Amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of the property was considered a qualifying distribution for any tax year, and
    c.  Any amount set aside for a specific pro­ject to the extent the amount set aside was not necessary for the purposes for which it was set aside.
  4. The excess of fair market value on the date of distribution over adjusted basis of property distributed to a state, a U.S. pos­session, or any political subdivision thereof; the United States; or the District of Columbia for public purposes, or to a char­itable trust or corporation, will not be in­cluded in gross income.
  5. Income received from an estate during the administration period will not be in­cluded in the operating foundation’s gross income. However, if the estate is consid­ered terminated for income tax purposes because of a prolonged administration pe­riod, the income will be included in gross income.

For purposes of item 2, in determining gain from the sale or other disposition of property, adjusted basis will be the greater of:

  1. The fair market value of the property on December 31, 1969, plus or minus all ad­justments to basis after 1969, using straight line depreciation and cost deple­tion, if the foundation held the property on December 31, 1969, and continuously thereafter to the date of sale or disposition, or
  2. Adjusted basis as normally determined us­ing straight line depreciation or cost deple­tion.

For determining loss from a sale or other disposition of property, the adjusted basis as normally determined using straight-line depreci­ation or cost depletion will apply.

Example.  The Morgan Foundation bought unimproved land in January 1969, for $102,000.  On December 31, 1969, the fair market value of the property was $110,000 and the adjusted basis was still $102,000.  The property was sold on January 2, 1983, for $105,000.  Because the fair market value on December 31, 1969, was greater than the adjusted basis, the fair market value is the adjusted basis used to determine gain.  However, because the adjusted basis for determining gain, $110,000, was greater than the sale price, there was no gain.  Moreover, because the adjusted basis for determining loss, $102,000, was less than the sale price, there was no loss.


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Page Last Reviewed or Updated: 14-Apr-2016