Life cycle of a private foundation: Jeopardizing exemption


Like all 501(c)(3) organizations, a private foundation will jeopardize its 501(c)(3) exemption if it ceases to be operated exclusively for exempt purposes. A foundation will be operated exclusively for exempt purposes only if it engages primarily in activities that accomplish the exempt purposes specified in section 501(c)(3). A foundation will not be so regarded if more than an insubstantial part of its activities does not further an exempt purpose. Like other exempt organizations, a private foundation loses its tax-exempt status if it does not file an annual return for three consecutive years.

In addition, like all section 501(c)(3) organizations, a private foundation:

  • must absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office and may generally not engage in substantial lobbying activities
  • must ensure that its earnings do not inure to the benefit of any private shareholder or individual
  • must not operate for the benefit of private interests such as those of its founder, the founder's family, its shareholders or persons controlled by such interests
  • must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school's operation of a factory
  • may not have purposes or activities that are illegal or violate fundamental public policy.

Certain activities permissible for 501(c)(3) public charities give rise to excise taxes if conducted by a private foundation. For instance, lobbying activity by a private foundation, whether or not substantial, gives rise to a taxable expenditure. Transactions with a private shareholder or individual, whether or not they result in inurement of net earnings, may result in the imposition of self-dealing taxes on individuals benefiting from certain transactions with a foundation. The conduct of an unrelated business (unless a functionally related business), whether or not as the primary purpose, may give rise to a taxable excess business holding, as may other excessive ownership in a business enterprise.

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