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 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.