If any qualifying distribution is not treated as being made out of undistributed income of the immediately preceding tax year, the foundation may choose to treat any part of the distribution as made out of the undistributed income of a designated prior tax year or out of corpus.
This choice is made by filing a statement with the IRS during the tax year in which the qualifying distribution is made or by attaching a statement to the foundation's annual return, for the tax year in which it made the qualifying distribution. The statement must contain a declaration by an appropriate foundation manager that the foundation is making the choice, under Regulations section 53.4942(a)-3(d)(2) and must specify whether the distribution is made out of undistributed income for a designated prior tax year (or years) or is made out of corpus.
When the choice is made during the tax year in which the qualifying distribution is made, the choice may be revoked in whole or in part by filing a statement with the Service during the same tax year or by attaching a statement to the foundation's annual return filed for the tax year during which the qualifying distribution was made. The revocation statement must contain a declaration by the appropriate foundation manager that the foundation is revoking the choice described above in whole or in part, and must specify the choice or part thereof being revoked.
Example. The Oak Foundation, a private foundation, has undistributed income of $300 for 2006 and $200 for 2007. On January 14, 2008, the Oak Foundation made its first qualifying distribution in 2008 when it set aside $700 for hospital construction.
On February 22, 2008, a notice of deficiency for the initial and additional excise tax on failure to distribute income with regard to the 2006 undistributed income was mailed to the Oak Foundation. The Oak Foundation notified the Service in writing on March 20, 2008, that it was making a choice to apply the January 14, 2008, distribution (to the extent that it exceeded 2007 undistributed income) against the 2006 undistributed income. The Oak Foundation is liable for an initial excise tax of $45 (15% of $300).
Because the Oak Foundation made the choice described, the $300 of undistributed income for 2006 is treated as distributed during the correction period, and no additional excise tax is imposed. Under these circumstances the $700 distribution is treated as made first out of the undistributed income of 2002 ($200), then out of the remaining undistributed income of 2006 ($300). The $200 remaining may be applied against the distributable amount for 2008 or may be treated as a distribution out of corpus.