The tax imposed under section 507(c) on the termination of a private foundation is the lesser of:
The combined tax benefit resulting from the section 501(c)(3) status of the organization, or
The value of the net assets of the organization.
The combined tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of:
The combined increases in income, estate, and gift taxes that would have been imposed on all substantial contributors if deductions for all contributions made by those contributors to the foundation after February 28, 1913, had been disallowed, and
The combined increases in income tax that would have been imposed on the private foundation’s income for tax years beginning after 1912 if—
a. The foundation had not been tax exempt, and
b. In the case of a trust, its charitable deduction had been limited to 20 percent of its taxable income, and
Amounts received from private foundations to which transferee liability applies, and
The interest on the tax increases in (1), (2), and (3) from the first date the increase would have been due or payable to the date the organization ceases to be a private foundation.
In figuring the combined increases in tax under (1), all deductions for a particular contribution for income, estate, or gift tax purposes must be included. For example, if a substantial contributor had taken income tax and gift tax deductions for a charitable contribution to the foundation, the amount of each deduction must be included. The combined tax benefit may be more than the fair market value of the property transferred.
The value of the net assets of the organization is generally the greater of:
The value on the first day action was taken to terminate private foundation status, or
The value on the date the organization ceased to be a private foundation.
A special rule may apply when valuing the net assets of a trust that holds amounts segregated for use for charitable purposes.
The valuation date in (1) is the date the organization gave notice it was terminating private foundation status.
When tax is imposed. These same dates determine when liability for the section 507(c) tax is imposed because a transfer of assets by a private foundation is involved.
Termination tax - involuntary termination: In the case of an involuntary termination, section 507(c) tax is computed in the same manner as for voluntary terminations. However, in determining the value of net assets of the foundation on the first day action was taken to terminate private foundation status, the valuation date is the date a willful and flagrant act, failure to act, or the first in a series of willful repeated acts or failures to act occurred.