For any tax year during which the organization is a private nonoperating foundation, any excess qualifying distributions may be used to reduce distributable amounts in any tax year of the adjustment period.
If a private foundation that had a carryover of excess qualifying distributions makes a section 507(b)(2) transfer of all its assets to an effectively controlled foundation, the transferee foundation may reduce its distributable amount by the carryover.
The distributable amount for a tax year in an adjustment period will be reduced by the lesser of:
- The excess of qualifying distributions made in prior tax years to which the adjustment period applies, or
- The remaining undistributed income at the close of the tax year after applying any qualifying distributions made in that year to the distributable amount for the year.
Example. Maple Foundation, a private nonoperating foundation, has distributable amounts for 1998, 1999, and 2000 of $100 each. It made a qualifying distribution in 1999 of $250 and in 2000 of $70. The qualifying distribution made in 1999 will be treated as $100 made out of the undistributed income for 1998, then as $100 made out of undistributed income of 1999, and finally as $50 out of corpus in 1999. Since the total qualifying distributions with respect to 1999 ($150) exceed the distributable amount for 1999 ($100), a $50 excess of qualifying distributions exists which the Maple Foundation may use to reduce its distributable amounts for the years 2000 through 2004 (the tax years in the adjustment period with respect to the 1999 excess).
Therefore, the $100 distributable amount for 2000 is reduced by $30 (the lesser of the 1999 excess ($50) and the remaining undistributed income at the close of 2000 ($30), after the qualifying distributions of $70 for 2000 were applied to the original distributable amount for 2000 of $100), Maple Foundation then has a $20 excess of qualifying distributions to use for tax years in the adjustment period. If during any tax year of the adjustment period another excess of qualifying distributions is created, that excess will not be taken into account until the earlier excess has been completely applied against distributable amounts during its adjustment period.
Note: A foundation may not refresh expiring distribution carryovers beyond the statutory five-year carryover period by electing to treat current distributions as made out of corpus. See Refreshing Expiring Distribution Carryovers for more information.