Private Operating Foundation - Endowment Test

A foundation will meet the endowment test if it normally makes qualifying distributions directly for the active conduct of its exempt activities of at least two-thirds of its minimum investment re­turn.

In determining whether the amount of quali­fying distributions is at least two-thirds of the organization’s minimum investment return, the organization is not required to trace the source of the expenditures to determine whether they were received from investment income or from contributions.

Example. X Foundation, created after May 26, 1969, has $400,000 of endowment funds and other assets not directly used for its exempt purpose.  X makes qualifying distributions of $20,000 during the year directly for the active conduct of its exempt function.  Two-thirds of X’s minimum investment return is $13,333.33 (5% X $400,000 = $20,000; 2/3 X $20,000 = $13,333.33).  Because the $20,000 distribution is greater than $13,333.33, X meets the endow­ment test.

In most cases, the foundation satisfies the endowment test if it satisfies the income test.  Only where the minimum investment return is markedly higher than adjusted net income does the endowment test (and thus the other alternative tests as well) have independent significance.



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