A new foundation generally will be treated as an operating foundation only if it has satisfied the income test and one of the three other tests for its first tax year of existence. If so, it will be treated as an operating foundation from the beginning of its first year. This status will continue for its second and third tax years only if it satisfies the tests by the combination method for all tax years.
Before the end of its first tax year, a foundation may be treated as an operating foundation if it makes a good faith determination that it is likely to meet the tests for its first year. A good faith determination may be based on an affidavit of opinion of counsel, giving enough facts about the foundation's operations and support to enable the Internal Revenue Service to determine that the requirements are likely to be met. If a foundation is treated as an operating foundation for its first year, but actually fails to qualify for the first year, it will be treated as a nonoperating foundation as of the first day of its second year. However, such a foundation may establish to the satisfaction of the Service that it is likely to qualify as an operating foundation based on its second, third, and fourth tax years. If so, it will be treated as an operating foundation until the first day of a tax year in which it fails to qualify. Status as a private foundation that is not an operating foundation will continue until the organization is able to satisfy these tests by either the three-out-of-four-year method or the combination method.