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Refreshing Expiring Distribution Carryovers of Private Foundations

QUESTION

Can a private foundation make an election to treat a qualifying distribution as made out of corpus, in order to refresh an expiring excess distribution carryover under Code section 4942?

ANSWER

A private foundation cannot refresh the life of an excess qualifying distribution carryover beyond the five-year period set forth in section 4942(i) by making an election to treat a current-year qualifying distribution as made out of corpus. It has been brought to the attention of the IRS that some private foundations may be attempting to refresh or renew or prolong their expiring excess qualifying distribution carryovers under Code section 4942(i) beyond the five-year limit in this manner, which is not permitted under the regulations.  The following discussion is intended to supplement the instructions to Part XIII of Form 990-PF.

BACKGROUND

Code section 4942 effectively requires a private foundation (other than an operating foundation) to make qualifying distributions at least equal to its distributable amount for the tax year.  An excise tax is imposed on the shortfall (referred to as undistributed income).

Section 4942(h) treats qualifying distributions as made: 

  • First, out of the undistributed income for the prior tax year;
  • Second, out of undistributed income for the current tax year (unless the foundation elects to treat all or a part as made out of corpus); and
  • Third, out of corpus. 

Thus, if a foundation has no undistributed income for the prior tax year, it may elect to treat all of its qualifying distributions as made out of corpus.

A foundation may make an election to treat qualifying distributions as made out of corpus for several reasons.  The foundation may have undistributed income for one or more tax years preceding the prior tax year and thus need to correct deficient distributions for such year(s).  The foundation may want to qualify as a pass-through foundation under Code section 170(b)(1)(F)(ii), or may want a donor foundation to receive credit for a qualifying distribution to it, as set forth in section 4942(g)(1)(A)(i) or (ii) and (g)(3) (contributions to private non-operating foundations or to certain controlled organizations).

A private foundation has excess qualifying distributions for a particular tax year if the foundation’s distributable amount for the year is less than the combination of its qualifying distributions made out of undistributed income for the year and out of corpus with respect to the year.  Amounts distributed out of corpus as required for pass-through contributions under section 170(b)(1)(F)(ii) or 4942(g)(3), or to correct deficient distributions in prior years are not considered in this calculation, however.  Regulations section 53.4942(a)-3(e)(2).  Thus, in no case can the carryover generated in the particular tax year exceed the qualifying distributions for the year less the distributable amount for the year.

An excess of qualifying distributions may be carried forward for up to five years.  Section 4942(i)(2).

DISCUSSION

The problem at issue is explained in the following examples.

Example 1.  X Foundation has an unused excess qualifying distribution carryover of $100,000 from a prior year (5 years ago) that will expire if it is not used in its current tax year.  For its current tax year, X Foundation has a distributable amount of $100,000 and qualifying distributions also of $100,000.  X Foundation has no undistributed income from prior tax years, and does not elect to distribute any part of its qualifying distributions in satisfaction of sections 170(b)(1)(F)(ii) or 4942(g)(3).  Because its qualifying distributions for the year do not exceed its distributable amount for the year, X Foundation has no excess distribution carryover for its current tax year, and its $100,000 carryover from 5 years ago must expire.  X Foundation cannot generate an excess distribution carryover for its current tax year by electing to treat the $100,000 qualifying distribution for the current year (or any part of it) as made out of corpus and applying the $100,000 carryover from the prior year (or any part of it) in satisfaction of its distributable amount for the current year.

Example 2.  Same facts as in Example 1, except that instead of a $100,000 carryover from 5 years ago, X Foundation has unused excess qualifying distribution carryovers of $20,000 for each of the five prior years.  Again, X Foundation has no excess distribution carryover for its current tax year, so in this case its $20,000 carryover from 5 years ago must expire.  X Foundation cannot generate an excess distribution carryover for its current tax year by electing to treat the $100,000 qualifying distribution for the current year (or any part of it) as made out of corpus and applying the $20,000 carryovers from each of the five prior years (or any part of them) in satisfaction of its distributable amount for the current year.

 

Page Last Reviewed or Updated: 20-Oct-2016