A substantial contributor includes any person who contributed or bequeathed a total amount of more than $5,000 to the private foundation if the amount is more than two percent of the total contributions and bequests received by the foundation from its creation up through the close of the tax year of the foundation in which the contribution or bequest is received from that person. For a trust, a substantial contributor includes the creator of the trust. However, in no case does the term include a governmental unit.
In determining whether the total contributions and bequests from a person are more than two percent of the total contributions and bequests received by a private foundation, both the total of the amounts received by the foundation and the total of the amounts contributed and bequeathed by the person, are determined as of the last day of each tax year. Although the determination is made on the last day of the foundation’s tax year, a donor is a substantial contributor as of the first day the foundation receives a gift large enough to make the donor a substantial contributor. Each contribution or bequest is valued at its fair market value on the date it is received by the foundation. Gifts by an individual include all contributions and bequests made by that individual and his or her spouse.
A determination is to be made as to whether a person is a substantial contributor as of the end of each of the foundation’s tax years, based on the respective totals of all contributions received and the total amount received from a particular person by that date. Status as a substantial contributor will date from the time the donor first met the $5,000–two percent test. Once a person is a substantial contributor to a private foundation, generally that person remains a substantial contributor even though the individual might not be so classified if a determination were first made at some later date. For instance, even though the total contributions and bequests of a person become less than two percent of the total received by a private foundation, generally the person remains a substantial contributor to the foundation.
However, a person ceases to be a substantial contributor as of the end of a private foundation’s tax year if:
That person (and all related persons) have not made any contributions to the foundation during the ten-year period ending with that tax year, and
That person (or any related person) was not a foundation manager of the foundation at any time during that ten-year period, and
The total contributions made by that person (and related persons) are determined by the IRS to be insignificant compared to the total contributions to the foundation by one other person. For the purpose of this comparison, appreciation on contributions while held by the foundation is taken into account.
A person is related to a substantial contributor, for this rule, if that person’s relationship to the contributor would make that other person a disqualified person with respect to the contributor. If the contributor is a corporation, the term related person also includes any officer or director of the corporation.
Special rules. A substantial contributor does not include an entity that is described in section 509(a)(1), (2), or (3) or any organization wholly owned by such an entity. In addition, only for purposes of section 4941 excise taxes on self-dealing, a substantial contributor does not include any other organization described in section 501(c)(3) (other than an organization with section 509(a)(4) status).
The term contribution includes gifts, and grants to the foundation, as well as bequests, devises, legacies, or transfers as outlined in the rules relating to estate and gift tax.
With respect to a private foundation, entities excluded from the definition of substantial contributor are also excluded from the definition of disqualified person.