For tax years beginning after 1984, the tax rate on net investment income is reduced from two percent to one percent for any private foundation that meets the following distribution requirements:
- The foundation makes qualifying distributions during the tax year at least equal to the sum of (a) the assets of the foundation for the tax year multiplied by its average percentage payout for the base period, plus (b) one percent of the foundation’s net investment income for the tax year, and
- The foundation was not liable for private foundation excise taxes for any year of the base period.
Average percentage payout is the average of the percentage payouts for each of the tax years in the foundation’s base period. For each tax year, the percentage payout is figured by dividing the qualifying distributions made during the year by the foundation’s assets for that year. If, for any tax year in the foundation’s base period, the foundation’s tax rate on net investment income is reduced to one percent by meeting these distribution requirements, the qualifying distributions made by the foundation during that year must be reduced by the amount of the reduction in tax.
The assets of the foundation for any tax year are the excess of the total fair market value of all the foundation’s assets, other than those used or held for use directly in carrying out the foundation’s exempt purpose, over the acquisition indebtedness with respect to those assets.
The base period with respect to any tax year is the five tax years preceding that year. If an organization has not been a private foundation throughout those five tax years, the base period consists of the tax years during which the foundation has been in existence. However, if a private foundation is a successor to another private foundation, it must take into account the experience of that other foundation.