Once an organization is classified as a private foundation, it may only terminate that status under the provisions of Internal Revenue Code section 507. Under section 507, there are four ways to terminate private foundation status, two of which involve tax liability:
1. Voluntary termination by notifying the IRS of intent to terminate and paying a termination tax: To voluntarily terminate under section 507(a)(1), the organization must send a statement to (Internal Revenue Service, Exempt Organizations Determinations, P.O. Box 2508, Cincinnati, OH 45201 of its intent to terminate its status under section 507(a)(1). The statement must provide, in detail, the computation and amount of private foundation termination tax. Unless the organization requests abatement, it must pay the tax at the time the statement is filed.
2. Involuntary termination for either willful repeated violations or a willful and flagrant violation of the private foundation excise tax provisions and becoming subject to the termination tax.
3. Transfer of assets to certain public charities: A private foundation may terminate its status under section 507(b)(1)(A) by distributing all its net assets to one or more organizations with a ruling or determination letter described in section 509(a)(1). However, the organization to which the distribution is made must have been in existence and so described for a continuous period of at least 60 months before the distribution. A private foundation that terminates its status in compliance with section 507(b)(1)(A) is not required to notify the IRS of its intent to terminate, and does not owe the termination tax.
4. Operating as a public charity for a continuous period of 60 months after giving appropriate notice: An organization may terminate its private foundation status under section 507(b)(1)(B) if it meets the requirements of section 509(a)(1), (2), or (3)) for a continuous 60-month period beginning with the first day of any tax year, and notifies the IRS before beginning the 60-month period that it is terminating its private foundation status.
To notify the IRS:
- To request an advance ruling that an organization can be expected to meet the requirements of section 507(b)(1)(B)(i), submit Form 8940 along with the required information and user fee to the address indicated in the Form 8940 instructions, or
- If not requesting an advance ruling, send the required information to Internal Revenue Service, Exempt Organizations Determinations, P.O. Box 2508, Cincinnati, OH 45201.
Both methods of notification of termination of private foundation status via operation as a public charity should include:
- The name and address of the private foundation,
- Its intention to terminate its private foundation status,
- The Code section under which it seeks classification (section 509(a)(1), (2), or (3)),
- If section 509(a)(1) applies, the specific type of section 170(b)(1)(A) organization for which it seeks classification,
- The date its regular tax year begins, and
- The date the 60-month period begins (must be the beginning of a tax period).
An organization that seeks an advance ruling and files Form 8940 will be required to complete and submit Form 872-B agreeing to extend the statute of limitations for paying the 4940 excise tax on net investment income until after the end of the 60-month period. Form 872-B is optional for organizations not requesting an advance ruling but if the organization chooses not to submit the form it must pay the taxes on its investment income during the period. The organization also must establish immediately after the end of the 60-month period that it has met the requirements of section 509(a)(1), (2), or (3).
Other situations related to termination of private foundation status:
- A foundation may also transfer its assets to another private foundation, commence voluntary termination, and pay no termination tax because it has no assets. In this case, the transferee acquires all of the aggregate tax benefits of the transferor associated with the transferred assets.
- An organization that erroneously determined that it was a private foundation and wishes to correct the error can request a determination letter classifying it as a public charity by showing that it continuously met the public support tests during the relevant periods. The organization should submit Form 8940 along with the appropriate user fee and documentation to the address listed in the Form 8940 instructions.
- Note that termination under section 507 only terminates your foundation status. If you have ceased activities and are terminating your organization refer to the page Termination of Exempt Organization. You should also notify the appropriate office in the state where you are organized about your intent to dissolve, liquidate, or terminate.
See Rev. Proc. 2017-5, updated annually, for further information.