Study for the Exam:
4940-4946 Excise Penalty Tax for Private Foundations
-Remember To Determine Whether Org is PF, These Penalties Only Apply to PF’s
Definitions:
DQP (4946) – broad definition, includes:
§ “Substantial Contributors” (major donors) –any person or entity (incl corps or other PF’s) who has contributed or bequested and aggregate amt of more than $5,000 to the PF, if amt is more than 2% of total contributions and bequests received by the PF since inception through the end of taxable year when contribution/bequest received\
o Creator of the Charitable Trust is Always a Substantial Contributor
o Donors Retain Status Even After Death
§ Exception: A person ceases to Substantial Contributor @ end of PF”s taxable year if, for a 10-yr period the contributor or any related person neither makes any contributions to the PF nor serves as Manager. Also requires that “aggregate contributions” be “insignificant” when compared with aggregate contributions of at least one other person.
o Spouses Are Vicariously Accountable
o Incl’s anyone who owns more than 20% of the “substantial contributor” business
§ Incl’s owning more than 20% of Voting Stock (incl’s “:constructive”)
§ “Foundation Manager”
o Includes: Officers, Directors, Trustees or Individuals w Similar Powers or Responsibilities
§ Foundation Manager who is a DQP solely under this “responsible employee” rule is not a DQP for any other purpose
§ Family Members and Some of Their Business Associates –spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren (any offshoots of the great grandchildren generation are immune)
§ Estates, and Related Business Entities such as Corps or Partnerships
I. 2% Excise Tax on Net Investment Income. § 4940(a)
Reduced to 1% for PF’s that Increase Charitable Distributions by Specified Amt. 4940(e)
Dividends, interests, royalties, and net capital gains, less directly related expenses
II. Federal Excise Tax.
Sanctions for Engaging in Various Proscribed Activities:
Self-Dealing – §4941
Penalizes virtually every business transaction between PF and DQP’s
May apply even if beneficial to PF
Prohibited Transactions Include: sales, exchanges, and leases of property; lending of $; and furnishing of goods, services or facilities
PF may pay DQP a reasonable compensation for services necessary to carry out the foundation’s exempt purpose
Penalties
Initial:
5% on PF
2.5% on Managers ($10,000 cap) if Knowing Participation
Second-Tier, if not corrected within specified time period
200%
50%
electioneering and voter registration, grants to individuals, grants to any org that is not classified as a public charity, and any other exp for noncharitable purposes
Initial: 10% on PF, 2.5% on “Knowing” Managers ($5,000 Cap)
2nd-Tier: 100% on PF, 50% on Managers ($10,000 Cap)
Exceptions: Pre-approved, “Expenditure Responsibility”-sole char use
Penalties for Failure to Meet Income Distribution Req’s Designed to Ensure that the PF”s Charitable Payout is Reasonably Related to its Endowment § 4942
PF’s must make “qualifying distributions” in an amt equal to 5% of the fair market value of their net investment assts
Penalty for Failure to Make Minimum Payout
Initial: 15% of Undistributed Income
2nd-Tier: 100% of Shortfall if Not Distributed Within Specified Correction Period
Qualifying Distributions: grants for charitable purposes, reasonable administrative costs related to the grantmaking process, payments to acquire assets used in the conduct of
