PART II—PRIVATE FOUNDATIONS
Editorial Notes
Amendments
1969—
§507. Termination of private foundation status
(a) General rule
Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if—
(1) such organization notifies the Secretary (at such time and in such manner as the Secretary may by regulations prescribe) of its intent to accomplish such termination, or
(2)(A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax under
(B) the Secretary notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c),
and either such organization pays the tax imposed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g).
(b) Special rules
(1) Transfer to, or operation as, public charity
The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under
(A) such organization distributes all of its net assets to one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution, or
(B)(i) such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969,
(ii) such organization notifies the Secretary (in such manner as the Secretary may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is terminating its private foundation status, and
(iii) such organization establishes to the satisfaction of the Secretary (in such manner as the Secretary may by regulations prescribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i).
If an organization gives notice under subparagraph (B)(ii) of the commencement of a 60-month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month period, this part and
(2) Transferee foundations
For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization.
(c) Imposition of tax
There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of—
(1) the amount which the private foundation substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status of such foundation, or
(2) the value of the net assets of such foundation.
(d) Aggregate tax benefit
(1) In general
For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of—
(A) the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contributors to the foundation after February 28, 1913, had been disallowed, and
(B) the aggregate increases in tax under
(C) interest on the increases in tax determined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a private foundation.
(2) Substantial contributor
(A) Definition
For purposes of paragraph (1), the term "substantial contributor" means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term "substantial contributor" also means the creator of the trust.
(B) Special rules
For purposes of subparagraph (A)—
(i) each contribution or bequest shall be valued at fair market value on the date it was received,
(ii) in the case of a foundation which is in existence on October 9, 1969, all contributions and bequests received on or before such date shall be treated (except for purposes of clause (i)) as if received on such date,
(iii) an individual shall be treated as making all contributions and bequests made by his spouse, and
(iv) any person who is a substantial contributor on any date shall remain a substantial contributor for all subsequent periods.
(C) Person ceases to be substantial contributor in certain cases
(i) In general
A person shall cease to be treated as a substantial contributor with respect to any private foundation as of the close of any taxable year of such foundation if—
(I) during the 10-year period ending at the close of such taxable year such person (and all related persons) have not made any contribution to such private foundation,
(II) at no time during such 10-year period was such person (or any related person) a foundation manager of such private foundation, and
(III) the aggregate contributions made by such person (and related persons) are determined by the Secretary to be insignificant when compared to the aggregate amount of contributions to such foundation by one other person.
For purposes of subclause (III), appreciation on contributions while held by the foundation shall be taken into account.
(ii) Related person
For purposes of clause (i), the term "related person" means, with respect to any person, any other person who would be a disqualified person (within the meaning of section 4946) by reason of his relationship to such person. In the case of a contributor which is a corporation, the term also includes any officer or director of such corporation.
(3) Regulations
For purposes of this section, the determination as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations prescribed by the Secretary.
(e) Value of assets
For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation.
(f) Liability in case of transfers of assets from private foundation
For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation.
(g) Abatement of taxes
The Secretary may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if—
(1) the private foundation distributes all of its net assets to one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or
(2) following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary, in such manner as the Secretary may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary receives certification from the appropriate State officer that such action has resulted in such preservation of assets.
(Added
Editorial Notes
Amendments
1984—Subsec. (d)(2)(C).
1976—
Statutory Notes and Related Subsidiaries
Effective Date of 1984 Amendment
Effective Date
Section effective Jan. 1, 1970, see section 101(k)(1) of
Applicability to Determination of Status as Substantial Contributor for Purposes of Taxes on Self-Dealing of Contributions Made Prior to October 9, 1969
"(1) were made on account of or in lieu of payments required under a lease in effect before such date, and
"(2) were coincident with or by reason of the reduction in the required payments under such lease,
shall not be taken into account. For purposes of applying section 507(d)(2)(B)(iv) of such Code, the preceding sentence shall be treated as having taken effect on January 1, 1970."
§508. Special rules with respect to section 501(c)(3) organizations
(a) New organizations must notify Secretary that they are applying for recognition of section 501(c)(3) status
Except as provided in subsection (c), an organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)—
(1) unless it has given notice to the Secretary in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of such status, or
(2) for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary by regulations for giving notice under this subsection.
(b) Presumption that organizations are private foundations
Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary, at such time and in such manner as the Secretary may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation.
(c) Exceptions
(1) Mandatory exceptions
Subsections (a) and (b) shall not apply to—
(A) churches, their integrated auxiliaries, and conventions or associations of churches, or
(B) any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000.
(2) Exceptions by regulations
The Secretary may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both—
(A) educational organizations described in section 170(b)(1)(A)(ii), and
(B) any other class of organizations with respect to which the Secretary determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provisions of this title relating to private foundations.
(d) Disallowance of certain charitable, etc., deductions
(1) Gift or bequest to organizations subject to section 507(c) tax
No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduction under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made—
(A) by any person after notification is made under section 507(a), or
(B) by a substantial contributor (as defined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year.
(2) Gift or bequest to taxable private foundation, section 4947 trust, etc.
No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made—
(A) to a private foundation or a trust described in section 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)), or
(B) to any organization in a period for which it is not treated as an organization described in section 501(c)(3) by reason of subsection (a).
(3) Exception
Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax imposed by section 507(c) is abated by the Secretary under section 507(g).
(e) Governing instruments
(1) General rule
A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are—
(A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the foundation to tax under section 4942, and
(B) to prohibit the foundation from engaging in any act of self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)).
(2) Special rules for existing private foundations
In the case of any organization organized before January 1, 1970, paragraph (1) shall not apply—
(A) to any period after December 31, 1971, during the pendency of any judicial proceeding begun before January 1, 1972, by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument in order to meet the requirements of paragraph (1), and
(B) to any period after the termination of any judicial proceeding described in subparagraph (A) during which its governing instrument or any other instrument does not permit it to meet the requirements of paragraph (1).
(f) Additional provisions relating to sponsoring organizations
A sponsoring organization (as defined in section 4966(d)(1)) shall give notice to the Secretary (in such manner as the Secretary may provide) whether such organization maintains or intends to maintain donor advised funds (as defined in section 4966(d)(2)) and the manner in which such organization plans to operate such funds.
(Added
Editorial Notes
Amendments
2006—Subsec. (f).
2004—Subsec. (d)(1), (2).
1976—Subsec. (a).
Subsec. (a)(1), (2).
Subsec. (b).
Subsec. (c)(2).
Subsec. (c)(2)(A).
Subsec. (c)(2)(B).
Subsec. (d)(2)(A).
Subsec. (d)(3).
Subsec. (e)(2)(A).
Subsec. (e)(2)(B).
Subsec. (e)(2)(C).
Statutory Notes and Related Subsidiaries
Effective Date of 2006 Amendment
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(71)(A)–(C), (b)(8)(E) of
Effective Date
Section effective Jan. 1, 1970, except that subsecs. (a), (b), and (c) effective Oct. 9, 1969, see section 101(k)(1), (3) of
Savings Provision
Limits on inclusion of provisions inconsistent with subsec. (e) of this section in governing instruments, see section 101(l)(6) of
§509. Private foundation defined
(a) General rule
For purposes of this title, the term "private foundation" means a domestic or foreign organization described in section 501(c)(3) other than—
(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii));
(2) an organization which—
(A) normally receives more than one-third of its support in each taxable year from any combination of—
(i) gifts, grants, contributions, or membership fees, and
(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year,
from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and
(B) normally receives not more than one-third of its support in each taxable year from the sum of—
(i) gross investment income (as defined in subsection (e)) and
(ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511;
(3) an organization which—
(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2),
(B) is—
(i) operated, supervised, or controlled by one or more organizations described in paragraph (1) or (2),
(ii) supervised or controlled in connection with one or more such organizations, or
(iii) operated in connection with one or more such organizations, and
(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and
(4) an organization which is organized and operated exclusively for testing for public safety.
For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).
(b) Continuation of private foundation status
For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under section 507.
(c) Status of organization after termination of private foundation status
For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination.
(d) Definition of support
For purposes of this part and
(1) gifts, grants, contributions, or membership fees,
(2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513),
(3) net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business,
(4) gross investment income (as defined in subsection (e)),
(5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and
(6) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge.
Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit.
(e) Definition of gross investment income
For purposes of subsection (d), the term "gross investment income" means the gross amount of income from interest, dividends, payments with respect to securities loans (as defined in section 512(a)(5)), rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. Such term shall also include income from sources similar to those in the preceding sentence.
(f) Requirements for supporting organizations
(1) Type III supporting organizations
For purposes of subsection (a)(3)(B)(iii), an organization shall not be considered to be operated in connection with any organization described in paragraph (1) or (2) of subsection (a) unless such organization meets the following requirements:
(A) Responsiveness
For each taxable year beginning after the date of the enactment of this subsection, the organization provides to each supported organization such information as the Secretary may require to ensure that such organization is responsive to the needs or demands of the supported organization.
(B) Foreign supported organizations
(i) In general
The organization is not operated in connection with any supported organization that is not organized in the United States.
(ii) Transition rule for existing organizations
If the organization is operated in connection with an organization that is not organized in the United States on the date of the enactment of this subsection, clause (i) shall not apply until the first day of the third taxable year of the organization beginning after the date of the enactment of this subsection.
(2) Organizations controlled by donors
(A) In general
For purposes of subsection (a)(3)(B), an organization shall not be considered to be—
(i) operated, supervised, or controlled by any organization described in paragraph (1) or (2) of subsection (a), or
(ii) operated in connection with any organization described in paragraph (1) or (2) of subsection (a),
if such organization accepts any gift or contribution from any person described in subparagraph (B).
(B) Person described
A person is described in this subparagraph if, with respect to a supported organization of an organization described in subparagraph (A), such person is—
(i) a person (other than an organization described in paragraph (1), (2), or (4) of section 509(a)) who directly or indirectly controls, either alone or together with persons described in clauses (ii) and (iii), the governing body of such supported organization,
(ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or
(iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting "persons described in clause (i) or (ii) of section 509(f)(2)(B)" for "persons described in subparagraph (A) or (B) of paragraph (1)" in subparagraph (A)(i) thereof).
(3) Supported organization
For purposes of this subsection, the term "supported organization" means, with respect to an organization described in subsection (a)(3), an organization described in paragraph (1) or (2) of subsection (a)—
(A) for whose benefit the organization described in subsection (a)(3) is organized and operated, or
(B) with respect to which the organization performs the functions of, or carries out the purposes of.
(Added
Editorial Notes
References in Text
The date of the enactment of this subsection, referred to in subsec. (f)(1)(A), (B)(ii), is the date of enactment of
Codification
Sections 1221(a)(2) and 1241(a), (b) of
Amendments
2006—Subsec. (a)(3)(B).
Subsec. (e).
Subsec. (f).
1978—Subsec. (e).
1975—Subsec. (a)(2)(B).
Statutory Notes and Related Subsidiaries
Effective Date of 2006 Amendment
"(1)
"(2)
"(A) in the case of trusts operated in connection with an organization described in paragraph (1) or (2) of section 509(a) of the Internal Revenue Code of 1986 on the date of the enactment of this Act, on the date that is one year after the date of the enactment of this Act, and
"(B) in the case of any other trust, on the date of the enactment of this Act."
Effective Date of 1978 Amendment
"(1) amounts received after December 31, 1976, as payments with respect to securities loans (as defined in section 512(a)(5) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]), and
"(2) transfers of securities, under agreements described in section 1058 of such Code, occurring after such date."
Effective Date of 1975 Amendment
Effective Date
Section effective Jan. 1, 1970, see section 101(k)(1) of
Savings Provision
Applicability of subsec. (a) of this section to testamentary trusts, see section 101(l)(7) of
Charitable Trusts Which Are Type III Supporting Organizations
"(1) it is a charitable trust under State law,
"(2) the supported organization (as defined in section 509(f)(3) of such Code) is a beneficiary of such trust, and
"(3) the supported organization (as so defined) has the power to enforce the trust and compel an accounting."
Payout Requirements for Type III Supporting Organizations
"(1)
"(2)