Private Foundations and Public Charities — Termination and Special Rules (Sections 507 and 508) (Portfolio 458)

Description

The Bloomberg Tax Portfolio, Private Foundations and Public Charities — Termination and Special Rules (Sections 507 and 508), No. 458, is one of several Portfolios dealing with the problems encountered by private foundations and other charitable organizations. This Portfolio considers in depth the various restrictions imposed under §508 upon charitable organizations. Included among these are the rule that requires organizations purporting to be tax-exempt under §501(c)(3) to notify the IRS of their claimed status, and the rule that presumes a §501(c)(3) organization to be a private foundation unless it notifies the IRS to the contrary. This Portfolio discusses the manner of giving such notifications by filing applications for recognition of exemption and the exceptions to such notification requirements. The governing instrument requirements imposed by §508(e) are also fully addressed. In addition, the terms “substantial contributor” and “disqualified person,” which have significance to foundations whether they are terminating or continuing in operation, are fully explained and illustrated from a practical standpoint.

This Portfolio also considers in depth the rules under §507 whereby the status of a charitable organization as a private foundation may be terminated voluntarily or involuntarily. Special emphasis is placed upon the planning aspects of such terminations, including consideration of whether private foundation status should be terminated and selection of the most advantageous method of accomplishing termination. Finally, the Portfolio describes the conditions for disallowance of the income, estate, and gift tax charitable deductions for contributions made to organizations subject to the §507(c) termination tax and to organizations that run afoul of the §508 notification and/or governing instrument requirements.

The statutory rules governing termination of private foundation status were added by the Tax Reform Act of 1969. Accordingly, both the legislative history of that Act and the regulations issued thereunder (including temporary and proposed) are explained and analyzed.

For detailed discussions of related topics, see 456 T.M., Private Foundations and Public Charities — Definition and Classification; 450 T.M., Tax-Exempt Organizations: Organizational Requirements; 451 T.M., Tax-Exempt Organizations: Operational Requirements; 452 T.M., Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects; and 459 T.M., Supporting Organizations.

This Portfolio may be cited as Cesare, 458 T.M., Private Foundations and Public Charities — Termination and Special Rules (Sections 507 and 508).

Table of Contents

I. Introduction
II. Overview of Special Rules for §501(c)(3) Organizations
III. Notification of §501(c)(3) Status
IV. Section 508(b) Notification Concerning Private Foundation Status
V. Exceptions to Notification Requirements
VI. Governing Instruments
VII. Disqualified Persons
VIII. Statutory Scheme of Termination Provisions
IX. Voluntary Termination
X. Involuntary Termination
XI. Termination by Transfer of Assets to Certain Public Charities
XII. Termination by Operation as a Public Charity
XIII. Transfers of Assets to Private Foundations
XIV. Termination Tax
XV. Abatement
XVI. Disallowance of Charitable Deductions