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Private Foundations — Distributions (Section 4942) (Portfolio 880)

Product Code: TPOR42
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Private Foundations — Distributions (Section 4942), written by Thomas J. Schenkelberg, Esq. and Virginia C. Gross, Esq. of Polsinelli Shalton & Welte, P.C., discusses in detail the distribution requirements imposed by §4942 upon private foundations. Section 4942, enacted by the Tax Reform Act of 1969 as part of a comprehensive effort to regulate private foundations, exacts an excise tax upon the failure of a private foundation to make “qualifying distributions” in the required amounts.

Section 4942 requires that private foundations spend a specified amount of their funds annually to accomplish charitable purposes or to make grants to other exempt organizations which will use the funds for charitable purposes. The minimum distributable amount is 5% of the fair market value of the private foundation's assets not used in carrying out its exempt purposes, less any acquisition indebtedness. There are a number of restrictions on the types of grants which may be used to satisfy the minimum distribution requirement.

Generally, a qualifying distribution may be made as a direct charitable expenditure or as a grant for charitable purposes. A set aside of funds for a specific project to be conducted in the future may also be a qualifying distribution at the time of the set aside under certain circumstances. This Portfolio

  • Provides detailed analysis and an in-depth historical background of distributions for private foundations
  • Examines the applicability of §4942 and provides a comparison of nonoperating foundations to nonoperating public charities
  • Discusses assets used for carrying out exempt purposes, including those used directly in exempt activities, and covers the concepts of future and dual use property and property leased at nominal cost
  • Reviews the general rules of qualifying distributions, discusses qualifying purposes and the contributions of the use of property and noncash property
  • Examines and reviews the general rules of grants to private nonoperating foundations and controlled charities and provides a definition of control
  • Discusses the concept and general rule for set-asides and then delves into the topics of contingent set-asides and the suitability and cash distribution tests
  • Provides analysis of credit for qualifying distributions, their general rules and election for prior years and carryovers and more

Private Foundations — Distributions (Section 4942) allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
  • Invaluable practice documents including tables, charts and lists
  • Plain-English guidance from world-class experts
  • Real-world and in-depth analysis that lets you explore various options
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
  • Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

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Detailed Analysis

I. Introduction

A. Historical Background

B. Applicability of § 4942 - Comparison of Nonoperating Foundations to Nonoperating Public Charities

C. Statutory Scheme

II. Required Distributable Amount

A. General Rule

B. Minimum Investment Return

1. General Definition

2. Assets Included

3. Assets Excluded

a. Assets Used for Carrying Out Exempt Purposes

(1) Directly in Exempt Activities

(2) Future Use Property

(3) Dual Use Property

(4) Property Leased at Nominal Cost

(5) Cash Held for Charitable Purposes

(6) Functionally Related Businesses and Program-Related Investments

b. Nonpossessory Interests

c. Other Assets

4. Acquisition Indebtedness

5. Valuation of Assets

a. General Rules

b. Securities

(1) General Rule

(2) Discounts from Market Price per Share of Listed Securities

(3) Unlisted Securities

c. Cash

d. Common Trust Funds

e. Real Estate and Other Assets

f. Assets Held for Less Than One Year

III. Qualifying Distributions

A. General Rules

1. Qualifying Purposes

2. Contribution of the Use of Property

3. Contributions of Noncash Property

B. Grants to Public Charities

1. General Rule

2. Determination of and Reliance on Donee's Public Charity Status

3. Large Grants Relative to a Donee's Normal Support

4. Earmarked Grants

5. Conditional Grants

6. Grants to Community Foundations

C. Grants to Private Operating Foundations

D. Grants to Private Nonoperating Foundations and Controlled Charities

1. General Rules

2. Definition of Control

3. Flow-Through Exception for Redistributions

E. Grants to Foreign Organizations

F. Grants to Noncharitable Organizations

G. Grants to Individuals

H. Grants to Governmental Organizations

I. Grants of Borrowed Funds and Loans as Grants

J. Direct Charitable Expenditures

1. General Rule

2. Administrative Expenses

3. Direct Program Operation

4. Acquisition and Conversion of Assets

K. Functionally Related Businesses

L. Program-Related Investments

M. Economic Development Grants

N. Set-Asides

1. General Rule

2. Contingent Set-Asides

3. Suitability Test for Set-Asides

4. Cash Distributions Test for Set-Asides

O. Amount of Qualifying Distribution

P. Utilizing Excess Qualifying Distributions

IV. Calculation of Undistributed Income

A. Distributable Amount

1. General Calculation

2. Charitable Income Trusts

B. Credit for Qualifying Distributions

1. General Rule

2. Election for Prior Years

3. Carryovers

C. Undistributed Income

V. Tax on Failure to Distribute Income

A. Initial Tax

B. Additional Tax

C. Liability for the Excise Tax and the Termination Tax

D. Exceptions

1. Private Operating Foundations

2. Asset Valuation Mistakes

E. Abatement of Tax

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Working Papers

Table of Worksheets

Worksheet 1 Legislative History [Excerpts] Tax Reform Act of 1969 (P.L. 91-172)

Worksheet 2 Selective History of § 4942

Worksheet 3 Sample Grant Agreements

Worksheet 4 Selected Letter Rulings Relating to Private Foundation Distributions

Worksheet 5 Rev. Proc. 92-94, 1992-1 C.B. 572

Worksheet 6 IRS Publication 578, Tax Information for Private Foundations and Foundation Managers, Chapter VII, "Taxes on Failure to Distribute Income"

Worksheet 7 Sample Election Statement to Allocate Distributions to Other Taxable Years and Sample Statement Revoking Election




Treasury Regulations:

Legislative History:

Official Publications:

Treasury Rulings:

Other Rulings:



Books and Looseleafs:









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Virginia C. Gross
Virginia C. Gross, B.S., Texas A&M University (1986); J.D., University of Texas School of Law (1990); shareholder, Polsinelli Shalton & Welte, P.C., Kansas City, Missouri; legal practice concentrates on tax issues for nonprofit and for-profit organizations; frequent writer and speaker on nonprofit tax issues. 
Thomas J. Schenkelberg
Thomas J. Schenkelberg, B.B.A., University of Iowa (with Distinction 1982); J.D., University of Iowa (with Distinction 1986); Certified Public Accountant; Chair of the Nonprofit Practice Group of Polsinelli Shalton & Welte, P.C., Kansas City, Missouri; frequent speaker and writer on nonprofit tax issues.