PORTFOLIO

Private Foundations — Section 4940 and Section 4944 (Portfolio 468)

Tax Management Portfolio, Private Foundations — Section 4940 and Section 4944, No. 468, discusses in detail the excise taxes imposed under §4940 upon investment income of private foundations and under §4944 upon private foundation investments that jeopardize the organization's charitable purposes.

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Tax Management Portfolio, Private Foundations — Section 4940 and Section 4944, No. 468, discusses in detail the excise taxes imposed under §4940 upon investment income of private foundations and under §4944 upon private foundation investments that jeopardize the organization's charitable purposes.
Section 4940 imposes a 2% excise tax on the net investment income of every nonoperating foundation exempt from taxation under §501(a). A private foundation's net investment income is defined by the statute as its gross investment income less the ordinary and necessary expenses paid or incurred for the production or collection of such income or for the management, conservation, or maintenance of property held for the production of such income. Private foundations which meet certain distribution requirements are subject to a reduced excise tax rate of 1%.
Section 4944 exacts an excise tax on any private foundation and its managers that make an investment that jeopardizes the carrying out of the foundation's exempt purposes. An initial excise tax of 10% of the amount of the investment is imposed on the foundation, with an equal tax imposed on any foundation manager who knowingly makes such an investment. If the foundation fails to remove the investment from jeopardy within a specified time, it is liable for an additional tax of 25% of the amount of the investment. A foundation manager who refuses to remove the investment from jeopardy is liable for an additional 5% tax. There is a general exception for program-related investments.
This portfolio may be cited as Etheridge, 468 T.M., Private Foundations — Section 4940 and Section 4944.


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AUTHORS

DONALD MCGEE ETHERIDGE, JR., ESQ.
Donald McGee Etheridge, Jr., A.B. (magna cum laude) and J.D., Duke University; LL.M. (Taxation), Georgetown University; member of State Bar of Georgia and North Carolina Bar; North Carolina Bar Association (Chairman, Tax Section, 1988–1989) and American Bar Association; Certified Public Accountant (North Carolina); Senior Lecturer of Law, Duke University Law School (1984–1994); Adjunct Faculty, University of North Carolina Law School (1985–1987); Adjunct Faculty, Emory University Law School (2010-2011); Adjunct Faculty, Boston University Law School (2012-2013); Adjunct Faculty, Northeastern University Law School (2013); Gift Planning Attorney, National Christian Foundation.

TABLE OF CONTENTS

Detailed Analysis

I. Section 4940

A. Historical Background

1. House Committee on Ways and Means

2. Senate Committee on Finance

3. House–Senate Conference - A Compromise

4. Subsequent Congressional Action

B. Incidence of Taxation

1. Tax–Exempt Foundations

2. Taxable Foundations

3. Exempt Operating Foundations

C. Definition of Net Investment Income

1. Gross Investment Income

2. Capital Gains and Losses

3. Deductions and Modifications

II. Section 4944

A. Historical Background

1. 1965 Treasury Department Report

2. House Committee on Ways and Means

3. Senate Committee on Finance

4. Subsequent Amendment of Section 4944

B. The Coverage of Section 4944 - What Is a Jeopardy Investment?

1. Scope of Prohibition

2. Insubstantial Speculative Investments

3. Gifts of Speculative Property

4. Investments Made Prior to January 1, 1970

5. Program–Related Investments

a. Primary Purpose

b. No Significant Purpose

c. Prohibited Political or Legislative Purposes

d. Changes in Investment

C. The Penalties for Violation of Section 4944

1. First–Tier Tax

a. Rate of Taxation

b. Taxable Period

c. Tax Liability of Foundation Managers

(1) Knowledge

(2) Participation

(3) Willfulness

(4) Reasonable Cause

(5) Advice of Counsel

(a) Legal Counsel

(b) Qualified Investment Counsel

(c) Lack of Advice

(6) Joint and Several Liability

(7) Burden of Proof

d. Abatement of First–Tier Taxes

2. Second–Tier Tax

a. Rate of Taxation

b. Prior Law and Amendment

c. Abatement of Second–Tier Taxes

d. Tax Liability of Foundation Managers


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 H.R. Rep. No. 91-413 (Part 1), 91st Cong., 2d Sess. 19-20, 31 (House Report on 1969 Enactment of Sections 4940 and 4944)

Worksheet 2 S. Rep. No. 91–552, 91st Cong., 2d Sess. 27-28, 45-46 (Senate Report on 1969 Enactment of Sections 4940 and 4944)

Worksheet 3 H.R. Rep. No. 98–432 (Part 2), 98th Cong., 2d Sess. 1465-1468 (House Report on 1984 Amendments to Section 4940)

Worksheet 4 Form 990–PF, Return of Private Foundation, with Instructions

Worksheet 5 Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code, with Instructions

Worksheet 6 IRS Publication 578, Tax Information for Private Foundations and Foundation Managers, Chapter IV, “Tax on Net Investment Income”

Worksheet 7 IRS Publication 578, Tax Information for Private Foundations and Foundation Managers, Chapter IX, “Taxes on Jeopardizing Investments”

Worksheet 8 Internal Revenue Manual, Private Foundations Handbook Chapter 12, “Tax on Net Investment Income of Private Foundations”

Worksheet 9 Internal Revenue Manual, Private Foundations Handbook Chapter 16, “Taxes on Investments Which Jeopardize Charitable Purposes”

Bibliography

OFFICIAL

Statutes:

Regulations:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

1970

1971

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