Private Foundations — Taxable Expenditures (Sec. 4945), written by Michael I. Sanders, Esq. and Celia Roady, Esq., discusses in detail the restrictions placed upon the activities of private foundations under §4945. Enacted by the Tax Reform Act of 1969, §4945 imposes an excise tax upon “taxable expenditures” of a private foundation, defined by §4945(d) as including five separate categories of expenditures.

This Portfolio discusses the background of §4945 and outlines the elements of each category of “taxable expenditure.”

Taxable expenditures are amounts paid:

(1) to attempt to influence legislation;

(2) to influence the outcome of a public election or to carry on most voter registration drives;

(3) as a grant, with exceptions, to an individual for travel or study;

(4) as a grant to certain organizations; and

(5) for any noncharitable purpose.

Private Foundations — Taxable Expenditures (Sec. 4945) provides guidance in problem areas, including changes made by the Pension Protection Act of 2006, discusses exceptions to the §4945 restrictions, and provides a technical analysis of the first and second-tier excise taxes imposed on foundations and foundation managers for the making of taxable expenditures.

The Worksheets include sample documents to which reference is made in this Portfolio.

Private Foundations — Taxable Expenditures (Sec. 4945) 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.

Detailed Analysis

I. Introduction

II. The Development of the Limitation on Legislative and Political Activity

A. Early History

1. Legislative Action

2. Administrative Restrictions

3. The Slee Decision

B. Congressional Clarification of "Insubstantial Lobbying" and Amendments to the Regulations

C. Applying the "Substantiality" Test: Quantitative and Qualitative Approaches

1. The Quantitative Test: Seasongood

2. The Qualitative Decisions

a. "Public Interest" Organizations and Their Motives

b. Professional Associations

D. Prohibiting Participation in Partisan Politics

E. Tax Reform Act of 1969: § 4945

F. Tax Reform Act of 1976

III. Section 4945: An Overview

A. Introduction

B. Imposition of Tax, Limitation on Liability and Correction

1. Imposition of First-Tier Excise Tax

a. Excise Tax on the Foundation

b. Excise Tax on the Foundation Manager

c. Definitions Relating to First-Tier Excise Tax

(1) "Agreement"

(2) "Knowing"

(3) "Willful"

(4) "Due to Reasonable Cause"

(5) "Advice of Counsel"

(6) Abatement of First-Tier Tax

d. Application of First-Tier Excise Tax

2. Imposition of Second-Tier Excise Taxes

3. Possible Third-Tier Sanctions

4. Limit on Liability of Foundation Managers

5. Correction by Foundation and Its Manager

a. Time for Correction

b. Method of Correction

C. Administrative and Litigation Procedures

IV. Use of Propaganda to Influence Legislation

A. Overview

B. In General

1. "Legislation" Defined

2. Grassroots Lobbying: § 4945(e)(1)

a. In General

b. Encouragement to Take Action

c. Mass Media Communications

3. Direct Lobbying

4. Allocation of Lobbying Expenditures

a. Communications to Members

b. Communications to Nonmembers

c. Mixed Grassroots and Direct Lobbying

5. Subsequent Use

C. Exceptions to Influencing Legislation

1. Nonpartisan Analysis, Study, or Research

a. In General

b. Presentation as Part of a Series

c. Making Available Results of Nonpartisan Analysis, Study or Research

2. Technical Advice or Assistance

a. In General

b. Governmental Body or Subdivision Thereof

3. Communications Concerning Government Decisions Affecting the Existence, Powers and Duties of a Private Foundation

4. Examinations and Discussions of Broad Social, Economic, and Similar Problems

5. Expressions of Individual Opinions by Foundation Officials

D. Permissible Nonlobbying Activities

1. Jointly Funded Projects and Matching Grants

2. Certain Expenditures by Program-Related Recipients

3. Grants to Public Charities Not Earmarked for Lobbying

a. General Support Grants

b. Specific Project Grants

E. Subsequent Lobbying Use

1. Expenditures for Membership Communications

2. Grants to Organizations That Lose Public Charity Status

V. Influencing Elections and Carrying on Voter Registration Drives; Other Voter Education Activities

A. In General

B. Legislative History: 1969 Tax Reform Act

C. Influencing the Outcome of a Specific Public Election

1. In General

2. Exception for Grants to § 4945(f) Organizations

a. Generally

b. Determination of Support

(1) General Rule

(2) Special Rule for New Organizations

c. Advance Ruling Procedures

D. Other Voter Education Activities

1. General Prohibition

2. Permissible Voter Education Activities

a. Rev. Rul. 78-160

b. Rev. Rul. 78-248

c. Rev. Rul. 80-282

E. Political Organizations

1. In General

2. Application to Private Foundations

VI. General Rules for Making Grants

Introductory Material

A. Generally

B. Legislative History: 1969 Tax Reform Act

1. Grants to Individuals

2. Grants to Organizations

C. General Rules Governing Foundation Grant-Making to Individuals and Organizations

1. "Grants" Defined

2. Application of Self-Dealing Rules

a. In General

b. "Incidental" or "Tenuous" Benefit

VII. Grants to Individuals: Specific Provisions

A. In General

B. Distinguishing § 4945(d)(3) Grants to Individuals from Other Types of Grants

1. Grants for Purposes Other Than Travel or Study

2. Grants That Do Not Attempt to Influence Future Activities of the Grantee

3. Grants to Individuals Distinguished from Grants to Organizations Subsequently Paid to Individuals

4. Grants to Individuals Distinguished from Grants to Public Charities

a. The "Control" Requirement

b. Examples

5. Government Agency Grantees as Distinct from Individual Grantees

C. Miscellaneous Definitional Issues Concerning Grants to Individuals

1. Grants to Individuals That Qualify Under § 4945(g)(3) by Focusing on a "Specific Objective"

2. Earmarked Grants to Individuals Used for Prohibited Purposes

3. Payments by Individual Grantee to Employees

D. Renewals and Extensions of Grants to Individuals

E. Selection of Grantees on an "Objective and Nondiscriminatory Basis"

1. In General

2. Group of Potential Grantees Not Always Necessary

3. Selection of Grantees

4. Persons Making Selections

5. Racial Discrimination in Scholarship Programs

a. Prohibition on Discrimination Against Minorities

b. Regulations Permitting Favorable Treatment for Minorities

c. Limits on Programs Favoring Minorities: The "Finnish" Ruling

F. Supervision of Scholarship and Fellowship Grants

1. In General

2. Supervision of Grants Described in § 4945(g)(3)

3. Investigation of "Jeopardized" or "Diverted" Grants

a. Foundation Duties in General

b. Foundation Duties Where Grantee Has Not Previously Diverted Funds

c. Foundation's Duties Where Grantee Has Previously Diverted Funds

d. Summary of Diversion Rules

4. Retention of Records

G. Special Guidelines for Company-Sponsored Foundations and Their Scholarship Grant Programs

1. In General

2. Grant Programs Under Rev. Proc. 76-47

a. Coverage of Rev. Proc. 76-47

b. The Specific Facts and Circumstances Tests and the Percentage Test

(1) The Specific Facts and Circumstances Tests

(a) Inducement

(b) Selection Committee

(c) Minimum Eligibility Requirements

(d) Objective Standards of Selection

(e) Employment

(f) Course of Study

(g) Other Objectives

(2) The Percentage Test

c. Relief for Failure to Satisfy the Percentage Test: The "All Relevant Facts and Circumstances" Test

d. Procedure for Advance IRS Approval

3. Rules for Loan Programs: Rev. Proc. 80-39

4. Scholarship Grants Made by Company-Sponsored Foundations to Public Charities

a. Foundation Grants to Public Charities in General

b. Rev. Rul. 81-217: Applying Rev. Proc. 76-47 to Foundation Grants to Public Charities

c. Critique

(1) The Regs. § 53.4945-4(a)(4)(i) Error

(2) The Regs. § 53.4945-4(a)(4)(ii) Issue

H. Requirement of Advance Approval of Grant Procedures

1. In General

2. Submission Requirements

3. Advance Approval by the IRS

a. 45-Day Rule

b. Transitional and Savings Provision

VIII. Grants to Organizations: Specific Rules

A. Rules Relating to Grantees

1. "Public Charity" Defined

a. In General

b. Grants to Supporting Organizations

(1) Type III Supporting Organizations

(2) Grants to Controlled Supporting Organizations

(3) Determining the Type of Supporting Organization

c. Foreign Grantee "Equivalency" Doctrine

(1) In General

(2) Apparent Conflict Between § 4948(b) and Foreign Grantee "Equivalency" Doctrine

(3) Application of "Equivalency Doctrine" to Organizations Receiving Substantial Support from Foreign Governments

2. Foundation Reliance on "Public Charity" Status Rulings Issued to Organizational Grantees: The Problem of Changing Status

a. In General

b. Three Tests for Determining Whether Grantee Status Changes Make a Grant a Taxable Expenditure

(1) Foundation's Responsibility for a "Substantial and Material Change" in Grantee's Support: Rev. Procs. 81-6 and 89-23

(a) Definitions Relating to Grantee Status

(b) Guidelines for Grantee Status

(i) Organizations Existing for Five or More Years

(ii) Organizations Existing for Fewer Than Five Years

(c) Alternate Test Under Rev. Proc. 89-23

(2) "Unusual Grants" from a Foundation to a Public Charity: Rev. Proc. 81-7

(3) Expenditure Responsibility

3. Grants Made by Grantees: Special Rules Regarding Earmarking

a. In General

b. Grants to Governmental Agencies

B. Expenditure Responsibility

1. In General

a. Pre-Grant Inquiry

b. Written Grant Agreement

(1) Conventional Outright Grant

(2) Program-Related Investments

(3) Grants to Foreign Private Foundations

c. Restrictions on Grants (Other than Program- Related Investments) to Noncharitable Organizations

2. Reports from Grantees

a. Annual Reports

b. Final Reports

c. Reports on Capital Endowment Grants

d. Grantee's Accounting and Recordkeeping Procedures - FIFO and Pro-Rata Accounting

e. Reliance on Information Supplied by Grantee

3. Grantor Reporting to the IRS

a. In General

b. Recordkeeping Requirements

c. Reports Received After the Close of Grantor's Accounting Year

4. Violations of Expenditure Responsibility Requirements

a. Diversions by Grantee: Requirement to Withhold

b. Grantee's Failure to Make Reports

IX. Expenditures for Noncharitable Purposes: § 4945(d)(5)

A. In General

B. Legislative History - 1969 Tax Reform Act

C. Particular Expenditures

Working Papers

Table of Worksheets

Worksheet 1 Checklist for Determining Whether Grant-Making Rules Apply

Worksheet 2 Grant-Making Checklist

Worksheet 3 Grant Letter to Public Charity

Worksheet 4 Letter of Inquiry by Private Foundation to Public Charity Seeking Confirmation of Exempt Status and Public Support

Worksheet 5 "Expenditure Responsibility" Grant Letter

Worksheet 6 Individual Grant Letter

Worksheet 7 Individual Grant Procedures

Worksheet 8 Sources for Verifying an Organization's Status under Section 509(a)

Worksheet 9 IRM 7.27.19, Exempt Organizations Tax Manual, Tax Expenditures of Private Foundations

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Tax Management Portfolios:

Periodicals:

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