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

Part of Tax

Tax Management Portfolio, Private Foundations — Distributions (Section 4942), No. 880-2nd, discusses in detail the distribution requirements imposed by §4942 upon private foundations.

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Tax Management Portfolio, Private Foundations — Distributions (Section 4942), No. 880-2nd, 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.
Other Tax Management Portfolios dealing with private foundations include T.M., Private Foundations — Self-Dealing (Section 4941); T.M., Private Foundations — Excess Business Holdings; T.M., Private Foundations and Public Charities — Termination (§507) and Special Rules (§508); T.M., Private Foundations and Public Charities — Definition and Classification; T.M., Private Foundations — Taxable Expenditures (Sec. 4945); and T.M., Private Foundations — Section 4940 and Section 4944.
This Portfolio may be cited as Schenkelberg and Gross, T.M., Private Foundations — Distributions (Section 4942).


Thomas J. Schenkelberg, Esq.

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, P.C., Kansas City, Missouri; frequent speaker and writer on nonprofit tax issues.

Virginia C. Gross, Esq.

Virginia C. Gross, B.S., Texas A&M University (1986); J.D., University of Texas School of Law (1990); shareholder, Polsinelli, 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.

Table of Contents

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

Working Papers

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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