Determination Letter
201925019
Released June 21, 2019
Other outcome
Transcribed from scan
Charity reclassified as private non-operating foundation
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This page covers one taxpayer's ruling from 2019, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
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View official IRS release (PDF)
Plain-English summary
An organization remained exempt under section 501(c)(3), but the IRS changed its foundation classification from a section 509(a)(2) publicly supported organization to a private non-operating foundation. Using the organization's filed Forms 990, the examination concluded that it failed the public-support test in multiple years and exceeded the one-third gross-investment-income limit. The organization therefore had to file Form 990-PF and owed section 4940 net-investment-income excise tax for two years. For section 4942, it owed tax on undistributed income for one examined year but not the other, where qualifying distributions exceeded the distributable amount.
Ruling snapshot
- Question: Did the organization continue to qualify as a publicly supported organization under section 509(a)(2), and what private-foundation excise taxes followed if it did not?
- Outcome: Reclassified as a private foundation while retaining section 501(c)(3) exemption; section 4940 tax applied for both examined years and section 4942 tax applied for one.
- Key authorities: IRC §§ 501(c)(3), 509(a)(2), 4940, and 4942
Full text (IRS public release)
Transcriber's note: this document is a fifteen-page scan containing a final classification letter, a proposed-modification letter, and Form 886-A. All page images were checked. Obvious OCR errors in headings, dates, words, punctuation, section citations, and table entries were corrected by comparison with the images; form layout was linearized and redacted blank text is identified where needed. Original grammatical and typographical irregularities are preserved. The wording is otherwise verbatim.
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce, MS 4920 DAL
Dallas, Texas 75242-1100
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Date: February 19, 2019
Number: 201925019 Employer Identification Number:
Release Date: 6/21/2019
Person to Contact/ID Number:
Contact Numbers:
Voice:
Fax:
UIL: 501.03-00
LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:
CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear [redacted]:
This is a final determination regarding your foundation classification. This modifies our
letter dated June 15, 19XX, in which we determined that you were an organization exempt
from Federal income tax under section [redacted] as described in section 509(a)(2) of the Internal
Revenue Code (IRC). We have modified your foundation status to that of an
organization described in IRC section 509(a) as a private non-operating foundation,
effective for tax years beginning January 1, 20XX.
Your tax-exempt status under section 501(c)(3) of the Internal Revenue Code is not
affected. Grantors and contributors may rely on this determination, unless the Internal
Revenue Service publishes a notice to the contrary. Because this letter could help
resolve any questions about your private foundation status, please keep it with your
permanent records.
We previously provided you a report of examination explaining the proposed
modification of your tax-exempt status. At that time, we informed you of your right to
contact the Taxpayer Advocate, as well as your appeal rights. On October 28, 20XX, you
signed Form 6018, Consent to Proposed Action — Section 7428, in which you agreed to
the modification of your foundation classification to 509(a) organization. This is a final
determination letter with regards to your Federal tax-exempt status under IRC section
501(a).
You are required to file Form 990 PF, Return of Private Foundation. Form 990 PF must
be filed by the 15th day of the fifth month after the end of your annual accounting
periods. A penalty of $20 a day is charged when a return is filed late, unless there is a
reasonable cause for the delay; however, the maximum penalty charged cannot exceed
$10,000 or 5
percent of your gross receipts for the year whichever is less. In addition, organizations with
gross receipts exceeding $1,000,000 for any year will be charged a penalty of $100 a day
when a return is filed late; however, the maximum penalty charged cannot exceed $50,000.
These penalties may also be charged if a return is not complete, so be sure your return is
complete before you file it.
If you are subject to the tax on unrelated business income under section 511 of the Code,
you must also file an income tax return on Form 990-T, Exempt Organization Business
Income Tax Return.
If you decide to contest this determination in court, you must initiate a suit for a declaratory
judgment in the United States Tax Court, the United States Claims Court, or the District
Court of the United States for the District of Columbia before the 91st day after the date this
final determination letter was mailed to you. Contact the clerk of the appropriate court for
rules for initiating suits for declaratory judgment. You may write to the Tax Court at the
following address:
United States Tax Court,
400 Second Street
Washington, D.C. 20217
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS
that can help protect your rights. We can offer you help if your tax problem is causing a
hardship, or you’ve tried but haven’t been able to resolve your problem with the IRS. If
you qualify for our assistance, which is always free, we will do everything possible to
help you. Visit [email protected] or call 1-877-777-4778.
If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter.
Thank you for your cooperation.
Sincerely,
Maria Hooke
Director, Exempt Organizations Examinations
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations
Date:
October 16, 2018
Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
Person to Contact:
Employee ID:
Telephone:
Fax: .
Manager's Contact Information:
Employee ID:
Telephone:
Response Due Date:
CERTIFIED MAIL — Return Receipt Requested
Dear [redacted]:
Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to modify your organization’s foundation status under Internal Revenue Code (IRC)
Section 509(a).
Your exempt status under IRC Section 501(c)(3) is still in effect.
If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final letter modifying
your foundation status.
If you disagree
1. Request a meeting or telephone conference with the manager shown at the top of this
letter.
2. Send any information you want us to consider.
3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
send additional information as stated in 1 and 2, above, you'll still be able to file a protest
with IRS Appeals Office after the meeting or after we consider the information.
The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
Letter 3620 (Rev 9-2017) -
Catalog Number 34811R
sign a consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.
Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we’ve issued this letter.
4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
Government Entities) if you feel the issue hasn't been addressed in published precedent
or has been treated inconsistently by the IRS.
If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.
If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final letter modifying your foundation status.
Effect of modification of your foundation status
If you receive a final modification letter making you a private foundation or a private operating
foundation, you'll be required to file annual returns on Form 990-PF, Return of Private
Foundation or Section 4947(a)(1) Trust Treated as Private Foundation.
Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can
help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a
hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you
qualify for TAS assistance, which is always free, TAS will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.
Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).
If you have questions, you can contact the person shown at the top of this letter.
Sincerely,
Maria Hooke
Director, Exempt Organizations
Examinations
Enclosures:
Form 886-A
Form 6018
2 Letter 3620 (Rev 9-2017)
Catalog Number 34811R
Form 886-A EXPLANATIONS OF ITEMS
Schedule number or exhibit
(May 2017)
Name of taxpayer Tax Identification Number (last four digits) Year/Period ended
12/31/20XX &
12/31/20XX
Issues:
1. Does [redacted] ("Foundation") fail the public support test and gross investment
income test, and should therefore be reclassified as a private foundation under Internal Revenue
Code ("IRC") Section ("§") 509(a) of the Code?
2. If Foundation is reclassified as a private foundation, is it liable for taxes under IRC § 4940 on net
investment income for tax years ending December 31, 20XX and December 31, 20XX?
3. If Foundation is reclassified as a private foundation, is it liable for taxes under IRC § 4942 for
undistributed income for the tax years ending December 31, 20XX & December 31, 20XX?
Facts:
Foundation incorporated in the state of [redacted] on May 31, 19XX. On May 15, 19XX, Foundation filed. its
amended Articles of Incorporation. The amendment added specific language that limited its purposes and
activities to those allowed for exemption from tax under IRC § 501(c)(3). The specific purpose is to
disseminate materials and information on stress-free living and to engage in any legal activities to cover
costs for the corporation. The amendment also included a provision if the foundation dissolved. The
assets upon dissolution will be distributed for one or more exempt purposes within the meaning of IRC §
501(c)(3) or distributed to the federal government, or to a state or local government for a public purpose.
Foundation received a favorable determination that it was exempt from tax under IRC § 501(c)(3) in August
19XX,- with an effective date for exemption as the day after the date of incorporation, June 1, 19XX.
Foundation was further classified as not a private foundation because it qualified as a publicly supported
organization under Section 509(a)(2) of the Code.
The Organization's Forms 990 for tax years 20XX and 20XX reflect the following:
Form 990 — Revenue & Expenses
20XX 20XX
Contributions: All Other Gifts: $0 $0
Program Service Revenue (1): Special Events/Classes
$0 $0
Investment Income: $0 $0
Gross Rents: $0 $0
Less: Rental Expenses $0 ($0)
Gross Sales of Inventory: $0 $0
Less: Cost of Goods Sold: ($0) ($0)
Total Revenue $0 $0
Fees: Legal: $0 $0
Fees: Accounting: $0 $0
Advertising & promotion $0 $0
Office Expenses: $0 $0
Information Technology $0 $0
Occupancy: $0 $0
Travel: $0 $0
Conferences, Conventions, Meetings: $0 $0
Insurance: $0 $0
Other Expenses (1): Bank Charges/Fees $0 $0
Other Expenses (2): Taxes - Non UBIT $0
Other Expenses (3): Postage/Mailing $0 $0
Other Expenses (4): Telephone/Internet $0 $0
Other Expenses (5): Dues/Memberships $0 $0
Other Expenses: All Other: $0 $0
Total Expenses $0 $0
Form 990 - Balance Sheet
20XX 20XX
Cash: Non-Interest Bearing: $0 $0
Savings & Temporary Cash: $0 $0
Accounts Receivable: $0 $0
Inventories for Sale or Use: $0 $0
Land, Buildings & Equipment: $0 $0
Less: Accumulated Depreciation: ($0) ($0)
Total Assets $0 $0
Total Liabilities $0 $0
Net Assets $0 $0
Foundation's filed Forms 990 for tax years 20XX — 20XX were used to calculate its public support and
gross investment income (see table below).
Public Support 20XX 20XX 20XX 20XX 20XX 20XX
Contributions: All Other Gifts: $0 $0 $0 $0 $0 $0
Program Service Revenue $0 $0 $0 $0 $0 $0
Gross Sales of Inventory: $0 $0 $0 $0 $0 $0
Total Public Support $0 $0 $0 $0 $0 $0
Total Support 20XX 20XX 20XX 20XX 20XX 20XX
Public Support $0 $0 $0 $0 $0 $0
Investment Income: $0 $0 $0 $0 $0 $0
Catalog Number 20810W
Page 2 www.irs.gov
Form 886-A (Rev. 5-2017)
Schedule number or exhibit
Form886-A EXPLANATIONS OF ITEMS
(May2017)
Name of taxpayer Tax Identification Number (last four digits) Year/Period ended
12/31/20XX &
12/31/20XX
Gross Rents: $0 $0 $0 $0 $0 $0
Total Support $0 $0 $0 $0 $0 $0
| Public Support Percentage [0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Gross Investment Income Percentage | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
Foundation's net average noncharitable-use assets for purposes of computing IRC § 4940 excise tax for
the 20XX and 20XX tax years was calculated taking an average of 0 months for the
[redacted] accounts and an average of 0 months for the [redacted] accounts.
20XX 20XX
January 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
Checking $0 $0
GICs $0 $0
February 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
March 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
April 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
May 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
June 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
July 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
August 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
September 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
October 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
November 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
December 1st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
December 31st
- Savings $0 $0
- Money Market $0 $0
- Debit $0 $0
- Savings $0 $0
- Money Market $0 $0
- Checking $0 $0
Checking $0 $0
GICs $0 $0
Average Net Assets $0 $0
Law - Issue 1:
IRC § 501(c)(3) provides, in part, exemption from federal income tax to organizations that are organized
and operated exclusively for religious, charitable, scientific, literary, or educational purposes, as long as no
part of the organization's net earnings inures to the benefit of any private shareholder or individual.
IRC § 509(a) states in part the term private foundation means a domestic or foreign organization described
in section 501(c)(3) other than 509(a)(1), (2), (3), or (4).
IRC § 509(a)(2) describes an organization which normally receives more than one-third of its support in
each taxable year from any combination of gifts, grants, contributions, or membership fees, and gross
receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an
activity which is not an unrelated trade or business (within the meaning of section 513), not including such
receipts from any person; or from any bureau or similar agency of a governmental unit (as described in
section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent
of the organization's support in such taxable year, from persons other than disqualified persons (as defined
in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or
from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and normally
Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)
Schedule number or exhibit
Form886-A EXPLANATIONS OF ITEMS
(May 2017)
Tax Identification Number (last four digits) Year/Period ended
Name of taxpayer
12/31/20XX &
12/31/20XX
receives not more than one-third of its support in each taxable year from the sum of gross investment
income (as defined in subsection (e)) and the excess (if any) of the amount of the unrelated business
taxable income (as defined in section 512) over the amount of the tax imposed by section 511.
Law - Issue 2:
IRC § 4940(a) imposes a on each private foundation which is exempt from taxation under IRC § 501(a) for
the taxable year, with respect to the carrying on of its activities, a tax equal to 2 percent of the net
investment income of such foundation for the taxable year.
IRC § 4940(c)(1) defines net investment income as the amount by which the sum of the gross investment
income and the capital gain net income exceeds the deductions allowed by IRC § 4940(c)(3).
IRC § 4940(c)(2) defines the term "gross investment income" as the gross amount of income from interest,
dividends, rents, payments with respect to securities loans and royalties, but not including any such income
to the extent included in computing tax imposed by IRC § 511.
IRC § 4940(c)(3) defines deductions as all ordinary and necessary expenses paid or incurred for the
production or collection of gross investment income or for the management, conservation, or maintenance
of property held for the production of such income.
IRC § 4940(e)(1) states in the case of any private foundation that meets the requirements of paragraph (2)
for any taxable year, Section 4940(a) shall be applied with respect to such taxable year by substituting "1
percent" for "2 percent."
IRC § 4940(e)(2) states, a private foundation meets the requirements of this paragraph for any taxable year
if-
(A) the amount of the Qualifying Distributions made by the private foundation during such taxable year
equals or exceeds the sum of-
(i) an amount equal to the assets of such foundation for such taxable year multiplied by the
average percentage payout for the base period, plus
(ii) 1 percent of the Net Investment Income of such foundation for such taxable year, and
(B) such private foundation was not liable for tax under Section 4942 of the Code with respect to any
year in the base period. [Section 4942 of the Code is the tax on private foundations for the failure to
distribute required minimum amounts of income each taxable year.]
Law - Issue 3:
IRC § 4942(a) imposes a tax on the undistributed income of a private foundation for any taxable year,
which has not been distributed before the first day of the second taxable year following such taxable year, a
tax equal to 30 percent of the amount of such income remaining undistributed at the beginning of such
second taxable year.
Catalog Number 20810W Page6_ ss www.irs.gov Form 886-A (Rev. 5-2017)
Schedule number or exhibit
Form886-A EXPLANATIONS OF ITEMS
(May2017)
Name of taxpayer Tax Identification Number (last four digits) Year/Period ended
12/31/20XX &
12/31/20XX
IRC § 4942(b) imposes an additional tax in any case in which an initial tax is imposed under IRC § 4942(a)
on the undistributed income of a private foundation for any taxable year, if any portion of such income
remains undistributed at the close of the taxable period, there is hereby imposed a tax equal to 100 percent
of the amount remaining undistributed at such time.
IRC § 4942(c) defines the term "undistributed income" as with respect to any private foundation for any
taxable year as of any time, the amount by which the distributable amount for such taxable year exceeds
the qualifying distributions made before such time out of such distributable amount.
IRC § 4942(c)(2)(i) excludes any future interest of a foundation in the income or corpus of any real or
personal property, until all intervening interest in, and rights to the actual possession or enjoyment of, such
property has expired.
IRC § 4942(d) defines distributable amount as with respect to any private foundation for any taxable year,
an amount equal to the sum of the minimum investment return plus amounts described in IRC §
4942(f)(2)(c), income modifications, reduced by the sum of the taxes imposed on such private foundation
for the taxable year under IRC § 4940.
IRC § 4942(e) defines minimum investment return for any private foundation for any taxable year as 5
percent of the excess of the aggregate fair market value of all assets of the foundation. other than those
which are used directly in carrying out the foundation's exempt purpose, over the acquisition indebtedness
with respect to such assets.
Regulation section 53.4942(a)-2(c)(3) defines assets used (or held for use) in carrying out the exempt
purpose as an asset that is actually used by the foundation in the carrying out of the charitable,
educational, or other similar purpose which gives rise to the exempt status of the foundation, or if the
foundation owns the asset and establishes to the satisfaction of the Commissioner that its immediate use
-for such exempt purpose is not practical (based on the facts and circumstances of the particular case) and
that definite plans exist to commence such use within a reasonable period of time. Consequently, assets
which are held for the production of income or for investment (for example, stocks, bonds, interest-bearing
notes, endowment funds, or, generally, leased real estate) are not being used (or held for use) directly in
carrying out the foundation's exempt purpose, even though the income from such assets is used to carry
out such exempt purpose.
Regulation section 53.4942(a)3(b)4 defines the minimum distribution required during start::-up period for
private foundations created before January 1, 1972, the start-up period is the four taxable years
immediately preceding the taxable year beginning in calendar year 1976. For private foundations created
after December 31, 1971 (or for organizations that first become private foundations after that date), the
start-up period is the four taxable years following the taxable year in which the private foundation was
created (or otherwise became a private foundation). For purposes of this subparagraph (4), a private
foundation will be considered "created" in the taxable year in which the private foundation's distributable
amount (as determined under section 4942(d)) first exceeds $500.
(ii) Start-up period minimum amount. The amount that a private foundation must actually distribute
in cash or its equivalent during the private foundation's start-up period is not less than the sum of:
(a) Twenty percent of the private foundation's distributable amount (as determined under
section 4942(d)) for the first taxable year of the start-up period,
Catalog Number 20810W Page 7 www.irs.gov Form 886-A (Rev. 5-2017)
Schedule number or exhibit
Form886-A EXPLANATIONS OF ITEMS
(May2017)
Name of taxpayer Tax Identification Number (last four digits) Year/Period ended
12/31/20XX &
12/31/20XX
(b) Forty percent of the private foundation's distributable amount for the second taxable year of
the start-up period,
(c) Sixty percent of the private foundation's distributable amount for the third taxable year of
the start-up period, and
(d) Eighty percent of the private foundation's distributable amount for the fourth taxable year
of the start-up period.
(iii) Timing of distributions. The requirement that a private foundation distribute the start-up period
minimum amount during the start-up period is a requirement that such amount be distributed before
the end of the start-up period and is not a requirement that any portion of such amount be
distributed in any one taxable year of the start-up period.
Government's Position - Issue 1:
Organizations generally qualify under IRC § 509(a)(2) if the main source of their revenue is from exempt
function income, such as fees for services, admissions, or sales of materials supporting their exempt
function. Contributions, gifts, and grants are normally not substantial in nature. IRC § 509(a)(2) indicates
that in order to qualify as a public supported organization under IRC § 509(a)(2) - (i) more than one-third of
the support must normally come from exempt function income, gifts, grants, contributions, or membership
fees; and (2) not more than one-third of the support can come from gross investment income and the
excess of the amount of unrelated business taxable income over the amount of taxes imposed by section
511.
Here, using Foundation's filed Forms 990, we calculated Foundation's public support for the period
including tax years 20XX to 20XX. Foundation failed the public support test in 20XX, 20XX, 20XX, and
20XX; and gross investment income percentage is above 33 1/3% in 20XX through 20XX. The testing
calculation is shown below:
Public Support 20XX 20XX 20XX 20XX 20XX 20XX
Contributions: All Other Gifts: $0 $0 $0 $0 $0 $0
Program Service Revenue $0 $0 $0 $0 $0 $0
Gross Sales of Inventory: $0 $0 $0 $0 $0 $0
Total Public Support $0 $0 $0 $0 $0 $0
Total Support 20XX 20XX 20XX 20XX 20XX 20XX
Public Support $0 $0 $0 $0 $0 $0
Investment Income: $0 $0 $0 $0 $0 $0
Gross Rents: $0 $0 $0 $0 $0 $0
Total Support $0 $0 $0 $0 $0 $0
| Public Support Percentage 0.00% | 0.00% | 0.00% | 0.00% | 0.00% 0.00% |
| Gross Investment Income Percentage 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
Catalog Number 20810W Page 8 www.irs.gov Form886-A (Rev. 5-2017)
Schedule number or exhibit
Form886-A EXPLANATIONS OF ITEMS
(May2017)
Name of taxpayer Tax Identification Number (last four digits) Year/Period ended
12/31/20XX &
12/31/20XX
Therefore, since Foundation fails the public support test and the gross investment income test, it no longer
qualifies as a publicly supported organization under IRC § 509(a)(2). Foundation must be reclassified as a:
private foundation.
Government's Position - Issue 2:
Since Foundation failed the public support test and the gross investment income test, and must be
reclassified as a private foundation, it is liable for the 2% excise tax under IRC § 4940(a) on its net
investment income. This tax calculation for tax years 20XX and 20XX is shown below:
Income 12/31/20XX 12/31/20XX
Interest Income $0 $0
Rent Income $0 $0
Gross Investment Income $0 $0
Deductions
Bank Fees $0 $0
Property Tax $0 $0
Repair & Maintenance - Facility $0 $0
Utilities $0 $0
Total Deductions $0 $0
Net Investment Income $0 $0
Multiply by IRC 4940(a) rate - 2% 2% 2%
IRC 4940(a) excise tax 0.00 0.00
The Foundation does not qualify for the 1% rate reduction for computing the net investment tax under IRC
§ 4940(e) for 20XX as it is the Foundation's first modified tax year under a private foundation. The
Foundation also does not qualify for the rate reduction in 20XX because the qualifying distributions made
by the private foundation during that tax year do not exceed the sum of the amount equal to the assets of
the foundation multiplied by the average payout for the base period plus 1 percent of the net investment
income of the foundation.
Government's Position - Issue 3:
Since Foundation failed the public support test and gross investment test, and must be reclassified as a
private foundation, it is required to pay out distributions for exempt purposes (Distributable Amount) in each
year in proportion to its Minimum Investment Return per IRC § 4942. If Foundation fails to make the
minimum required distributions (Distributable Amount), it is liable for excise taxes under IRC § 4942(a) on
the Undistributed Income.
Catalog Number 20810W Page 9 www.irs.gov Form 886-A (Rev. 5-2017)
Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(May 2017)
Name of taxpayer Tax Identification Number (last four digits) Year/Period ended
12/31/20XX &
12/31/20XX
The Minimum Investment Return, Distributable Amount and the Undistributed Income are calculated as
follows for the tax years ending December 31, 20XX and December 31, 20XX:
Minimum Investment Return
Tax Years 20XX 20XX
Average Monthly Cash Balances $0 $0
multiply by 0.0% 0.0% 0.0%
Cash deemed for charitable activities (avg. cash* 0.0%) $0 $0
Average Monthly Cash Balances $0 $0
less Cash deemed for charitable activities ($0) ($0)
Net Value of Assets for Investment Purposes $0 $0
Minimum Investment Return $0 $0
(multiply Net Value of Assets for Investment Purposes
by 0%)
Distributable Amount
Tax Years 20XX 20XX
Minimum Investment Return $0 $0
Less Tax on Investment Income (IRC § 4940(a)) ($0) ($0)
Distributable Amount (IRC § 4942(d)) $0 $0
Rate for start-up period (Treas. Reg. 53.4942(a)3(b)4) 0% 0%
Start-up period minimum distributable amount $0 $0
Must distribute this amount by 12/31/20XX 12/31/20XX
Undistributed Income
Tax Years 20XX 20XX
Start-up period minimum distributable amount $0 $0
Less Qualifying Distributions ($0) ($0)
Undistributed Income ($0) $0
Added to/taken from corpus $0 ($0)
Total undistributed income ($0.00) $0
The excise tax under Section 4942(a) is calculated as follows:
Excise Tax per IRC 4942(a)
Tax Years 20XX 20XX
Undistributed Income ($0.00) $0
Catalog Number 20810W Page 10 www.irs.gov Form 886-A (Rev. 5-2017)
Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(May2017)
Name of taxpayer Tax Identification Number (last four digits) Year/Period ended
12/31/20XX &
12/31/20XX
Excise Tax Rate - 30% 30% 30%
Excise Tax per IRC 4942(a) ($0.00) $0
Foundation's qualifying distributions exceeded the distributable amount in tax year ending December 31,
20XX. The exceeded amount is to be added into corpus. Foundation's qualifying distributions did not meet
the required distribution amount in tax year ending December 31, 20XX. Therefore, Foundation is liable for
excise taxes under IRC § 4942(a) on the Undistributed Income for tax year ending December 31, 20XX.
In any case in which an initial tax is imposed under IRC § 4942(a) on the undistributed income of a private
foundation for any taxable year, if any portion of such income remains undistributed at the close of the
taxable period, under IRC § 4942(b), there is hereby imposed a tax equal to 100 percent of the amount
remaining undistributed at such time. Foundation is not liable for IRC § 4942(b) taxes in tax years ending
December 31, 20XX, because it did not have undistributed income. Foundation is not liable for IRC §
4942(b) taxes in tax years ending December 31, 20XX, because it had direct expenditures, exceeding the
undistributed amount, to accomplish its exempt purpose in tax year ending December 31, 20XX.
Taxpayer's Position:
Foundation has not provided a written position on any of the issues at this time.
Conclusion:
Issue #1: Foundation fails the public support test and gross investment income test. It no longer
qualifies as a publicly supported organization under IRC § 509(a)(2). Foundation should be
reclassified as a private foundation under IRC § 509(a), The effective date of this
reclassification is January 1, 20XX. Foundation is required to file annual return Form 990-
PF, Return of Private Foundation.
Issue# 2: As a private foundation, Foundation is liable for excise taxes on net investment income
under IRC § 4940(a) as follows:
20XX - $0.00
20XX - $0.00
Total -$0.00
Issue# 3: As a private foundation, Foundation is not liable for excise taxes on its undistributed income
under IRC § 4942(a) for the tax year ended December 31, 20XX. However, Foundation is
liable for excise taxes on its undistributed income under IRC § 4942(a) for the tax year
ended December 31, 20XX in the amount of $0.
Catalog Number 20810W Page 11 www.irs.gov Form 886-A (Rev. 5-2017)
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