A private foundation's 501(c)(3) exemption is revoked for distributing only a tiny fraction of the minimum charitable amount it was required to pay out

Plain-English summary

A private foundation must actually pay out money for charitable purposes each year:
Section 4942 requires it to make "qualifying distributions" equal to roughly 5% of
its non-charitable assets (its "distributable amount"), and Section 501(c)(3)
requires it to be operated exclusively for exempt purposes. Here, the IRS examined a
private foundation and found that, although it was financially well equipped, it
distributed only a tiny fraction of the amount it was required to pay out. The IRS
concluded that such meager giving showed the organization was not engaged primarily
in activities furthering its exempt purpose, so its 501(c)(3) exemption is revoked.
The examination materials also fault the foundation for filing returns with missing
entries and zeros and for not correcting them, noting that relying on an unqualified
preparer does not excuse the taxpayer. Going forward, the organization is treated as
a taxable private foundation: it must keep filing Form 990-PF, remains subject to the
Chapter 42 excise taxes (including the Sections 4940 and 4942 taxes), and must file
Form 1041 to report and pay income tax. This release contains the determination
letter package (including Letter 6337 with declaratory-judgment rights under Section
7428) and the Form 886-A explanation of items. (The IRS's text layer extracted here
is partial and page-reordered; the full letter is in the linked PDF.)

Ruling snapshot

• Question: Should a private foundation's 501(c)(3) exemption be revoked where it paid out only a small fraction of the minimum charitable distribution required under Section 4942?
• Outcome: Revocation (exemption revoked; organization treated as a taxable private foundation)
• Key authorities: IRC § 501(c)(3); § 4942 (minimum distribution / undistributed income); § 4940; Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1); Treas. Reg. § 53.4942(a)-2, -3

Full text (IRS public release)

do so. You may also file your petition at the address below:

                                          United States Tax Court
                                          400 Second Street, NW
                                          Washington, DC 20217
                                          ustaxcourt.gov
The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:
                                           US Court of Federal Claims
                                           717 Madison Place, NW
                                           Washington, DC 20439
                                           uscfc.uscourts.gov
                                          US District Court for the District of Columbia
                                          333 Constitution Avenue, NW
                                          Washington, DC 20001
                                          dcd.uscourts.gov
Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for
declaratory judgment under IRC Section 7428.
The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can’t resolve your tax problem with the IRS or if you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Visit TaxpayerAdvocate.IRS.gov/contact-us or call 877-777-4778 (TTY/TDD 800-829-4059)
to find the location and phone number of your local advocate. Learn more about TAS and your rights under the
Taxpayer Bill of Rights at TaxpayerAdvocate.IRS.gov. Do not send your Tax Court petition to TAS. Use the
Tax Court address provided earlier in the letter. Contacting TAS does not extend the time to file a petition.
Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.
Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you
have questions, you can call the person shown at the top of this letter.
If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.
You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.




                                                                                            Letter 6337 (Rev. 3-2024)
                                                                                            Catalog Number 74808E
   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
adverse determination letter.
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,


                                                          For: Lynn A. Brinkley
                                                          Director, Exempt Organizations Examinations


Enclosures:
Form 886-a, 4621, 6018
Publication 892, 3498




                                                                                           Letter 3618 (Rev. 3-2024)
                                                                                           Catalog Number 34809F
                                  Department of the Treasury – Internal Revenue Service                Schedule number
     Form 886-A                                                                                        or exhibit
      (May 2017)                      Explanations of Items
 Name of taxpayer                                          Tax Identification Number (last 4 digits)   Year/Period ended




Returns from              show similar pattern of reporting as the                return.

The following is a reconstruction of the missing amounts from               return -




Catalog Number 20810W                    Page    4                 www.irs.gov                     Form 886-A (Rev. 5-2017)
                                    Department of the Treasury – Internal Revenue Service                Schedule number
     Form 886-A                                                                                          or exhibit
      (May 2017)                        Explanations of Items
 Name of taxpayer                                            Tax Identification Number (last 4 digits)   Year/Period ended




Section 4940(c)(1) defines net investment income as the amount by which (A) the sum of the gross
investment income and the capital gain net income exceeds (B) the deductions allowed by paragraph (3).
Except to the extent inconsistent with the provisions of this section, net investment income shall be
determined under the principles of subtitle A.

Section 4940(c)(2) defines gross investment income as the gross amount of income from interest,
dividends, rents, payments with respect to securities loans (as defined in section 512(a)(5)), and royalties,
but not including any such income to the extent included in computing the tax imposed by section 511.
Such term shall also include income from sources similar to those in the preceding sentence.

Section 4940(c)(3)(A) allows 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, determined with the modifications set forth in subparagraph (B).

Section 4940(c)(3)(B) allows the following modifications: For purposes of subparagraph (A)—
  (i) The deduction provided by section 167 shall be allowed, but only on the basis of the straight line
  method of depreciation.
  (ii) The deduction for depletion provided by section 611 shall be allowed, but such deduction shall be
  determined without regard to section 613 (relating to percentage depletion).

Section 4940(d)(1) imposes no tax by section 4940 on any private foundation which is an exempt operating
foundation for the taxable year.

Section 4942(a) imposes an excise 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% (15% before Pension Protection Act of 2006) of the amount of undistributed
income.

Section 4942(b) provides that, where an initial tax is imposed 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 imposed a tax equal to 100% of the amount remaining undistributed at such time.

Section 4942(c) defines the undistributed income as the distributable amount for such taxable year,
exceeds the qualifying distributions made before such time out of such distributable amount.

Section 4942(d) states the distributable amount equals the foundation’s minimum investment return,
reduced by any income taxes and the tax on net investment income imposed by Section 4940, increased
by certain amounts listed in Section 4942(f)(2)(C).

Section 4942(e) defines the minimum investment return for any private foundation for any taxable year is 5
percent of the excess of—
(A) the aggregate fair market value of all assets of the foundation other than those which are used (or held
for use) directly in carrying out the foundation’s exempt purpose, over
(B) the acquisition indebtedness with respect to such assets (determined under section 514(c)(1) without
regard to the taxable year in which the indebtedness was incurred).




Catalog Number 20810W                      Page    6                 www.irs.gov                     Form 886-A (Rev. 5-2017)
                                     Department of the Treasury – Internal Revenue Service                Schedule number
     Form 886-A                                                                                           or exhibit
      (May 2017)                         Explanations of Items
 Name of taxpayer                                             Tax Identification Number (last 4 digits)   Year/Period ended




Section 4942(f)(2)(C) amounts are those received or accrued as repayments of amounts which were
considered as a qualifying distribution for any taxable year, amounts received or accrued from the sale or
other disposition of property to the extent that the acquisition of such property was considered as a
qualifying distribution for any taxable year, and any amount set aside under Section 4942(g)(2) to the
extent it is determined that such amount is not necessary for the purposes for which it was set aside.

Section 4942(g) defines a qualifying distribution as the payment that must -
• Accomplish one or more charitable purposes described in IRC Section 170(c)(2)(B),
• Be a reasonable and necessary administrative expense paid to accomplish one or more purposes in
section 170(c)(2)(B),
• Not be paid to an organization controlled (directly or indirectly) by the foundation or a disqualified person
connected to the foundation (with one exception), or
• Not be paid to a non-operating private foundation (with one exception).

Section 4942(h) Treatment of qualifying distributions
(1) In general, except as provided in paragraph (2), any qualifying distribution made during a taxable year
shall be treated as made—
    (A) first out of the undistributed income of the immediately preceding taxable year (if the private
    foundation was subject to the tax imposed by this section for such preceding taxable year) to the extent
    thereof,
    (B) second out of the undistributed income for the taxable year to the extent thereof, and
    (C) then out of corpus.
    For purposes of this paragraph, distributions shall be taken into account in the order of time in which
    made.
(2) Correction of deficient distributions for prior taxable years, etc.
In the case of any qualifying distribution which (under paragraph (1)) is not treated as made out of
the undistributed income of the immediately preceding taxable year, the foundation may elect to treat any
portion of such distribution as made out of the undistributed income of a designated prior taxable year or
out of corpus. The election shall be made by the foundation at such time and in such manner as the
Secretary shall by regulations prescribe.

Section 4942(i) Adjustment of distributable amount where distributions during prior years have exceeded
income
(1) In general. If, for the taxable years in the adjustment period for which an organization is a private
foundation—
   (A) the aggregate qualifying distributions treated (under subsection (h)) as made out of the undistributed
   income for such taxable year or as made out of corpus (except to the extent subsection (g)(3) with
   respect to the recipient private foundation or section 170(b)(1)(F)(ii) applies) during such taxable years,
   exceed
   (B) the distributable amounts for such taxable years (determined without regard to this subsection),
   then, for purposes of this section (other than subsection (h)), the distributable amount for the taxable
   year shall be reduced by an amount equal to such excess.
(2) Taxable years in adjustment period
For purposes of paragraph (1), with respect to any taxable year of a private foundation the taxable years in
the adjustment period are the taxable years (not exceeding 5) immediately preceding the taxable year.




Catalog Number 20810W                       Page    7                 www.irs.gov                     Form 886-A (Rev. 5-2017)
                                    Department of the Treasury – Internal Revenue Service                Schedule number
     Form 886-A                                                                                          or exhibit
      (May 2017)                        Explanations of Items
 Name of taxpayer                                            Tax Identification Number (last 4 digits)   Year/Period ended




Treas. Reg. § 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an organization
described in section 501(c)(3) of the Code, the organization must be one that is both organized and
operated exclusively for one or more of the purposes specified in that section.

Treas. Reg. § 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more of such exempt purposes specified in section 501(c)(3). It is not so operated if
more than an insubstantial part of its activities does not further those purposes.

Treas. Reg. 53.4942(a)-1(a) clarifies that tax under section 4942(a) or (b) is imposed on the private
foundation.

Treas. Reg. 53.4942(a)-1(c)(1) defines the taxable period as, with respect to the undistributed income of a
private foundation for any taxable year, the period beginning with the first day of the taxable year and
ending on the earlier of the date of mailing of a notice of deficiency under Section 6212(a) with respect to
the initial excise tax imposed under Section 4942(a) or the date on which the initial excise tax imposed
under Section 4942(a) is assessed.

Treas. Reg. 53.4942(a)-2(a) defines undistributed income as the amount by which the distributable amount
(defined in Section 4942(d)) for that taxable year exceeds the qualifying distributions (defined in Section
4942(g)) made before that time out of such distributable amount. The difference constitutes undistributed
income of the taxable year.

Treas. Reg. 53.4942(a)-2(b)(1)(ii) states, a private foundation, other than an operating foundation, is
required to distribute its distributable amount for each taxable year beginning after December 31, 1969.
Distributable amount generally means a private foundation’s minimum investment return (an imputed return
on non-charitable use assets), reduced by any taxes imposed under subtitle A and Section 4940.

Treas. Reg. 53.4942(a)-2(c) defines then minimum investment return as 5% of the excess of the aggregate
fair market value of all assets of the foundation (other than those that are used or held for use directly in
carrying out the foundation’s exempt purpose as described in Treas. Reg. 53.4942(a)-2(c)(3); or certain
other assets which are excluded as described in Treas. Reg. 53.4942(a)-2(c)(2)) over the amount of the
acquisition indebtedness for those assets (determined under Section 514(c)(1), but without regard to the
taxable year in which the indebtedness was incurred).

Treas. Reg. 53.4942(a)-2(c)(5)(iii) states, for a taxable year shorter than 12 months, the minimum
investment return is calculated by using a percentage equal to five multiplied by a fraction the numerator of
which is the number of days in the short taxable year and the denominator of which is 365.

Treas. Reg. 53.4942(a)-3(a)(2) states, the required distributions must be qualifying distributions. In general,
a qualifying distribution is any expenditure or grant, and certain set-asides, for charitable, educational,
religious, or similar purposes (Section 170(c)(2)(B) purposes). Certain conditions and restrictions apply to
payments to nonoperating foundations, controlled organizations, and certain supporting organizations.

Treas. Reg. 1.509(b)-1(b) states, if an organization is a private foundation on October 9, 1969, and it is
determined that it is not exempt under section 501(a) as an organization described in section 501(c)(3) as


Catalog Number 20810W                      Page    8                 www.irs.gov                     Form 886-A (Rev. 5-2017)
                                     Department of the Treasury – Internal Revenue Service                Schedule number
     Form 886-A                                                                                           or exhibit
      (May 2017)                         Explanations of Items
 Name of taxpayer                                             Tax Identification Number (last 4 digits)   Year/Period ended




Relying on the work of an unqualified preparer doesn’t absolve the responsibility of the taxpayer.
should have known the law. Additionally, it’s difficult to understand why            did not exercise proper
oversight of its return given the fact that it was prepared with numerous missing entries and/or computed
with zeros even when clearly instructed by the form. Not only that, but            did not attempt to amend
the poorly prepared return even with the knowledge that it may not have been prepared properly.
In short,          was fully responsible for failing to meet its exempt obligations.

Conclusion
          exemption under section 501(c)(3) should be revoked because the organization failed to
demonstrate that it operated exclusively for its exempt purposes.                was only required to make
qualifying distributions of the required distributable amount at the beginning of its tax years. Even though it
was financially well equipped,            only distributed just a tiny fraction of the required amount, or roughly
             . Such meager distribution clearly showed that              did not engage primarily in activities
furthering its exempt purpose as required under the law.

As a taxable private foundation,       is required to continue filing the form 990-PF and subject to all
chapter 42 taxes such as section 4940 and 4942 taxes. In addition,           is required to file Form 1041,
U.S. Income Tax Return for Estates and Trusts to report and pay tax on its income from           and all future
tax years.




Catalog Number 20810W                       Page    10                www.irs.gov                     Form 886-A (Rev. 5-2017)