TG 3-20: Introduction to Private Foundations and Special Rules

Publication 5525 (Rev. 3-2024) Catalog Number 37494S Department of the Treasury Internal Revenue Service www.irs.gov

Exempt Organizations

Technique Guide

TG 3-20: Introduction to Private Foundations

and Special Rules - IRC Section 508

This document is not an official pronouncement of the law or the position of the IRS and cannot be used,

cited, or relied upon as such. This guide is current through the revision date. Changes after the revision

date may affect the contents of this document and users should consider any subsequent resources to

ensure technical accuracy. All references to “Section” in this document refer to the Internal Revenue

Code of 1986, as amended, unless specifically noted otherwise. The taxpayer names and addresses

shown in examples within this publication are fictitious.

Technique Guide Revision Date: 3/21/2024

Table of Contents

I. Overview ................................................................................................ 3

Background/History ...................................................................... 3

Relevant Terms ............................................................................. 4

Law/Authority ................................................................................ 4

II. Exemption / Filing Requirements ........................................................ 6

Exemption ...................................................................................... 6

Exemption Application ................................................................. 6

Annual Return Requirements ...................................................... 6

III. Other Considerations ........................................................................... 8

Differences Between Private Foundation and Public Charity ... 8

Brief Overview of the Excise Taxes for Private Foundations ... 8

Special Rules for Private Foundations ....................................... 9

Section 508(b) Presumption of Foundation Status and

Required Notice ........................................................................... 10

Section 508(e) Governing Instrument Requirements .............. 11

E.1. Exceptions to Section 508(e) Requirements ................. 13

Section 508(d) Disallowance of Charitable Deductions .......... 14

F.1. Section 508(d)(1) Disallowance ...................................... 14

F.2. Certain Transfer of Assets .............................................. 15

I. Overview

(1) This TG provides an introduction to Private Foundations and gives an overview

of the applicable excise taxes. This TG also discusses the special rules of

Section 508 that pertain to private foundations.

Background/History

(1) The Tax Reform Act of 1969 introduced the classification of private foundation

into the Internal Revenue Code (Code) and added a wide array of restrictions,

requirements, taxes, and penalties affecting organizations classified as a

private foundation and certain individuals associated with them. Later, the

Pension Protection Act of 2006, P.L.109-280 (PPA 2006) and the Bipartisan

Budget Act of 2018, P.L.115-123 (2018) changed several Chapter 42 provisions

on private foundations.

Note: These law changes impacted other entities as well as private

foundations. This introduction gives you a brief overview of the code sections

that are generally for private foundations.

(2) Every organization that qualifies for tax exemption as an organization under

Section 501(c)(3) is a private foundation unless it is described under one of the

categories in Section 509(a). Also, certain nonexempt charitable trusts are

subject to some private foundation rules. Organizations in Section 509(a)

classified as public charities include:

a. Institutions such as hospitals or universities,

b. Those that have broad public support, or

c. Those that actively function in a supporting relationship to these

organizations.

(3) Once an organization becomes a private foundation, it retains that status, even

if it no longer is described in Section 501(c)(3) until its private foundation status

terminates under Section 507. See Section 509(b).

(4) The main Code sections affecting private foundations are in Sections 4940 -

4946 inclusive, and the special rules governing private foundations in the

Section 507 termination provisions. See other Audit Technique Guides for

detailed discussions of these provisions listed below:

a. Section 507 – Termination of private foundation status.

b. Section 508(b) - (f) – Special rules (notice requirements, disallowance of

charitable deductions, governing instrument requirements as pertaining to

private foundations).

c. Section 509 – Private foundation defined.

d. Section 4940 – Excise tax based on investment income.

e. Section 4941 – Taxes on self-dealing.

f. Section 4942 – Taxes on failure to distribute income.

g. Section 4943 – Taxes on excess business holdings.

h. Section 4944 – Taxes on investments which jeopardize charitable purpose.

i. Section 4945 – Taxes on taxable expenditures.

j. Section 4946 – Definitions and special rules (disqualified persons).

k. Section 4947 – Application of taxes to certain non-exempt trusts.

l. Section 4948 – Application of taxes and denial of exemption with respect to

certain foreign organizations.

m. Section 4960(c)(1)(A) – Tax on excess tax-exempt organization executive

compensation.

Relevant Terms

(1) Private Foundations: Organizations that are exempt from taxation under

Section 501(c)(3) and do not fall into any of the public charity statuses under

Section 509(a) are called private foundations. Private foundations raise

complex and interrelated issues regarding the application of Chapter 42.

(2) Chapter 42: Refers to 26 U.S. Code Chapter 42, Private Foundations; and

Certain Other Tax-Exempt Organizations. Code sections that apply excise

taxes on certain private foundations and provide definitions within Chapter 42

are: 4940 through 4948.

Law/Authority

(1) There are different types of private foundations depending on how they are

structured and how they operate. Such organizations can be private non-

operating foundations (in other words, grantmaking private foundations), private

operating foundations and exempt operating foundations. It is important to

determine which type of private foundation you are reviewing because not all

Chapter 42 requirements apply to private operating foundations and exempt

operating foundations.

(2) Private foundations pursuant to Section 501(c)(3) are organizations that qualify

for tax exemption as an organization described in Section 501(c)(3) unless it

falls into one of the categories specifically excluded from the definition of that

term (referred to in section 509(a)). In addition, certain nonexempt charitable

trusts are also treated as private foundations.

(3) Private operating foundation, as defined in Section 4942(j)(3)(A), is any private

foundation that spends at least 85% of its adjusted net income or its minimum

investment return, whichever is less, directly for the active conduct of its exempt

activities (the income test). In addition, the foundation must meet one of the

following tests:

a. The assets test,

b. The endowment test, or

c. The support test.

(4) Exempt operating foundations, as defined in Section 4940(d), for a tax year, a

private foundation must meet all the following requirements:

a. It is a private operating foundation,

b. It has been publicly supported for at least ten tax years or was a private

operating foundation on January 1, 1983,

c. Its governing body, at all times during the tax year, consists of individuals

fewer than 25% of whom are disqualified individuals, and is broadly

representative of the general public, and

d. It has no officer who is a disqualified individual at any time during the tax

year.

II. Exemption / Filing Requirements

(1) During its existence, a private foundation has numerous interactions with the

IRS - from filing an application for recognition of tax-exempt status, to filing

required annual information returns, to making changes in its mission and

purpose.

Exemption

(1) To be tax-exempt under Section 501(c)(3), an organization must be organized

and operated exclusively for exempt purposes set forth in Section 501(c)(3),

and none of its earnings may inure to any private shareholder or individual. In

addition, it may not be an action organization, meaning it may not attempt to

influence legislation as a substantial part of its activities, and it may not

participate in any campaign activity for or against political candidates.

(2) Organizations described in Section 501(c)(3) are commonly referred to as

charitable organizations. Organizations described in Section 501(c)(3), other

than testing for public safety organizations, are eligible to receive tax-deductible

contributions in accordance with Section 170.

(3) The organization must not be organized or operated for the benefit of private

interests, and no part of a Section 501(c)(3) organization's net earnings may

inure to the benefit of any private shareholder or individual. If the organization

engages in an excess benefit transaction with a person having substantial

influence over the organization, an excise tax may be imposed on the person

and any organization managers agreeing to the transaction.

(4) Section 501(c)(3) organizations are restricted in how much political and

legislative (lobbying) activities they may conduct.

Exemption Application

(1) To apply for exemption, a foundation should complete and submit Form 1023,

Application for Recognition of Exemption under Section 501(c)(3) of the Internal

Revenue Code, or Form 1023-EZ, Streamlined Application for Recognition of

Exemption under Section 501(c)(3) of the Internal Revenue Code, along with

the required user fee. If a foundation is represented by an attorney or other

representative, it must also submit a power of attorney.

(2) Private operating foundations and certain other organizations cannot file a Form

1023-EZ. See Revenue Procedure 2021-5 (updated annually) for additional

information.

Annual Return Requirements

(1) All private foundations, whether they have taxable income for, or activity during

the year or not (including nonexempt private foundations, and nonexempt

charitable trusts described in Section 4947(a)(1) that are treated as private

foundations), are required to file an annual return on Form 990-PF, Return of

Private Foundation.

(2) Form 990-PF must be filed by the 15th day of the 5th month following the close

of the organization’s accounting period.

(3) If the foundation is on a calendar year, or if it has no established accounting

period, the return will be due May 15, each year.

(4) For a complete liquidation, dissolution, or termination, the return must be filed

by the 15th day of the 5th month following complete liquidation, dissolution, or

termination.

(5) If an organization fails to file Form 990-PF by the due date (taking into account

any extensions granted), it will have to pay $20 for each day the return is late

($100 a day for large organizations), not to exceed the lesser of $10,000

($50,000 for large organizations) or 5% of the organization’s gross receipts,

unless it can show that the failure was due to reasonable cause. The IRS may

make written demand that the delinquent return be filed within a reasonable

time after the date of mailing the demand. If the organization does not file by the

date specified in the demand, the person or persons responsible for the failure

to file will be subject to a penalty of $10 a day for each day after the date

specified in the notice that the return is not filed unless it is shown that the

failure to file is due to reasonable cause. The total amount imposed on all

persons responsible for the failure to file is limited to $5,000. The penalty is also

applicable to a failure to provide information required by the return, or a failure

to file correct information.

(6) Even though a private foundation is recognized as tax exempt, it still may be

liable for tax on its unrelated business income. For foundations, unrelated

business income is income from a trade or business, regularly carried on, that is

not substantially related to the charitable, educational, or other purpose that is

the basis of the organization's exemption. An exempt organization that has

$1,000 or more of gross income from an unrelated business must file Form 990-

T. An organization must pay estimated tax if it expects its tax for the year to be

$500 or more. The obligation to file Form 990-T is in addition to the obligation to

file the annual information return, Form 990-PF.

Note: With a few exceptions, most tax-exempt organizations that file Forms

990, 990-EZ, 990-PF or 1120-POL can file electronically. Form 990-T, Exempt

Organization Business Income Tax Return, is not yet available for electronic

filing.

III. Other Considerations

(1) There are other considerations that need to be reviewed when looking at a

classified private foundation. Private foundations raise complex and interrelated

issues regarding the application of Chapter 42.

Differences Between Private Foundation and Public Charity

(1) Private foundations must meet stricter requirements and are subject to more

regulation than public charities.

(2) A private foundation cannot be tax exempt, nor will contributions to it be

deductible as charitable contributions unless its governing instrument contains

special provisions in addition to those that apply to all organizations described

in Section 501(c)(3).

(3) There are additional restrictions and requirements for private foundations,

including:

a. Restrictions on self-dealing with substantial contributors and other

disqualified persons;

b. Requirements that the private foundation annually distribute income for

charitable purposes;

c. Limits on their holdings in private businesses;

d. Provisions that investments must not jeopardize the carrying out of exempt

purposes; and

e. Provisions to assure that expenditures further exempt purposes.

Brief Overview of the Excise Taxes for Private Foundations

(1) Section 4940(a) imposes on each private foundation which is exempt from

taxation under Section 501(a) for the taxable year, with respect to the carrying

on of its activities, a tax equal to 1.39% of the net investment income of such

foundation for the taxable year.

Note: The Taxpayer Certainty and Disaster Taxpayer Relief Act passed on

December 20, 2019, included legislation that reduced the 2% excise tax on net

investment income of private foundations to 1.39%. At the same time, the

legislation repealed the 1% special rate that applied if the private foundation

met certain distribution requirements. The changes are effective for taxable

years beginning after December 20, 2019.

(2) Section 4941 imposes an excise tax on any direct or indirect act of self-dealing

between a private foundation and a disqualified person. There is an initial 10%

excise tax imposed on a disqualified person, who is the self-dealer, on the

amount involved in the act of self-dealing for each year or partial year in the

taxable period. An excise tax of 5% of the amount involved is imposed on a

foundation manager who knowingly participates in an act of self-dealing, unless

participation is not willful and is due to reasonable cause, for each year or part

of a year in the taxable period.

(3) Section 4942 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 (or any succeeding) taxable year following such taxable year

(if such first day falls within the taxable period), a tax equal to 30% of the

amount of such income remaining undistributed at the beginning of such

second (or succeeding) taxable year.

(4) Section 4943 imposes an excise tax on the excess business holdings of any

private foundation in a business enterprise during any taxable year which ends

during the taxable period a tax equal to 10% of the value of such holdings.

(5) Section 4944 imposes an excise tax if a private foundation invests any amount

in such a manner as to jeopardize the carrying out of any of its exempt

purposes, there is hereby imposed on the making of such investment a tax

equal to 10% of the amount so invested for each year (or part thereof) in the

taxable period.

(6) Section 4945 imposes an excise tax on each taxable expenditure a tax equal to

20% of the amount thereof.

(7) Section 4946 defines disqualified persons with respect to a private foundation.

Special Rules for Private Foundations

(1) Section 508 has several rules on private foundations, in addition to the

exemption application requirement under Section 508(a) for all Section

501(c)(3) organizations:

a. Section 508(b) presumes that a Section 501(c)(3) organization is a private

foundation unless it notifies the IRS to the contrary.

b. Section 508(e) requires a private foundation’s governing instrument to

observe the rules of Sections 4941, 4942, 4943, 4944, and 4945.

c. Section 508(d) disallows charitable deductions for contributions to private

foundations under certain circumstances.

(2) No gift or bequest made to an organization upon which the tax provided by

section 507(c) has been imposed shall be allowed as a deduction under section

170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is

made:

a. By any person after notification is made under Section 507(a), or

b. By a substantial contributor (as defined in Section 507(d)(2)) in his taxable

year which includes the first day on which action is taken by such

organization which culminates in the imposition of tax under Section 507(c)

and any subsequent taxable year.

(3) No gift or bequest made to an organization shall be allowed as a deduction

under Section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or

bequest is made:

a. To a private foundation or a trust described in Section 4947 in a taxable

year for which it fails to meet the requirements of Section 508(e)

(determined without regard to Section 508(e)(2)), or

b. To any organization in a period for which it is not treated as an organization

described in Section 501(c)(3) by reason of Section 508(a).

Exception: Paragraph (1) of Section 508(d) shall not apply if the entire amount

of the unpaid portion of the tax imposed by Section 507(c) is abated by the

Secretary under Section 507(g).

Section 508(b) Presumption of Foundation Status and Required

Notice

(1) Generally, a Section 501(c)(3) organization is presumed to be a private

foundation unless it files a timely notice to the contrary with the IRS (Section

508(b)). An organization ordinarily files its notice by filing a properly completed

Form 1023 or Form 1023-EZ application. Form 1023 includes questions

determining whether the organization is a private foundation or a private

operating foundation. See Treasury Regulation (Treas. Reg.) 1.508-1(b)(2)(iv).

(2) The regulations allow for a 15-month filing deadline to file the notice with the

IRS, like that for Section 508(a). See Treas. Reg. 1.508-1(b)(2)(i).

Organizations receive an automatic 12-month extension if they file an

application for exemption with the IRS within 12 months of the original 15-month

deadline. See Treas. Reg. 301.9100-2. However, the presumption of private

foundation status is rebuttable. Even if they don’t meet the deadline, the

organization may subsequently submit information establishing its status as a

public charity. Most organizations exempt from the Section 508(a) notice

requirement are also exempt from the Section 508(b) notice requirement

(including Section 4947(a)(1) trusts). See Treas. Reg. 1.508-1(b)(7).

(3) Usually, an organization cannot be a private foundation unless it is exempt

under Section 501(c)(3).

(4) Private foundation status begins with recognition of exemption; so, if an

organization required under Section 508(a) to file a Form 1023 or Form 1023-

EZ application, fails to do so by the deadline, and is recognized as exempt only

from the filing date of the application, then it will be a private foundation (or a

public charity) from the filing date.

(5) Certain nonexempt trusts in Section 4947 are treated as private foundations for

certain purposes even if they have not met the Section 508(a) notice

requirement.

(6) Private foundations that lose their exempt status remain private foundations

until they terminate this status under Section 507.

(7) An organization, its contributors, or others can only rely on a determination

letter from the IRS to prove that it is not a private foundation. They may not rely

on the timely filing of a notice under Section 508(b). See Treas. Reg. 1.508-

1(b)(3)(i), (5)(ii), and (6), Treas. Reg. 1.509(a)-7, and Revenue Procedure (Rev.

Proc.) 2011-33, 2011-1 C.B. 887.

Exception: An exception applies for certain community trusts. See Rev. Proc.

77-20, 1977-1 C.B. 585.

Section 508(e) Governing Instrument Requirements

(1) In general, a private foundation is not exempt under Section 501(a) for the year,

and contributors may not deduct contributions to the private foundation made in

the year, unless the private foundation’s governing instrument requires it to

conduct itself to avoid tax liability (both for itself and its disqualified persons)

under Sections 4941, 4942, 4943, 4944, and 4945. See Sections 508(e)(1) and

(d)(2)(A).

(2) The governing instrument is the articles of organization under Treas. Reg.

1.501(c)(3)-1(b)(2). Bylaws do not qualify. See Treas. Reg. 1.508-3(c).

(3) The governing instrument is deemed to meet the Section 508(e)(1)

requirements if State law requires this conduct, or, equivalently, treats the

governing instrument as requiring this conduct. See Treas. Reg. 1.508-3(d)(1).

(4) As a practical matter, most domestic private foundations do not need Section

508(e) provisions in their governing instruments, since most States’ laws satisfy

the requirements. See Revenue Ruling (Rev. Rul.) 75-38, 1975-1 C.B. 161. The

laws of many States do not satisfy Section 508(e) if their coverage is

specifically disclaimed in one of the following documents:

a. The governing instrument, or

b. Court decrees.

(5) A private foundation’s notification/election to an appropriate State law does not

satisfy Section 508(e) if it does not apply to a clause in the governing

instrument that conflicts with Section 508(e)(1). See Treas. Reg. 1.508-3(d)(5).

Example 1: A clause prohibiting distribution of corpus conflicts with Section

508(e)(1). See Treas. Reg. 1.508-3(b)(2).

Example 2: A clause empowering the trustee to make investments without

being limited to investments authorized by law does not conflict. See Treas.

Reg. 1.508-3(d)(3).

Example 3: In Trust Under Will of Bella Mabury v. Commissioner, 80 T.C. 718

(1983), the court held that a California law requiring private foundations to meet

the requirements of Section 4942 did not automatically supersede a conflicting

provision in a pre-1969 testamentary trust that required accumulation of

income, but allowed for the trustee to bring a judicial proceeding to reform the

trust in compliance with Section 4942.

(6) If the State law by its terms does not apply to a governing instrument with a

mandatory conflicting direction or allows private foundations to elect out of the

law, then the private foundation must indicate on its annual return whether the

State law applies. See Treas. Reg. 1.508-3(d)(3) and (4).

(7) In general, where State law does not satisfy Section 508(e), the governing

instrument must specifically refer to each of Sections 4941, 4942, 4943, 4944,

and 4945. See Treas. Reg. 1.508-3(b)(1). For examples of language that

satisfies the requirements, see Rev. Rul. 70-270, 1970-1 C.B. 135 and Rev.

Rul. 74-368, 1974-2 C.B. 390 (for Section 4947(a)(2) trusts).

(8) The governing instrument cannot expressly prohibit the distribution of

capital/principal/corpus. See Treas. Reg. 1.508-3(b)(2).

(9) Language that satisfies the organizational test under Treas. Reg. 1.501(c)(3)-

1(b) does not necessarily meet Section 508(e). See Treas. Reg. 1.508-3(b)(1).

Conversely, language sufficient for Section 508(e)(1) purposes does not

necessarily satisfy the Section 501(c)(3) organizational test. See Rev. Rul. 85-

160, 1985-2 C.B. 162.

Note: Private foundations cannot be tax exempt nor will contributions to it be

deductible as charitable contributions unless its governing instrument contains

special provisions in addition to those that apply to all organizations described

in IRC 501(c)(3). See Publication 557, Tax-Exempt Status for Your

Organization, for examples of these provisions. In most cases, this requirement

may be satisfied by reference to state law. The IRS has published a list of

states with this type of law. See Rev. Rul. 75-38, 1975-1 C.B. 161.

Note: Arizona is not listed in the revenue ruling but now has the requisite state

law. The only state without the requisite law is New Mexico. Organizations in

United States territories are generally required to have the required clauses in

their governing instruments.

(10) In States where the law does not satisfy Section 508(e), governing instruments

generally meet the Section 508(e)(1) requirements for a tax year only if they

meet the requirements by the end of the year. See Treas. Reg. 1.508-3(a).

Several exceptions apply:

a. In certain situations where a court declares a State law meeting the

requirements of Section 508(e)(1) invalid for a class of private foundations,

a private foundation has one year to amend its governing instrument. See

Treas. Reg. 1.508-3(d)(2)(ii)-(iv).

b. If an organization originally is classified as a public charity and later

classified as a private foundation, then it has one year from the date of

receiving the final private foundation ruling to amend its governing

instrument. See Treas. Reg. 1.508-3(b)(5).

c. If an organization must institute a judicial proceeding to amend its

governing instrument, then the Section 508(e)(1) requirements are deemed

satisfied within the one-year period if the organization institutes the

proceeding within the period, and within a reasonable time, the organization

in fact meets the Section 508(e) requirements. See Treas. Reg. 1.508-

3(b)(6).

d. If the organization was organized before Jan. 1, 1970, and institutes a

necessary judicial proceeding within the year, then Section 508(e)(1) does

not apply after the judicial proceeding if the court does not allow the

reformation. See Treas. Reg. 1.508-3(b)(6).

(11) Charitable trusts described in Section 4947(a)(1) that are subject to the private

foundation rules must comply with Section 508(e). Split-interest trusts under

Section 4947(a)(2) are also subject to the Section 508(e) requirements if

chapter 42 provisions apply to them. See Treas. Reg. 1.508-3(e).

(12) These trusts must comply with Section 508(e) to avoid disallowed deductions

under Section 508(d)(2)(A) for contributions to them. For additional details, see

Treas. Reg. 1.508-3(e)(2) and (3).

E.1. Exceptions to Section 508(e) Requirements

(1) There are multiple exceptions to the Section 508(e) requirements regarding the

foundation’s governing instrument.

(2) If an organization whose governing instrument was executed before Jan. 1,

1970, instituted a necessary judicial proceeding in a court of proper jurisdiction

by Dec. 31, 1971, to reform its governing instrument to comply with Section

508(e), then Section 508(e)(1) does not apply to the organization before,

during, and (if the court did not allow the organization to reform its governing

instrument to comply with Section 508(e)(1)) after the judicial proceeding. See

Section 508(e)(2).

(3) The court in Trust Under Will of Bella Mabury v. Commissioner, cited above,

applied a similar rule under Section 4942 to excuse the trust from complying

with Sections 508(e) and 4942 where it filed a timely judicial proceeding and the

State court did not allow reformation. This transitional rule under Section 4942

allowed certain pre-existing trusts to accumulate income where courts were

determining the validity of an accumulation provision.

(4) A similar exception applies to organizations for tax years beginning before a

certain transitional date. The exception also applies to any periods after the

transitional date during a judicial proceeding in which the organization changed

the governing instrument established before the transitional date (and thereafter

if the court did not allow reformation of the governing instrument). See Treas.

Reg. 1.508-3(g), as originally published (T.D. 7232, 1973-1 C.B. 252), and as

amended.

(5) The transitional date is the earlier of:

a. The latter date is Feb. 10, 1977 (for community trusts), May 21, 1976 (for

medical research organizations), or March 30, 1973 (for all other

organizations), or

b. The date 91 days after the organization received a final ruling that it is a

private foundation, or the date 91 days after the final regulations for public

charity status under Section 170(b)(1)(A) were published. See Treas. Reg.

1.170A-9.

(6) Foreign private foundations that have received substantially all their support

(other than gross investment income) from sources outside the United States

are exempt from Section 508(e). See Section 4948(b) and Treas. Reg. 1.508-

1(a)(2)(vi).

(7) Certain transitional/savings/grandfather provisions in the Tax Reform Act of

1969 override Section 508(e). See Treas. Reg. 1.508-3(b)(3).

Section 508(d) Disallowance of Charitable Deductions

(1) Section 508(d) disallows charitable deductions under the Code’s income,

estate, and gift tax provisions for contributions to private foundations (and trusts

in Sections 4947(a)(1) and (2)) under certain circumstances.

(2) Section 508(d)(1) disallows deductions for certain contributions made to a

private foundation or Section 4947 trust that has been assessed for tax under

Section 507(c).

(3) Section 508(d)(2)(A) disallows deductions for certain contributions made in

taxable years for which the private foundation or Section 4947 trust does not

meet the Section 508(e)(1) requirements.

(4) The charitable deduction Code sections’ provisions are equivalent to or cross-

reference Section 508(d). See Section 170(f)(1) and Treas. Reg. 1.170A-1(j)(2);

Section 681(b) and Treas. Reg. 1.681(b)-1; Section 2055(e)(1) and Treas. Reg.

20.2055-5; and Section 2522(c)(1) and Treas. Reg. 25.2522(c)-2.

(5) Section 508(d)(2)(B) has a similar rule disallowing a deduction for a contribution

made to an organization during a period the organization is not exempt under

Section 501(c)(3) because of Section 508(a).

F.1. Section 508(d)(1) Disallowance

(1) Under Section 508(d)(1) and Treas. Reg. 1.508-2(a), charitable deductions for

contributions to an organization are disallowed if all the following circumstances

exist. Either:

a. The date 91 days after the organization received a final ruling that it is a

private foundation, or

b. A substantial contributor makes the contribution in his tax year which

includes the first day on which the organization acts which ends in the

Section 507(c) tax (or any subsequent tax year). See Section 508(d)(1)(B).

(2) The Section 507(c) termination tax has been imposed on the organization but

has not yet been fully paid or abated. Section 508(d)(3) allows a deduction

under Section 508(d)(1) if the entire amount of the unpaid portion of the Section

507(c) tax is abated under Section 507(g). See Treas. Reg. 1.508-2(a)(2). Also,

under Section 509(c), an organization generally has a fresh start for private

foundation purposes beginning on the day after Section 507 termination.

(3) The "taxable year" referred to in Section 508(d)(2)(A) is the donee

organization’s year. If it meets the Section 508(e)(1) requirements by the end of

the taxable year in which the gift is made, the donor’s charitable deduction will

not be disallowed under Section 508(d)(2)(A). See Treas. Reg. 1.508-2(b)(1)(ii)

and (iii).

(4) For a bequest to an organization that does not exist on the date of the testator’s

death (but created by the testator’s will), the "taxable year" is the organization’s

first taxable year. See Treas. Reg. 1.508-2(b)(1)(ii).

F.2. Certain Transfer of Assets

(1) In general, the exceptions that apply under Section 508(e) (to both private

foundations and Section 4947 trusts) also apply for Section 508(d)(2)(A). So, if

an organization is exempt from (or is considered to meet) the Section 508(e)

requirements for its tax year in which a contribution is made, then the deduction

is not disallowed under Section 508(d)(2)(A) to the contributor; conversely, if

Section 508(e) is not satisfied for the year, then the deduction is disallowed.

However, there are some special rules for Section 508(d)(2)(A) purposes:

a. A contribution to a Section 4947(a)(2) trust, whose governing instrument is

executed after March 22, 1973, and that (by its terms) will become an

Section 4947(a)(1) trust, is disallowed unless the trust states it’ll comply

with all the chapter 42 provisions when it becomes an Section 4947(a)(1)

trust. See Treas. Reg. 1.508-2(b)(1)(vii).

b. Where a State law meeting the Section 508(e) requirements applies

retroactively, it does not apply to contributions made more than two years

before the enactment of the State law. See Treas. Reg. 1.508-3(d)(6).

c. Treas. Reg. 1.508-3(g) applies only to contributions made before the

transitional date.