§ 4940. Excise tax based on investment income
(b)
Taxable foundations
There is hereby imposed on each private foundation which is not 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)
the amount (if any) by which the sum of
(A)
the tax imposed under subsection (a) (computed as if such subsection applied to such private foundation for the taxable year), plus
(B)
the amount of the tax which would have been imposed under section
511 for the taxable year if such private foundation had been exempt from taxation under section
501
(a), exceeds
(c)
Net investment income defined
(1)
In general
For purposes of subsection (a), the net investment income is the amount by which
(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.
(2)
Gross investment income
For purposes of paragraph (1), the term “gross investment income” means 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.
(3)
Deductions
(A)
In general
For purposes of paragraph (1), there shall be allowed as a deduction all the 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).
(B)
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.
(4)
Capital gains and losses
For purposes of paragraph (1) in determining capital gain net income—
(A)
There shall not be taken into account any gain or loss from the sale or other disposition of property to the extent that such gain or loss is taken into account for purposes of computing the tax imposed by section
511.
(B)
The basis for determining gain in the case of property held by the private foundation on December 31, 1969, and continuously thereafter to the date of its disposition shall be deemed to be not less than the fair market value of such property on December 31, 1969.
(C)
Losses from sales or other dispositions of property shall be allowed only to the extent of gains from such sales or other dispositions, and there shall be no capital loss carryovers or carrybacks.
(D)
Except to the extent provided by regulation, under rules similar to the rules of section
1031 (including the exception under subsection (a)(2) thereof), no gain or loss shall be taken into account with respect to any portion of property used for a period of not less than 1 year for a purpose or function constituting the basis of the private foundation’s exemption if the entire property is exchanged immediately following such period solely for property of like kind which is to be used primarily for a purpose or function constituting the basis for such foundation’s exemption.
(d)
Exemption for certain operating foundations
(1)
In general
No tax shall be imposed by this section on any private foundation which is an exempt operating foundation for the taxable year.
(2)
Exempt operating foundation
For purposes of this subsection, the term “exempt operating foundation” means, with respect to any taxable year, any private foundation if—
(3)
Definitions
For purposes of this subsection—
(A)
Publicly supported
A private foundation is publicly supported for a taxable year if it meets the requirements of section
170
(b)(1)(A)(vi) or
509
(a)(2) for such taxable year.
(B)
Disqualified individual
The term “disqualified individual” means, with respect to any private foundation, an individual who is—
(e)
Reduction in tax where private foundation meets certain distribution requirements
(1)
In general
In the case of any private foundation which meets the requirements of paragraph (2) for any taxable year, subsection (a) shall be applied with respect to such taxable year by substituting “1 percent” for “2 percent”.
(2)
Requirements
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—
(B)
such private foundation was not liable for tax under section
4942 with respect to any year in the base period.
(3)
Average percentage payout for base period
For purposes of this subsection—
(A)
In general
The average percentage payout for the base period is the average of the percentage payouts for taxable years in the base period.
(B)
Percentage payout
The term “percentage payout” means, with respect to any taxable year, the percentage determined by dividing—
(C)
Special rule where tax reduced under this subsection
For purposes of this paragraph, if the amount of the tax imposed by this section for any taxable year in the base period is reduced by reason of this subsection, the amount of the qualifying distributions made by the private foundation during such year shall be reduced by the amount of such reduction in tax.
(4)
Base period
For purposes of this subsection—