§ 4942. Taxes on failure to distribute income
(a)
Initial tax
There is hereby imposed 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 percent of the amount of such income remaining undistributed at the beginning of such second (or succeeding) taxable year. The tax imposed by this subsection shall not apply to the undistributed income of a private foundation—
(1)
for any taxable year for which it is an operating foundation (as defined in subsection (j)(3)), or
(2)
to the extent that the foundation failed to distribute any amount solely because of an incorrect valuation of assets under subsection (e), if—
(B)
such amount is distributed as qualifying distributions (within the meaning of subsection (g)) by the foundation during the allowable distribution period (as defined in subsection (j)(2)),
(b)
Additional tax
In any case in which an initial tax is imposed under subsection (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.
(c)
Undistributed income
For purposes of this section, the term “undistributed income” means, with respect to any private foundation for any taxable year as of any time, the amount by which—
(d)
Distributable amount
For purposes of this section, the term “distributable amount” means, with respect to any foundation for any taxable year, an amount equal to—
(1)
the sum of the minimum investment return plus the amounts described in subsection (f)(2)(C), reduced by
(2)
the sum of the taxes imposed on such private foundation for the taxable year under subtitle A and section
4940.
(e)
Minimum investment return
(1)
In general
For purposes of subsection (d), the minimum investment return for any private foundation for any taxable year is 5 percent of the excess of—
(2)
Valuation
(A)
In general
For purposes of paragraph (1)(A), the fair market value of securities for which market quotations are readily available shall be determined on a monthly basis. For all other assets, the fair market value shall be determined at such times and in such manner as the Secretary shall by regulations prescribe.
(B)
Reductions in value for blockage or similar factors
In determining the value of any securities under this paragraph, the fair market value of such securities (determined without regard to any reduction in value) shall not be reduced unless, and only to the extent that, the private foundation establishes that as a result of—
the securities could not be liquidated within a reasonable period of time except at a price less than such fair market value. Any reduction in value allowable under this subparagraph shall not exceed 10 percent of such fair market value.
(f)
Adjusted net income
(1)
Defined
For purposes of subsection (j), the term “adjusted net income” means the excess (if any) of—
(A)
the gross income for the taxable year (determined with the income modifications provided by paragraph (2)), over
(B)
the sum of the deductions (determined with the deduction modifications provided by paragraph (3)) which would be allowed to a corporation subject to the tax imposed by section
11 for the taxable year.
(2)
Income modifications
The income modifications referred to in paragraph (1)(A) are as follows:
(B)
capital gains and losses from the sale or other disposition of property shall be taken into account only in an amount equal to any net short-term capital gain for the taxable year;
(C)
there shall be taken into account—
(i)
amounts received or accrued as repayments of amounts which were taken into account as a qualifying distribution within the meaning of subsection (g)(1)(A) for any taxable year;
(D)
section
483 (relating to imputed interest) shall not apply in the case of a binding contract made in a taxable year beginning before January 1, 1970.
(3)
Deduction modifications
The deduction modifications referred to in paragraph (1)(B) are as follows:
(A)
no deduction shall be allowed other than all the ordinary and necessary expenses paid or incurred for the production or collection of gross income or for the management, conservation, or maintenance of property held for the production of such income and the allowances for depreciation and depletion determined under section
4940
(c)(3)(B), and
(B)
section
265 (relating to expenses and interest relating to tax-exempt interest) shall not apply.
(4)
Transitional rule
For purposes of paragraph (2)(B), the basis (for purposes of determining gain) of property held by a 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.
(g)
Qualifying distributions defined
(1)
In general
For purposes of this section, the term “qualifying distribution” means—
(A)
any amount (including that portion of reasonable and necessary administrative expenses) paid to accomplish one or more purposes described in section
170
(c)(2)(B), other than any contribution to (i) an organization controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined in section
4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as provided in paragraph (3), or
(2)
Certain set-asides
(A)
In general
For all taxable years beginning on or after January 1, 1975, subject to such terms and conditions as may be prescribed by the Secretary, an amount set aside for a specific project which comes within one or more purposes described in section
170
(c)(2)(B) may be treated as a qualifying distribution if it meets the requirements of subparagraph (B).
(B)
Requirements
An amount set aside for a specific project shall meet the requirements of this subparagraph if at the time of the set-aside the foundation establishes to the satisfaction of the Secretary that the amount will be paid for the specific project within 5 years, and either—
(i)
at the time of the set-aside the private foundation establishes to the satisfaction of the Secretary that the project is one which can better be accomplished by such set-aside than by immediate payment of funds, or
(ii)
(I)
the project will not be completed before the end of the taxable year of the foundation in which the set-aside is made,
(II)
the private foundation in each taxable year beginning after December 31, 1975 (or after the end of the fourth taxable year following the year of its creation, whichever is later), distributes amounts, in cash or its equivalent, equal to not less than the distributable amount determined under subsection (d) (without regard to subsection (i)) for purposes described in section
170
(c)(2)(B) (including but not limited to payments with respect to set-asides which were treated as qualifying distributions in one or more prior years), and
(III)
the private foundation has distributed (including but not limited to payments with respect to set-asides which were treated as qualifying distributions in one or more prior years) during the four taxable years immediately preceding its first taxable year beginning after December 31, 1975, or the fifth taxable year following the year of its creation, whichever is later, an aggregate amount, in cash or its equivalent, of not less than the sum of the following: 80 percent of the first preceding taxable year’s distributable amount; 60 percent of the second preceding taxable year’s distributable amount; 40 percent of the third preceding taxable year’s distributable amount; and 20 percent of the fourth preceding taxable year’s distributable amount.
(C)
Certain failures to distribute
If, for any taxable year to which clause (ii)(II) of subparagraph (B) applies, the private foundation fails to distribute in cash or its equivalent amounts not less than those required by such clause and—
(ii)
the foundation distributes an amount in cash or its equivalent which is not less than the difference between the amounts required to be distributed under clause (ii)(II) of subparagraph (B) and the amounts actually distributed in cash or its equivalent during that taxable year within the correction period (as defined in section
4963
(e)),
such distribution in cash or its equivalent shall be treated for the purposes of this subparagraph as made during such year.
(D)
Reduction in distribution amount
If, during the taxable years in the adjustment period for which the organization is a private foundation, the foundation distributes amounts in cash or its equivalent which exceed the amount required to be distributed under clause (ii)(II) of subparagraph (B) (including but not limited to payments with respect to set-asides which were treated as qualifying distributions in prior years), then for purposes of this subsection the distribution required under clause (ii)(II) of subparagraph (B) for the taxable year shall be reduced by an amount equal to such excess.
(E)
Adjustment period
For purposes of subparagraph (D), with respect to any taxable year of a private foundation, the taxable years in the adjustment period are the taxable years (not exceeding 5) beginning after December 31, 1975, and immediately preceding the taxable year.
In the case of a set-aside which satisfies the requirements of clause (i) of subparagraph (B), for good cause shown, the period for paying the amount set aside may be extended by the Secretary.
(3)
Certain contributions to section
501
(c)(3) organizations
For purposes of this section, the term “qualifying distribution” includes a contribution to a section
501
(c)(3) organization described in paragraph (1)(A)(i) or (ii) if—
(A)
not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such section
501
(c)(3) organization were a private foundation which is not an operating foundation), and
(4)
Limitation on distributions by nonoperating private foundations to supporting organizations
(A)
In general
For purposes of this section, the term “qualifying distribution” shall not include any amount paid by a private foundation which is not an operating foundation to—
(i)
any type III supporting organization (as defined in section
4943
(f)(5)(A)) which is not a functionally integrated type III supporting organization (as defined in section
4943
(f)(5)(B)), and
(B)
Type I and type II supporting organizations
An organization is described in this subparagraph if the organization meets the requirements of subparagraphs (A) and (C) of section
509
(a)(3) and is—
(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,
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.
(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.
(j)
Other definitions
For purposes of this section—
(1)
Taxable period
The term “taxable period” means, with respect to the undistributed income for any taxable year, the period beginning with the first day of the taxable year and ending on the earlier of—
(A)
the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a) under section
6212, or
(2)
Allowable distribution period
The term “allowable distribution period” means, with respect to any private foundation, the period beginning with the first day of the first taxable year following the taxable year in which the incorrect valuation (described in subsection (a)(2)) occurred and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (a)) under section
6212 extended by—
(3)
Operating foundation
For purposes of this section, the term “operating foundation” means any organization—
(A)
which makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated equal to substantially all of the lesser of—
(B)
(i)
substantially more than half of the assets of which are devoted directly to such activities or to functionally related businesses (as defined in paragraph (4)), or to both, or are stock of a corporation which is controlled by the foundation and substantially all of the assets of which are so devoted.
(ii)
which normally makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated in an amount not less than two-thirds of its minimum investment return (as defined in subsection (e)), or
(iii)
substantially all of the support (other than gross investment income as defined in section 509(e)) of which is normally received from the general public and from 5 or more exempt organizations which are not described in section
4946
(a)(1)(H) with respect to each other or the recipient foundation; not more than 25 percent of the support (other than gross investment income) of which is normally received from any one such exempt organization; and not more than half of the support of which is normally received from gross investment income.
Notwithstanding the provisions of subparagraph (A), if the qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) of an organization for the taxable year exceed the minimum investment return for the taxable year, clause (ii) of subparagraph (A) shall not apply unless substantially all of such qualifying distributions are made directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated.
(5)
Certain elderly care facilities
For purposes of this section (but no other provisions of this title), the term “operating foundation” includes any organization which, on May 26, 1969, and at all times thereafter before the close of the taxable year, operated and maintained as its principal functional purpose facilities for the long-term care, comfort, maintenance, or education of permanently and totally disabled persons, elderly persons, needy widows, or children but only if such organization meets the requirements of paragraph (3)(B)(ii).