Private Foundations

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Private Foundations

Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation 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. Organizations that fall into the excluded categories are generally those that either have broad public support or actively function in a supporting relationship to such organizations. Organizations that test for public safety also are excluded. Even if an organization falls within one of the categories excluded from the definition of private foundation, it will be presumed to be a private foundation, with some exceptions, unless it gives timely notice to the IRS that it is not a private foundation. If an organization is required to file the notice, it must do so within 15 months from the end of the month in which it was organized. Generally, foundations use Form 1023, Application for Recognition of Exemption, for this purpose.

There is an excise tax on the net investment income of most domestic private foundations. Certain foreign private foundations are also subject to a tax on gross investment income derived from United States sources. This tax must be reported on Form 990-PF, Return of Private Foundation, and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year is $500 or more.

In addition, there are several restrictions and requirements on private foundations, including:

  • restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons;
  • requirements that the foundation annually distribute income for charitable purposes;
  • limits on their holdings in private businesses;

provisions that investments must not jeopardize the carrying out of exempt purposes; and

  • provisions to assure that expenditures further exempt purposes.

Certain trusts that have charitable interests as well as private interests may also be subject to some of the private foundation tax provisions.

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