-CITE-

26 USC CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN

OTHER TAX-EXEMPT ORGANIZATIONS 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

-HEAD-

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

-MISC1-

Subchapter Sec.(!1)

A. Private foundations 4940

B. Black lung benefit trusts 4951

C. Political expenditures of section 501(c)(3)

organizations 4955

D. Failure by certain charitable organizations to meet

certain qualification requirements 4958

E. Abatement of first and second tier taxes in certain

cases 4961

AMENDMENTS

1996 - Pub. L. 104-168, title XIII, Sec. 1311(c)(6), July 30,

1996, 110 Stat. 1478, struck out item for subchapter D "Abatement

of first and second-tier taxes in certain cases" and added items

for subchapters D and E.

1987 - Pub. L. 100-203, title X, Sec. 10712(c)(7), (9), Dec. 22,

1987, 101 Stat. 1330-467, substituted in chapter heading "AND

CERTAIN OTHER TAX-EXEMPT ORGANIZATIONS" for "BLACK LUNG BENEFIT

TRUSTS", struck out item for subchapter C "Abatement of first and

second tier taxes in certain cases", and added items for

subchapters C and D.

1984 - Pub. L. 98-369, div. A, title III, Sec. 305(b)(3), July

18, 1984, 98 Stat. 784, substituted "Abatement of first and second

tier taxes in certain cases" for "Abatement of second tier taxes

where there is correction during correction period" in item for

subchapter C.

1980 - Pub. L. 96-596, Sec. 2(c)(3), Dec. 24, 1980, 94 Stat.

3474, added item for subchapter C.

1978 - Pub. L. 95-227, Sec. 4(c)(2)(A), Feb. 10, 1978, 92 Stat.

22, in chapter heading inserted "; BLACK LUNG BENEFIT TRUSTS" after

"FOUNDATIONS", and added items for subchapters A and B.

1969 - Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 498, added chapter heading "PRIVATE FOUNDATIONS".

-SECREF-

CHAPTER REFERRED TO IN OTHER SECTIONS

This chapter is referred to in sections 170, 275, 509, 2055,

6104, 6161, 6211, 6212, 6213, 6214, 6344, 6405, 6501, 6503, 6511,

6512, 6684, 6862, 6871, 7422 of this title.

-FOOTNOTE-

(!1) Section numbers editorially supplied.

-End-

-CITE-

26 USC Subchapter A - Private Foundations 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

SUBCHAPTER A - PRIVATE FOUNDATIONS

-MISC1-

Sec.

4940. Excise tax based on investment income.

4941. Taxes on self-dealing.

4942. Taxes on failure to distribute income.

4943. Taxes on excess business holdings.

4944. Taxes on investments which jeopardize charitable

purpose.

4945. Taxes on taxable expenditures.

4946. Definitions and special rules.

4947. Application of taxes to certain nonexempt trusts.

4948. Application of taxes and denial of exemption with

respect to certain foreign organizations.

AMENDMENTS

1978 - Pub. L. 95-227, Sec. 4(c)(2)(A), Feb. 10, 1978, 92 Stat.

22, added subchapter A heading and designated sections 4940 to 4948

as subchapter A.

1969 - Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 498, added analysis of sections.

-SECREF-

SUBCHAPTER REFERRED TO IN OTHER SECTIONS

This subchapter is referred to in sections 4962, 7871 of this

title.

-End-

-CITE-

26 USC Sec. 4940 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4940. Excise tax based on investment income

-STATUTE-

(a) Tax-exempt foundations

There is hereby imposed on each private foundation which is

exempt from taxation under section 501(a) for the taxable year,

with respect to the carrying on its activities, a tax equal to 2

percent of the net investment income of such foundation for the

taxable year.

(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

(2) the tax imposed under subtitle A on such private foundation

for the taxable year.

(c) Net investment income defined

(1) In general

For purposes of subsection (a), the net investment income is

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.

(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.

(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.

(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).

(4) Capital gains and losses

For purposes of paragraph (1) in determining capital gain net

income -

(A) There shall be taken into account only gains and losses

from the sale or other disposition of property used for the

production of interest, dividends, rents, and royalties, and

property used for the production of income included in

computing the tax imposed by section 511 (except to the extent

gain or loss from the sale or other disposition of such

property is taken into account for purposes of such tax).

(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.

(5) Tax-exempt income

For purposes of this section, net investment income shall be

determined by applying section 103 (relating to State and local

bonds) and section 265 (relating to expenses and interest

relating to tax-exempt income).

(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 -

(A) such foundation is an operating foundation (as defined in

section 4942(j)(3)),

(B) such foundation has been publicly supported for at least

10 taxable years,

(C) at all times during the taxable year, the governing body

of such foundation -

(i) consists of individuals at least 75 percent of whom are

not disqualified individuals, and

(ii) is broadly representative of the general public, and

(D) at no time during the taxable year does such foundation

have an officer who is a disqualified individual.

(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 -

(i) a substantial contributor to the foundation,

(ii) an owner of more than 20 percent of -

(I) the total combined voting power of a corporation,

(II) the profits interest of a partnership, or

(III) the beneficial interest of a trust or

unincorporated enterprise,

which is a substantial contributor to the foundation, or

(iii) a member of the family of any individual described in

clause (i) or (ii).

(C) Substantial contributor

The term "substantial contributor" means a person who is

described in section 507(d)(2).

(D) Family

The term "family" has the meaning given to such term by

section 4946(d).

(E) Constructive ownership

The rules of paragraphs (3) and (4) of section 4946(a) shall

apply for purposes of subparagraph (B)(ii).

(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 -

(i) an amount equal to the assets of such foundation for

such taxable year multiplied by the average percentage payout

for the base period, plus

(ii) 1 percent of the net investment income of such

foundation for such taxable year, and

(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 -

(i) the amount of the qualifying distributions made by the

private foundation during the taxable year, by

(ii) the assets of the private foundation for the taxable

year.

(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 -

(A) In general

The term "base period" means, with respect to any taxable

year, the 5 taxable years preceding such taxable year.

(B) New private foundations, etc.

If an organization has not been a private foundation

throughout the base period referred to in subparagraph (A), the

base period shall consist of the taxable years during which

such foundation has been in existence.

(5) Other definitions

For purposes of this subsection -

(A) Qualifying distribution

The term "qualifying distribution" has the meaning given such

term by section 4942(g).

(B) Assets

The assets of a private foundation for any taxable year shall

be treated as equal to the excess determined under section

4942(e)(1).

(6) Treatment of successor organizations, etc.

In the case of -

(A) a private foundation which is a successor to another

private foundation, this subsection shall be applied with

respect to such successor by taking into account the experience

of such other foundation, and

(B) a merger, reorganization, or division of a private

foundation, this subsection shall be applied under regulations

prescribed by the Secretary.

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 498; amended Pub. L. 94-455, title XIX, Sec. 1901(b)(33)(N),

Oct. 4, 1976, 90 Stat. 1802; Pub. L. 95-345, Sec. 2(a)(4), Aug. 15,

1978, 92 Stat. 481; Pub. L. 95-600, title V, Sec. 520(a), Nov. 6,

1978, 92 Stat. 2884; Pub. L. 98-369, div. A, title III, Secs.

302(a), 303(a), July 18, 1984, 98 Stat. 779, 781; Pub. L. 99-514,

title XIII, Sec. 1301(j)(6), title XVIII, Sec. 1832, Oct. 22, 1986,

100 Stat. 2658, 2851.)

-MISC1-

AMENDMENTS

1986 - Subsec. (c)(5). Pub. L. 99-514, Sec. 1301(j), substituted

"(relating to State and local bonds)" for "(relating to interest on

certain governmental obligations)".

Subsec. (e)(2). Pub. L. 99-514, Sec. 1832, added subpar. (B) and

struck out former subpar. (B) and concluding provision which read

as follows:

"(B) the average percentage payout for the base period equals

or exceeds 5 percent.

In the case of an operating foundation (as defined in section

4942(j)(3)), subparagraph (B) shall be applied by substituting '3

1/3 percent' for '5 percent'."

1984 - Subsec. (d). Pub. L. 98-369, Sec. 302(a), added subsec.

(d).

Subsec. (e). Pub. L. 98-369, Sec. 303(a), added subsec. (e).

1978 - Subsec. (a). Pub. L. 95-600 substituted "2 percent" for "4

percent".

Subsec. (c)(2). Pub. L. 95-345 inserted provision relating to

payments with respect to securities loans.

1976 - Subsec. (c). Pub. L. 94-455 substituted "capital gain net

income" for "net capital gain" in par. (1) after "investment income

and the", and in par. (4) after "par. (1) in determining".

EFFECTIVE DATE OF 1986 AMENDMENT

Amendment by section 1301(j)(6) of Pub. L. 99-514 applicable to

bonds issued after Aug. 15, 1986, except as otherwise provided, see

sections 1311 to 1318 of Pub. L. 99-514, set out as an Effective

Date; Transitional Rules note under section 141 of this title.

Amendment by section 1832 of Pub. L. 99-514 effective, except as

otherwise provided, as if included in the provisions of the Tax

Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment

relates, see section 1881 of Pub. L. 99-514, set out as a note

under section 48 of this title.

EFFECTIVE DATE OF 1984 AMENDMENT

Section 302(c)(1) of Pub. L. 98-369 provided that: "The amendment

made by subsection (a) [amending this section] shall apply to

taxable years beginning after December 31, 1984."

Section 303(b) of Pub. L. 98-369 provided that: "The amendment

made by subsection (a) [amending this section] shall apply to

taxable years beginning after December 31, 1984."

EFFECTIVE DATE OF 1978 AMENDMENTS

Section 520(b) of Pub. L. 95-600 provided that: "The amendment

made by the first section of this Act [probably meaning section

520(a), which amended this section] shall apply to taxable years

beginning after September 30, 1977."

Amendment by Pub. L. 95-345 applicable with respect to amounts

received after Dec. 31, 1976, as payments with respect to

securities loans (as defined in section 512(a)(5) of this title),

and transfers of securities, under agreements described in section

1058 of this title, occurring after such date, see section 2(e) of

Pub. L. 95-345, set out as a note under section 509 of this title.

EFFECTIVE DATE

Section 101(k) of Pub. L. 91-172, as amended by Pub. L. 99-514,

Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided:

"(1) In general. - Except as otherwise provided in this

subsection and subsection (l) [set out as a note below] the

amendments made by this section [enacting this section and sections

507 to 509, 4941 to 4848, 6056, 6684, and 6685 of this title,

amending sections 101, 170, 501, 503, 542, 663, 681, 878, 884,

1443, 2039, 2517, 4057, 4221, 4253, 4294, 5214, 6033, 6034, 6043,

6104, 6161, 6201, 6211 to 6214, 6344, 6501, 6503, 6511, 6512, 6601,

6652, 6653, 6659, 6676, 6677, 6679, 6682, 7207, 7422, and 7454 of

this title, repealing section 504 of this title, and enacting

provisions set out as notes under this section and section 1 of

this title] shall take effect on January 1, 1970.

"(2) Provisions effective for taxable years beginning after

december 31, 1969. - The following provisions shall apply to

taxable years beginning after December 31, 1969:

"(A) Sections 4940, 4942, 4943, and 4948 of the Internal

Revenue Code of 1986 [formerly I.R.C. 1954] (as added by this

section), and

"(B) The amendments made by subsection (d) [enacting section

6056 of this title, and amending sections 6033 and 6652 of this

title] and paragraphs (3), (15), (16), (20), (21), (30), (31),

(32), (33), (34), (35), and (61) of subsection (j) [amending

sections 501, 542, 878, 884, 6033, 6034, and 6043 of this title

and repealing section 504 of this title].

"(3) Sections 508(a), (b), and (c). - Sections 508 (a),(b), and

(c) of the Internal Revenue Code of 1986 (as added by this section)

shall take effect on October 9, 1969."

SAVINGS PROVISION

Section 101(l) of Pub. L. 91-172, as amended by Pub. L. 93-490,

Sec. 4(a), Oct. 26, 1974, 88 Stat. 1467; Pub. L. 94-455, title

XIII, Secs. 1301(a), 1309(a), Oct. 4, 1976, 90 Stat. 1713, 1729;

Pub. L. 95-600, title VII, Sec. 703(f), Nov. 6, 1978, 92 Stat.

2940; Pub. L. 98-369, div. A, title III, Sec. 314(b)(1), July 18,

1984, 98 Stat. 787; Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100

Stat. 2095, provided that:

"(1) References to internal revenue code provisions. - Except as

otherwise expressly provided, references in the following

paragraphs of this subsection are to sections of the Internal

Revenue Code of 1986 [formerly I.R.C. 1954] as amended by this

section.

"(2) Section 4941. - Section 4941 shall not apply to -

"(A) any transaction between a private foundation and a

corporation which is a disqualified person (as defined in section

4946), pursuant to the terms of securities of such corporation in

existence at the time acquired by the foundation, if such

securities were acquired by the foundation before May 27, 1969;

"(B) the sale, exchange, or other disposition of property which

is owned by a private foundation on May 26, 1969 (or which is

acquired by a private foundation under the terms of a trust which

was irrevocable on May 26, 1969, or under the terms of a will

executed on or before such date, which are in effect on such date

and at all times thereafter), to a disqualified person, if such

foundation is required to dispose of such property in order not

to be liable for tax under section 4943 (relating to taxes on

excess business holdings) applied, in the case of a disposition

before January 1, 1977, without taking section 4943(c)(4) into

account and it receives in return an amount which equals or

exceeds the fair market value of such property at the time of

such disposition or at the time a contract for such disposition

was previously executed in a transaction which would not

constitute a prohibited transaction (within the meaning of

section 503(b) or the corresponding provisions of prior law);

"(C) the leasing of property or the lending of money or other

extension of credit between a disqualified person and a private

foundation pursuant to a binding contract in effect on October 9,

1969 (or pursuant to renewals of such a contract), until taxable

years beginning after December 31, 1979, if such leasing or

lending (or other extension of credit) remains at least as

favorable as an arm's-length transaction with an unrelated party

and if the execution of such contract was not at the time of such

execution a prohibited transaction (within the meaning of section

503(b) or the corresponding provisions of prior law);

"(D) the use of goods, services, or facilities which are shared

by a private foundation and a disqualified person until taxable

years beginning after December 31, 1979, if such use is pursuant

to an arrangement in effect before October 9, 1969, and such

arrangement was not a prohibited transaction (within the meaning

of section 503(b) or the corresponding provisions of prior law)

at the time it was made and would not be a prohibited transaction

if such section continued to apply;

"(E) the use of property in which a private foundation and a

disqualified person have a joint or common interest, if the

interests of both in such property were acquired before October

9, 1969; and

"(F) the sale, exchange, or other disposition (other than by

lease) of property which is owned by a private foundation to a

disqualified person if -

"(i) such foundation is leasing substantially all of such

property under a lease to which subparagraph (C) applies,

"(ii) the disposition to such disqualified person occurs

before January 1, 1978, and

"(iii) such foundation receives in return for the disposition

to such disqualified person an amount which equals or exceeds

the fair market value of such property at the time of the

disposition or at the time (after June 30, 1976) a contract for

the disposition was previously executed in a transaction which

would not constitute a prohibited transaction (within the

meaning of section 503(b) or any corresponding provision of

prior law).

"(3) Section 4942. - In the case of organizations organized

before May 27, 1969, section 4942 shall -

"(A) for all purposes other than the determination of the

minimum investment return under section 4942(j)(3)(B)(ii), for

taxable years beginning before January 1, 1972, apply without

regard to section 4942(e) (relating to minimum investment

return), and for taxable years beginning in 1972, 1973, and 1974,

apply with an applicable percentage (as prescribed in section

4942(e)(3)) which does not exceed 4 1/2 percent, 5 percent, and

5 1/2 percent, respectively;

"(B) not apply to an organization to the extent its income is

required to be accumulated pursuant to the mandatory terms (as in

effect on May 26, 1969, and at all times thereafter) of an

instrument executed before May 27, 1969, with respect to the

transfer of income producing property to such organization,

except that section 4942 shall apply to such organization if the

organization would have been denied exemption if section 504(a)

had not been repealed by this Act, or would have had its

deductions under section 642(c) limited if section 681(c) had not

been repealed by this Act. In applying the preceding sentence, in

addition to the limitations contained in section 504(a) or 681(c)

before its repeal, section 504(a)(1) or 681(c)(1) shall be

treated as not applying to an organization to the extent its

income is required to be accumulated pursuant to the mandatory

terms (as in effect on January 1, 1951, and at all times

thereafter) of an instrument executed before January 1, 1951,

with respect to the transfer of income producing property to such

organization before such date, if such transfer was irrevocable

on such date;

"(C) apply to a grant to a private foundation described in

section 4942(g)(1)(A)(ii) which is not described in section

4942(g)(1)(A)(i), pursuant to a written commitment which was

binding on May 26, 1969, and at all times thereafter, as if such

grant is a grant to an operating foundation (as defined in

section 4942(j)(3)), if such grant is made for one or more of the

purposes described in section 170(c)(2)(B) and is to be paid out

to such private foundation on or before December 31, 1974;

"(D) apply, for purposes of section 4942(f), in such a manner

as to treat any distribution made to a private foundation in

redemption of stock held by such private foundation in a business

enterprise as not essentially equivalent to a dividend under

section 302(b)(1) if such redemption is described in paragraph

(2)(B) of this subsection;

"(E) not apply to an organization which is prohibited by its

governing instrument or other instrument from distributing

capital or corpus to the extent the requirements of section 4942

are inconsistent with such prohibition; and

"(F) apply, in the case of an organization described in

paragraph (4)(A) of this subsection,

"(i) by applying section 4942(e) without regard to the stock

to which paragraph (4)(A)(ii) of this subsection applies,

"(ii) by applying section 4942(f) without regard to dividend

income for such stock, and

"(iii) by defining the distributable amount as the sum of the

amount determined under section 4942(d) (after the application

of clauses (i) and (ii)), and the amount of the dividend income

from such stock.

With respect to taxable years beginning after December 31, 1971,

subparagraphs (B) and (E) shall apply only during the pendency of

any judicial proceeding by the private foundation which is

necessary to reform, or to excuse such foundation from compliance

with, its governing instrument or any other instrument (as in

effect on May 26, 1969) in order to comply with the provisions of

section 4942, and in the case of subparagraph (B) for all periods

after the termination of such judicial proceeding during which the

governing instrument or any other instrument does not permit

compliance with such provisions.

"(4) Section 4943. -

"(A) In the case of a private foundation -

"(i) which was incorporated before January 1, 1951;

"(ii) substantially all of the assets of which on May 26,

1969, consist of more than 90 percent of the stock of an

incorporated business enterprise which is licensed and

regulated, the sales or contracts of which are regulated, and

the professional representatives of which are licensed, by

State regulatory agencies in at least 10 States; and

"(iii) which acquired such stock solely by gift, devise, or

bequest, section 4943(c)(4)(A)(i) shall be applied with respect

to the holdings of such foundation in such incorporated

business enterprise as if it did not contain the phrase ', but

in no event shall the percentage so substituted be more than 50

percent', and section 4943(c)(4)(D) shall not apply with

respect to such holdings. For purposes of the preceding

sentence, stock of such enterprise in a trust created before

May 27, 1969, of which the foundation is the remainder

beneficiary shall be deemed to be held by such foundation on

May 26, 1969, if such foundation held (without regard to such

trust) more than 20 percent of the stock of such enterprise on

May 26, 1969.

"(B) Subparagraph (A) shall apply to a private foundation only

if -

"(i) the foundation does not purchase any stock or other

interest in the enterprise described in subparagraph (A) after

May 26, 1969, and does not acquire any stock or other interest

in any other business enterprise which constitutes excess

business holdings under section 4943; and

"(ii) in the last 5 taxable years ending on or before

December 31, 1970, the foundation expends substantially all of

its adjusted net income (as defined in section 4942(f)) for the

purpose or function for which it is organized and operated.

"(C) For purposes of section 4943(c)(6), the term 'purchase'

does not include an exchange which is described in paragraph

(2)(B) of this subsection and which is pursuant to a plan for

disposition of excess business holdings.

"(5) Section 4945. - Section 4945(d)(4) and (h) shall not apply

to a grant which is described in paragraph (3)(C) of this

subsection.

"(6) Section 508(e). - Section 508(e) shall not apply to require

inclusion in governing instruments of any provisions inconsistent

with this subsection.

"(7) Section 509(a). - In the case of any trust created under the

terms of a will or a codicil to a will executed on or before March

30, 1924, by which the testator bequeathed all of the outstanding

common stock of a corporation in trust, the income of which trust

is to be used principally for the benefit of those from time to

time employed by the corporation and their families, the trustees

of which trust are elected or selected from among the employees of

such corporation, and which trust does not own directly any stock

in any other corporation, if the trust makes an irrevocable

election under this paragraph within one year after the date of the

enactment of this Act [Dec. 30, 1969], such trust shall be treated

as not being a private foundation for purposes of the Internal

Revenue Code of 1986 but shall be treated for purposes of such Code

as if it were not exempt from tax under section 501(a) for any

taxable year beginning after the date of the enactment of this Act

[Dec. 30, 1969] and before the date (if any) on which such trust

has complied with the requirements of section 507 for termination

of the status of an organization as a private foundation.

"(8) Certain redemptions. - For purposes of applying section

302(b)(1) to the determination of the amount of gross investment

income under sections 4940 and 4948(a), any distribution made to a

private foundation in redemption of stock held by such private

foundation in a business enterprise shall be treated as not

essentially equivalent to a dividend, if such redemption is

described in paragraph (2)(B) of this subsection."

[Section 314(b)(2) of Pub. L. 98-369 provided that: "The

amendment made by paragraph (1) [amending section 101(4)(A)(iii) of

Pub. L. 91-172, set out above] shall apply as if included in

section 101(l)(4) of the Tax Reform Act of 1969 [Pub. L. 91-172]."]

[Section 1301(b) of Pub. L. 94-455 provided that: "The amendments

made by subsection (a) [enacting subpar. (F) of section 101(2) of

Pub. L. 91-172, set out above] shall apply to dispositions after

the date of the enactment of this Act [Oct. 4, 1976] in taxable

years ending after such date."]

[Section 1309(b) of Pub. L. 94-455 provided that: "The amendment

made by this section [amending section 101(2)(B) of Pub. L. 91-172,

set out above] shall apply to dispositions made after the date of

enactment of this Act [Oct. 4, 1976]."]

[Section 4(b) of Pub. L. 93-490 provided that: "The amendment

made by this section [enacting subpar. (F) of section 101(3) of

Pub. L. 91-172, set out above] shall apply to taxable years

beginning after December 31, 1971."]

DETERMINATION OF OPERATING FOUNDATION STATUS FOR CERTAIN PURPOSES

Pub. L. 100-647, title VI, Sec. 6204, Nov. 10, 1988, 102 Stat.

3730, provided that: "For purposes of section 302(c)(3) of the

Deficit Reduction Act of 1984 [Pub. L. 98-369, set out below], a

private foundation which constituted an operating foundation (as

defined in section 4942(j)(3) of the Internal Revenue Code of 1986)

for its last taxable year ending before January 1, 1983, shall be

treated as constituting an operating foundation as of January 1,

1983."

PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989

For provisions directing that if any amendments made by subtitle

A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or

title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an

amendment to any plan, such plan amendment shall not be required to

be made before the first plan year beginning on or after Jan. 1,

1989, see section 1140 of Pub. L. 99-514, as amended, set out as a

note under section 401 of this title.

PUBLIC SUPPORT REQUIREMENT NOT APPLICABLE TO CERTAIN EXISTING

FOUNDATIONS

Section 302(c)(3) of Pub. L. 98-369 provided that: "A foundation

which was an operating foundation (as defined in section 4942(j)(3)

of the Internal Revenue Code of 1954) as of January 1, 1983, shall

be treated as meeting the requirements of section 4940(d)(2)(B) of

such Code (as added by subsection (a))."

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 41, 4942, 4945, 4948,

6212, 6501, 6655 of this title.

-End-

-CITE-

26 USC Sec. 4941 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4941. Taxes on self-dealing

-STATUTE-

(a) Initial taxes

(1) On self-dealer

There is hereby imposed a tax on each act of self-dealing

between a disqualified person and a private foundation. The rate

of tax shall be equal to 5 percent of the amount involved with

respect to the act of self-dealing for each year (or part

thereof) in the taxable period. The tax imposed by this paragraph

shall be paid by any disqualified person (other than a foundation

manager acting only as such) who participates in the act of

self-dealing. In the case of a government official (as defined in

section 4946(c)), a tax shall be imposed by this paragraph only

if such disqualified person participates in the act of

self-dealing knowing that it is such an act.

(2) On foundation manager

In any case in which a tax is imposed by paragraph (1), there

is hereby imposed on the participation of any foundation manager

in an act of self-dealing between a disqualified person and a

private foundation, knowing that it is such an act, a tax equal

to 2 1/2 percent of the amount involved with respect to the act

of self-dealing for each year (or part thereof) in the taxable

period, unless such participation is not willful and is due to

reasonable cause. The tax imposed by this paragraph shall be paid

by any foundation manager who participated in the act of

self-dealing.

(b) Additional taxes

(1) On self-dealer

In any case in which an initial tax is imposed by subsection

(a)(1) on an act of self-dealing by a disqualified person with a

private foundation and the act is not corrected within the

taxable period, there is hereby imposed a tax equal to 200

percent of the amount involved. The tax imposed by this paragraph

shall be paid by any disqualified person (other than a foundation

manager acting only as such) who participated in the act of

self-dealing.

(2) On foundation manager

In any case in which an additional tax is imposed by paragraph

(1), if a foundation manager refused to agree to part or all of

the correction, there is hereby imposed a tax equal to 50 percent

of the amount involved. The tax imposed by this paragraph shall

be paid by any foundation manager who refused to agree to part or

all of the correction.

(c) Special rules

For purposes of subsections (a) and (b) -

(1) Joint and several liability

If more than one person is liable under any paragraph of

subsection (a) or (b) with respect to any one act of

self-dealing, all such persons shall be jointly and severally

liable under such paragraph with respect to such act.

(2) $10,000 limit for management

With respect to any one act of self-dealing, the maximum amount

of the tax imposed by subsection (a)(2) shall not exceed $10,000,

and the maximum amount of the tax imposed by subsection (b)(2)

shall not exceed $10,000.

(d) Self-dealing

(1) In general

For purposes of this section, the term "self-dealing" means any

direct or indirect -

(A) sale or exchange, or leasing, of property between a

private foundation and a disqualified person;

(B) lending of money or other extension of credit between a

private foundation and a disqualified person;

(C) furnishing of goods, services, or facilities between a

private foundation and a disqualified person;

(D) payment of compensation (or payment or reimbursement of

expenses) by a private foundation to a disqualified person;

(E) transfer to, or use by or for the benefit of, a

disqualified person of the income or assets of a private

foundation; and

(F) agreement by a private foundation to make any payment of

money or other property to a government official (as defined in

section 4946(c)), other than an agreement to employ such

individual for any period after the termination of his

government service if such individual is terminating his

government service within a 90-day period.

(2) Special rules

For purposes of paragraph (1) -

(A) the transfer of real or personal property by a

disqualified person to a private foundation shall be treated as

a sale or exchange if the property is subject to a mortgage or

similar lien which the foundation assumes or if it is subject

to a mortgage or similar lien which a disqualified person

placed on the property within the 10-year period ending on the

date of the transfer;

(B) the lending of money by a disqualified person to a

private foundation shall not be an act of self-dealing if the

loan is without interest or other charge (determined without

regard to section 7872) and if the proceeds of the loan are

used exclusively for purposes specified in section 501(c)(3);

(C) the furnishing of goods, services, or facilities by a

disqualified person to a private foundation shall not be an act

of self-dealing if the furnishing is without charge and if the

goods, services, or facilities so furnished are used

exclusively for purposes specified in section 501(c)(3);

(D) the furnishing of goods, services, or facilities by a

private foundation to a disqualified person shall not be an act

of self-dealing if such furnishing is made on a basis no more

favorable than that on which such goods, services, or

facilities are made available to the general public;

(E) except in the case of a government official (as defined

in section 4946(c)), the payment of compensation (and the

payment or reimbursement of expenses) by a private foundation

to a disqualified person for personal services which are

reasonable and necessary to carrying out the exempt purpose of

the private foundation shall not be an act of self-dealing if

the compensation (or payment or reimbursement) is not

excessive;

(F) any transaction between a private foundation and a

corporation which is a disqualified person (as defined in

section 4946(a)), pursuant to any liquidation, merger,

redemption, recapitalization, or other corporate adjustment,

organization, or reorganization, shall not be an act of

self-dealing if all of the securities of the same class as that

held by the foundation are subject to the same terms and such

terms provide for receipt by the foundation of no less than

fair market value;

(G) in the case of a government official (as defined in

section 4946(c)), paragraph (1) shall in addition not apply to

-

(i) prizes and awards which are subject to the provisions

of section 74(b) (without regard to paragraph (3) thereof),

if the recipients of such prizes and awards are selected from

the general public,

(ii) scholarships and fellowship grants which would be

subject to the provisions of section 117(a) (as in effect on

the day before the date of the enactment of the Tax Reform

Act of 1986) and are to be used for study at an educational

organization described in section 170(b)(1)(A)(ii),

(iii) any annuity or other payment (forming part of a

stock-bonus, pension, or profit-sharing plan) by a trust

which is a qualified trust under section 401,

(iv) any annuity or other payment under a plan which meets

the requirements of section 404(a)(2),

(v) any contribution or gift (other than a contribution or

gift of money) to, or services or facilities made available

to, any such individual, if the aggregate value of such

contributions, gifts, services, and facilities to, or made

available to, such individual during any calendar year does

not exceed $25,

(vi) any payment made under chapter 41 of title 5, United

States Code, or

(vii) any payment or reimbursement of traveling expenses

for travel solely from one point in the United States to

another point in the United States, but only if such payment

or reimbursement does not exceed the actual cost of the

transportation involved plus an amount for all other

traveling expenses not in excess of 125 percent of the

maximum amount payable under section 5702 of title 5, United

States Code, for like travel by employees of the United

States; and

(H) the leasing by a disqualified person to a private

foundation of office space for use by the foundation in a

building with other tenants who are not disqualified persons

shall not be treated as an act of self-dealing if -

(i) such leasing of office space is pursuant to a binding

lease which was in effect on October 9, 1969, or pursuant to

renewals of such a lease;

(ii) the execution of such lease was not a prohibited

transaction (within the meaning of section 503(b) or any

corresponding provision of prior law) at the time of such

execution; and

(iii) the terms of the lease (or any renewal) reflect an

arm's-length transaction.

(e) Other definitions

For purposes of this section -

(1) Taxable period

The term "taxable period" means, with respect to any act of

self-dealing, the period beginning with the date on which the act

of self-dealing occurs and ending on the earliest of -

(A) the date of mailing a notice of deficiency with respect

to the tax imposed by subsection (a)(1) under section 6212,

(B) the date on which the tax imposed by subsection (a)(1) is

assessed, or

(C) the date on which correction of the act of self-dealing

is completed.

(2) Amount involved

The term "amount involved" means, with respect to any act of

self-dealing, the greater of the amount of money and the fair

market value of the other property given or the amount of money

and the fair market value of the other property received; except

that, in the case of services described in subsection (d)(2)(E),

the amount involved shall be only the excess compensation. For

purposes of the preceding sentence, the fair market value -

(A) in the case of the taxes imposed by subsection (a), shall

be determined as of the date on which the act of self-dealing

occurs; and

(B) in the case of the taxes imposed by subsection (b), shall

be the highest fair market value during the taxable period.

(3) Correction

The terms "correction" and "correct" mean, with respect to any

act of self-dealing, undoing the transaction to the extent

possible, but in any case placing the private foundation in a

financial position not worse than that in which it would be if

the disqualified person were dealing under the highest fiduciary

standards.

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 499; amended Pub. L. 94-455, title XIX, Secs. 1901(b)(8)(H),

1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1795, 1834; Pub. L. 96-596,

Sec. 2(a)(1)(A), (B), (2)(A), (3)(A), Dec. 24, 1980, 94 Stat. 3469,

3471; Pub. L. 96-608, Sec. 5, Dec. 28, 1980, 94 Stat. 3553; Pub. L.

99-234, title I, Sec. 107(c), Jan. 2, 1986, 99 Stat. 1759; Pub. L.

99-514, title I, Sec. 122(a)(2)(A), title XVIII, Sec. 1812(b)(1),

Oct. 22, 1986, 100 Stat. 2110, 2833; Pub. L. 100-647, title I, Sec.

1001(d)(1)(A), Nov. 10, 1988, 102 Stat. 3350.)

-REFTEXT-

REFERENCES IN TEXT

The date of the enactment of the Tax Reform Act of 1986, referred

to in subsec. (d)(2)(G)(ii), is the date of enactment of Pub. L.

99-514, which was approved Oct. 22, 1986.

-MISC1-

AMENDMENTS

1988 - Subsec. (d)(2)(G)(ii). Pub. L. 100-647 amended cl. (ii)

generally. Prior to amendment, cl. (ii) read as follows:

"scholarships and fellowship grants which are subject to the

provisions of section 117(a) and are to be used for study at an

educational organization described in section 170(b)(1)(A)(ii),".

1986 - Subsec. (d)(2)(B). Pub. L. 99-514, Sec. 1812(b)(1),

inserted "(determined without regard to section 7872)" after

"without interest or other charge".

Subsec. (d)(2)(G)(i). Pub. L. 99-514, Sec. 122(a)(2)(A), inserted

"(without regard to paragraph (3) thereof)" after "section 74(b)".

Subsec. (d)(2)(G)(vii). Pub. L. 99-234 substituted "5702" for

"5702(a)".

1980 - Subsec. (b)(1). Pub. L. 96-596, Sec. 2(a)(1)(A),

substituted "taxable period" for "correction period".

Subsec. (d)(2)(H). Pub. L. 96-608 added subpar. (H).

Subsec. (e)(1)(B), (C). Pub. L. 96-596, Sec. 2(a)(2)(A), added

subpar. (B) and redesignated former subpar. (B) as (C).

Subsec. (e)(2)(B). Pub. L. 96-596, Sec. 2(a)(1)(B), substituted

"taxable period" for "correction period".

Subsec. (e)(4). Pub. L. 96-596, Sec. 2(a)(3)(A), struck out par.

(4) which defined correction period, with respect to any act of

self-dealing, as the period beginning with the date on which the

act of self-dealing occurs and ending 90 days after the date of

mailing of a notice of deficiency with respect to the tax imposed

by subsec. (b)(1) of this section under section 6212 of this title,

extended by any period in which the deficiency cannot be assessed

under section 6213(a) of this title and any other period which the

Secretary determines is reasonable and necessary to bring about

correction of the act of self-dealing.

1976 - Subsec. (d)(2)(G)(ii). Pub. L. 94-455, Sec. 1901(b)(8)(H),

substituted "educational organization described in section

170(b)(1)(A)(ii)" for "educational institution described in section

151(e)(4)" after "study at an".

Subsec. (e)(4). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out

"or his delegate" after "Secretary".

EFFECTIVE DATE OF 1988 AMENDMENT

Amendment by Pub. L. 100-647 effective, except as otherwise

provided, as if included in the provision of the Tax Reform Act of

1986, Pub. L. 99-514, to which such amendment relates, see section

1019(a) of Pub. L. 100-647, set out as a note under section 1 of

this title.

EFFECTIVE DATE OF 1986 AMENDMENTS

Amendment by section 122(a)(2)(A) of Pub. L. 99-514 applicable to

prizes and awards granted after Dec. 31, 1986, see section 151(c)

of Pub. L. 99-514, set out as a note under section 1 of this title.

Amendment by section 1812(b)(1) of Pub. L. 99-514 effective,

except as otherwise provided, as if included in the provisions of

the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such

amendment relates, see section 1881 of Pub. L. 99-514, set out as a

note under section 48 of this title.

Amendment by Pub. L. 99-234 effective (1) on effective date of

regulations to be promulgated not later than 150 days after Jan. 2,

1986, or (2) 180 days after Jan. 2, 1986, whichever occurs first,

see section 301(a) of Pub. L. 99-234, set out as a note under

section 5701 of Title 5, Government Organization and Employees.

EFFECTIVE DATE OF 1980 AMENDMENT

For effective date of amendment by Pub. L. 96-596 with respect to

any first tier tax and to any second tier tax, see section 2(d) of

Pub. L. 96-596, set out as an Effective Date note under section

4961 of this title.

SAVINGS PROVISION

Exceptions to applicability of section, see section 101(l)(2) of

Pub. L. 91-172, set out as a note under section 4940 of this title.

PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989

For provisions directing that if any amendments made by subtitle

A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or

title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an

amendment to any plan, such plan amendment shall not be required to

be made before the first plan year beginning on or after Jan. 1,

1989, see section 1140 of Pub. L. 99-514, as amended, set out as a

note under section 401 of this title.

TAX ON SELF-DEALING NOT TO APPLY TO CERTAIN STOCK PURCHASES

Pub. L. 98-369, div. A, title III, Sec. 312, July 18, 1984, 98

Stat. 786, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100

Stat. 2095, provided that:

"(a) General Rule. - Section 4941 of the Internal Revenue Code of

1986 [formerly I.R.C. 1954] (relating to taxes on self-dealing)

shall not apply to the purchase during 1978 of stock from a private

foundation (and to any note issued in connection with such

purchase) if -

"(1) consideration for such purchase equaled or exceeded the

fair market value of such stock,

"(2) the purchaser of such stock did not make any contribution

to such foundation at any time during the 5-year period ending on

the date of such purchase,

"(3) the aggregate contributions to such foundation by the

purchaser before such date were less than $10,000 and less than 2

percent of the total contributions received by the foundation as

of such date, and

"(4) such purchase was pursuant to the settlement of litigation

involving the purchaser.

"(b) Statute of Limitations. - If credit or refund of any

overpayment of tax resulting from subsection (a) is prevented at

any time before the close of the 1-year period beginning on the

date of the enactment of this Act [July 18, 1984] by the operation

of any law or rule of law, refund or credit of such overpayment

may, nevertheless, be made or allowed if claim therefor is filed

before the close of such 1-year period."

APPLICABILITY TO DETERMINATION OF STATUS AS SUBSTANTIAL CONTRIBUTOR

FOR PURPOSES OF TAXES ON SELF-DEALING OF CONTRIBUTIONS MADE PRIOR

TO OCTOBER 9, 1969

Determination of status as substantial contributor within section

507(d)(2) of this title for purposes of applying this section, see

section 3 of Pub. L. 95-170, set out as a note under section 507 of

this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 508, 4946, 4947, 4962,

4963, 6213, 7422, 7454 of this title.

-End-

-CITE-

26 USC Sec. 4942 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4942. Taxes on failure to distribute income

-STATUTE-

(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 15 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 -

(A) the failure to value the assets properly was not willful

and was due to reasonable cause,

(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)),

(C) the foundation notifies the Secretary that such amount

has been distributed (within the meaning of subparagraph (B))

to correct such failure, and

(D) such distribution is treated under subsection (h)(2) as

made out of the undistributed income for the taxable year for

which a tax would (except for this paragraph) have been imposed

under this subsection.

(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 -

(1) the distributable amount for such taxable year, exceeds

(2) the qualifying distributions made before such time out of

such distributable amount.

(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 -

(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).

(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 -

(i) the size of the block of such securities,

(ii) the fact that the securities held are securities in a

closely held corporation, or

(iii) the fact that the sale of such securities would

result in a forced or distress sale,

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:

(A) section 103 (relating to State and local bonds) shall not

apply,

(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;

(ii) notwithstanding subparagraph (B), amounts received or

accrued from the sale or other disposition of property to the

extent that the acquisition of such property was taken into

account as a qualifying distribution (within the meaning of

subsection (g)(1)(B)) for any taxable year; and

(iii) any amount set aside under subsection (g)(2) to the

extent it is determined that such amount is not necessary for

the purposes for which it was set aside; and

(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

(B) any amount paid to acquire an asset used (or held for

use) directly in carrying out one or more purposes described in

section 170(c)(2)(B).

(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 -

(i) the failure to distribute such amounts was not willful

and was due to reasonable cause, 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

(B) the private foundation making the contribution obtains

adequate records or other sufficient evidence from such

organization showing that the qualifying distribution described

in subparagraph (A) has been made by such organization.

(4) Limitation on administrative expenses allocable to making of

contributions, gifts, and grants

(A) In general

The amount of the grant administrative expenses paid during

any taxable year which may be taken into account as qualifying

distributions shall not exceed the excess (if any) of -

(i) .65 percent of the sum of the net assets of the private

foundation for such taxable year and the immediately

preceding 2 taxable years, over

(ii) the aggregate amount of grant administrative expenses

paid during the 2 preceding taxable years which were taken

into account as qualifying distributions.

(B) Grant administrative expenses

For purposes of this paragraph, the term "grant

administrative expenses" means any administrative expenses

which are allocable to the making of qualified grants.

(C) Qualified grants

For purposes of this paragraph, the term "qualified grant"

means any contribution, gift, or grant which is a qualifying

distribution.

(D) Net asset

For purposes of this paragraph, the term "net assets" means,

with respect to any taxable year, the excess determined under

subsection (e)(1) for such taxable year.

(E) Transitional rule

In the case of any preceding taxable year which begins before

January 1, 1985, the amount of the grant administrative

expenses taken into account under subparagraph (A)(ii) shall

not exceed .65 percent of the net assets of the private

foundation for such taxable year.

(F) Termination

This paragraph shall not apply to taxable years beginning

after December 31, 1990.

(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.

(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)(E)(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) beginning after

December 31, 1969, and immediately preceding the taxable year.

(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

(B) the date on which the tax imposed by subsection (a) is

assessed.

(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 -

(A) any period in which a deficiency cannot be assessed under

section 6213(a), and

(B) any other period which the Secretary determines is

reasonable and necessary to permit a distribution of

undistributed income under this section.

(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 -

(i) its adjusted net income (as defined in subsection (f)),

or

(ii) its minimum investment return; and

(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.

(4) Functionally related business

The term "functionally related business" means -

(A) a trade or business which is not an unrelated trade or

business (as defined in section 513), or

(B) an activity which is carried on within a larger aggregate

of similar activities or within a larger complex of other

endeavors which is related (aside from the need of the

organization for income or funds or the use it makes of the

profits derived) to the exempt purposes of the organization.

(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).

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 502; amended Pub. L. 94-455, title XIII, Secs. 1302(a),

1303(a), 1310(a), title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90

Stat. 1713, 1715, 1729, 1834; Pub. L. 95-600, title V, Sec. 522(a),

Nov. 6, 1978, 92 Stat. 2885; Pub. L. 96-596, Sec. 2(a)(1)(C),

(2)(B), (3)(B), (4)(A), Dec. 24, 1980, 94 Stat. 3469-3472; Pub. L.

97-34, title VIII, Sec. 823(a), Aug. 13, 1981, 95 Stat. 351; Pub.

L. 97-448, title I, Sec. 108(b), Jan. 12, 1983, 96 Stat. 2391; Pub.

L. 98-369, div. A, title III, Secs. 304(a), (b), 305(b)(4),

314(a)(1), (2), July 18, 1984, 98 Stat. 782-784, 787; Pub. L.

99-514, title XIII, Sec. 1301(j)(6), Oct. 22, 1986, 100 Stat.

2658.)

-MISC1-

AMENDMENTS

1986 - Subsec. (f)(2)(A). Pub. L. 99-514 substituted "(relating

to State and local bonds)" for "(relating to interest on certain

governmental obligations)".

1984 - Subsec. (a)(2)(B). Pub. L. 98-369, Sec. 314(a)(1),

substituted "subsection (j)(2)" for "subsection (j)(4)".

Subsec. (d)(1). Pub. L. 98-369, Sec. 304(b), substituted "the sum

of the minimum investment return plus the amounts described in

subsection (f)(2)(C), reduced by" for "the minimum investment

return reduced by".

Subsec. (f)(1). Pub. L. 98-369, Sec. 314(a)(2), substituted

"subsection (j)" for "subsection (d)".

Subsec. (g)(1)(A). Pub. L. 98-369, Sec. 304(a)(2), substituted

"including that portion of reasonable and necessary administrative

expenses" for "including administrative expenses".

Subsec. (g)(2)(C)(ii). Pub. L. 98-369, Sec. 305(b)(4),

substituted "section 4963(e)" for "section 4962(e)".

Subsec. (g)(4). Pub. L. 98-369, Sec. 304(a)(1), added par. (4).

1983 - Subsec. (j)(3)(A)(i). Pub. L. 97-448 substituted "or" for

"and" at the end.

1981 - Subsec. (d)(1). Pub. L. 97-34, Sec. 823(a)(1), struck out

"or the adjusted net income (whichever is higher)" after "return".

Subsec. (j)(3). Pub. L. 97-34, Sec. 823(a)(2), (3), inserted in

subpar. (A) "the lesser of" after "substantially all of",

designated existing provisions as cl. (i), added cl. (ii), and

inserted provision respecting applicability of subpar. (A)(ii).

1980 - Subsec. (b). Pub. L. 96-596, Sec. 2(a)(1)(C), substituted

"taxable period" for "correction period".

Subsec. (g)(2)(C)(ii). Pub. L. 96-596, Sec. 2(a)(4)(A),

substituted "the correction period (as defined in section 4962(e))"

for "the initial correction period provided in subsection (j)(2)".

Subsec. (j)(1). Pub. L. 96-596, Sec. 2(a)(2)(B), substituted

provision ending the taxable period on the earlier of the date of

mailing of a notice of deficiency with respect to the tax imposed

by subsec. (a) of this section under section 6212 of this title or

the date on which the tax imposed by subsec. (a) of this section is

assessed for provision ending the taxable period on the date of

mailing the notice of deficiency with respect to a tax imposed by

subsec. (a) of this section under section 6212 of this title.

Subsec. (j)(2). Pub. L. 96-596, Sec. 2(a)(3)(B)(i), (iii),

redesignated par. (4) as (2) and struck out former par. (2), which

defined correction period, with respect to any private foundation

for any taxable year, as the period beginning with the first day of

the taxable year and ending 90 days after the date of mailing a

notice of deficiency with respect to the tax imposed by subsec. (b)

of this section under section 6212 of this title, extended by any

period in which a deficiency cannot be assessed under section

6213(a) of this title and any other period which the Secretary

determines is reasonable and necessary to permit a distribution of

undistributed income.

Subsec. (j)(3)(B)(i). Pub. L. 96-596, Sec. 2(a)(3)(B)(ii),

substituted "paragraph (4)" for "paragraph (5)".

Subsec. (j)(4) to (6). Pub. L. 96-596, Sec. 2(a)(3)(B)(iii),

(iv), redesignated pars. (5) and (6) as (4) and (5), respectively.

1978 - Subsec. (j)(6). Pub. L. 95-600 added par. (6).

1976 - Subsec. (a)(2)(C). Pub. L. 94-455, Sec. 1906(b)(13)(A),

struck out "or his delegate" after "Secretary".

Subsec. (e). Pub. L. 94-455, Sec. 1303(a), among other changes,

substituted provisions establishing a fixed percentage rate to be

used in computing the minimum investment return for any private

foundation for provisions establishing a variable applicable

percentage rate of 7 percent in 1970 and an applicable rate to be

determined by the Secretary after 1970, for use in computing the

minimum investment return for any private foundation and inserted

provisions relating to reduction in value for blockage or similar

factors.

Subsec. (f)(2)(D). Pub. L. 94-455, Sec. 1310(a), added subpar.

(D).

Subsec. (g)(2). Pub. L. 94-455, Sec. 1302(a), among other

changes, inserted reference to all taxable years beginning on or

after Jan. 1, 1975, requirement that the project will not be

completed before the end of the taxable year of the foundation in

which the set-aside is made, and subpars. (C) to (E).

Subsecs. (h)(2), (j)(2)(B). Pub. L. 94-455, Sec. 1906(b)(13)(A),

struck out "or his delegate" after "Secretary".

EFFECTIVE DATE OF 1986 AMENDMENT

Amendment by Pub. L. 99-514 applicable to bonds issued after Aug.

15, 1986, except as otherwise provided, see sections 1311 to 1318

of Pub. L. 99-514, set out as an Effective Date; Transitional Rules

note under section 141 of this title.

EFFECTIVE DATE OF 1984 AMENDMENT

Section 304(c) of Pub. L. 98-369 provided that: "The amendments

made by this section [amending this section] shall apply to taxable

years beginning after December 31, 1984."

Amendment by section 305(b)(4) of Pub. L. 98-369 applicable to

taxable events occurring after Dec. 31, 1984, see section 305(c) of

Pub. L. 98-369, set out as an Effective Date note under section

4962 of this title.

Section 314(a)(4) of Pub. L. 98-369 provided that: "The

amendments made by this subsection [amending this section and

section 6501 of this title] shall take effect on the date of the

enactment of this Act [July 18, 1984].".

EFFECTIVE DATE OF 1983 AMENDMENT

Amendment by Pub. L. 97-448 effective, except as otherwise

provided, as if it had been included in the provision of the

Economic Recovery Tax Act of 1981, Pub. L. 97-34, to which such

amendment relates, see section 109 of Pub. L. 97-448, set out as a

note under section 1 of this title.

EFFECTIVE DATE OF 1981 AMENDMENT

Section 823(b) of Pub. L. 97-34 provided that: "The amendments

made by this section [amending this section] shall apply to taxable

years beginning after December 31, 1981."

EFFECTIVE DATE OF 1980 AMENDMENT

For effective date of amendment by Pub. L. 96-596 with respect to

any first tier tax and to any second tier tax, see section 2(d) of

Pub. L. 96-596, set out as an Effective Date note under section

4961 of this title.

EFFECTIVE DATE OF 1978 AMENDMENT

Section 522(b) of Pub. L. 95-600 provided that: "The amendment

made by subsection (a) [amending this section] shall apply to

taxable years beginning after December 31, 1969."

EFFECTIVE DATE OF 1976 AMENDMENT

Section 1302(c) of Pub. L. 94-455 provided that: "The amendments

made by this section [amending this section and section 6501 of

this title] shall apply to taxable years beginning after December

31, 1974."

Section 1303(b) of Pub. L. 94-455 provided that: "The amendment

made by this section [amending this section] applies to taxable

years beginning after December 31, 1975."

Section 1310(b) of Pub. L. 94-455 provided that: "The amendments

made by this section [amending this section] shall apply to taxable

years ending after the date of the enactment of this Act [Oct. 4,

1976]."

SAVINGS PROVISION

Applicability of section to organizations organized before May

27, 1969, see section 101(l)(3) of Pub. L. 91-172, set out as a

note under section 4940 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 150, 170, 508, 2055,

2503, 4940, 4943, 4948, 4963, 6110, 6213, 6501, 7422, 7428 of this

title.

-End-

-CITE-

26 USC Sec. 4943 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4943. Taxes on excess business holdings

-STATUTE-

(a) Initial tax

(1) Imposition

There is hereby imposed 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 5

percent of the value of such holdings.

(2) Special rules

The tax imposed by paragraph (1) -

(A) shall be imposed on the last day of the taxable year, but

(B) with respect to the private foundation's holdings in any

business enterprise, shall be determined as of that day during

the taxable year when the foundation's excess holdings in such

enterprise were the greatest.

(b) Additional tax

In any case in which an initial tax is imposed under subsection

(a) with respect to the holdings of a private foundation in any

business enterprise, if, at the close of the taxable period with

respect to such holdings, the foundation still has excess business

holdings in such enterprise, there is hereby imposed a tax equal to

200 percent of such excess business holdings.

(c) Excess business holdings

For purposes of this section -

(1) In general

The term "excess business holdings" means, with respect to the

holdings of any private foundation in any business enterprise,

the amount of stock or other interest in the enterprise which the

foundation would have to dispose of to a person other than a

disqualified person in order for the remaining holdings of the

foundation in such enterprise to be permitted holdings.

(2) Permitted holdings in a corporation

(A) In general

The permitted holdings of any private foundation in an

incorporated business enterprise are -

(i) 20 percent of the voting stock, reduced by

(ii) the percentage of the voting stock owned by all

disqualified persons.

In any case in which all disqualified persons together do not

own more than 20 percent of the voting stock of an incorporated

business enterprise, nonvoting stock held by the private

foundation shall also be treated as permitted holdings.

(B) 35 percent rule where third person has effective control of

enterprise

If -

(i) the private foundation and all disqualified persons

together do not own more than 35 percent of the voting stock

of an incorporated business enterprise, and

(ii) it is established to the satisfaction of the Secretary

that effective control of the corporation is in one or more

persons who are not disqualified persons with respect to the

foundation,

then subparagraph (A) shall be applied by substituting 35

percent for 20 percent.

(C) 2 percent de minimis rule

A private foundation shall not be treated as having excess

business holdings in any corporation in which it (together with

all other private foundations which are described in section

4946(a)(1)(H)) owns not more than 2 percent of the voting stock

and not more than 2 percent in value of all outstanding shares

of all classes of stock.

(3) Permitted holdings in partnerships, etc.

The permitted holdings of a private foundation in any business

enterprise which is not incorporated shall be determined under

regulations prescribed by the Secretary. Such regulations shall

be consistent in principle with paragraphs (2) and (4), except

that -

(A) in the case of a partnership or joint venture, "profits

interest" shall be substituted for "voting stock", and "capital

interest" shall be substituted for "nonvoting stock",

(B) in the case of a proprietorship, there shall be no

permitted holdings, and

(C) in any other case, "beneficial interest" shall be

substituted for "voting stock".

(4) Present holdings

(A)(i) In applying this section with respect to the holdings of

any private foundation in a business enterprise, if such

foundation and all disqualified persons together have holdings in

such enterprise in excess of 20 percent of the voting stock on

May 26, 1969, the percentage of such holdings shall be

substituted for "20 percent," and for "35 percent" (if the

percentage of such holdings is greater than 35 percent), wherever

it appears in paragraph (2), but in no event shall the percentage

so substituted be more than 50 percent.

(ii) If the percentage of the holdings of any private

foundation and all disqualified persons together in a business

enterprise (or if the percentage of the holdings of the private

foundation in such enterprise) decreases for any reason, clause

(i) and subparagraph (D) shall, except as provided in the next

sentence, be applied for all periods after such decrease by

substituting such decreased percentage for the percentage held on

May 26, 1969, but in no event shall the percentage substituted be

less than 20 percent. For purposes of the preceding sentence, any

decrease in percentage holdings attributable to issuances of

stock (or to issuances of stock coupled with redemptions of

stock) shall be disregarded so long as -

(I) the net percentage decrease disregarded under this

sentence does not exceed 2 percent, and

(II) the number of shares held by the foundation is not

affected by any such issuance or redemption.

(iii) The percentage substituted under clause (i), and any

percentage substituted under subparagraph (D), shall be applied

both with respect to the voting stock and, separately, with

respect to the value of all outstanding shares of all classes of

stock.

(iv) In the case of any merger, recapitalization, or other

reorganization involving one or more business enterprises, the

application of clauses (i), (ii), and (iii) shall be determined

under regulations prescribed by the Secretary.

(B) Any interest in a business enterprise which a private

foundation holds on May 26, 1969, if the private foundation on

such date has excess business holdings, shall (while held by the

foundation) be treated as held by a disqualified person (rather

than by the private foundation) -

(i) during the 20-year period beginning on such date, if the

private foundation and all disqualified persons have more than

a 95 percent voting stock interest on such date,

(ii) except as provided in clause (i), during the 15-year

period beginning on such date, if the foundation and all

disqualified persons have more than a 75 percent voting stock

interest (or more than a 75 percent profits or beneficial

interest in the case of any unincorporated enterprise) on such

date or more than a 75 percent interest in the value of all

outstanding shares of all classes of stock (or more than a 75

percent capital interest in the case of a partnership or joint

venture) on such date, or

(iii) during the 10-year period beginning on such date, in

any other case.

(C) The 20-year, 15-year, and 10-year periods described in

subparagraph (B) for the disposition of excess business holdings

shall be suspended during the pendency of any judicial proceeding

by the private foundation which is necessary to reform, or to

excuse such foundation from compliance with, its governing

instrument or any other instrument (as in effect on May 26, 1969)

in order to allow disposition of such holdings.

(D)(i) If, at any time during the second phase, all

disqualified persons together have holdings in a business

enterprise in excess of 2 percent of the voting stock of such

enterprise, then subparagraph (A)(i) shall be applied by

substituting for "50 percent" the following: "50 percent, of

which not more than 25 percent shall be voting stock held by the

private foundation".

(ii) If, immediately before the close of the second phase,

clause (i) of this subparagraph did not apply with respect to a

business enterprise, then for all periods after the close of the

second phase subparagraph (A)(i) shall be applied by substituting

for "50 percent" the following: "35 percent, or if at any time

after the close of the second phase all disqualified persons

together have had holdings in such enterprise which exceed 2

percent of the voting stock, 35 percent, of which not more than

25 percent shall be voting stock held by the private foundation".

(iii) For purposes of this subparagraph, the term "second

phase" means the 15-year period immediately following the

20-year, 15-year, or 10-year period described in subparagraph

(B), whichever applies, as modified by subparagraph (C).

(E) Clause (ii) of subparagraph (B) shall not apply with

respect to any business enterprise if before January 1, 1971, one

or more individuals who are substantial contributors (or members

of the family (within the meaning of section 4946(d)) of one or

more substantial contributors) to the private foundation and who

on May 26, 1969, held more than 15 percent of the voting stock of

the enterprise elect, in such manner as the Secretary may by

regulations prescribe, not to have such clause (ii) apply with

respect to such enterprise.

(5) Holdings acquired by trust or will

Paragraph (4) (other than subparagraph (B)(i)) shall apply to

any interest in a business enterprise which a private foundation

acquires under the terms of a trust which was irrevocable on May

26, 1969, or under the terms of a will executed on or before such

date, which are in effect on such date and at all times

thereafter, as if such interest were held on May 26, 1969, except

that the 15-year and 10-year periods prescribed in clauses (ii)

and (iii) of paragraph (4)(B) shall commence with respect to such

interest on the date of distribution under the trust or will in

lieu of May 26, 1969.

(6) 5-year period to dispose of gifts, bequests, etc.

Except as provided in paragraph (5), if, after May 26, 1969,

there is a change in the holdings in a business enterprise (other

than by purchase by the private foundation or by a disqualified

person) which causes the private foundation to have -

(A) excess business holdings in such enterprise, the interest

of the foundation in such enterprise (immediately after such

change) shall (while held by the foundation) be treated as held

by a disqualified person (rather than by the foundation) during

the 5-year period beginning on the date of such change in

holdings; or

(B) an increase in excess business holdings in such

enterprise (determined without regard to subparagraph (A)),

subparagraph (A) shall apply, except that the excess holdings

immediately preceding the increase therein shall not be

treated, solely because of such increase, as held by a

disqualified person (rather than by the foundation).

In any case where an acquisition by a disqualified person would

result in a substitution under clause (i) or (ii) of subparagraph

(D) of paragraph (4), the preceding sentence shall be applied

with respect to such acquisition as if it did not contain the

phrase "or by a disqualified person" in the material preceding

subparagraph (A).

(7) 5-year extension of period to dispose of certain large gifts

and bequests

The Secretary may extend for an additional 5-year period the

period under paragraph (6) for disposing of excess business

holdings in the case of an unusually large gift or bequest of

diverse business holdings or holdings with complex corporate

structures if -

(A) the foundation establishes that -

(i) diligent efforts to dispose of such holdings have been

made within the initial 5-year period, and

(ii) disposition within the initial 5-year period has not

been possible (except at a price substantially below fair

market value) by reason of such size and complexity or

diversity of such holdings,

(B) before the close of the initial 5-year period -

(i) the private foundation submits to the Secretary a plan

for disposing of all of the excess business holdings involved

in the extension, and

(ii) the private foundation submits the plan described in

clause (i) to the Attorney General (or other appropriate

State official) having administrative or supervisory

authority or responsibility with respect to the foundation's

disposition of the excess business holdings involved and

submits to the Secretary any response received by the private

foundation from the Attorney General (or other appropriate

State official) to such plan during such 5-year period, and

(C) the Secretary determines that such plan can reasonably be

expected to be carried out before the close of the extension

period.

(d) Definitions; special rules

For purposes of this section -

(1) Business holdings

In computing the holdings of a private foundation, or a

disqualified person (as defined in section 4946) with respect

thereto, in any business enterprise, any stock or other interest

owned, directly or indirectly, by or for a corporation,

partnership, estate, or trust shall be considered as being owned

proportionately by or for its shareholders, partners, or

beneficiaries. The preceding sentence shall not apply with

respect to an income or remainder interest of a private

foundation in a trust described in section 4947(a)(2), but only

if, in the case of property transferred in trust after May 26,

1969, such foundation holds only an income interest or only a

remainder interest in such trust.

(2) Taxable period

The term "taxable period" means, with respect to any excess

business holdings of a private foundation in a business

enterprise, the period beginning on the first day on which there

are excess holdings 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

in respect of such holdings, or

(B) the date on which the tax imposed by subsection (a) in

respect of such holdings is assessed.

(3) Business enterprise

The term "business enterprise" does not include -

(A) a functionally related business (as defined in section

4942(j)(4)), or

(B) a trade or business at least 95 percent of the gross

income of which is derived from passive sources.

For purposes of subparagraph (B), gross income from passive

sources includes the items excluded by section 512(b)(1), (2),

(3), and (5), and income from the sale of goods (including

charges or costs passed on at cost to purchasers of such goods or

income received in settlement of a dispute concerning or in lieu

of the exercise of the right to sell such goods) if the seller

does not manufacture, produce, physically receive or deliver,

negotiate sales of, or maintain inventories in such goods.

(4) Disqualified person

The term "disqualified person" (as defined in section 4946(a))

does not include a plan described in section 4975(e)(7) with

respect to the holdings of a private foundation described in

paragraphs (4) and (5) of subsection (c).

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 507; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A),

Oct. 4, 1976, 90 Stat. 1834; Pub. L. 96-596, Sec. 2(a)(1)(D),

(2)(C), (3)(C), (4)(B), Dec. 24, 1980, 94 Stat. 3469-3472; Pub. L.

98-369, div. A, title III, Secs. 307(a), 308(a), 309(a), 310(a),

314(c)(1), July 18, 1984, 98 Stat. 784, 785, 787.)

-MISC1-

AMENDMENTS

1984 - Subsec. (c)(4)(A)(ii). Pub. L. 98-369, Sec. 308(a),

substituted "For purposes of the preceding sentence, any decrease

in percentage holdings attributable to issuances of stock (or to

issuances of stock coupled with redemptions of stock) shall be

disregarded so long as (I) the net percentage decrease disregarded

under this sentence does not exceed 2 percent, and (II) the number

of shares held by the foundation is not affected by any such

issuance or redemption" for "For purposes of this clause, any

decrease in percentage holdings attributable to issuances of stock

(or to issuances of stock coupled with redemptions of stock) shall

be determined only as of the close of each taxable year of the

private foundation unless the aggregate of the percentage decreases

attributable to the issuances of stock (or such issuances and

redemptions) during such taxable year equals or exceeds 1 percent".

Subsec. (c)(4)(B)(i). Pub. L. 98-369, Sec. 309(a), substituted

"the private foundation and all disqualified persons have" for "the

private foundation has".

Subsec. (c)(6). Pub. L. 98-369, Sec. 310(a), inserted following

subpar. (B) "In any case where an acquisition by a disqualified

person would result in a substitution under clause (i) or (ii) of

subparagraph (D) of paragraph (4), the preceding sentence shall be

applied with respect to such acquisition as if it did not contain

the phrase 'or by a disqualified person' in the material preceding

subparagraph (A)."

Subsec. (c)(7). Pub. L. 98-369, Sec. 307(a), added par. (7).

Subsec. (d)(4). Pub. L. 98-369, Sec. 314(c)(1), added par. (4).

1980 - Subsec. (b). Pub. L. 96-596, Sec. 2(a)(1)(D), substituted

"taxable period" for "correction period".

Subsec. (d)(2). Pub. L. 96-596, Sec. 2(a)(2)(C), substituted

provision ending the taxable period on the earlier of the date of

mailing of a notice of deficiency with respect to the tax imposed

by subsec. (a) of this section under section 6212 of this title in

respect to such holdings or the date on which the tax imposed by

subsec. (a) of this section in respect to such holdings is assessed

for provision ending the taxable period on the date of mailing the

notice of deficiency with respect to a tax imposed by subsec. (a)

of this section under section 6212 of this title in respect to such

holdings.

Subsec. (d)(3), (4). Pub. L. 96-596, Sec. 2(a)(3)(C), (4)(B),

redesignated par. (4) as (3), and in subpar. (A) of par. (3) as so

redesignated, substituted "section 4942(j)(4)" for "section

4942(j)(5)", and struck out par. (3), which defined correction

period, with respect to excess business holdings of a private

foundation in a business enterprise, as the period ending 90 days

after the date of mailing of a notice of deficiency with respect to

the tax imposed by subsec. (b) of this section under section 6212

of this title, extended by any period in which a deficiency cannot

be assessed under section 6213(a) of this title and any other

period which the Secretary determines is reasonable and necessary

to permit orderly disposition of such excess business holdings.

1976 - Subsecs. (c), (d). Pub. L. 94-455 struck out "or his

delegate" after "Secretary" wherever appearing.

EFFECTIVE DATE OF 1984 AMENDMENT

Section 307(b) of Pub. L. 98-369, as amended by Pub. L. 99-514,

Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:

"(1) In general. - The amendment made by subsection (a) [amending

this section] shall apply to business holdings with respect to

which the 5-year period described in section 4943(c)(6) of the

Internal Revenue Code of 1986 [formerly I.R.C. 1954] ends on or

after November 1, 1983.

"(2) Transitional rule. - Any plan submitted to the Secretary of

the Treasury or his delegate on or before the 60th day after the

date of the enactment of this Act [July 18, 1984] shall be treated

as submitted before the close of the initial 5-year period referred

to in section 4943(c)(7)(B) of the Internal Revenue Code of 1986

(as added by subsection (a))."

Section 308(b) of Pub. L. 98-369 provided that: "The amendment

made by subsection (a) [amending this section] shall apply to

increases and decreases occurring after the date of the enactment

of this Act [July 18, 1984]."

Section 309(b) of Pub. L. 98-369 provided that: "The amendment

made by subsection (a) [amending this section] shall take effect as

if included in the amendment made by section 101(b) of the Tax

Reform Act of 1969 [section 101(b) of Pub. L. 91-172 which enacted

this section]."

Section 310(b) of Pub. L. 98-369 provided that: "The amendment

made by subsection (a) [amending this section] shall apply to

acquisitions after the date of the enactment of this Act [July 18,

1984]."

Section 314(c)(2) of Pub. L. 98-369 provided that: "The amendment

made by paragraph (1) [amending this section] shall apply with

respect to taxable years beginning after the date of the enactment

of this Act [July 18, 1984]."

EFFECTIVE DATE OF 1980 AMENDMENT

For effective date of amendment by Pub. L. 96-596 with respect to

any first tier tax and to any second tier tax, see section 2(d) of

Pub. L. 96-596, set out as an Effective Date note under section

4961 of this title.

SAVINGS PROVISION

Applicability of section to private foundations, see section

101(l)(4) of Pub. L. 91-172, set out as a note under section 4940

of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 150, 508, 537, 4946,

4947, 4963, 6213, 7422 of this title.

-End-

-CITE-

26 USC Sec. 4944 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4944. Taxes on investments which jeopardize charitable purpose

-STATUTE-

(a) Initial taxes

(1) On the private foundation

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 5 percent of the amount so invested for each year (or

part thereof) in the taxable period. The tax imposed by this

paragraph shall be paid by the private foundation.

(2) On the management

In any case in which a tax is imposed by paragraph (1), there

is hereby imposed on the participation of any foundation manager

in the making of the investment, knowing that it is jeopardizing

the carrying out of any of the foundation's exempt purposes, a

tax equal to 5 percent of the amount so invested for each year

(or part thereof) in the taxable period, unless such

participation is not willful and is due to reasonable cause. The

tax imposed by this paragraph shall be paid by any foundation

manager who participated in the making of the investment.

(b) Additional taxes

(1) On the foundation

In any case in which an initial tax is imposed by subsection

(a)(1) on the making of an investment and such investment is not

removed from jeopardy within the taxable period, there is hereby

imposed a tax equal to 25 percent of the amount of the

investment. The tax imposed by this paragraph shall be paid by

the private foundation.

(2) On the management

In any case in which an additional tax is imposed by paragraph

(1), if a foundation manager refused to agree to part or all of

the removal from jeopardy, there is hereby imposed a tax equal to

5 percent of the amount of the investment. The tax imposed by

this paragraph shall be paid by any foundation manager who

refused to agree to part or all of the removal from jeopardy.

(c) Exception for program-related investments

For purposes of this section, investments, the primary purpose of

which is to accomplish one or more of the purposes described in

section 170(c)(2)(B), and no significant purpose of which is the

production of income or the appreciation of property, shall not be

considered as investments which jeopardize the carrying out of

exempt purposes.

(d) Special rules

For purposes of subsections (a) and (b) -

(1) Joint and several liability

If more than one person is liable under subsection (a)(2) or

(b)(2) with respect to any one investment, all such persons shall

be jointly and severally liable under such paragraph with respect

to such investment.

(2) Limit for management

With respect to any one investment, the maximum amount of the

tax imposed by subsection (a)(2) shall not exceed $5,000, and the

maximum amount of the tax imposed by subsection (b)(2) shall not

exceed $10,000.

(e) Definitions

For purposes of this section -

(1) Taxable period

The term "taxable period" means, with respect to any investment

which jeopardizes the carrying out of exempt purposes, the period

beginning with the date on which the amount is so invested and

ending on the earliest of -

(A) the date of mailing of a notice of deficiency with

respect to the tax imposed by subsection (a)(1) under section

6212,

(B) the date on which the tax imposed by subsection (a)(1) is

assessed, or

(C) the date on which the amount so invested is removed from

jeopardy.

(2) Removal from jeopardy

An investment which jeopardizes the carrying out of exempt

purposes shall be considered to be removed from jeopardy when

such investment is sold or otherwise disposed of, and the

proceeds of such sale or other disposition are not investments

which jeopardize the carrying out of exempt purposes.

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 511; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A),

Oct. 4, 1976, 90 Stat. 1834; Pub. L. 96-596, Sec. 2(a)(1)(E),

(2)(D), (3)(D), Dec. 24, 1980, 94 Stat. 3469-3471.)

-MISC1-

AMENDMENTS

1980 - Subsec. (b)(1). Pub. L. 96-596, Sec. 2(a)(1)(E),

substituted "taxable period" for "correction period".

Subsec. (e)(1)(B), (C). Pub. L. 96-596, Sec. 2(a)(2)(D), added

subpar. (B) and redesignated former subpar. (B) as (C).

Subsec. (e)(3). Pub. L. 96-596, Sec. 2(a)(3)(D), struck out par.

(3), which defined correction period, with respect to any

investment which jeopardizes the carrying out of exempt purposes,

as the period beginning with the date on which such investment is

entered into and ending 90 days after the date of mailing of a

notice of deficiency with respect to the tax imposed by subsec.

(b)(1) of this section under section 6212 of this title, extended

by any period in which a deficiency cannot be assessed under

section 6213(a) of this title and any other period which the

Secretary determines is reasonable and necessary to bring about

removal from jeopardy.

1976 - Subsec. (e)(3)(B). Pub. L. 94-455 struck out "or his

delegate" after "Secretary".

EFFECTIVE DATE OF 1980 AMENDMENT

For effective date of amendment by Pub. L. 96-596 with respect to

any first tier tax and to any second tier tax, see section 2(d) of

Pub. L. 96-596, set out as an Effective Date note under section

4961 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 501, 508, 4947, 4963,

6213, 7422, 7454 of this title.

-End-

-CITE-

26 USC Sec. 4945 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4945. Taxes on taxable expenditures

-STATUTE-

(a) Initial taxes

(1) On the foundation

There is hereby imposed on each taxable expenditure (as defined

in subsection (d)) a tax equal to 10 percent of the amount

thereof. The tax imposed by this paragraph shall be paid by the

private foundation.

(2) On the management

There is hereby imposed on the agreement of any foundation

manager to the making of an expenditure, knowing that it is a

taxable expenditure, a tax equal to 2 1/2 percent of the amount

thereof, unless such agreement is not willful and is due to

reasonable cause. The tax imposed by this paragraph shall be paid

by any foundation manager who agreed to the making of the

expenditure.

(b) Additional taxes

(1) On the foundation

In any case in which an initial tax is imposed by subsection

(a)(1) on a taxable expenditure and such expenditure is not

corrected within the taxable period, there is hereby imposed a

tax equal to 100 percent of the amount of the expenditure. The

tax imposed by this paragraph shall be paid by the private

foundation.

(2) On the management

In any case in which an additional tax is imposed by paragraph

(1), if a foundation manager refused to agree to part or all of

the correction, there is hereby imposed a tax equal to 50 percent

of the amount of the taxable expenditure. The tax imposed by this

paragraph shall be paid by any foundation manager who refused to

agree to part or all of the correction.

(c) Special rules

For purposes of subsections (a) and (b) -

(1) Joint and several liability

If more than one person is liable under subsection (a)(2) or

(b)(2) with respect to the making of a taxable expenditure, all

such persons shall be jointly and severally liable under such

paragraph with respect to such expenditure.

(2) Limit for management

With respect to any one taxable expenditure, the maximum amount

of the tax imposed by subsection (a)(2) shall not exceed $5,000,

and the maximum amount of the tax imposed by subsection (b)(2)

shall not exceed $10,000.

(d) Taxable expenditure

For purposes of this section, the term "taxable expenditure"

means any amount paid or incurred by a private foundation -

(1) to carry on propaganda, or otherwise to attempt, to

influence legislation, within the meaning of subsection (e),

(2) except as provided in subsection (f), to influence the

outcome of any specific public election, or to carry on, directly

or indirectly, any voter registration drive,

(3) as a grant to an individual for travel, study, or other

similar purposes by such individual, unless such grant satisfies

the requirements of subsection (g),

(4) as a grant to an organization unless -

(A) such organization is described in paragraph (1), (2), or

(3) of section 509(a) or is an exempt operating foundation (as

defined in section 4940(d)(2)), or

(B) the private foundation exercises expenditure

responsibility with respect to such grant in accordance with

subsection (h), or

(5) for any purpose other than one specified in section

170(c)(2)(B).

(e) Activities within subsection (d)(1)

For purposes of subsection (d)(1), the term "taxable expenditure"

means any amount paid or incurred by a private foundation for -

(1) any attempt to influence any legislation through an attempt

to affect the opinion of the general public or any segment

thereof, and

(2) any attempt to influence legislation through communication

with any member or employee of a legislative body, or with any

other government official or employee who may participate in the

formulation of the legislation (except technical advice or

assistance provided to a governmental body or to a committee or

other subdivision thereof in response to a written request by

such body or subdivision, as the case may be),

other than through making available the results of nonpartisan

analysis, study, or research. Paragraph (2) of this subsection

shall not apply to any amount paid or incurred in connection with

an appearance before, or communication to, any legislative body

with respect to a possible decision of such body which might affect

the existence of the private foundation, its powers and duties, its

tax-exempt status, or the deduction of contributions to such

foundation.

(f) Nonpartisan activities carried on by certain organizations

Subsection (d)(2) shall not apply to any amount paid or incurred

by any organization -

(1) which is described in section 501(c)(3) and exempt from

taxation under section 501(a),

(2) the activities of which are nonpartisan, are not confined

to one specific election period, and are carried on in 5 or more

States,

(3) substantially all of the income of which is expended

directly for the active conduct of the activities constituting

the purpose or function for which it is organized and operated,

(4) substantially all of the support (other than gross

investment income as defined in section 509(e)) of which is

received from exempt organizations, the general public,

governmental units described in section 170(c)(1), or any

combination of the foregoing; not more than 25 percent of such

support is received from any one exempt organization (for this

purpose treating private foundations which are described in

section 4946(a)(1)(H) with respect to each other as one exempt

organization); and not more than half of the support of which is

received from gross investment income, and

(5) contributions to which for voter registration drives are

not subject to conditions that they may be used only in specified

States, possessions of the United States, or political

subdivisions or other areas of any of the foregoing, or the

District of Columbia, or that they may be used in only one

specific election period.

In determining whether the organization meets the requirements of

paragraph (4) for any taxable year of such organization, there

shall be taken into account the support received by such

organization during such taxable year and during the immediately

preceding 4 taxable years of such organization (excluding therefrom

any preceding taxable year which begins before January 1, 1970).

Subsection (d)(4) shall not apply to any grant to an organization

which meets the requirements of this subsection.

(g) Individual grants

Subsection (d)(3) shall not apply to an individual grant awarded

on an objective and nondiscriminatory basis pursuant to a procedure

approved in advance by the Secretary, if it is demonstrated to the

satisfaction of the Secretary that -

(1) the grant constitutes a scholarship or fellowship grant

which would be subject to the provisions of section 117(a) (as in

effect on the day before the date of the enactment of the Tax

Reform Act of 1986) and is to be used for study at an educational

organization described in section 170(b)(1)(A)(ii),

(2) the grant constitutes a prize or award which is subject to

the provisions of section 74(b) (without regard to paragraph (3)

thereof), if the recipient of such prize or award is selected

from the general public, or

(3) the purpose of the grant is to achieve a specific

objective, produce a report or other similar product, or improve

or enhance a literary, artistic, musical, scientific, teaching,

or other similar capacity, skill, or talent of the grantee.

(h) Expenditure responsibility

The expenditure responsibility referred to in subsection (d)(4)

means that the private foundation is responsible to exert all

reasonable efforts and to establish adequate procedures -

(1) to see that the grant is spent solely for the purpose for

which made,

(2) to obtain full and complete reports from the grantee on how

the funds are spent, and

(3) to make full and detailed reports with respect to such

expenditures to the Secretary.

(i) Other definitions

For purposes of this section -

(1) Correction

The terms "correction" and "correct" means, with respect to any

taxable expenditure, (A) recovering part or all of the

expenditure to the extent recovery is possible, and where full

recovery is not possible such additional corrective action as is

prescribed by the Secretary by regulations, or (B) in the case of

a failure to comply with subsection (h)(2) or (h)(3), obtaining

or making the report in question.

(2) Taxable period

The term "taxable period" means, with respect to any taxable

expenditure, the period beginning with the date on which the

taxable expenditure occurs and ending on the earlier of -

(A) the date of mailing a notice of deficiency with respect

to the tax imposed by subsection (a)(1) under section 6212, or

(B) the date on which the tax imposed by subsection (a)(1) is

assessed.

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 512; amended Pub. L. 94-455, title XIX, Secs. 1901(b)(8)(H),

1906(b)(13(A), Oct. 4, 1976, 90 Stat. 1795, 1834; Pub. L. 96-596,

Sec. 2(a)(1)(F), (2)(E), Dec. 24, 1980, 94 Stat. 3469, 3470; Pub.

L. 98-369, div. A, title III, Sec. 302(b), July 18, 1984, 98 Stat.

780; Pub. L. 99-514, title I, Sec. 122(a)(2)(B), Oct. 22, 1986, 100

Stat. 2110; Pub. L. 100-647, title I, Sec. 1001(d)(1)(B), Nov. 10,

1988, 102 Stat. 3350.)

-REFTEXT-

REFERENCES IN TEXT

The date of the enactment of the Tax Reform Act of 1986, referred

to in subsec. (g)(1), is the date of enactment of Pub. L. 99-514,

which was approved Oct. 22, 1986.

-MISC1-

AMENDMENTS

1988 - Subsec. (g)(1). Pub. L. 100-647 amended par. (1)

generally. Prior to amendment, par. (1) read as follows: "the grant

constitutes a scholarship or fellowship grant which is subject to

the provisions of section 117(a) and is to be used for study at an

educational organization described in section 170(b)(1)(A)(ii),".

1986 - Subsec. (g)(2). Pub. L. 99-514 inserted "(without regard

to paragraph (3) thereof)" after "section 74(b)".

1984 - Subsec. (d)(4). Pub. L. 98-369, in amending par. (4)

generally, divided existing provisions into subpars. (A) and (B)

and inserted reference in subpar. (A) to exempt foundations (as

defined in section 4940(d)(2)).

1980 - Subsec. (b)(1). Pub. L. 96-596, Sec. 2(a)(1)(F),

substituted "taxable period" for "correction period".

Subsec. (i)(2). Pub. L. 96-596, Sec. 2(a)(2)(E), substituted

provision defining taxable period as the period beginning with the

date on which the taxable expenditure occurs and ending on the

earlier of the date of mailing a notice of deficiency with respect

to the tax imposed by subsec. (a)(1) of this section under section

6212 of this title or the date on which the tax imposed by subsec.

(a)(1) of this section is assessed for provision defining

correction period as the period beginning with the date on which

the taxable expenditure occurs and ending 90 days after the date of

mailing of a notice of deficiency with respect to the tax imposed

by subsec. (b)(1) of this section under section 6212 of this title,

extended by any period in which the deficiency cannot be assessed

under section 6213(a) of this title and any other period which the

Secretary determines to be reasonable and necessary, except that

such determination not be made with respect to any taxable

expenditure within the meaning of pars. (1), (2), (3), or (4) of

subsec. (d) of this section because of any action by an appropriate

State officer.

1976 - Subsec. (g). Pub. L. 94-455, Secs. 1901(b)(8)(H),

1906(b)(13)(A), struck out in provisions preceding par. (1) "or his

delegate" after "Secretary" and substituted in par. (1)

"educational organization described in section 170(b)(1)(A)(ii)"

for "educational institution described in section 151(e)(4)".

Subsecs. (h), (i). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck

out "or his delegate" after "Secretary" wherever appearing.

EFFECTIVE DATE OF 1988 AMENDMENT

Amendment by Pub. L. 100-647 effective, except as otherwise

provided, as if included in the provision of the Tax Reform Act of

1986, Pub. L. 99-514, to which such amendment relates, see section

1019(a) of Pub. L. 100-647, set out as a note under section 1 of

this title.

EFFECTIVE DATE OF 1986 AMENDMENT

Amendment by Pub. L. 99-514 applicable to prizes and awards

granted after Dec. 31, 1986, see section 151(c) of Pub. L. 99-514,

set out as a note under section 1 of this title.

EFFECTIVE DATE OF 1984 AMENDMENT

Section 302(c)(2) of Pub. L. 98-369 provided that: "The amendment

made by subsection (b) [amending this section] shall apply to

grants made after December 31, 1984, in taxable years ending after

such date."

EFFECTIVE DATE OF 1980 AMENDMENT

For effective date of amendment by Pub. L. 96-596 with respect to

any first tier tax and to any second tier tax, see section 2(d) of

Pub. L. 96-596, set out as an Effective Date note under section

4961 of this title.

SAVINGS PROVISION

Applicability of subsecs. (d)(4) and (h) of this section to

grants to private foundations described in section 101(l)(C)(3) of

Pub. L. 91-172, see section 101(l)(5) of Pub. L. 91-172, set out as

a note under section 4940 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 508, 4947, 4955, 4963,

6213, 7422, 7454 of this title.

-End-

-CITE-

26 USC Sec. 4946 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4946. Definitions and special rules

-STATUTE-

(a) Disqualified person

(1) In general

For purposes of this subchapter, the term "disqualified person"

means, with respect to a private foundation, a person who is -

(A) a substantial contributor to the foundation,

(B) a foundation manager (within the meaning of subsection

(b)(1)),

(C) an owner of more than 20 percent of -

(i) the total combined voting power of a corporation,

(ii) the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated

enterprise,

which is a substantial contributor to the foundation,

(D) a member of the family (as defined in subsection (d)) of

any individual described in subparagraph (A), (B), or (C),

(E) a corporation of which persons described in subparagraph

(A), (B), (C), or (D) own more than 35 percent of the total

combined voting power,

(F) a partnership in which persons described in subparagraph

(A), (B), (C), or (D) own more than 35 percent of the profits

interest,

(G) a trust or estate in which persons described in

subparagraph (A), (B), (C), or (D) hold more than 35 percent of

the beneficial interest,

(H) only for purposes of section 4943, a private foundation -

(i) which is effectively controlled (directly or

indirectly) by the same person or persons who control the

private foundation in question, or

(ii) substantially all of the contributions to which were

made (directly or indirectly) by the same person or persons

described in subparagraph (A), (B), or (C), or members of

their families (within the meaning of subsection (d)), who

made (directly or indirectly) substantially all of the

contributions to the private foundation in question, and

(I) only for purposes of section 4941, a government official

(as defined in subsection (c)).

(2) Substantial contributors

For purposes of paragraph (1), the term "substantial

contributor" means a person who is described in section

507(d)(2).

(3) Stockholdings

For purposes of paragraphs (1)(C)(i) and (1)(E), there shall be

taken into account indirect stockholdings which would be taken

into account under section 267(c), except that, for purposes of

this paragraph, section 267(c)(4) shall be treated as providing

that the members of the family of an individual are the members

within the meaning of subsection (d).

(4) Partnerships; trusts

For purposes of paragraphs (1)(C)(ii) and (iii), (1)(F), and

(1)(G), the ownership of profits or beneficial interests shall be

determined in accordance with the rules for constructive

ownership of stock provided in section 267(c) (other than

paragraph (3) thereof), except that section 267(c)(4) shall be

treated as providing that the members of the family of an

individual are the members within the meaning of subsection (d).

(b) Foundation manager

For purposes of this subchapter, the term "foundation manager"

means, with respect to any private foundation -

(1) an officer, director, or trustee of a foundation (or an

individual having powers or responsibilities similar to those of

officers, directors, or trustees of the foundation), and

(2) with respect to any act (or failure to act), the employees

of the foundation having authority or responsibility with respect

to such act (or failure to act).

(c) Government official

For purposes of subsection (a)(1)(I) and section 4941, the term

"government official" means, with respect to an act of self-dealing

described in section 4941, an individual who, at the time of such

act, holds any of the following offices or positions (other than as

a "special Government employee", as defined in section 202(a) of

title 18, United States Code):

(1) an elective public office in the executive or legislative

branch of the Government of the United States,

(2) an office in the executive or judicial branch of the

Government of the United States, appointment to which was made by

the President,

(3) a position in the executive, legislative, or judicial

branch of the Government of the United States -

(A) which is listed in schedule C of rule VI of the Civil

Service Rules, or

(B) the compensation for which is equal to or greater than

the lowest rate of basic pay for the Senior Executive Service

under section 5382 of title 5, United States Code,

(4) a position under the House of Representatives or the Senate

of the United States held by an individual receiving gross

compensation at an annual rate of $15,000 or more,

(5) an elective or appointive public office in the executive,

legislative, or judicial branch of the government of a State,

possession of the United States, or political subdivision or

other area of any of the foregoing, or of the District of

Columbia, held by an individual receiving gross compensation at

an annual rate of $20,000 or more,

(6) a position as personal or executive assistant or secretary

to any of the foregoing, or

(7) a member of the Internal Revenue Service Oversight Board.

(d) Members of family

For purposes of subsection (a)(1), the family of any individual

shall include only his spouse, ancestors, children, grandchildren,

great grandchildren, and the spouses of children, grandchildren,

and great grandchildren.

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 515; amended Pub. L. 95-227, Sec. 4(c)(2)(B), Feb. 10, 1978,

92 Stat. 22; Pub. L. 98-369, div. A, title III, Sec. 306(a), July

18, 1984, 98 Stat. 784; Pub. L. 99-514, title XVI, Sec. 1606(a),

Oct. 22, 1986, 100 Stat. 2771; Pub. L. 105-206, title I, Sec.

1101(c)(1), July 22, 1998, 112 Stat. 696; Pub. L. 106-554, Sec.

1(a)(7) [title III, Sec. 319(16)], Dec. 21, 2000, 114 Stat. 2763,

2763A-647.)

-MISC1-

AMENDMENTS

2000 - Subsec. (c)(3)(B). Pub. L. 106-554 substituted "the lowest

rate of basic pay for the Senior Executive Service under section

5382" for "the lowest rate of compensation prescribed for GS-16 of

the General Schedule under section 5332".

1998 - Subsec. (c)(7). Pub. L. 105-206 added par. (7).

1986 - Subsec. (c)(5). Pub. L. 99-514 substituted "$20,000" for

"$15,000".

1984 - Subsec. (d). Pub. L. 98-369 amended subsec. (d) generally,

substituting references to children, grandchildren, and great

grandchildren for references to lineal descendants in two places.

1978 - Subsecs. (a)(1), (b). Pub. L. 95-227 substituted

"subchapter" for "chapter".

EFFECTIVE DATE OF 1986 AMENDMENT

Section 1606(b) of Pub. L. 99-514 provided that: "The amendment

made by this section [amending this section] shall apply to

compensation received after December 31, 1985."

EFFECTIVE DATE OF 1984 AMENDMENT

Section 306(c) of Pub. L. 98-369 provided that: "The amendments

made by this subsection [probably should be "section", amending

this section and section 6104 of this title] shall take effect on

January 1, 1985."

EFFECTIVE DATE OF 1978 AMENDMENT

Amendment by Pub. L. 95-227 applicable with respect to

contributions, acts, and expenditures made after Dec. 31, 1977, in

and for taxable years beginning after such date, see section 4(f)

of Pub. L. 95-227, set out as an Effective Date note under section

192 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 507, 509, 4940, 4941,

4942, 4943, 4945, 4948, 4958, 6033, 7454 of this title.

-End-

-CITE-

26 USC Sec. 4947 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4947. Application of taxes to certain nonexempt trusts

-STATUTE-

(a) Application of tax

(1) Charitable trusts

For purposes of part II of subchapter F of chapter 1 (other

than section 508(a), (b), and (c)) and for purposes of this

chapter, a trust which is not exempt from taxation under section

501(a), all of the unexpired interests in which are devoted to

one or more of the purposes described in section 170(c)(2)(B),

and for which a deduction was allowed under section 170,

545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 (or the

corresponding provisions of prior law), shall be treated as an

organization described in section 501(c)(3). For purposes of

section 509(a)(3)(A), such a trust shall be treated as if

organized on the day on which it first becomes subject to this

paragraph.

(2) Split-interest trusts

In the case of a trust which is not exempt from tax under

section 501(a), not all of the unexpired interests in which are

devoted to one or more of the purposes described in section

170(c)(2)(B), and which has amounts in trust for which a

deduction was allowed under section 170, 545(b)(2), 556(b)(2),

642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to

termination of private foundation status), section 508(e)

(relating to governing instruments) to the extent applicable to a

trust described in this paragraph, section 4941 (relating to

taxes on self-dealing), section 4943 (relating to taxes on excess

business holdings) except as provided in subsection (b)(3),

section 4944 (relating to investments which jeopardize charitable

purpose) except as provided in subsection (b)(3), and section

4945 (relating to taxes on taxable expenditures) shall apply as

if such trust were a private foundation. This paragraph shall not

apply with respect to -

(A) any amounts payable under the terms of such trust to

income beneficiaries, unless a deduction was allowed under

section 170(f)(2)(B), 2055(e)(2)(B), or 2522(c)(2)(B),

(B) any amounts in trust other than amounts for which a

deduction was allowed under section 170, 545(b)(2), 556(b)(2),

642(c), 2055, 2106(a)(2), or 2522, if such other amounts are

segregated from amounts for which no deduction was allowable,

or

(C) any amounts transferred in trust before May 27, 1969.

(3) Segregated amounts

For purposes of paragraph (2)(B), a trust with respect to which

amounts are segregated shall separately account for the various

income, deduction, and other items properly attributable to each

of such segregated amounts.

(b) Special rules

(1) Regulations

The Secretary shall prescribe such regulations as may be

necessary to carry out the purposes of this section.

(2) Limit to segregated amounts

If any amounts in the trust are segregated within the meaning

of subsection (a)(2)(B) of this section, the value of the net

assets for purposes of subsections (c)(2) and (g) of section 507

shall be limited to such segregated amounts.

(3) Sections 4943 and 4944

Sections 4943 and 4944 shall not apply to a trust which is

described in subsection (a)(2) if -

(A) all the income interest (and none of the remainder

interest) of such trust is devoted solely to one or more of the

purposes described in section 170(c)(2)(B), and all amounts in

such trust for which a deduction was allowed under section 170,

545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 have an

aggregate value not more than 60 percent of the aggregate fair

market value of all amounts in such trusts, or

(B) a deduction was allowed under section 170, 545(b)(2),

556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for amounts

payable under the terms of such trust to every remainder

beneficiary but not to any income beneficiary.

(4) Section 507

The provisions of section 507(a) shall not apply to a trust

which is described in subsection (a)(2) by reason of a

distribution of qualified employer securities (as defined in

section 664(g)(4)) to an employee stock ownership plan (as

defined in section 4975(e)(7)) in a qualified gratuitous transfer

(as defined by section 664(g)).

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 517; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A),

Oct. 4, 1976, 90 Stat. 1834; Pub. L. 105-34, title XV, Sec.

1530(c)(9), Aug. 5, 1997, 111 Stat. 1079; Pub. L. 107-16, title V,

Sec. 542(e)(4), June 7, 2001, 115 Stat. 85.)

-STATAMEND-

AMENDMENT OF SUBSECTION (A)(2)(A)

Pub. L. 107-16, title V, Sec. 542(e)(4), (f)(3), title IX, Sec.

901, June 7, 2001, 115 Stat. 85, 86, 150, provided that, applicable

to deductions for taxable years beginning after Dec. 31, 2009,

subsection (a)(2)(A) of this section is temporarily amended by

inserting "642(c)," after "170(f)(2)(B),". See Effective and

Termination Dates of 2001 Amendment note below.

-MISC1-

AMENDMENTS

1997 - Subsec. (b)(4). Pub. L. 105-34 added par. (4).

1976 - Subsec. (b)(1). Pub. L. 94-455 struck out "or his

delegate" after "Secretary".

EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT

Amendment by Pub. L. 107-16 applicable to deductions for taxable

years beginning after Dec. 31, 2009, see section 542(f)(3) of Pub.

L. 107-16, set out as a note under section 121 of this title.

Amendment by Pub. L. 107-16 inapplicable to estates of decedents

dying, gifts made, or generation skipping transfers after Dec. 31,

2010, and the Internal Revenue Code of 1986 to be applied and

administered to such estates, gifts, and transfers as if such

amendment had never been enacted, see section 901 of Pub. L.

107-16, set out as a note under section 1 of this title.

EFFECTIVE DATE OF 1997 AMENDMENT

Amendment by Pub. L. 105-34 applicable to transfers made by

trusts to, or for the use of, an employee stock ownership plan

after Aug. 5, 1997, see section 1530(d) of Pub. L. 105-34, set out

as a note under section 401 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 508, 644, 2055, 4943,

6033, 6034, 6049 of this title.

-End-

-CITE-

26 USC Sec. 4948 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter A - Private Foundations

-HEAD-

Sec. 4948. Application of taxes and denial of exemption with

respect to certain foreign organizations

-STATUTE-

(a) Tax on income of certain foreign organizations

In lieu of the tax imposed by section 4940, there is hereby

imposed for each taxable year on the gross investment income

(within the meaning of section 4940(c)(2)) derived from sources

within the United States (within the meaning of section 861) by

every foreign organization which is a private foundation for the

taxable year a tax equal to 4 percent of such income.

(b) Certain sections inapplicable

Section 507 (relating to termination of private foundation

status), section 508 (relating to special rules with respect to

section 501(c)(3) organizations), and this chapter (other than this

section) shall not apply to any foreign organization which has

received substantially all of its support (other than gross

investment income) from sources outside the United States.

(c) Denial of exemption to foreign organizations engaged in

prohibited transactions

(1) General rule

A foreign organization described in subsection (b) shall not be

exempt from taxation under section 501(a) if it has engaged in a

prohibited transaction after December 31, 1969.

(2) Prohibited transactions

For purposes of this subsection, the term "prohibited

transaction" means any act or failure to act (other than with

respect to section 4942(e)) which would subject a foreign

organization described in subsection (b), or a disqualified

person (as defined in section 4946) with respect thereto, to

liability for a penalty under section 6684 or a tax under section

507 if such foreign organization were a domestic organization.

(3) Taxable years affected

(A) Except as provided in subparagraph (B), a foreign

organization described in subsection (b) shall be denied

exemption from taxation under section 501(a) by reason of

paragraph (1) for all taxable years beginning with the taxable

year during which it is notified by the Secretary that it has

engaged in a prohibited transaction. The Secretary shall publish

such notice in the Federal Register on the day on which he so

notifies such foreign organization.

(B) Under regulations prescribed by the Secretary any foreign

organization described in subsection (b) which is denied

exemption from taxation under section 501(a) by reason of

paragraph (1) may, with respect to the second taxable year

following the taxable year in which notice is given under

subparagraph (A) (or any taxable year thereafter), file claim for

exemption from taxation under section 501(a). If the Secretary is

satisfied that such organization will not knowingly again engage

in a prohibited transaction, such organization shall not, with

respect to taxable years beginning with the taxable year with

respect to which such claim is filed, be denied exemption from

taxation under section 501(a) by reason of any prohibited

transaction which was engaged in before the date on which such

notice was given under subparagraph (A).

(4) Disallowance of certain charitable deductions

No gift or bequest shall be allowed as a deduction under

section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or

2522, if made -

(A) to a foreign organization described in subsection (b)

after the date on which the Secretary publishes notice under

paragraph (3)(A) that he has notified such organization that it

has engaged in a prohibited transaction, and

(B) in a taxable year of such organization for which it is

not exempt from taxation under section 501(a) by reason of

paragraph (1).

-SOURCE-

(Added Pub. L. 91-172, title I, Sec. 101(b), Dec. 30, 1969, 83

Stat. 518; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A),

Oct. 4, 1976, 90 Stat. 1834.)

-MISC1-

AMENDMENTS

1976 - Subsec. (c). Pub. L. 94-455 struck out "or his delegate"

after "Secretary" wherever appearing.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 170, 663, 681, 878, 1443,

2055, 2522 of this title.

-End-

-CITE-

26 USC Subchapter B - Black Lung Benefit Trusts 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter B - Black Lung Benefit Trusts

-HEAD-

SUBCHAPTER B - BLACK LUNG BENEFIT TRUSTS

-MISC1-

Sec.

4951. Taxes on self-dealing.

4952. Taxes on taxable expenditures.

4953. Tax on excess contributions to black lung benefit

trusts.

-SECREF-

SUBCHAPTER REFERRED TO IN OTHER SECTIONS

This subchapter is referred to in sections 170, 9501 of this

title.

-End-

-CITE-

26 USC Sec. 4951 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter B - Black Lung Benefit Trusts

-HEAD-

Sec. 4951. Taxes on self-dealing

-STATUTE-

(a) Initial taxes

(1) On self-dealer

There is hereby imposed a tax on each act of self-dealing

between a disqualified person and a trust described in section

501(c)(21). The rate of tax shall be equal to 10 percent of the

amount involved with respect to the act of self-dealing for each

year (or part thereof) in the taxable period. The tax imposed by

this paragraph shall be paid by any disqualified person (other

than a trustee acting only as a trustee of the trust) who

participates in the act of self-dealing.

(2) On trustee

In any case in which a tax is imposed by paragraph (1), there

is hereby imposed on the participation of any trustee of such a

trust in an act of self-dealing between a disqualified person and

the trust, knowing that it is such an act, a tax equal to 2 1/2

percent of the amount involved with respect to the act of

self-dealing for each year (or part thereof) in the taxable

period, unless such participation is not willful and is due to

reasonable cause. The tax imposed by this paragraph shall be paid

by any such trustee who participated in the act of self-dealing.

(b) Additional taxes

(1) On self-dealer

In any case in which an initial tax is imposed by subsection

(a)(1) on an act of self-dealing by a disqualified person with a

trust described in section 501(c)(21) and in which the act is not

corrected within the taxable period, there is hereby imposed a

tax equal to 100 percent of the amount involved. The tax imposed

by this paragraph shall be paid by any disqualified person (other

than a trustee acting only as a trustee of such a trust) who

participated in the act of self-dealing.

(2) On trustee

In any case in which an additional tax is imposed by paragraph

(1), if a trustee of such a trust refused to agree to part or all

of the correction, there is hereby imposed a tax equal to 50

percent of the amount involved. The tax imposed by this paragraph

shall be paid by any such trustee who refused to agree to part or

all of the correction.

(c) Joint and several liability

If more than one person is liable under any paragraph of

subsection (a) or (b) with respect to any one act of self-dealing,

all such persons shall be jointly and severally liable under such

paragraph with respect to such act.

(d) Self-dealing

(1) In general

For purposes of this section, the term "self-dealing" means any

direct or indirect -

(A) sale, exchange, or leasing of real or personal property

between a trust described in section 501(c)(21) and a

disqualified person;

(B) lending of money or other extension of credit between

such a trust and a disqualified person;

(C) furnishing of goods, services, or facilities between such

a trust and a disqualified person;

(D) payment of compensation (or payment or reimbursement of

expenses) by such a trust to a disqualified person; and

(E) transfer to, or use by or for the benefit of, a

disqualified person of the income or assets of such a trust.

(2) Special rules

For purposes of paragraph (1) -

(A) the transfer of personal property by a disqualified

person to such a trust shall be treated as a sale or exchange

if the property is subject to a mortgage or similar lien;

(B) the furnishing of goods, services, or facilities by a

disqualified person to such a trust shall not be an act of

self-dealing if the furnishing is without charge and if the

goods, services, or facilities so furnished are used

exclusively for the purposes specified in section

501(c)(21)(A); and

(C) the payment of compensation (and the payment or

reimbursement of expenses) by such a trust to a disqualified

person for personal services which are reasonable and necessary

to carrying out the exempt purpose of the trust shall not be an

act of self-dealing if the compensation (or payment or

reimbursement) is not excessive.

(e) Definitions

For purposes of this section -

(1) Taxable period

The term "taxable period" means, with respect to any act of

self-dealing, the period beginning with the date on which the act

of self-dealing occurs and ending on the earliest of -

(A) the date of mailing a notice of deficiency with respect

to the tax imposed by subsection (a)(1) under section 6212,

(B) the date on which the tax imposed by subsection (a)(1) is

assessed, or

(C) the date on which correction of the act of self-dealing

is completed.

(2) Amount involved

The term "amount involved" means, with respect to any act of

self-dealing, the greater of the amount of money and the fair

market value of the other property given or the amount of money

and the fair market value of the other property received; except

that in the case of services described in subsection (d)(2)(C),

the amount involved shall be only the excess compensation. For

purposes of the preceding sentence, the fair market value -

(A) in the case of the taxes imposed by subsection (a), shall

be determined as of the date on which the act of self-dealing

occurs; and

(B) in the case of taxes imposed by subsection (b), shall be

the highest fair market value during the taxable period.

(3) Correction

The terms "correction" and "correct" mean, with respect to any

act of self-dealing, undoing the transaction to the extent

possible, but in any case placing the trust in a financial

position not worse than that in which it would be if the

disqualified person were dealing under the highest fiduciary

standards.

(4) Disqualified person

The term "disqualified person" means, with respect to a trust

described in section 501(c)(21), a person who is -

(A) a contributor to the trust,

(B) a trustee of the trust,

(C) an owner of more than 10 percent of -

(i) the total combined voting power of a corporation,

(ii) the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated

enterprise,

which is a contributor to the trust,

(D) an officer, director, or employee of a person who is a

contributor to the trust,

(E) the spouse, ancestor, lineal descendant, or spouse of a

lineal descendant of an individual described in subparagraph

(A), (B), (C), or (D),

(F) a corporation of which persons described in subparagraph

(A), (B), (C), (D), or (E) own more than 35 percent of the

total combined voting power,

(G) a partnership in which persons described in subparagraph

(A), (B), (C), (D), or (E), own more than 35 percent of the

profits interest, or

(H) a trust or estate in which persons described in

subparagraph (A), (B), (C), (D), or (E), hold more than 35

percent of the beneficial interest.

For purposes of subparagraphs (C)(i) and (F), there shall be

taken into account indirect stockholdings which would be taken

into account under section 267(c), except that, for purposes of

this paragraph, section 267(c)(4) shall be treated as providing

that the members of the family of an individual are only those

individuals described in subparagraph (E) of this paragraph. For

purposes of subparagraphs (C) (ii) and (iii), (G), and (H), the

ownership of profits or beneficial interests shall be determined

in accordance with the rules for constructive ownership of stock

provided in section 267(c) (other than paragraph (3) thereof),

except that section 267(c)(4) shall be treated as providing that

the members of the family of an individual are only those

individuals described in subparagraph (E) of this paragraph.

(f) Payments of benefits

For purposes of this section, a payment, out of assets or income

of a trust described in section 501(c)(21), for the purposes

described in subclause (I) or (IV) of section 501(c)(21)(A)(i)

shall not be considered an act of self-dealing.

-SOURCE-

(Added Pub. L. 95-227, Sec. 4(c)(1), Feb. 10, 1978, 92 Stat. 18;

amended Pub. L. 96-596, Sec. 2(a)(1)(G), (H), (2)(F), (3)(E), Dec.

24, 1980, 94 Stat. 3469-3471; Pub. L. 102-486, title XIX, Sec.

1940(b), Oct. 24, 1992, 106 Stat. 3035.)

-MISC1-

AMENDMENTS

1992 - Subsec. (f). Pub. L. 102-486 substituted "subclause (I) or

(IV) of section 501(c)(21)(A)(i)" for "clause (i) of section

501(c)(21)(A)".

1980 - Subsec. (b)(1). Pub. L. 96-596, Sec. 2(a)(1)(G),

substituted "taxable period" for "correction period".

Subsec. (e)(1)(B), (C). Pub. L. 96-596, Sec. 2(a)(2)(F), added

subpar. (B) and redesignated former subpar. (B) as (C).

Subsec. (e)(2)(B). Pub. L. 96-596, Sec. 2(a)(1)(H), substituted

"taxable period" for "correction period".

Subsec. (e)(4), (5). Pub. L. 96-596, Sec. 2(a)(3)(E),

redesignated par. (5) as (4) and struck out former par. (4) which

defined correction period, with respect to any act of self-dealing,

as the period beginning with the date on which the act of

self-dealing occurs and ending 90 days after the date of mailing of

a notice of deficiency under section 6212 of this title with

respect to the tax imposed by subsec. (b)(1) of this section,

extended by any period in which a deficiency cannot be assessed

under section 6213(a) of this title and any other period which the

Secretary determines is reasonable and necessary to bring about

correction of the act of self-dealing.

EFFECTIVE DATE OF 1992 AMENDMENT

Amendment by Pub. L. 102-486 applicable to taxable years

beginning after Dec. 31, 1991, see section 1940(d) of Pub. L.

102-486, set out as a note under section 192 of this title.

EFFECTIVE DATE OF 1980 AMENDMENT

For effective date of amendment by Pub. L. 96-596 with respect to

any first tier tax and to any second tier tax, see section 2(d) of

Pub. L. 96-596, set out as an Effective Date note under section

4961 of this title.

EFFECTIVE DATE

Subchapter effective with respect to contributions, acts, and

expenditures made after Dec. 31, 1977, in and for taxable years

beginning after such date, see section 4(f) of Pub. L. 95-227, set

out as a note under section 192 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 468A, 4953, 4963, 6213,

7422, 7454 of this title.

-End-

-CITE-

26 USC Sec. 4952 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter B - Black Lung Benefit Trusts

-HEAD-

Sec. 4952. Taxes on taxable expenditures

-STATUTE-

(a) Tax imposed

(1) On the fund

There is hereby imposed on each taxable expenditure (as defined

in subsection (d)) from the assets or income of a trust described

in section 501(c)(21) a tax equal to 10 percent of the amount

thereof. The tax imposed by this paragraph shall be paid by the

trustee out of the assets of the trust.

(2) On the trustee

There is hereby imposed on the agreement of any trustee of such

a trust to the making of an expenditure, knowing that it is a

taxable expenditure, a tax equal to 2 1/2 percent of the amount

thereof, unless such agreement is not willful and is due to

reasonable cause. The tax imposed by this paragraph shall be paid

by the trustee who agreed to the making of the expenditure.

(b) Additional taxes

(1) On the fund

In any case in which an initial tax is imposed by subsection

(a)(1) on a taxable expenditure and such expenditure is not

corrected within the taxable period, there is hereby imposed a

tax equal to 100 percent of the amount of the expenditure. The

tax imposed by this paragraph shall be paid by the trustee out of

the assets of the trust.

(2) On the trustee

In any case in which an additional tax is imposed by paragraph

(1), if a trustee refused to agree to a part or all of the

correction, there is hereby imposed a tax equal to 50 percent of

the amount of the taxable expenditure. The tax imposed by this

paragraph shall be paid by any trustee who refused to agree to

part or all of the correction.

(c) Joint and several liability

For purposes of subsections (a) and (b), if more than one person

is liable under subsection (a)(2) or (b)(2) with respect to the

making of a taxable expenditure, all such persons shall be jointly

and severally liable under such paragraph with respect to such

expenditure.

(d) Taxable expenditure

For purposes of this section, the term "taxable expenditure"

means any amount paid or incurred by a trust described in section

501(c)(21) other than for a purpose specified in such section.

(e) Definitions

(1) Correction

The terms "correction" and "correct" mean, with respect to any

taxable expenditure, recovering part or all of the expenditure to

the extent recovery is possible, and where full recovery is not

possible, contributions by the person or persons whose

liabilities for black lung benefit claims (as defined in section

192(e)) are to be paid out of the trust to the extent necessary

to place the trust in a financial position not worse than that in

which it would be if the taxable expenditure had not been made.

(2) Taxable period

The term "taxable period" means, with respect to any taxable

expenditure, the period beginning with the date on which the

taxable expenditure occurs and ending on the earlier of -

(A) the date of mailing a notice of deficiency with respect

to the tax imposed by subsection (a)(1) under section 6212, or

(B) the date on which the tax imposed by subsection (a)(1) is

assessed.

-SOURCE-

(Added Pub. L. 95-227, Sec. 4(c)(1), Feb. 10, 1978, 92 Stat. 21;

amended Pub. L. 96-596, Sec. 2(a)(1)(I), (2)(G), Dec. 24, 1980, 94

Stat. 3469, 3471.)

-MISC1-

AMENDMENTS

1980 - Subsec. (b)(1). Pub. L. 96-596, Sec. 2(a)(1)(I),

substituted "taxable period" for "correction period".

Subsec. (e)(2). Pub. L. 96-596, Sec. 2(a)(2)(G), substituted

provision defining taxable period as the period beginning with the

date on which the taxable expenditure occurs and ending on the

earlier of the date of mailing a notice of deficiency with respect

to the tax imposed by subsec. (a)(1) of this section under section

6212 of this title or the date on which the tax imposed by subsec.

(a)(1) of this section is assessed for provision defining

correction period as the period beginning with the date on which

the taxable expenditure occurs and ending 90 days after the date of

mailing a notice of deficiency under section 6212 of this title

with respect to the tax imposed by subsec. (b)(1) of this section,

extended by any period in which the deficiency cannot be assessed

under section 6213(a) of this title and any other period which the

Secretary determines reasonable and necessary to bring about the

correction of the taxable expenditure.

EFFECTIVE DATE OF 1980 AMENDMENT

For effective date of amendment by Pub. L. 96-596 with respect to

any first tier tax and to any second tier tax, see section 2(d) of

Pub. L. 96-596, set out as an Effective Date note under section

4961 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 4953, 4963, 6213, 7422,

7454 of this title.

-End-

-CITE-

26 USC Sec. 4953 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter B - Black Lung Benefit Trusts

-HEAD-

Sec. 4953. Tax on excess contributions to black lung benefit trusts

-STATUTE-

(a) Tax imposed

There is hereby imposed for each taxable year a tax in an amount

equal to 5 percent of the amount of the excess contributions made

by a person to or under a trust or trusts described in section

501(c)(21). The tax imposed by this subsection shall be paid by the

person making the excess contribution.

(b) Excess contribution

For purposes of this section, the term "excess contribution"

means the sum of -

(1) the amount by which the amount contributed for the taxable

year to a trust or trusts described in section 501(c)(21) exceeds

the amount of the deduction allowable to such person for such

contributions for the taxable year under section 192, and

(2) the amount determined under this subsection for the

preceding taxable year, reduced by the sum of -

(A) the excess of the maximum amount allowable as a deduction

under section 192 for the taxable year over the amount

contributed to the trust or trusts for the taxable year, and

(B) amounts distributed from the trust to the contributor

which were excess contributions for the preceding taxable year.

(c) Treatment of withdrawal of excess contributions

Amounts distributed during the taxable year from a trust

described in section 501(c)(21) to the contributor thereof the sum

of which does not exceed the amount of the excess contribution made

by the contributor shall not be treated as -

(1) an act of self-dealing (within the meaning of section

4951),

(2) a taxable expenditure (within the meaning of section 4952),

or

(3) an act contrary to the purposes for which the trust is

exempt from taxation under section 501(a).

-SOURCE-

(Added Pub. L. 95-227, Sec. 4(c)(1), Feb. 10, 1978, 92 Stat. 22.)

-End-

-CITE-

26 USC Subchapter C - Political Expenditures of Section

501(c)(3) Organizations 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter C - Political Expenditures of Section 501(c)(3)

Organizations

-HEAD-

SUBCHAPTER C - POLITICAL EXPENDITURES OF SECTION 501(C)(3)

ORGANIZATIONS

-MISC1-

Sec.

4955. Taxes on political expenditures of section 501(c)(3)

organizations.

PRIOR PROVISIONS

A prior subchapter C, consisting of sections 4961 to 4963 of this

title, was redesignated subchapter E.

-SECREF-

SUBCHAPTER REFERRED TO IN OTHER SECTIONS

This subchapter is referred to in section 4962 of this title.

-End-

-CITE-

26 USC Sec. 4955 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter C - Political Expenditures of Section 501(c)(3)

Organizations

-HEAD-

Sec. 4955. Taxes on political expenditures of section 501(c)(3)

organizations

-STATUTE-

(a) Initial taxes

(1) On the organization

There is hereby imposed on each political expenditure by a

section 501(c)(3) organization a tax equal to 10 percent of the

amount thereof. The tax imposed by this paragraph shall be paid

by the organization.

(2) On the management

There is hereby imposed on the agreement of any organization

manager to the making of any expenditure, knowing that it is a

political expenditure, a tax equal to 2 1/2 percent of the

amount thereof, unless such agreement is not willful and is due

to reasonable cause. The tax imposed by this paragraph shall be

paid by any organization manager who agreed to the making of the

expenditure.

(b) Additional taxes

(1) On the organization

In any case in which an initial tax is imposed by subsection

(a)(1) on a political expenditure and such expenditure is not

corrected within the taxable period, there is hereby imposed a

tax equal to 100 percent of the amount of the expenditure. The

tax imposed by this paragraph shall be paid by the organization.

(2) On the management

In any case in which an additional tax is imposed by paragraph

(1), if an organization manager refused to agree to part or all

of the correction, there is hereby imposed a tax equal to 50

percent of the amount of the political expenditure. The tax

imposed by this paragraph shall be paid by any organization

manager who refused to agree to part or all of the correction.

(c) Special rules

For purposes of subsections (a) and (b) -

(1) Joint and several liability

If more than 1 person is liable under subsection (a)(2) or

(b)(2) with respect to the making of a political expenditure, all

such persons shall be jointly and severally liable under such

subsection with respect to such expenditure.

(2) Limit for management

With respect to any 1 political expenditure, the maximum amount

of the tax imposed by subsection (a)(2) shall not exceed $5,000,

and the maximum amount of the tax imposed by subsection (b)(2)

shall not exceed $10,000.

(d) Political expenditure

For purposes of this section -

(1) In general

The term "political expenditure" means any amount paid or

incurred by a section 501(c)(3) organization in any participation

in, or intervention in (including the publication or distribution

of statements), any political campaign on behalf of (or in

opposition to) any candidate for public office.

(2) Certain other expenditures included

In the case of an organization which is formed primarily for

purposes of promoting the candidacy (or prospective candidacy) of

an individual for public office (or which is effectively

controlled by a candidate or prospective candidate and which is

availed of primarily for such purposes), the term "political

expenditure" includes any of the following amounts paid or

incurred by the organization:

(A) Amounts paid or incurred to such individual for speeches

or other services.

(B) Travel expenses of such individual.

(C) Expenses of conducting polls, surveys, or other studies,

or preparing papers or other materials, for use by such

individual.

(D) Expenses of advertising, publicity, and fundraising for

such individual.

(E) Any other expense which has the primary effect of

promoting public recognition, or otherwise primarily accruing

to the benefit, of such individual.

(e) Coordination with sections 4945 and 4958

If tax is imposed under this section with respect to any

political expenditure, such expenditure shall not be treated as a

taxable expenditure for purposes of section 4945 or an excess

benefit for purposes of section 4958.

(f) Other definitions

For purposes of this section -

(1) Section 501(c)(3) organization

The term "section 501(c)(3) organization" means any

organization which (without regard to any political expenditure)

would be described in section 501(c)(3) and exempt from taxation

under section 501(a).

(2) Organization manager

The term "organization manager" means -

(A) any officer, director, or trustee of the organization (or

individual having powers or responsibilities similar to those

of officers, directors, or trustees of the organization), and

(B) with respect to any expenditure, any employee of the

organization having authority or responsibility with respect to

such expenditure.

(3) Correction

The terms "correction" and "correct" mean, with respect to any

political expenditure, recovering part or all of the expenditure

to the extent recovery is possible, establishment of safeguards

to prevent future political expenditures, and where full recovery

is not possible, such additional corrective action as is

prescribed by the Secretary by regulations.

(4) Taxable period

The term "taxable period" means, with respect to any political

expenditure, the period beginning with the date on which the

political expenditure occurs and ending on the earlier of -

(A) the date of mailing a notice of deficiency under section

6212 with respect to the tax imposed by subsection (a)(1), or

(B) the date on which tax imposed by subsection (a)(1) is

assessed.

-SOURCE-

(Added Pub. L. 100-203, title X, Sec. 10712(a), Dec. 22, 1987, 101

Stat. 1330-465; amended Pub. L. 104-168, title XIII, Sec.

1311(c)(1), July 30, 1996, 110 Stat. 1478.)

-MISC1-

AMENDMENTS

1996 - Subsec. (e). Pub. L. 104-168 substituted "sections 4945

and 4958" for "section 4945" in heading and inserted "or an excess

benefit for purposes of section 4958" before period at end of text.

EFFECTIVE DATE OF 1996 AMENDMENT

Section 1311(d)(1), (2) of Pub. L. 104-168 provided that:

"(1) In general. - The amendments made by this section [enacting

section 4958 of this title and amending this section and sections

4963, 6213, 7422, and 7454 of this title] (other than subsection

(b)) [amending section 501 of this title] shall apply to excess

benefit transactions occurring on or after September 14, 1995.

"(2) Binding contracts. - The amendments referred to in paragraph

(1) shall not apply to any benefit arising from a transaction

pursuant to any written contract which was binding on September 13,

1995, and at all times thereafter before such transaction

occurred."

EFFECTIVE DATE

Section 10712(d) of Pub. L. 100-203 provided that: "The

amendments made by this section [enacting this section and amending

sections 4962, 4963, 6213, 6501, 6503, 6684, 7422, and 7454 of this

title] shall apply to taxable years beginning after the date of the

enactment of this Act [Dec. 22, 1987]."

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 4912, 4962, 4963, 6033,

6213, 6852, 7409, 7422, 7454 of this title.

-End-

-CITE-

26 USC Subchapter D - Failure by Certain Charitable

Organizations To Meet Certain

Qualification Requirements 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter D - Failure by Certain Charitable Organizations To Meet

Certain Qualification Requirements

-HEAD-

SUBCHAPTER D - FAILURE BY CERTAIN CHARITABLE ORGANIZATIONS TO MEET

CERTAIN QUALIFICATION REQUIREMENTS

-MISC1-

Sec.

4958. Taxes on excess benefit transactions.

PRIOR PROVISIONS

A prior subchapter D, consisting of sections 4961 to 4963 of this

title, was redesignated subchapter E.

-End-

-CITE-

26 USC Sec. 4958 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter D - Failure by Certain Charitable Organizations To Meet

Certain Qualification Requirements

-HEAD-

Sec. 4958. Taxes on excess benefit transactions

-STATUTE-

(a) Initial taxes

(1) On the disqualified person

There is hereby imposed on each excess benefit transaction a

tax equal to 25 percent of the excess benefit. The tax imposed by

this paragraph shall be paid by any disqualified person referred

to in subsection (f)(1) with respect to such transaction.

(2) On the management

In any case in which a tax is imposed by paragraph (1), there

is hereby imposed on the participation of any organization

manager in the excess benefit transaction, knowing that it is

such a transaction, a tax equal to 10 percent of the excess

benefit, unless such participation is not willful and is due to

reasonable cause. The tax imposed by this paragraph shall be paid

by any organization manager who participated in the excess

benefit transaction.

(b) Additional tax on the disqualified person

In any case in which an initial tax is imposed by subsection

(a)(1) on an excess benefit transaction and the excess benefit

involved in such transaction is not corrected within the taxable

period, there is hereby imposed a tax equal to 200 percent of the

excess benefit involved. The tax imposed by this subsection shall

be paid by any disqualified person referred to in subsection (f)(1)

with respect to such transaction.

(c) Excess benefit transaction; excess benefit

For purposes of this section -

(1) Excess benefit transaction

(A) In general

The term "excess benefit transaction" means any transaction

in which an economic benefit is provided by an applicable

tax-exempt organization directly or indirectly to or for the

use of any disqualified person if the value of the economic

benefit provided exceeds the value of the consideration

(including the performance of services) received for providing

such benefit. For purposes of the preceding sentence, an

economic benefit shall not be treated as consideration for the

performance of services unless such organization clearly

indicated its intent to so treat such benefit.

(B) Excess benefit

The term "excess benefit" means the excess referred to in

subparagraph (A).

(2) Authority to include certain other private inurement

To the extent provided in regulations prescribed by the

Secretary, the term "excess benefit transaction" includes any

transaction in which the amount of any economic benefit provided

to or for the use of a disqualified person is determined in whole

or in part by the revenues of 1 or more activities of the

organization but only if such transaction results in inurement

not permitted under paragraph (3) or (4) of section 501(c), as

the case may be. In the case of any such transaction, the excess

benefit shall be the amount of the inurement not so permitted.

(d) Special rules

For purposes of this section -

(1) Joint and several liability

If more than 1 person is liable for any tax imposed by

subsection (a) or subsection (b), all such persons shall be

jointly and severally liable for such tax.

(2) Limit for management

With respect to any 1 excess benefit transaction, the maximum

amount of the tax imposed by subsection (a)(2) shall not exceed

$10,000.

(e) Applicable tax-exempt organization

For purposes of this subchapter, the term "applicable tax-exempt

organization" means -

(1) any organization which (without regard to any excess

benefit) would be described in paragraph (3) or (4) of section

501(c) and exempt from tax under section 501(a), and

(2) any organization which was described in paragraph (1) at

any time during the 5-year period ending on the date of the

transaction.

Such term shall not include a private foundation (as defined in

section 509(a)).

(f) Other definitions

For purposes of this section -

(1) Disqualified person

The term "disqualified person" means, with respect to any

transaction -

(A) any person who was, at any time during the 5-year period

ending on the date of such transaction, in a position to

exercise substantial influence over the affairs of the

organization,

(B) a member of the family of an individual described in

subparagraph (A), and

(C) a 35-percent controlled entity.

(2) Organization manager

The term "organization manager" means, with respect to any

applicable tax-exempt organization, any officer, director, or

trustee of such organization (or any individual having powers or

responsibilities similar to those of officers, directors, or

trustees of the organization).

(3) 35-percent controlled entity

(A) In general

The term "35-percent controlled entity" means -

(i) a corporation in which persons described in

subparagraph (A) or (B) of paragraph (1) own more than 35

percent of the total combined voting power,

(ii) a partnership in which such persons own more than 35

percent of the profits interest, and

(iii) a trust or estate in which such persons own more than

35 percent of the beneficial interest.

(B) Constructive ownership rules

Rules similar to the rules of paragraphs (3) and (4) of

section 4946(a) shall apply for purposes of this paragraph.

(4) Family members

The members of an individual's family shall be determined under

section 4946(d); except that such members also shall include the

brothers and sisters (whether by the whole or half blood) of the

individual and their spouses.

(5) Taxable period

The term "taxable period" means, with respect to any excess

benefit transaction, the period beginning with the date on which

the transaction occurs and ending on the earliest of -

(A) the date of mailing a notice of deficiency under section

6212 with respect to the tax imposed by subsection (a)(1), or

(B) the date on which the tax imposed by subsection (a)(1) is

assessed.

(6) Correction

The terms "correction" and "correct" mean, with respect to any

excess benefit transaction, undoing the excess benefit to the

extent possible, and taking any additional measures necessary to

place the organization in a financial position not worse than

that in which it would be if the disqualified person were dealing

under the highest fiduciary standards.

-SOURCE-

(Added Pub. L. 104-168, title XIII, Sec. 1311(a), July 30, 1996,

110 Stat. 1475.)

-MISC1-

EFFECTIVE DATE

Section applicable to excess benefit transactions occurring on or

after Sept. 14, 1995, and not applicable to any benefit arising

from a transaction pursuant to any written contract which was

binding on Sept. 13, 1995, and at all times thereafter before such

transaction occurred, see section 1311(d)(1), (2) of Pub. L.

104-168, set out as an Effective Date of 1996 Amendment note under

section 4955 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 4955, 4963, 6033, 6213,

7422, 7454 of this title; title 47 section 396.

-End-

-CITE-

26 USC Subchapter E - Abatement of First and Second Tier

Taxes in Certain Cases 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter E - Abatement of First and Second Tier Taxes in Certain

Cases

-HEAD-

SUBCHAPTER E - ABATEMENT OF FIRST AND SECOND TIER TAXES IN CERTAIN

CASES

-MISC1-

Sec.

4961. Abatement of second tier taxes where there is

correction.

4962. Abatement of first tier taxes in certain cases.

4963. Definitions.

AMENDMENTS

1996 - Pub. L. 104-168, title XIII, Sec. 1311(a), July 30, 1996,

110 Stat. 1475, redesignated former subchapter D as E.

1987 - Pub. L. 100-203, title X, Sec. 10712(a), (b)(5), Dec. 22,

1987, 101 Stat. 1330-465, 1330-467, redesignated former subchapter

C as D, and struck out "private foundation" before "first tier

taxes" in item 4962.

1984 - Pub. L. 98-369, div. A, title III, Sec. 305(b)(1), (2),

July 18, 1984, 98 Stat. 783, substituted "Abatement of First and

Second Tier Taxes in Certain Cases" for "Abatement of Second Tier

Taxes Where There Is Correction During Correction Period" in the

subchapter heading, added item 4962, and renumbered former item

4962 as 4963.

-End-

-CITE-

26 USC Sec. 4961 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter E - Abatement of First and Second Tier Taxes in Certain

Cases

-HEAD-

Sec. 4961. Abatement of second tier taxes where there is correction

-STATUTE-

(a) General rule

If any taxable event is corrected during the correction period

for such event, then any second tier tax imposed with respect to

such event (including interest, additions to the tax, and

additional amounts) shall not be assessed, and if assessed the

assessment shall be abated, and if collected shall be credited or

refunded as an overpayment.

(b) Supplemental proceeding

If the determination by a court that the taxpayer is liable for a

second tier tax has become final, such court shall have

jurisdiction to conduct any necessary supplemental proceeding to

determine whether the taxable event was corrected during the

correction period. Such a supplemental proceeding may be begun only

during the period which ends on the 90th day after the last day of

the correction period. Where such a supplemental proceeding has

begun, the reference in the second sentence of section 6213(a) to a

final decision of the Tax Court shall be treated as including a

final decision in such supplemental proceeding.

(c) Suspension of period of collection for second tier tax

(1) Proceeding in District Court or United States Court of

Federal Claims

If, not later than 90 days after the day on which the second

tier tax is assessed, the first tier tax is paid in full and a

claim for refund of the amount so paid is filed, no levy or

proceeding in court for the collection of the second tier tax

shall be made, begun, or prosecuted until a final resolution of a

proceeding begun as provided in paragraph (2) (and of any

supplemental proceeding with respect thereto under subsection

(b)). Notwithstanding section 7421(a), the collection by levy or

proceeding may be enjoined during the time such prohibition is in

force by a proceeding in the proper court.

(2) Suit must be brought to determine liability

If, within 90 days after the day on which his claim for refund

is denied, the person against whom the second tier tax was

assessed fails to begin a proceeding described in section 7422

for the determination of his liability for such tax, paragraph

(1) shall cease to apply with respect to such tax, effective on

the day following the close of the 90-day period referred to in

this paragraph.

(3) Suspension of running of period of limitations on collection

The running of the period of limitations provided in section

6502 on the collection by levy or by a proceeding in court with

respect to any second tier tax described in paragraph (1) shall

be suspended for the period during which the Secretary is

prohibited from collecting by levy or a proceeding in court.

(4) Jeopardy collection

If the Secretary makes a finding that the collection of the

second tier tax is in jeopardy, nothing in this subsection shall

prevent the immediate collection of such tax.

-SOURCE-

(Added Pub. L. 96-596, Sec. 2(c)(1), Dec. 24, 1980, 94 Stat. 3472;

amended Pub. L. 99-514, title XVIII, Sec. 1899A(50), Oct. 22, 1986,

100 Stat. 2961; Pub. L. 102-572, title IX, Sec. 902(b)(1), Oct. 29,

1992, 106 Stat. 4516.)

-MISC1-

AMENDMENTS

1992 - Subsec. (c)(1). Pub. L. 102-572 substituted "United States

Court of Federal Claims" for "United States Claims Court" in

heading.

1986 - Subsec. (c)(1). Pub. L. 99-514 substituted "United States

Claims Court" for "Court of Claims" in heading.

EFFECTIVE DATE OF 1992 AMENDMENT

Amendment by Pub. L. 102-572 effective Oct. 29, 1992, see section

911 of Pub. L. 102-572, set out as a note under section 171 of

Title 28, Judiciary and Judicial Procedure.

EFFECTIVE DATE

Section 2(d) of Pub. L. 96-596, as amended by Pub. L. 99-514,

Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:

"(1) First tier taxes. - The amendments made by this section

[enacting this section and section 4962 of this title and amending

sections 4941 to 4945, 4951, 4952, 4971, 4975, 6213, 6214, 6503,

and 7422 of this title] with respect to any first tier tax shall

take effect as if included in the Internal Revenue Code of 1986

[formerly I.R.C. 1954] when such tax was first imposed.

"(2) Second tier taxes. - The amendments made by this section

with respect to any second tier tax shall apply only with respect

to taxes assessed after the date of the enactment of this Act [Dec.

24, 1980]. Nothing in the preceding sentence shall be construed to

permit the assessment of a tax in a case to which, on the date of

the enactment of this Act, the doctrine of res judicata applies.

"(3) First and second tier tax. - For purposes of this

subsection, the terms 'first tier tax' and 'second tier tax' have

the respective meanings given to such terms by section 4962 of the

Internal Revenue Code of 1986."

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in section 4963 of this title.

-End-

-CITE-

26 USC Sec. 4962 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter E - Abatement of First and Second Tier Taxes in Certain

Cases

-HEAD-

Sec. 4962. Abatement of first tier taxes in certain cases

-STATUTE-

(a) General rule

If it is established to the satisfaction of the Secretary that -

(1) a taxable event was due to reasonable cause and not to

willful neglect, and

(2) such event was corrected within the correction period for

such event,

then any qualified first tier tax imposed with respect to such

event (including interest) shall not be assessed and, if assessed,

the assessment shall be abated and, if collected, shall be credited

or refunded as an overpayment.

(b) Qualified first tier tax

For purposes of this section, the term "qualified first tier tax"

means any first tier tax imposed by subchapter A, C, or D of this

chapter, except that such term shall not include the tax imposed by

section 4941(a) (relating to initial tax on self-dealing).

(c) Special rule for tax on political expenditures of section

501(c)(3) organizations

In the case of the tax imposed by section 4955(a), subsection

(a)(1) shall be applied by substituting "not willful and flagrant"

for "due to reasonable cause and not to willful neglect".

-SOURCE-

(Added Pub. L. 98-369, div. A, title III, Sec. 305(a), July 18,

1984, 98 Stat. 783; amended Pub. L. 100-203, title X, Sec.

10712(b)(1), (2), (4), Dec. 22, 1987, 101 Stat. 1330-467; Pub. L.

105-34, title XVI, Sec. 1603(a), Aug. 5, 1997, 111 Stat. 1096.)

-MISC1-

PRIOR PROVISIONS

A prior section 4962 was renumbered section 4963 of this title.

AMENDMENTS

1997 - Subsec. (b). Pub. L. 105-34 substituted "subchapter A, C,

or D" for "subchapter A or C".

1987 - Pub. L. 100-203, Sec. 10712(b)(4), struck out "private

foundation" before "first tier taxes" in section catchline.

Subsec. (a). Pub. L. 100-203, Sec. 10712(b)(2), substituted "any

qualified first tier tax" for "any private foundation first tier

tax" in closing provisions.

Subsec. (b). Pub. L. 100-203, Sec. 10712(b)(1), added subsec. (b)

and struck out former subsec. (b) "Private foundation first tier

tax" which read as follows: "For purposes of this section, the term

'private foundation first tier tax' means any first tier tax

imposed by subchapter A of chapter 42, except that such term shall

not include the tax imposed by section 4941(a) (relating to initial

tax on self-dealing)."

Subsec. (c). Pub. L. 100-203, Sec. 10712(b)(1), added subsec.

(c).

EFFECTIVE DATE OF 1997 AMENDMENT

Section 1603(c) of Pub. L. 105-34 provided that: "The amendments

made by this section [amending this section and section 6033 of

this title] shall take effect as if included in the provisions of

the Taxpayer Bill of Rights 2 [Pub. L. 104-168] to which such

amendments relate."

EFFECTIVE DATE OF 1987 AMENDMENT

Amendment by Pub. L. 100-203 applicable to taxable years

beginning after Dec. 22, 1987, see section 10712(d) of Pub. L.

100-203, set out as an Effective Date note under section 4955 of

this title.

EFFECTIVE DATE

Section 305(c) of Pub. L. 98-369 provided that: "The amendments

made by this section [enacting this section, redesignating former

section 4962 as 4963, and amending sections 4942, 6213, and 6503 of

this title] shall apply to taxable events occurring after December

31, 1984."

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in section 6033 of this title.

-End-

-CITE-

26 USC Sec. 4963 01/06/03

-EXPCITE-

TITLE 26 - INTERNAL REVENUE CODE

Subtitle D - Miscellaneous Excise Taxes

CHAPTER 42 - PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT

ORGANIZATIONS

Subchapter E - Abatement of First and Second Tier Taxes in Certain

Cases

-HEAD-

Sec. 4963. Definitions

-STATUTE-

(a) First tier tax

For purposes of this subchapter, the term "first tier tax" means

any tax imposed by subsection (a) of section 4941, 4942, 4943,

4944, 4945, 4951, 4952, 4955, 4958, 4971, or 4975.

(b) Second tier tax

For purposes of this subchapter, the term "second tier tax" means

any tax imposed by subsection (b) of section 4941, 4942, 4943,

4944, 4945, 4951, 4952, 4955, 4958, 4971, or 4975.

(c) Taxable event

For purposes of this subchapter, the term "taxable event" means

any act (or failure to act) giving rise to liability for tax under

section 4941, 4942, 4943, 4944, 4945, 4951, 4952, 4955, 4958, 4971,

or 4975.

(d) Correct

For purposes of this subchapter -

(1) In general

Except as provided in paragraph (2), the term "correct" has the

same meaning as when used in the section which imposes the second

tier tax.

(2) Special rules

The term "correct" means -

(A) in the case of the second tier tax imposed by section

4942(b), reducing the amount of the undistributed income to

zero,

(B) in the case of the second tier tax imposed by section

4943(b), reducing the amount of the excess business holdings to

zero, and

(C) in the case of the second tier tax imposed by section

4944, removing the investment from jeopardy.

(e) Correction period

For purposes of this subchapter -

(1) In general

The term "correction period" means, with respect to any taxable

event, the period beginning on the date on which such event

occurs and ending 90 days after the date of mailing under section

6212 of a notice of deficiency with respect to the second tier

tax imposed on such taxable event, extended by -

(A) any period in which a deficiency cannot be assessed under

section 6213(a) (determined without regard to the last sentence

of section 4961(b)), and

(B) any other period which the Secretary determines is

reasonable and necessary to bring about correction of the

taxable event.

(2) Special rules for when taxable event occurs

For purposes of paragraph (1), the taxable event shall be

treated as occurring -

(A) in the case of section 4942, on the first day of the

taxable year for which there was a failure to distribute

income,

(B) in the case of section 4943, on the first day on which

there are excess business holdings,

(C) in the case of section 4971, on the last day of the plan

year in which there is an accumulated funding deficiency, and

(D) in any other case, the date on which such event occurred.

-SOURCE-

(Added Pub. L. 96-596, Sec. 2(c)(1), Dec. 24, 1980, 94 Stat. 3473,

Sec. 4962; renumbered Sec. 4963, Pub. L. 98-369, div. A, title III,

Sec. 305(a), July 18, 1984, 98 Stat. 783; amended Pub. L. 100-203,

title X, Sec. 10712(b)(3), Dec. 22, 1987, 101 Stat. 1330-467; Pub.

L. 104-168, title XIII, Sec. 1311(c)(2), July 30, 1996, 110 Stat.

1478.)

-MISC1-

AMENDMENTS

1996 - Subsecs. (a) to (c). Pub. L. 104-168 inserted "4958,"

after "4955,".

1987 - Subsecs. (a) to (c). Pub. L. 100-203 inserted reference to

section 4955 of this title.

EFFECTIVE DATE OF 1996 AMENDMENT

Amendment by Pub. L. 104-168 applicable to excess benefit

transactions occurring on or after Sept. 14, 1995, and not

applicable to any benefit arising from a transaction pursuant to

any written contract which was binding on Sept. 13, 1995, and at

all times thereafter before such transaction occurred, see section

1311(d)(1), (2) of Pub. L. 104-168, set out as a note under section

4955 of this title.

EFFECTIVE DATE OF 1987 AMENDMENT

Amendment by Pub. L. 100-203 applicable to taxable years

beginning after Dec. 22, 1987, see section 10712(d) of Pub. L.

100-203, set out as an Effective Date note under section 4955 of

this title.

EFFECTIVE DATE

For effective date of section with respect to any first tier tax

and to any second tier tax, see section 2(d) of Pub. L. 96-596, set

out as a note under section 4961 of this title.

-SECREF-

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 4942, 6213, 6214, 6503,

7422 of this title.

-End-