Federal Tax

Private Foundations — Distributions (Section 4942) (Portfolio 880)

  • This Portfolio discusses in detail the distribution requirements imposed by §4942 upon private foundations.


Tax Management Portfolio, Private Foundations — Distributions (Section 4942), No. 880-2nd, discusses in detail the distribution requirements imposed by §4942 upon private foundations. Section 4942, enacted by the Tax Reform Act of 1969 as part of a comprehensive effort to regulate private foundations, exacts an excise tax upon the failure of a private foundation to make “qualifying distributions” in the required amounts.
Section 4942 requires that private foundations spend a specified amount of their funds annually to accomplish charitable purposes or to make grants to other exempt organizations which will use the funds for charitable purposes. The minimum distributable amount is 5% of the fair market value of the private foundation’s assets not used in carrying out its exempt purposes, less any acquisition indebtedness. There are a number of restrictions on the types of grants which may be used to satisfy the minimum distribution requirement. Generally, a qualifying distribution may be made as a direct charitable expenditure or as a grant for charitable purposes. A set aside of funds for a specific project to be conducted in the future may also be a qualifying distribution at the time of the set aside under certain circumstances.
Other Tax Management Portfolios dealing with private foundations include 470 T.M., Private Foundations — Self-Dealing (Section 4941); 473 T.M., Private Foundations — Excess Business Holdings; 877 T.M., Private Foundations and Public Charities — Termination (§507) and Special Rules (§508); 456 T.M., Private Foundations and Public Charities — Definition and Classification; 474 T.M., Private Foundations — Taxable Expenditures (Sec. 4945); and 468 T.M., Private Foundations — Section 4940 and Section 4944.
This Portfolio may be cited as Schenkelberg and Gross, 880-2nd T.M., Private Foundations — Distributions (Section 4942).

Table of Contents

Detailed Analysis
I. Introduction
II. Required Distributable Amount
III. Qualifying Distributions
IV. Calculation of Undistributed Income
V. Tax on Failure to Distribute Income

Thomas Schenkelberg
Polsinelli Shalton & Welte, P.C.
Virginia C. Gross
Polsinelli PC