Private Foundations — Investment Income Tax and Jeopardy Investments (Sections 4940 and 4944) (Portfolio 468)

Description

Tax Management Portfolio, Private Foundations — Investment Income Tax and Jeopardy Investments (Sections 4940 and 4944), No. 468-2nd, discusses in detail the excise taxes imposed under §4940 upon investment income of private foundations and under §4944 upon private foundation investments that jeopardize the organization’s charitable purposes.

Section 4940 imposes a 2% excise tax on the net investment income of most §501(c)(3) private foundations exempt from taxation under §501(a). A private foundation’s net investment income is defined by the statute as its gross investment income, including capital gains, less the ordinary and necessary expenses paid or incurred for the production or collection of such income or for the management, conservation, or maintenance of property held for the production of such income. This Portfolio provides a detailed examination of which foundations are subject to the tax, what items are included in the definition of net investment income, situations in which the tax can be reduced to 1%, reporting and compliance, and how the tax applies in the year in which a private foundation dissolves, merges, or reorganizes.

Section 4944 imposes an excise tax on any private foundation and its managers that make an investment that jeopardizes the carrying out of the foundation’s exempt purposes. An initial excise tax of 10% of the amount of the investment is imposed on the foundation, with an equal tax imposed on any foundation manager who knowingly makes such an investment. If the foundation fails to remove the investment from jeopardy within a specified time, it is liable for an additional tax of 25% of the amount of the investment. A foundation manager who refuses to remove the investment from jeopardy is liable for an additional 5% tax. There is an important exception for program-related investments, which are an increasingly used form of charitable activity. This Portfolio also discusses the key distinctions between so-called mission-related investments, a term of art, and program-related investments, which are an express exception to the jeopardy investment rules defined in §4944(c).

This portfolio may be cited as Levitt and Wexler, 468-2nd T.M., Private Foundations — Investment Income Tax and Jeopardy Investments (Sections 4940 and 4944).

Table of Contents

I. Overview
II. Section 4940 — Tax on Investment Income
III. Section 4944 — Investments Which Jeopardize Charitable Purpose