26 U.S.C. § 507 — Termination of private foundation status

Page 1689 TITLE 26—INTERNAL REVENUE CODE § 507 election of the employer) be excluded from consider- ation all disability or severance payments payable to individuals who are in pay status as of January 1, 1985. The preceding sentence shall not apply to any payment to the extent such payment is increased by any plan amendment adopted after June 22, 1984.’’ REGULATIONS Secretary of the Treasury or his delegate to issue be- fore Feb. 1, 1988, final regulations to carry out amend- ments made by section 1114 of Pub. L. 99–514, see sec- tion 1141 of Pub. L. 99–514, set out as a note under sec- tion 401 of this title. NONENFORCEMENT OF AMENDMENT MADE BY SECTION 1151 OF PUB. L. 99–514 FOR FISCAL YEAR 1990 No monies appropriated by Pub. L. 101–136 to be used to implement or enforce section 1151 of Pub. L. 99–514 or the amendments made by such section, see section 528 of Pub. L. 101–136, set out as a note under section 89 of this title. SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining li- ability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 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 [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 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. § 506. Organizations required to notify Secretary of intent to operate under 501(c)(4) (a) In general An organization described in section 501(c)(4) shall, not later than 60 days after the organiza- tion is established, notify the Secretary (in such manner as the Secretary shall by regulation pre- scribe) that it is operating as such. (b) Contents of notice The notice required under subsection (a) shall include the following information: (1) The name, address, and taxpayer identi- fication number of the organization. (2) The date on which, and the State under the laws of which, the organization was orga- nized. (3) A statement of the purpose of the organi- zation. (c) Acknowledgment of receipt Not later than 60 days after receipt of such a notice, the Secretary shall send to the organiza- tion an acknowledgment of such receipt. (d) Extension for reasonable cause The Secretary may, for reasonable cause, ex- tend the 60-day period described in subsection (a). (e) User fee The Secretary shall impose a reasonable user fee for submission of the notice under subsection (a). (f) Request for determination Upon request by an organization to be treated as an organization described in section 501(c)(4), the Secretary may issue a determination with respect to such treatment. Such request shall be treated for purposes of section 6104 as an appli- cation for exemption from taxation under sec- tion 501(a). (Added Pub. L. 114–113, div. Q, title IV, § 405(a), Dec. 18, 2015, 129 Stat. 3118.) Statutory Notes and Related Subsidiaries EFFECTIVE DATE Pub. L. 114–113, div. Q, title IV, § 405(f), Dec. 18, 2015, 129 Stat. 3120, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [enacting this section and amending sections 6033 and 6652 of this title] shall apply to organizations which are described in section 501(c)(4) of the Internal Revenue Code of 1986 and organized after the date of the enactment of this Act [Dec. 18, 2015]. ‘‘(2) CERTAIN EXISTING ORGANIZATIONS.—In the case of any other organization described in section 501(c)(4) of such Code, the amendments made by this section shall apply to such organization only if, on or before the date of the enactment of this Act— ‘‘(A) such organization has not applied for a written determination of recognition as an organization de- scribed in section 501(c)(4) of such Code, and ‘‘(B) such organization has not filed at least one an- nual return or notice required under subsection (a)(1) or (i) (as the case may be) of section 6033 of such Code. In the case of any organization to which the amend- ments made by this section apply by reason of the pre- ceding sentence, such organization shall submit the no- tice required by section 506(a) of such Code, as added by this Act, not later than 180 days after the date of the enactment of this Act.’’ LIMITATION ON EXPENDITURE OF USER FEES Pub. L. 114–113, div. Q, title IV, § 405(e), Dec. 18, 2015, 129 Stat. 3119, provided that: ‘‘Notwithstanding any other provision of law, any fees collected pursuant to section 506(e) of the Internal Revenue Code of 1986, as added by subsection (a), shall not be expended by the Secretary of the Treasury or the Secretary’s delegate unless provided by an appropriations Act.’’ PART II—PRIVATE FOUNDATIONS Sec. 507. Termination of private foundation status. 508. Special rules with respect to section 501(c)(3) organizations. 509. Private foundation defined. Editorial Notes AMENDMENTS 1969—Pub. L. 91–172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 492, added part heading and analysis for part II. § 507. Termination of private foundation status (a) General rule Except as provided in subsection (b), the sta- tus of any organization as a private foundation shall be terminated only if— (1) such organization notifies the Secretary (at such time and in such manner as the Sec- retary may by regulations prescribe) of its in- tent to accomplish such termination, or (2)(A) with respect to such organization, there have been either willful repeated acts (or Page 1690 TITLE 26—INTERNAL REVENUE CODE § 507 failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax under chapter 42, and (B) the Secretary notifies such organization that, by reason of subparagraph (A), such or- ganization is liable for the tax imposed by sub- section (c), and either such organization pays the tax im- posed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g). (b) Special rules (1) Transfer to, or operation as, public charity The status as a private foundation of any or- ganization, with respect to which there have not been either willful repeated acts (or fail- ures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if— (A) such organization distributes all of its net assets to one or more organizations de- scribed in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a con- tinuous period of at least 60 calendar months immediately preceding such distribution, or (B)(i) such organization meets the require- ments of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period be- ginning with its first taxable year which be- gins after December 31, 1969, or for a contin- uous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969, (ii) such organization notifies the Sec- retary (in such manner as the Secretary may by regulations prescribe) before the com- mencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is ter- minating its private foundation status, and (iii) such organization establishes to the satisfaction of the Secretary (in such man- ner as the Secretary may by regulations pre- scribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i). If an organization gives notice under subpara- graph (B)(ii) of the commencement of a 60- month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month pe- riod, this part and chapter 42 shall not apply to such organization for any taxable year within such 60-month period for which it does meet such requirements. (2) Transferee foundations For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitaliza- tion, or other adjustment, organization, or re- organization, the transferee foundation shall not be treated as a newly created organiza- tion. (c) Imposition of tax There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of— (1) the amount which the private foundation substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) sta- tus of such foundation, or (2) the value of the net assets of such founda- tion. (d) Aggregate tax benefit (1) In general For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of— (A) the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contribu- tors to the foundation after February 28, 1913, had been disallowed, and (B) the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912, if (i) it had not been ex- empt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deductions under section 642(c) (or the corresponding provi- sions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of section 170(b)(1)(A)), and (C) interest on the increases in tax deter- mined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a pri- vate foundation. (2) Substantial contributor (A) Definition For purposes of paragraph (1), the term ‘‘substantial contributor’’ means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and be- quests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is re- ceived by the foundation from such person. In the case of a trust, the term ‘‘substantial contributor’’ also means the creator of the trust. (B) Special rules For purposes of subparagraph (A)— (i) each contribution or bequest shall be valued at fair market value on the date it was received, (ii) in the case of a foundation which is in existence on October 9, 1969, all con- Page 1691 TITLE 26—INTERNAL REVENUE CODE § 507 tributions and bequests received on or be- fore such date shall be treated (except for purposes of clause (i)) as if received on such date, (iii) an individual shall be treated as making all contributions and bequests made by his spouse, and (iv) any person who is a substantial con- tributor on any date shall remain a sub- stantial contributor for all subsequent pe- riods. (C) Person ceases to be substantial contrib- utor in certain cases (i) In general A person shall cease to be treated as a substantial contributor with respect to any private foundation as of the close of any taxable year of such foundation if— (I) during the 10-year period ending at the close of such taxable year such per- son (and all related persons) have not made any contribution to such private foundation, (II) at no time during such 10-year pe- riod was such person (or any related per- son) a foundation manager of such pri- vate foundation, and (III) the aggregate contributions made by such person (and related persons) are determined by the Secretary to be insig- nificant when compared to the aggregate amount of contributions to such founda- tion by one other person. For purposes of subclause (III), apprecia- tion on contributions while held by the foundation shall be taken into account. (ii) Related person For purposes of clause (i), the term ‘‘re- lated person’’ means, with respect to any person, any other person who would be a disqualified person (within the meaning of section 4946) by reason of his relationship to such person. In the case of a contributor which is a corporation, the term also in- cludes any officer or director of such cor- poration. (3) Regulations For purposes of this section, the determina- tion as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations pre- scribed by the Secretary. (e) Value of assets For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private founda- tion, or (2) the date on which it ceases to be a private foundation. (f) Liability in case of transfers of assets from private foundation For purposes of determining liability for the tax imposed by subsection (c) in the case of as- sets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organi- zation which culminates in its ceasing to be a private foundation. (g) Abatement of taxes The Secretary may abate the unpaid portion of the assessment of any tax imposed by sub- section (c), or any liability in respect thereof, if— (1) the private foundation distributes all of its net assets to one or more organizations de- scribed in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or (2) following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary, in such manner as the Secretary may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary re- ceives certification from the appropriate State officer that such action has resulted in such preservation of assets. (Added Pub. L. 91–172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 492; amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98–369, div. A, title III, § 313(a), July 18, 1984, 98 Stat. 786.) Editorial Notes AMENDMENTS 1984—Subsec. (d)(2)(C). Pub. L. 98–369 added subpar. (C). 1976—Pub. L. 94–455 struck out ‘‘or his delegate’’ after ‘‘Secretary’’ wherever appearing. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title III, § 313(b), July 18, 1984, 98 Stat. 787, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1984.’’ EFFECTIVE DATE Section effective Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91–172, set out as a note under section 4940 of this title. APPLICABILITY TO DETERMINATION OF STATUS AS SUB- STANTIAL CONTRIBUTOR FOR PURPOSES OF TAXES ON SELF-DEALING OF CONTRIBUTIONS MADE PRIOR TO OC- TOBER 9, 1969 Pub. L. 95–170, § 3, Nov. 12, 1977, 91 Stat. 1352, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘In determining whether a person is a substantial contributor within the meaning of sec- tion 507(d)(2) of the Internal Revenue Code of 1986 [for- merly I.R.C. 1954] for purposes of applying section 4941 of such Code (relating to taxes on self-dealing), con- tributions made before October 9, 1969, which— ‘‘(1) were made on account of or in lieu of payments required under a lease in effect before such date, and ‘‘(2) were coincident with or by reason of the reduc- tion in the required payments under such lease, shall not be taken into account. For purposes of apply- ing section 507(d)(2)(B)(iv) of such Code, the preceding Page 1692 TITLE 26—INTERNAL REVENUE CODE § 508 sentence shall be treated as having taken effect on Jan- uary 1, 1970.’’ § 508. Special rules with respect to section 501(c)(3) organizations (a) New organizations must notify Secretary that they are applying for recognition of section 501(c)(3) status Except as provided in subsection (c), an orga- nization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)— (1) unless it has given notice to the Sec- retary in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of such status, or (2) for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary by regulations for giving notice under this subsection. (b) Presumption that organizations are private foundations Except as provided in subsection (c), any orga- nization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Sec- retary, at such time and in such manner as the Secretary may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation. (c) Exceptions (1) Mandatory exceptions Subsections (a) and (b) shall not apply to— (A) churches, their integrated auxiliaries, and conventions or associations of churches, or (B) any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000. (2) Exceptions by regulations The Secretary may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both— (A) educational organizations described in section 170(b)(1)(A)(ii), and (B) any other class of organizations with respect to which the Secretary determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provi- sions of this title relating to private founda- tions. (d) Disallowance of certain charitable, etc., de- ductions (1) Gift or bequest to organizations subject to section 507(c) tax No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduc- tion under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— (A) by any person after notification is made under section 507(a), or (B) by a substantial contributor (as de- fined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which cul- minates in the imposition of tax under sec- tion 507(c) and any subsequent taxable year. (2) Gift or bequest to taxable private founda- tion, section 4947 trust, etc. No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— (A) to a private foundation or a trust de- scribed in section 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)), or (B) to any organization in a period for which it is not treated as an organization de- scribed in section 501(c)(3) by reason of sub- section (a). (3) Exception Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax im- posed by section 507(c) is abated by the Sec- retary under section 507(g). (e) Governing instruments (1) General rule A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are— (A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the founda- tion to tax under section 4942, and (B) to prohibit the foundation from engag- ing in any act of self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)). (2) Special rules for existing private founda- tions In the case of any organization organized be- fore January 1, 1970, paragraph (1) shall not apply— (A) to any period after December 31, 1971, during the pendency of any judicial pro- ceeding begun before January 1, 1972, by the private foundation which is necessary to re- form, or to excuse such foundation from compliance with, its governing instrument or any other instrument in order to meet the requirements of paragraph (1), and (B) to any period after the termination of any judicial proceeding described in subpara- graph (A) during which its governing instru- ment or any other instrument does not per- mit it to meet the requirements of para- graph (1). (f) Additional provisions relating to sponsoring organizations A sponsoring organization (as defined in sec- tion 4966(d)(1)) shall give notice to the Secretary (in such manner as the Secretary may provide)