Thursday March 28, 2024

7.2.6 Taxable Expenditures

Taxable Expenditures

Definition:  Any money spent by a private foundation that is not consistent with the foundation's charitable purposes is called a "taxable expenditure."

Penalty for Taxable Expenditures:  A private foundation's taxable expenditures are subject to a 20% excise tax, and a foundation manager who knowingly participates in the taxable expenditure is subject to a 5% excise tax (with a $10,000 cap).

Definition


Any money spent by a private foundation that is not consistent with the foundation's charitable purposes is called a "taxable expenditure." Taxable expenditures include any of the following: lobbying, most voter registration drives, grants to individuals (unless grantmaking procedures are approved), grants to any organization not classified as a public charity (unless expenditure responsibility is exercised; see GiftLaw Pro 7.2.4), and any other expenditure not in furtherance of the private foundation's exempt purposes. One of the most common areas where taxable expenditures occur is in the area of distributions to individuals in the form of scholarships that do not meet the requirements discussed in GiftLaw Pro 7.2.3.

Penalty for Taxable Expenditures


A private foundation's taxable expenditures are subject to a 20% excise tax, and a foundation manager who knowingly participates in the taxable expenditure is subject to a 5% excise tax (with a $10,000 cap). If the private foundation does not correct the taxable expenditure by recovering the taxable expenditure or taking other corrective action prescribed by the Internal Revenue Service, an additional 100% excise tax on the taxable expenditure is imposed on the foundation, and any foundation manager who knowingly participated in the investment is subject to a 50% excise tax (with a $20,000 cap). Sec. 4945.

Private Letter Rulings

PLR 200102054 Private-Public Charity Cooperation on Scholarship Fund:   Private foundations may award scholarships, but they are subject to specific requirements under Sec. 4945(b)(3) that include advance approval by the Service. The advance approval is designed to make certain that the grants are on an objective and nondiscriminatory basis.

PLR 200103080 No Excise Tax on Grants Used for Children of Company's Employees:   A public charity currently selects scholarship recipients from a scholastic competition. Students who perform extremely well on these tests and meet other criteria are designated as finalists. Private foundation has entered into an agreement with the charity to sponsor yearly scholarships.

PLR 200115041 Grants to Charity's Scholarship Program are Not Taxable Expenditures:   Taxpayer proposed to make annual contributions to Charity B. The contributions would be used to fund scholarships for the children of Company D employees. The scholarships would be awarded to students by Charity B based on selection criteria that included test scores, class rank, interests, and overall potential. Financial need and specific course of study, however, were not required factors.

PLR 200217057 Private Foundation's Grants are Not Subject to Excise Tax:   Private Foundation wants to implement a scholarship grant program. The scholarship grant program will make grants to high school students to help them pay for college or university expenses. The goal of the program is to benefit public school students from primarily rural areas.

PLR 200249010 Scholarship Grants Not Deemed Taxable Expenditures:   Taxpayer wants to implement a scholarship program. The scholarship program will make 52 grants annually, one in each state plus two additional grants. Each selected student will receive $10,000 for qualified education expenses. However, 10 national winners will each receive $15,000, a computer and an intern position with Taxpayer.

PLR 200251019 Foundation's Religious Seminars and Audio Tapes Not Taxable Expenditures:   X, a private foundation, is engaged in worldwide missionary work. X either directly or indirectly assists charities that actively engage in missionary work. However, many years ago, X began to conduct charitable activities of its own. These activities included producing audio recordings of the Bible in various languages, duplicating them and distributing the tapes free of charge to missionary organizations.

PLR 200324056 Foundation May Reimburse Its Conference Participants' Travel Expenses:   The Teach Democracy Foundation is a private foundation that encourages the study, teaching and research of the fundamental principles of democracy. To accomplish its purpose, the foundation supports programs and activities that will result in an increased understanding of the benefits of individual freedom and civic responsibility. For example, the foundation achieves its charitable purpose by granting scholarships to students who are interested in the areas of law, history and political science.

PLR 200420031 Corporate Foundation Grant Procedures Approved:   Widget Foundation is a private foundation created and funded by Widget, Inc. The Foundation started a program to provide scholarships to the children of Widget, Inc., employees. Widget Foundation seeks a ruling that the scholarships it awards will not constitute taxable expenditures.

PLR 200522016 Scholarships Not Taxable Expenditures:   Scholarships awarded by private foundations to an individual for travel, study, or similar purposes are taxable expenditures to the private foundation unless exempted under 4945(g)(1). Under 4945(g)(1) scholarships are exempted as taxable expenditures if the grants are awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary.

PLR 200650026 Private Foundation Grants Not Taxable Expenditures:   M is an organization recognized under Sec. 501(c)(3) of the Code and is further classified as a private foundation within the meaning of Sec. 509(a). M awards scholarships to recipients for their initial academic year that may continue for a maximum of four years contingent upon maintaining a certain grade point average and status as a full-time student.

PLR 200708088 Private Foundation Asset Transfer:   A incorporated Y and Z, recognized as two private foundations (PFs) under Sec. 509(a). A has two sets of grandchildren, the B grandchildren and the C grandchildren. Currently A, one B grandchild and one C grandchild control PF Y. A's B and C grandchildren have different charitable goals, so A proposes that PF Y transfer one-half of its assets, comprised of corporate stocks and bonds, to PF Z.

PLR 200720020 Scholarships Not Taxable Expenditures:   G, a private foundation under Sec. 509(a) of the Code, proposed to create a scholarship program to benefit deserving children of the employees of B. G's proposed scholarship plan would make grants available to children of B employees who worked at B for at least one year and maintained a 3.0 grade point average or higher.

PLR 200813043 PF May Make Grants to Foreign Charity:   Private Foundation (PF) provides support primarily to charitable endeavors in the United States to relieve poverty, homelessness, disease, benefit the arts and promote scholarship.

PLR 200909071 Grants Are Not Taxable Expenditures:   P, a private foundation, conducted a study on intergenerational poverty and determined that early childhood education is the best means to break the cycle of poverty.

PLR 201047026 Scholarships Not Taxable Expenditures:   W is a non-profit private foundation. W requested an advanced letter ruling approving a proposed scholarship program. W's program would provide scholarships to students attending primary or secondary schools as well as those in undergraduate and graduate programs.
PLR 201052018 Scholarships Not Taxable Expenditures:   Charity is a non-profit private foundation under Secs. 501(c)(3) and 509(a). Charity requested an advanced letter ruling approving Y, a proposed scholarship program. Y would provide scholarships to students based on credit point average and financial need.
PLR 201106020 Scholarships Are Not Taxable Expenditures:   Org. is classified as a private operating foundation under Secs. 501(c)(3) and 509(a). Org. seeks to award scholarships to high school students who plan on attending a college or university in the K system.
PLR 201116029 Grants to Artists Are Not Taxable Expenditures:   X is a non-profit private foundation. X requested an advanced letter ruling approving B, a proposed grant-making program. B would provide grants to eligible artists who demonstrate the capacity to have an impact on their communities by working on innovative and interdisciplinary art initiatives.

PLR 201152021 Set Asides Satisfied with Debt Are Qualifying Distributions:   Foundation's trustees approved the demolition of its facilities and the construction of a new, large facility. The trustees also approved the set aside of funds to accomplish the redevelopment. The Service approved the setting aside funds on two separate occasions.
PLR 201152022 Scholarships Not Included In Gross Income of Recipients:   ORG is tax-exempt under Sec. 501(c)(3) and classified as a private foundation under Sec. 509(a). ORG requested advance approval of their grant-making programs under Sec. 4945(g)(1). ORG plans to offer a scholarship program that will benefit F, a small community with approximately 11,000 residents.
PLR 201205016 Scholarship Awards Not Taxable:   ORG is tax-exempt under Sec. 501(c)(3) and classified as a private foundation under Sec. 509(a). ORG requested advance approval of their grant-making programs under Sec. 4945(g)(1).
PLR 201210038 Awards Not Taxable Expenditures:   Foundation requested an advanced ruling of a proposed grant making program under Sec. 4945(g)(3). The program will make grants to various sponsoring organizations outside of the United States.
PLR 201210040 Set Aside of Funds Approved:   ORG is a private non-operating foundation under Sec. 509(a). ORG desires to set aside funds to assist in a lead removal program in City. The funds will be disbursed to D, a government agency, and E, a publicly supported charity.
PLR 201219033 Scholarship Program Approved:   Foundation requested an advance letter ruling approving of its proposed scholarship program. Foundation plans to operate a program where one student from each local high school will be selected to receive a scholarship that must be used to assist with the costs associated with the college or university of the recipient's choice.
PLR 201232037 Scholarship Awards Are Not Taxable Expenditures:   Foundation is tax-exempt under Sec. 501(c)(3) and classified as a private foundation under Sec. 509(a). Foundation requested advance approval of their employer-grant making programs under Sec. 4945(g)(1).

PLR 201233019 IRS Approves Foundation's Set-Aside of Funds:   ORG is tax-exempt under Sec. 501(c)(3) and classified as a private foundation under Sec. 509(a). ORG requested a set-aside of funds for the tax year ending U to fund work to develop a cure for M.

PLR 201233020 Foundation's Grants Are Not Taxable Expenditures:   Foundation is tax-exempt under Sec. 501(c)(3) and classified as a private foundation under Sec. 509(a). Foundation requested advance approval of their grant-making program under Secs. 4945(g)(1) and 4945(g)(3).

PLR 201239014 Scholarship Awards Will Not Be Taxable Expenditures:   ORG requests an advanced ruling that the grants awarded pursuant to its scholarship program will not be taxable expenditures under Sec. 4945. ORG is recognized as a tax exempt organization and is classified as a private foundation.

PLR 201243015 IRS Rules on Foundation's Proposed Transfer of Property:   Foundation was organized as a Sec. 501(c)(3) organization and classified as a private foundation under Sec. 509(a). Foundation's charitable purpose was to receive and administer funds for religious, charitable, scientific and educational purposes.

PLR 201304010 Foundation Grants Not Taxable Expenditures:   Foundation is a private foundation. It plans to operate three grant-making programs called X, Y and Z. All grant awards are competitive and are based on merit and the qualifications of the applicant. A diverse selection committee will be appointed.
PLR 201348016 Scholarship Awards Will Not Be Taxable:   Foundation plans to operate a scholarship program called X. The purpose of the program is to provide scholarships to students who are likely to pursue a higher education degree or program in the arts and sciences.
 

PLR 201404014 Foundation's Grants Not Taxable:   Foundation plans to offer educational grants through X, which will use the grants to support individuals who share Foundation's values in the pursuit of social justice.

PLR 201407021 Distribution to Fdn. Won't Result in Self-Dealing or Excess Business Holdings:   Founder's estate plan provides that after the death of the survivor of Founder and Founder's wife, an ownership interest in an LLC will pass to Foundation. Founder owns all membership units, voting and nonvoting, in LLC.

PLR 201415010 Foundation's Museum Expansion Won't Result in Self-Dealing:   Foundation is a tax-exempt private foundation. Foundation operates Museum. Museum occupies the same parcel of land as the personal residence of Foundation’s founder, a disqualified person with respect to Foundation.

PLR 201441027 Foundation’s Grants Not Taxable:   Foundation is a tax-exempt private foundation within the meaning of Sec. 509(a). Foundation proposes to operate a grant program called X that will provide leaders of nonprofit institutions an opportunity to take a sabbatical.

PLR 201612015 Foundation's Educational Grants Approved:   A private foundation requested advanced approval of its educational grant procedures. The foundation will operate an educational grant program, B, which will fund trips to C.

PLR 201628022 Set-Aside of Funds for Construction Project Approved:   A private foundation (“Foundation”) requested advanced approval of a set-aside account to fund the construction of an educational water quality and science facility.

PLR 201641031 Set-Aside for Art Gallery Approved:   A private foundation (Foundation) requested approval of a set-aside account to fund the construction of a new art gallery. Foundation plans to set aside money over a five-year period for the relocation and construction of a new art gallery.


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