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Avoiding Private Foundation 507(c) Termination Tax Means Less Pain for the Gain

November 11, 2017

Becky Farr Seidel of the Leaffer Law Group wrote a great piece recently for Bloomberg BNA’s Estates, Gifts and Trusts Journal addressing issues in terminating private foundations.  Here are some salient points, and you can read the entire article here.

Unlike other 501(c)(3) entities, private foundations are subject to additional stringent regulations under Chapter 42 of the Code.  For that reason, organizations that begin as private foundations may wish to terminate that status in the future.

Section 507(c) imposes a termination tax equal to the lesser of 100% of (1) the foundation’s net assets, or (2) all income, estate, and gift tax benefits received by the foundation and its substantial contributors when a foundation terminates its private foundation status either (1) involuntarily, where there have been willful, repeated violations of the private foundation rules; or (2) voluntarily, by notifying the IRS of its intent to terminate, setting forth the amount of the tax due.

There are ways to terminate without paying the tax. All of the net assets can be transferred to an institutional charity such as: a hospital, church, or school, which gets public charity status by virtue of the nature of their activities. The net assets can also be transferred to a publicly supported charity, as long as it meets one of two public support tests demonstrating that a substantial amount of support comes from the general public.  Such transferee charity must have been in existence for a continuous period of at least 60 calendar months immediately preceding the distribution.  A transfer to a donor advised fund held by a sponsoring organization that qualifies under Section 170(b)(1)(A)(vi) is also permissible without a termination tax.

Post by:  Jillian Mastroianni

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