Reg. § 53.4942(a)-1 Taxes for failure to distribute income.
(a) Imposition of tax
(1) Initial tax Except as provided in of this section, section imposes an excise tax of 15 percent on the undistributed income (as defined in ) of a private foundation for any taxable year which has not been distributed before the first day of the second (or any succeeding) taxable year following such taxable year (if such first day falls within the taxable period as defined in of this section). For purposes of section and this section, the term distributed means distributed as qualifying distributions under section . See with respect to correction of deficient distributions for prior taxable years.
(2) Additional tax In any case in which an initial excise tax is imposed by section on the undistributed income of a private foundation for any taxable year, section imposes an additional excise tax on any portion of such income remaining undistributed at the close of the correction period (as defined in of this section). The tax imposed by section is equal to 100 percent of the amount remaining undistributed at the close of the taxable period.
(3) Payment of tax Payment of the excise taxes imposed by section (a) or (b) is in addition to, and not in lieu of, making the distribution of such undistributed income as required by section . See section and the regulations thereunder.
(4) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1 M, a private foundation which uses the calendar year as its taxable year, has at the end of 1981, $50,000 of undistributed income (as defined in ) for 1981. As of January 1, 1983, $40,000 is still undistributed. On August 15, 1983, a notice of deficiency with respect to the excise taxes imposed by section (a) and (b) is mailed to M under section (a) and the taxable period ends. Thus, under these facts, an initial excise tax of $6,000 (15 percent of $40,000) is imposed upon M. An additional excise tax of $40,000 (100 percent of $40,000) is imposed by section . Under section , however, if the undistributed income is reduced to zero during the correction period, this latter tax will not be assessed, and if assessed, it will be abated, and if collected, it will be credited or refunded as an overpayment.
Example 2. Assume the facts as stated in example (1), except that the notice of deficiency is mailed to M on September 7, 1984, and as of January 1, 1984, only $10,000 of the $50,000 of undistributed income with respect to 1981 is undistributed. Therefore, initial excise taxes of $6,000 (15 percent of $40,000, M's undistributed income from 1981, as of January 1, 1983) and $1,500 (15 percent of $10,000, M's undistributed income from 1981 as of January 1, 1984) are imposed by section . If the $10,000 remains undistributed as of September 7, 1984, the end of the taxable period, an additional excise tax of $10,000 (100 percent of $10,000, M's undistributed income from 1981, as of September 7, 1984) is imposed by section .
(b) Exceptions
(1) In general The initial excise tax imposed by section shall not apply to the undistributed income of a private foundation:
(i) For any taxable year for which it is an operating foundation (as defined in section and the regulations thereunder), or
(ii) To the extent that the foundation failed to distribute any amount solely because of incorrect valuation of assets under , if:
(a) The failure to value the assets properly was not willful and was due to reasonable cause,
(b) Such amount is distributed as qualifying distributions (within the meaning of ) by the foundation during the allowable distribution period (as defined in of this section),
(c) The foundation notifies the Commissioner that such amount has been distributed (within the meaning of subdivision (ii)(b) of this subparagraph) to correct such failure, and
(d) Such distribution is treated under as made out of the undistributed income for the taxable year for which a tax would (except for this subdivision) have been imposed by section .
(2) Improper valuation For purposes of subparagraph (1)(ii) of this paragraph, failure to value an asset properly shall be regarded as “not willful” and “due to reasonable cause” whenever, under all the facts and circumstances, the foundation can show that it has made all reasonable efforts in good faith to value such an asset in accordance with the provisions of . If a foundation, after full disclosure of the factual situation, obtains a bona fide appraisal of the fair market value of an asset by a person qualified to make such an appraisal (whether or not such a person is a disqualified person with respect to the foundation), and such foundation relies upon such appraisal, then failure to value the asset properly shall ordinarily be regarded as “not willful” and “due to reasonable cause”. Notwithstanding the preceding sentence, the failure to obtain such a bona fide appraisal shall not, by itself, give rise to any inference that a foundation's failure to value an asset properly was willful or not due to reasonable cause.
(3) Example The provisions of this paragraph may be illustrated by the following example:
Example. In 1976 M, a private foundation which was established in 1975 and which uses the calendar year as the taxable year, incorrectly values its assets under in a manner which is not willful and is due to reasonable cause. As a result of the incorrect valuation of assets, $20,000 which should be distributed with respect to 1976 is not distributed, and as of January 1, 1978, such amount is still undistributed. On March 29, 1978, a notice of deficiency with respect to the excise taxes imposed by section (a) and (b) is mailed to M under section . On May 5, 1978 (within the allowable distribution period), M makes a qualifying distribution of $20,000 which is treated under as made out of M's undistributed income for 1976. M notifies the Commissioner of its action. Under the stated facts, an initial excise tax of $3,000 (15 percent of $20,000) would (except for the exception contained in subparagraph (1)(ii) of this paragraph) have been imposed by section , but since all of the requirements of such subparagraph are satisfied no tax is imposed by section .
(c) Certain periods For purposes of this section—
(1) Taxable period
(i) The term “taxable period” means, with respect to the undistributed income of a private foundation for any taxable year, the period beginning with the first day of the taxable year and ending on the earlier of:
(A) The date of mailing of a notice of deficiency under section with respect to the initial excise tax imposed under section , or
(B) The date on which the initial excise tax imposed under section is assessed.
For example, assume M, a private foundation which uses the calendar year as the taxable year, has $15,000 of undistributed income for 1981. A notice of deficiency is mailed to M under section on June 1, 1983. With respect to the undistributed income of M for 1981, the taxable period began on January 1, 1981, and ended on June 1, 1983.
(ii) Where a notice of deficiency referred to in subdivision (i) of this subparagraph is not mailed because there is a waiver of the restrictions on assessment and collection of a deficiency, or because the deficiency is paid, the date of filing of the waiver or the date of such payment, respectively, shall be treated as the end of the taxable period.
(2) Allowable distribution period
(i) The term “allowable distribution period” means the period beginning with the first day of the first taxable year following the taxable year in which the incorrect valuation of foundation assets (described in of this section) occurred and ending 90 days after the date of mailing of a notice of deficiency under section with respect to the initial excise tax imposed by section . This period shall be extended by any period in which a deficiency cannot be assessed under section , and any other period which the Commissioner determines is reasonable and necessary to permit a distribution of undistributed income under section .
(ii) Where a notice of deficiency referred to in subdivision (i) of this subparagraph is not mailed because there is a waiver of the restrictions on assessment and collection of a deficiency, or because the deficiency is paid, the date of filing of the waiver or the date of such payment, respectively, shall be treated as the end of the allowable distribution period.
(3) Cross reference For rules relating to taxable events that are corrected within the correction period, defined in section , see section (a) and the regulations thereunder.
(4) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1. In 1975 M, a private foundation which uses the calendar year as the taxable year, made an error in valuing its assets which was not willful and was due to reasonable cause. The error caused M not to distribute $25,000 that should have been distributed with respect to 1975. On March 1, 1978, a notice of deficiency with respect to the excise taxes imposed by section (a) and (b) was mailed to M under section . With respect to the undistributed income for 1975, the taxable period is the period from January 1, 1975, through March 1, 1978, and the allowable distribution period is the period from January 1, 1976, through May 30, 1978 (90 days after the mailing of the notice of deficiency).
Example 2. Assume the facts as stated in example (1), except that the Commissioner determines that it is reasonable and necessary to extend the period for distribution through June 15, 1978. Thus, the allowable distribution period is from January 1, 1976, through June 15, 1978.
(d) Effective date Except as otherwise specifically provided, section and the regulations thereunder shall only apply with respect to taxable years beginning after December 31, 1969.
[T.D. 7256, 38 FR 3317, Feb. 7, 1973, as amended by T.D. 8084, 51 FR 16302, May 2, 1986]