Reg. § 53.4948-1 Application of taxes and denial of exemption with respect to certain foreign organizations.
(a) Tax on income of certain foreign organizations
(1) In lieu of the tax imposed by section and the regulations thereunder, there is hereby imposed for each taxable year beginning after December 31, 1969, on the gross investment income (within the meaning of section and the regulations thereunder) derived from sources within the United States (within the meaning of section and the regulations thereunder) by every foreign organization which is a private foundation (within the meaning of section and the regulations thereunder) and exempt from taxation under section for the taxable year a tax equal to 4 percent of such income, except as provided in subparagraph (3) of this paragraph. The tax (if any) will be reported on the form the foundation is required to file under section and will be paid annually for the taxable year, at the time prescribed for filing such annual return (determined without regard to any extension of time for filing). For purposes of this section, the term foreign organization means any organization which is not described in section .
(2) With respect to the deduction and withholding of tax imposed by section , see section and the regulations thereunder.
(3) Whenever there exists a tax treaty between the United States and a foreign country, and a foreign private foundation subject to section is a resident of such country or is otherwise entitled to the benefits of such treaty (whether or not such benefits are available to all residents), if the treaty provides that any item or items (or all items with respect to an organization exempt from income taxation) of gross investment income (within the meaning of section ) shall be exempt from income tax, such item or items shall not be taken into account by such foundation in computing the tax to be imposed under section for any taxable year for which the treaty is effective.
(b) Certain sections inapplicable Section (relating to termination of private foundation status), section (relating to special rules with respect to section organizations), and Chapter 42 (other than section ) of the Code shall not apply to any foreign organization which from the date of its creation has received at least 85 percent of its support (as defined in section , other than section ) from sources outside the United States. For purposes of this paragraph, gifts, grants, contributions, or membership fees directly or indirectly from a United States person (as defined in section ) are from sources within the United States.
(c) Denial of exemption to foreign organizations engaged in prohibited transactions
(1) In general A foreign private foundation described in section and of this section shall not be exempt from taxation under section if it has engaged in a prohibited transaction (within the meaning of subparagraph (2) of this paragraph) after December 31, 1969.
(2) Prohibited transactions
(i) For purposes of this section, the term “prohibited transaction” means any act or failure to act (other than with respect to section , relating to minimum investment return) which would subject a foreign private foundation described in of this section, or a disqualified person (as defined in section ) with respect thereto, to liability for a penalty under section (relating to assessable penalties with respect to liability for tax under Chapter 42) or a tax under section (relating to termination of private foundation status) if such foreign private foundation were a domestic private foundation.
(ii) For purposes of subdivision (i) of this subparagraph:
(a) Approval by an appropriate foreign government of grants by the foreign private foundation to individuals is sufficient to satisfy the requirements of section and the regulations thereunder.
(b) In determining whether a grantee of the foreign organization is a private foundation which is not an operating foundation for purposes of section or is an organization which is not described in section (1), (2), or (3) for purposes of section (d)(4) and (h), a determination made by such foreign organization will be accepted if such determination is made in good faith after a reasonable effort to identify the status of its grantee.
(iii) For purposes of subdivision (i) of this subparagraph, in order for an act or failure to act (without regard to section ) to be treated as a prohibited transaction under section by reason of the application of section , there must have been a prior act or failure to act (without regard to section ), which:
(a) Would have resulted in liability for tax under Chapter 42 (other than section or ) if the foreign private foundation had been a domestic private foundation, and
(b) Had been the subject of a warning from the Commissioner that a second act or failure to act (without regard to section ) would result in a prohibited transaction.
The second act or failure to act (with respect to which a warning described in subparagraph (3)(i) of this paragraph is given) need not be related to the prior act or failure to act with respect to which a warning from the Commissioner was given under (b) of this subdivision.
(3) Taxable years affected
(i) Except as provided in subdivision (ii) of this subparagraph, a foreign private foundation described in of this section shall be denied exemption from taxation under section by reason of subparagraph (1) of this paragraph for all taxable years beginning with the taxable year during which it is notified by the Commissioner that it has engaged in a prohibited transaction. The Commissioner shall publish such notice in the Federal Register on the day on which he so notifies such foreign private foundation. In the case of an act or failure to act (without regard to section ) which would result in a penalty under section if the foreign private foundation were a domestic private foundation, before giving notice under this subdivision the Commissioner shall warn such foreign private foundation that such act or failure to act may be treated as a prohibited transaction. However, such act or failure to act will not be treated as a prohibited transaction if it is corrected (within the meaning of Chapter 42 and the regulations thereunder) within 90 days after the making of such warning.
(ii)
(a) Any foreign private foundation described in of this section which is denied exemption from taxation under section by reason of subparagraph (1) of this paragraph may, with respect to the second taxable year following the taxable year in which notice is given under subdivision (i) of this subparagraph (or any taxable year subsequent to such second taxable year), file a request for exemption from taxation under section on Form 1023. In addition to the information generally required of an organization requesting exemption as an organization described in section , a request under this subdivision must contain or have attached to it a written declaration, made under the penalties of perjury, by a principal officer of such organization authorized to make such declaration, that the organization will not knowingly again engage in a prohibited transaction.
(b) If the Commissioner is satisfied that such organization will not knowingly again engage in a prohibited transaction and that the organization has satisfied all other requirements under section , the organization will be so notified in writing. In such case the organization shall not, with respect to taxable years beginning with the taxable year with respect to which a request under this subdivision is filed, be denied exemption from taxation under section by reason of any prohibited transaction which was engaged in before the date on which notice was given under subdivision (i) of this subparagraph. Section provides that an organization denied exemption under such section will not be exempt from taxation under section for the taxable year in which notice of loss of exemption is given and at least one immediately subsequent taxable year.
(d) Disallowance of certain charitable deductions No gift, bequest, legacy, devise, or transfer shall be allowed as a deduction under section , , 556(b)(2), , , , or , if made:
(1) To a foreign private foundation described in of this section after the date on which the Commissioner publishes notice under of this section that he has notified such organization that it has engaged in a prohibited transaction, and
(2) In a taxable year of such organization for which it is not exempt from taxation under section by reason of of this section.
For purposes of this paragraph, a bequest, legacy, devise, or transfer under section or shall be treated as made on the date of death of the decedent. For example, assume that an individual gives money to a foreign private foundation described in section in January 1970, January 1971, and January 1972. The organization has a taxable year from June 1 through May 31. In February 1970, notice is duly published that the foreign organization has engaged in a prohibited transaction. In December 1970, the organization duly submits a request for exemption under of this section which is granted for the taxable year ending May 31, 1972. The January 1970 gift is allowable as a deduction under section since it was made before the notice (February 1970). The January 1971 gift is not allowable as a deduction because the taxable year ending May 31, 1971, is a nonexempt year (the first taxable year subsequent to the taxable year of the notice) for the foreign organization. The January 1972 gift is allowable as a deduction under section because the taxable year ending May 31, 1972, is an exempt year for the organization.
[T.D. 7218, 37 FR 23918, Nov. 10, 1972; 37 FR 24748, Nov. 21, 1972; 38 FR 4324, Feb. 13, 1973]