§ 509. Private foundation defined

Legislative history

Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.

1. 1969

   Tax Reform Act of 1969

   Pub. L. 91–172 title I § 101(a) · 83 Stat. 487

   Enacted · 26 U.S.C. § 509

   Added Pub. L. 91–172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 496

   Source evidence

   Code source credit
   Added Pub. L. 91–172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 496

   Enacted provision · exact public law section
   (a) In General.— Subchapter F of chapter 1 (relating to exempt 68A Stat. 163.. 26 USC 501–526. organizations) is amended by redesignating parts II, III, and IV as parts III, IV, and V, respectively, and by inserting after part I the following new part: “PART II— PRIVATE FOUNDATIONS “Sec. 507. Termination of private foundation status. “Sec. 508. Special rules with respect to section 501(c)(3) organizations. “Sec. 509. Private foundation defined. “SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS. “(a) General Rule.— Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if— “(1) such organization notifies the Secretary or his delegate (at such time and in such manner as the Secretary or his delegate may by regulations prescribe) of its intent to accomplish such termination, or “(2) (A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax Post, p. 498. under chapter 42, and “(B) the Secretary or his delegate notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c), and either such organization pays the tax imposed 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 organization, with respect to which there have not been either willful repeated acts (or failures 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 described in section 170(b)(1) Post, p. 550. (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 immediately preceding such distribution, or “(B) (i) such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous 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 Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) before the commencement 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 terminating its private foundation status, and “(iii) such organization establishes to the satisfaction of the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) 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 subparagraph (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 period, this part and chapter 42 shall not apply to such organization for any taxable year Post, p. 498. 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, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization. “(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) status 68A Stat. 163. 26 USC 501. of such foundation, or “(2) the value of the net assets of such foundation. “(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 26 USC 1, 2001, 2501. would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contributors 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 exempt 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 Post, p. 558. corresponding provisions 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 Post, p. 550. “(C) interest on the increases in tax determined 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 private 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 bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received 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 contributions and bequests received on or before 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 contributor on any date shall remain a substantial contributor for all subsequent periods. “(3) Regulations.— For purposes of this section, the determination as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations prescribed by the Secretary or his delegate. “(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 foundation, 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 assets 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 organization which culminates in its ceasing to be a private foundation. “(g) Abatement of Taxes.— The Secretary or his delegate may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if— “(1) the private foundation distributes all of its net assets to Post, p. 550. one or more organizations described 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 or his delegate, in such manner as the Secretary or his delegate 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 68A Stat. 163. 26 USC 501. 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 or his delegate receives certification from the appropriate State officer that such action has resulted in such preservation of assets. “SEC. 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 organization 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 Secretary or his delegate, in such manner as the Secretary or his delegate 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 or his delegate by regulations for giving notice under this subsection. For purposes of paragraph (2), the time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(b) Presumption That Organizations Are Private Foundations.— Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary 68A Stat. 163. 26 USC 501. or his delegate, at such time and in such manner as the Secretary or his delegate may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation. The time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(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 or his delegate 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 which normally maintain a regular faculty and curriculum and normally have a regularly enrolled body of pupils or students in attendance at the place where their educational activities are regularly carried on; and “(B) any other class of organizations with respect to which the Secretary or his delegate determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provisions of this title relating to private foundations. “(d) Disallowance of Certain Charitable, etc., Deductions.— “(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 deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— Post, pp. 549, 558, 560–562. 26 USC 170, 545, 556, 642, 2055, 2106, 2522. “(A) by any person after notification is made under section 507(a), or “(B) by a substantial contributor (as defined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year. “(2) Gift or bequest to taxable private foundation, section 4947 trust, etc.— No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 556(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 described in section Post, p. 517. 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)(B) and (C)), or “(B) to any organization in a period for which it is not 68A Stat. 163. 26 USC 501. treated as an organization described in section 501(c)(3) by reason of subsection (a). “(3) Exception.— Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax imposed by section 507(c) is abated by the Secretary or his delegate 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 Post, p. 502. foundation to tax under section 4942, and “(B) to prohibit the foundation from engaging in any act of Post, p. 500. Post, p. 507. 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 Post, p. 511. Post, p. 513. foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)). “(2) Special rules for existing private foundations.— In the case of any organization organized before January 1, 1970, paragraph (1) shall not apply— “(A) to any taxable year beginning before January 1, 1972, “(B) to any period after December 31, 1971, during the pendency of any judicial proceeding begun before January 1, 1972, by the private foundation which is necessary to reform, 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 “(C) to any period after the termination of any judicial proceeding described in subparagraph (B) during which its governing instrument or any other instrument does not permit it to meet the requirements of paragraph (1). “SEC. 509. PRIVATE FOUNDATION DEFINED. “(a) General Rule.— For purposes of this title, the term ‘private foundation’ means a domestic or foreign organization described in section 501(c)(3) other than— “(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); “(2) an organization which— “(A) normally receives more than one-third of its support in each taxable year from any combination of— “(i) gifts, grants, contributions, or membership fees, and “(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business Post, pp. 541, 542. (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section Post, p. 553. 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization’s support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental Post, p. 515. units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses Post, p. 550. (vii) and (viii)), and “(B) normally receives not more than one-third of its support in each taxable year from gross investment income (as defined in subsection (e)); “(3) an organization which— “(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), “(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and “(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and “(4) an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph 68A Stat. 163. 26 USC 501. (2) if it were an organization described in section 501(c)(3). “(b) Continuation of Private Foundation Status.— For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under section 507. “(c) Status of Organization After Termination of Private Foundation Status.— For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination. “(d) Definition of Support.— For purposes of this part and chapter 42, the term ‘support’ includes (but is not limited to)— Post, p. 498. “(1) gifts, grants, contributions, or membership fees, “(2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513), Post, pp. 541, 542. “(3) net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business, “(4) gross investment income (as defined in subsection (e)), “(5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and “(6) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge. Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit. “(e) Definition of Gross Investment Income.— For purposes of subsection (d), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the Post, p. 536. tax imposed by section 511.”

2. 1975

   Pub. L. 94–81 § 3(a) · 89 Stat. 417

   1. Amended · 26 U.S.C. § 509(a)(2)(B)

      Pub. L. 94–81 designated existing provisions as cl. (i)

   2. Added · 26 U.S.C. § 509(a)(2)(B)

      Pub. L. 94–81 added cl. (ii)

   Source evidence

   Code amendment note
   Subsec. (a)(2)(B). Pub. L. 94–81 designated existing provisions as cl. (i) and added cl. (ii).

   Enacted provision · exact public law section
   (a) Subparagraph (B) of section 509(a)(2) of the Internal Revenue 26 USC 509. Code of 1954 (relating to permitted extent of private support.) is amended to read as follows: “(B) normally receives not more than one-third of its support in each taxable year from the sum of— “(i) gross investment income (as defined in subsection (e)) and “(ii) the excess (if any) of the amount, of the unrelated 26 USC 512. 26 USC 511. business taxable income (as defined in section 512) over the amount of the tax imposed by sect ion 511;”.

3. 1978

   Pub. L. 95–345 § 2(a)(1) · 92 Stat. 481

   Inserted · 26 U.S.C. § 509(e)

   Pub. L. 95–345 inserted provision relating to payments with respect to securities loans

   Source evidence

   Code amendment note
   Subsec. (e). Pub. L. 95–345 inserted provision relating to payments with respect to securities loans.

   Enacted provision · exact public law section
   (1) Inclusion in gross investment income for purposes of defining private foundation.— Section 509(e) of the Internal Revenue Code of 1954 (relating to definition of gross investment 26 USC 509. income) is amended by inserting “payments with respect to securities loans (as defined in section 512(a)(5)),” after “dividends,”.

4. 2006

   Pub. L. 109–280 § 1241(a) · 120 Stat. 780

   Amended · 26 U.S.C. § 509(a)(3)(B)

   Pub. L. 109–280, § 1241(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and”. See Codification note above

   Source evidence

   Code amendment note
   Subsec. (a)(3)(B). Pub. L. 109–280, § 1241(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and”. See Codification note above.

   Enacted provision · exact public law section
   (a) Types of Supporting Organizations.— Subparagraph (B) of section 509(a)(3) 26 USC 509. is amended to read as follows: “(B) is— “(i) operated, supervised, or controlled by one or more organizations described in paragraph (1) or (2), “(ii) supervised or controlled in connection with one or more such organizations, or “(iii) operated in connection with one or more such organizations, and” .

   Effective date note
   Pub. L. 109–280, title XII, § 1221(c), Aug. 17, 2006, 120 Stat. 1089, provided that: “The amendments made by this section [amending this section and section 4940 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Aug. 17, 2006].” Pub. L. 109–280, title XII, § 1241(e), Aug. 17, 2006, 120 Stat. 1103, provided that:

5. 2006

   Pub. L. 109–280 § 1221(a)(2) · 120 Stat. 780

   Inserted · 26 U.S.C. § 509(e)

   Pub. L. 109–280, § 1221(a)(2), inserted at end “Such term shall also include income from sources similar to those in the preceding sentence.” See Codification note above

   Source evidence

   Code amendment note
   Subsec. (e). Pub. L. 109–280, § 1221(a)(2), inserted at end “Such term shall also include income from sources similar to those in the preceding sentence.” See Codification note above.

   Enacted provision · exact public law section
   (2) Conforming amendment.— Subsection (e) of section 509 (relating to gross investment income) is amended by adding at the end the following new sentence: “Such term shall also include income from sources similar to those in the preceding sentence.”.

   Effective date note
   Pub. L. 109–280, title XII, § 1221(c), Aug. 17, 2006, 120 Stat. 1089, provided that: “The amendments made by this section [amending this section and section 4940 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Aug. 17, 2006].” Pub. L. 109–280, title XII, § 1241(e), Aug. 17, 2006, 120 Stat. 1103, provided that:

6. 2006

   Pub. L. 109–280 § 1241(b) · 120 Stat. 780

   Added · 26 U.S.C. § 509(f)

   Pub. L. 109–280, § 1241(b), added subsec. (f). See Codification note above

   Source evidence

   Code amendment note
   Subsec. (f). Pub. L. 109–280, § 1241(b), added subsec. (f). See Codification note above.

   Enacted provision · exact public law section
   (b) Requirements for Supporting Organizations.— Section 509 (relating to private foundation defined) is amended by adding at the end the following new subsection: “(f) Requirements for Supporting Organizations.— “(1) Type iii supporting organizations.— For purposes of subsection (a)(3)(B)(iii), an organization shall not be considered to be operated in connection with any organization described in paragraph (1) or (2) of subsection (a) unless such organization meets the following requirements: “(A) Responsiveness.— For each taxable year beginning after the date of the enactment of this subsection, the organization provides to each supported organization such information as the Secretary may require to ensure that such organization is responsive to the needs or demands of the supported organization. “(B) Foreign supported organizations.— “(i) In general.— The organization is not operated in connection with any supported organization that is not organized in the United States. “(ii) Transition rule for existing organizations.— If the organization is operated in connection with an organization that is not organized in the United States on the date of the enactment of this subsection, clause (i) shall not apply until the first day of the third taxable year of the organization beginning after the date of the enactment of this subsection. “(2) Organizations controlled by donors.— “(A) In general.— For purposes of subsection (a)(3)(B), an organization shall not be considered to be— “(i) operated, supervised, or controlled by any organization described in paragraph (1) or (2) of subsection (a), or “(ii) operated in connection with any organization described in paragraph (1) or (2) of subsection (a), if such organization accepts any gift or contribution from any person described in subparagraph (B). “(B) Person described.— A person is described in this subparagraph if, with respect to a supported organization of an organization described in subparagraph (A), such person is— “(i) a person (other than an organization described in paragraph (1), (2), or (4) of section 509(a)) who directly or indirectly controls, either alone or together with persons described in clauses (ii) and (iii), the governing body of such supported organization, “(ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or “(iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting ‘persons described in clause (i) or (ii) of section 509(f)(2)(B)’ for ‘persons described in subparagraph (A) or (B) of paragraph (1)’ in subparagraph (A)(i) thereof). “(3) Supported organization.— For purposes of this subsection, the term ‘supported organization’ means, with respect to an organization described in subsection (a)(3), an organization described in paragraph (1) or (2) of subsection (a)— “(A) for whose benefit the organization described in subsection (a)(3) is organized and operated, or “(B) with respect to which the organization performs the functions of, or carries out the purposes of.” .

   Effective date note
   Pub. L. 109–280, title XII, § 1221(c), Aug. 17, 2006, 120 Stat. 1089, provided that: “The amendments made by this section [amending this section and section 4940 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Aug. 17, 2006].” Pub. L. 109–280, title XII, § 1241(e), Aug. 17, 2006, 120 Stat. 1103, provided that:

7 of 7 references resolved to an enrolled provision