Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in section 509(a)).
In addition, certain nonexempt charitable trusts are also treated as private foundations. Organizations that fall into the excluded categories are institutions such as hospitals or universities and those that generally have broad public support or actively function in a supporting relationship to such organizations.
Even if an organization falls within one of the categories excluded from the definition of private foundation, it will be presumed to be a private foundation, with some exceptions, unless it gives timely notice to the IRS that it is not a private foundation. If an organization is required to file the notice, it generally must do so within 27 months from the end of the month in which it was organized. Generally, organizations use Form 1023, Application for Recognition of Exemption, for this purpose.
All private foundations, including nonexempt trusts treated as private foundations, must annually file Form 990-PF, Return of Private Foundation. Forms 990-PF and 1023 (where applicable) are subject to public disclosure.
There is an excise tax on the net investment income of most domestic private foundations. Certain foreign private foundations are also subject to a tax on gross investment income derived from United States sources. See the Form 990-PF for more information. This tax must be reported on Form 990-PF, and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year is $500 or more.
In addition, there are several restrictions and requirements on private foundations, including:
- restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons;
- requirements that the foundation annually distribute income for charitable purposes;
- limits on their holdings in private businesses;
- provisions that investments must not jeopardize the carrying out of exempt purposes; and
- provisions to assure that expenditures further exempt purposes.
Certain nonexempt trusts that have charitable interests as well as private interests may also be subject to some of the private foundation tax provisions. These trusts must annually file Form 5227,Split-Interest Trust Information Return. See Form 5227 and Form 5227 instructions for more information.
Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. IRC Section 4941 provides more on how self-dealing rules apply to private foundation dealings with disqualified person financial institutions and their financial products and services.
A private foundation cannot be tax exempt nor will contributions to it be deductible as charitable contributions unless its governing instrument contains special provisions in addition to those that apply to all organizations described in 501(c)(3). See Publication 557, Tax-Exempt Status for Your Organization, from the IRS for examples of these provisions. In most cases, this requirement may be satisfied by reference to state law. The IRS has published a list of states with this type of law. See Revenue Ruling 75-38, 1975-1 C.B. 161.