[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.503(e)-4]

[Page 60-61]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.503(e)-4  Disallowance of charitable deductions for certain 
gifts made before January 1, 1970.

    Paragraphs (a), (b), and (c) of this section shall apply only to 
gifts or contributions made before January 1, 1970, to an organization 
described in section 501(c)(3). For rules relating to the denial of 
deductions with respect to gifts or contributions made after December 
31, 1969, see Sec. 1.503(c)-1(d).
    (a) No gift or contribution which would otherwise be allowable as a 
charitable or other deductions under section 170, 642(c), or 545(b)(2) 
shall be allowed as a deduction if made to an organization described in 
section 501(c)(3) which at the time the gift or contribution is made is 
not exempt under section 501(a) by reason of the provisions of section 
503.

[[Page 61]]

    (b) If an organization which is described in section 501(c)(3) is 
not exempt because it engaged in a prohibited transaction involving a 
substantial part of its income of corpus with the purpose of diverting 
its income or corpus from its exempt purposes, and if the organization 
receives a gift or contribution during, or prior to, its taxable year in 
which such prohibited transaction occurred, then a deduction by the 
donor with respect to the gift or contribution shall not be disallowed 
under section 503(b) unless the donor (or any member of his family if 
the donor is an individual) is a party to such prohibited transaction. 
For the purpose of the preceding sentence family is defined in section 
267(c)(4) and includes brothers and sisters, whether by whole or half 
blood, spouse, ancestors, and lineal descendants. See the regulations 
under section 267(c).
    (c) The application of Sec. 1.503(e)-4 may be illustrated by the 
following example:

    Example. In 1954, Corporation M, which files its income tax returns 
on the calendar year basis, creates a foundation purportedly for 
charitable purposes and deducts from its gross income for that year the 
amount of the gift to the foundation. Corporation M makes additional 
gifts to this foundation in 1955, 1956, and 1957, and takes charitable 
deductions for such years. B, an individual, also contributes to the 
foundation in 1955, 1956, and 1957, and takes charitable deductions for 
such years. In 1955, the foundation commences purposely to divert its 
corpus to the benefit of Corporation M, and a substantial amount of such 
corpus is so diverted by the close of the taxable year 1956. For 1955 
and subsequent taxable years, the exemption allowed the foundation as an 
organization described in section 501(c)(3) is denied by reason of the 
provisions of section 503(a). Both Corporation M and individual B would 
be disallowed any deduction for the contributions made during 1957 to 
the foundation. Moreover, the charitable deductions taken by Corporation 
M for contributions to the foundation in the years 1955 and 1956 would 
also be disallowed since Corporation M was a party to the prohibited 
transactions. If the facts and surrounding cuircumstances indicate that 
the contribution in 1954 by Corporation M was for the purpose of the 
prohibited transaction, then the charitable deduction for the year 1954 
shall also be disallowed with respect to Corporation M, since the 
prohibited transaction would then have commenced with the making of such 
contribution and the exemption allowed the foundation would then be 
denied for 1954 by reason of the provisions of Sec. 1.503(e)-4. B's 
deductions for his contributions for the years 1955 and 1956 will not be 
disallowed since he was not a party to the prohibited transaction.

[T.D. 7428, 41 FR 34626, Aug. 16, 1976]