[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: 26CFR1.508-3]

[Page 101-105]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.508-3  Governing instruments.

    (a) General rule. A private foundation shall not be exempt from 
taxation under section 501(a) for a taxable year unless by the end of 
such taxable year its governing instrument includes provisions the 
effects of which are:
    (1) To require distributions at such times and in such manner as not 
to subject the foundation to tax under section 4942, and
    (2) To prohibit the foundation from engaging in any act of 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 foundation to tax under 
section 4944, and from making any taxable expenditures (as defined in 
section 4945(d)).
    (b) Effect and nature of governing instrument--(1) In general. 
Except as provided in paragraph (d) of this section, the provisions of a 
foundation's governing instrument must require or prohibit, as the case 
may be, the foundation to act or refrain from acting so that the 
foundation, and any foundation managers or other disqualified persons 
with respect thereto, shall not be liable for any of the taxes imposed 
by sections 4941, 4942, 4943, 4944, and 4945 of the Code or, in the case 
of a split-interest trust described in section 4947(a)(2), any of the 
taxes imposed by those sections of chapter 42 made applicable under 
section 4947. Specific reference to these sections of the Code will 
generally be required to be included in the governing instrument, unless 
equivalent language is used which is deemed by the Commissioner to have 
the same full force and effect. However, a governing instrument which 
contains only language sufficient to satisfy the requirements of the 
organizational test under Sec. 1.501(c)(3)-1(b) will not be considered 
as meeting the requirements of this subparagraph, regardless of the 
interpretation placed on such language as a matter of law by a State 
court in a particular jurisdiction, unless the requirements of paragraph 
(d) of this section are satisfied.
    (2) Corpus. A governing instrument does not meet the requirements of 
paragraph (a)(1) of this section if it expressly prohibits the 
distribution of capital or corpus.
    (3) Savings provisions. For purposes of sections 508(d)(2) (A) and 
(e), a governing instrument need not include any provision which is 
inconsistent with section 101(l) (2), (3), (4), or (5) of the Tax Reform 
Act of 1969 (83 Stat. 533), as amended by sections 1301 and 1309 of the 
Tax Reform Act of 1976 (90 Stat. 1713, 1729), with respect to the 
organization. Accordingly, a governing instrument complying with the 
requirements of subparagraph (1) of this paragraph may incorporate any 
savings provision contained in section 101(l) (2), (3), (4), or (5) of 
the Tax Reform Act of 1969, as amended by sections 1301 and 1309 of the 
Tax Reform Act of 1976, as a specific exception to the general 
provisions of paragraph (a) of this section. In addition, in the absence 
of any express provisions to the contrary, the exceptions contained in 
such savings provisions will generally be regarded as contained in a 
governing instrument meeting the requirements of subparagraph (1) of 
this paragraph.
    (4) Excess holdings. For purposes of paragraph (a)(2) of this 
section, the prohibition against retaining any excess business holdings 
(as defined in section 4943(c)) shall be deemed only to prohibit the 
foundation from retaining any excess business holdings when such 
holdings would subject the foundation to tax under section 4943(a).
    (5) Revoked ruling on status. In the case of an organization which:
    (i) Has been classified as an organization described in section 
509(a) (1), (2), (3), or (4), and
    (ii) Subsequently receives a ruling or determination letter stating 
that it is no longer described in section 509(a) (1), (2), (3), or (4), 
but is a private foundation within the meaning of section 509,

such organization shall have 1 year from the date of receipt of such 
ruling or determination letter, or the final

[[Page 102]]

ruling or determination letter if a protest is filed to an earlier one, 
to meet the requirements of section 508(e). Section 508(d)(2)(A) shall 
not be applicable with respect to gifts and bequests made during this 1-
year period if such requirements are met within the 1-year period.
    (6) Judicial proceeding. For purposes of paragraphs (a), (b)(5), 
(d)(2), and (e)(3) of this section, an organization shall be deemed to 
have met the requirements of section 508(e) within a year, if a judicial 
proceeding which is necessary to reform its governing instrument or 
other instrument is instituted within the year and within a reasonable 
time the organization, in fact, meets the requirements of section 
508(e). For purposes only of paragraphs (b)(5), (d)(2), and (e)(3) of 
this section, if an organization organized before January 1, 1970, 
institutes such a judicial proceeding within such 1-year period, section 
508 (e)(2)(C) shall be applied as if such proceeding had been instituted 
prior to January 1, 1972.
    (c) Meaning of governing instrument. For purposes of section 508(e), 
the term governing instrument shall have the same meaning as the term 
articles of organization under Sec. 1.501(c)(3)-1(b)(2). The bylaws of 
an organization shall not constitute its governing instrument for 
purposes of section 508(e).
    (d) Effect of State law--(1) In general. A private foundation's 
governing instrument shall be deemed to conform with the requirements of 
paragraph (a) of this section if valid provisions of State law have been 
enacted which:
    (i) Require it to act or refrain from acting so as not to subject 
the foundation to the taxes imposed by section 4941 (relating to taxes 
on self-dealing), 4942 (relating to taxes on failure to distribute 
income), 4943 (relating to taxes on excess business holdings), 4944 
(relating to taxes on investments which jeopardize charitable purpose), 
and 4945 (relating to taxable expenditures); or
    (ii) Treat the required provisions as contained in the foundation's 
governing instrument.
    (2) Validity. (i) Any provision of State law described in 
subparagraph (1) of this paragraph shall be presumed valid as enacted, 
and in the absence of State provisions to the contrary, to apply with 
respect to any foundation that does not specifically disclaim coverage 
under State law (either by notification to the appropriate State 
official or by commencement of judicial proceedings) except as provided 
in subdivisions (ii) and (iii) of this subparagraph.
    (ii) If such provision is declared invalid or inapplicable with 
respect to a class of foundations by the highest appellate court of the 
State or by the Supreme Court of the United States, the foundations 
covered by the determination must meet the requirements of section 
508(e) within 1 year from the date on which the time for perfecting an 
application for review by the Supreme Court expires. If such application 
is filed, the requirements of section 508(e) must be met within a year 
from the date on which the Supreme Court disposes of the case, whether 
by denial of the application for review or decision on the merits.
    (iii) In addition, if such provision of State law is declared 
invalid or inapplicable with respect to a class of foundations by any 
court of competent jurisdiction which decision is not reviewed by a 
court referred to in subdivision (ii) of this subparagraph, and the 
Commissioner makes notice to the general public (such as by publication 
in the Internal Revenue Bulletin) that such provision has been so 
declared invalid or inapplicable, then all foundations in such State 
must meet the requirements of section 508(e), without reliance upon such 
statute to the extent declared invalid or inapplicable by such decision, 
within 1 year from the date such notice is made public.
    (iv) This subparagraph shall not apply to any foundation that is 
subject to a final judgment entered by a court of competent 
jurisdiction, holding the law invalid or inapplicable with respect to 
such foundation. See paragraph (b)(6) of this section for the effect of 
certain judicial proceedings that are brought within 1 year.
    (3) Conflicting instrument. For taxable years beginning after March 
22, 1973 in order for a private foundation or trust described in section 
4947(a)(2) to receive the benefit of coverage under any State statute 
which makes applicable the requirements of section 508(e)(1) (A) and 
(B), where the statute by its

[[Page 103]]

terms does not apply to a governing instrument which contains a 
mandatory direction conflicting with any of such requirements, such 
organization must indicate on its annual return required to be filed 
under section 6033 (or section 6012 in the case of a trust described in 
section 4947(a)) that its governing instrument contains no mandatory 
directions which conflict with the requirements of section 508(e)(1) (A) 
or (B), as incorporated by the State statute. General language in a 
governing instrument empowering the trustee to make investments without 
being limited to those investments authorized by law will not be 
regarded as a mandatory conflicting direction.
    (4) Exclusion from statute. (i) For any taxable year beginning after 
March 22, 1973 in the case of a private foundation or trust described in 
section 4947(a)(2) subject to a State statute which makes applicable the 
requirements of section 508(e)(1) (A) and (B) to the governing 
instruments of such organizations, other than those which take action to 
be excluded therefrom (such as by filing a notice of exclusion or by 
instituting appropriate judicial proceedings), an organization will 
receive the benefit of such State statute only if it indicates on its 
annual return required to be filed under section 6033 (or section 6012 
in the case of a trust described in section 4947(a)) that it has not so 
taken action to be excluded.
    (ii) This paragraph permits certain organizations that are subject 
to the provisions of such a State law, to avoid changing their governing 
instruments in order to meet the requirements of section 508(e)(1). 
Since an organization which avoids the application of a provision or 
provisions of State law, such as by filing a notice of exclusion, is not 
entitled to the benefits of this paragraph, such an organization must 
meet the requirements of section 508(e)(1) without regard to this 
paragraph and except as provided in section 508(e)(2)(C) or paragraph 
(g)(1)(iii) of this section must change its governing instrument to the 
extent inconsistent with section 508(e)(1).
    (5) Treatment of prevailing conflicting clause. If provisions of 
State law are inapplicable to a clause in a governing instrument which 
is contrary to the provisions of section 508(e)(1), the requirements of 
section 508(e)(2)(C) and paragraph (g)(1)(iii) of this section are not 
satisfied by a provision of State law which purports to eliminate the 
need for litigation under such circumstances. Therefore, except as 
otherwise provided in this section unless the governing instrument is 
changed or litigation is commenced pursuant to section 508(e)(2)(B) by 
an organization organized before January 1, 1970, or pursuant to 
paragraph (g)(1)(ii) of this section, to amend the nonconforming 
provision to meet the requirements of section 508(e)(1) (A) and (B), 
then pursuant to section 508(e), such organization will not be exempt 
from taxation.
    (6) Retroactive application to grants or bequests. If valid 
provisions of such a State law apply retroactively to a taxable year 
within which an organization has received a grant or request, section 
508(d)(2)(A) shall not apply so as to disallow such grant or bequest, 
but only if such valid provisions of State law are enacted within 2 
years of such grant or bequest.
    (e) Effect of section 508(e) upon section 4947 trusts--(1) Section 
4947(a)(1) trusts. A charitable trust described in section 4947(a)(1) 
(unless also described in a paragraph of section 509(a)) is subject to 
all the provisions of paragraph (a) of this section.
    (2) Section 4947(a)(2) trusts. A split-interest trust described in 
section 4947(a)(2), as long as it is so described, is subject to the 
provisions of paragraph (a)(2) of this section, except to the extent 
that section 4947 makes any such provisions inapplicable to certain 
trusts and certain amounts in trust. The governing instrument of a trust 
described in section 4947(a)(2) may except amounts described in section 
4947(a)(2) (A), (B), and (C) from the requirements of paragraph (a)(2) 
of this section. In the case of a trust having amounts transferred to it 
both before May 27, 1969, and after May 26, 1969, its governing 
instrument may except from the provisions of paragraph (a)(2) of this 
section only those segregated amounts excluded from the application of 
section 4947(a)(2) by reason of section 4947(a)(2)(C) and the 
regulations thereunder. Also, the governing instrument of such a trust 
may exclude the

[[Page 104]]

application of sections 4943 and 4944 for any period during which such 
trust is described in section 4947(b)(3) (A) or (B). See Sec. 53.4947-
1(c) of this chapter for rules relating to the applicability of section 
4947 to split-interest trusts and Sec. 1.508-2(b)(1) (vi) and (vii) for 
rules relating to the deductibility of grants or bequests to such 
trusts.
    (3) A section 4947(a)(2) trust becoming a section 4947(a)(1) trust. 
If the governing instrument of a trust described in section 4947(a)(2) 
meets the applicable requirements of paragraph (a)(2) of this section 
and such trust ceases to be so described and becomes instead a trust 
described in section 4947(a)(1), then such governing instrument must 
meet, prior to the end of 12 months from the date such trust first 
becomes described in section 4947(a)(1) (except as otherwise provided in 
this section) all the requirements of paragraph (a) of this section in 
order to comply with section 508(e).
    (f) Special rules for existing private foundations. (1) Pursuant to 
section 508(e)(2), section 508(e)(1) and paragraph (a) of this section 
shall not apply in the case of any organization whose governing 
instrument was executed before January 1, 1970:
    (i) To any taxable year beginning before January 1, 1972;
    (ii) 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 section 508(e)(1); and
    (iii) To any period after the termination of any judicial proceeding 
described in subdivision (ii) of this subparagraph during which its 
governing instrument or any other instrument does not permit it to meet 
the requirements of section 508(e)(1).
    (2) For purposes of subparagraph (1) of this paragraph, and Sec. 
1.508-2(b)(1)(vi)(a), a governing instrument will not be treated as 
executed before the applicable date, if, after such date the dispositive 
provisions of the instrument are amended (determined under rules similar 
to the rules set forth in Sec. 20.2055-2(e)(4) of this chapter).
    (3) For purposes of subparagraph (1) (ii) and (iii) of this 
paragraph, a private foundation will be treated as meeting the 
requirements of section 508(e)(2) (B) and (C) if it has commenced a 
necessary and timely proceeding in an appropriate court of original 
jurisdiction and such court has ruled that the foundation's governing 
instrument or any other instrument does not permit it to meet the 
requirements of section 508(e)(1). Such foundation is not required to 
commence proceedings in any court of appellate jurisdiction in order to 
comply with section 508(e)(2)(C). See also Sec. 1.508-2(b)(2).
    (g) Extension of time for compliance with section 508(e). (1) Except 
as provided in subparagraph (2) of this paragraph, section 508(e)(1) 
shall not apply to any private foundation (regardless of when organized) 
with respect:
    (i) To any taxable year beginning before the transitional date,
    (ii) To any period on or after the transitional date during the 
pendency of any judicial proceeding begun before the transitional date 
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 section 508(e)(1), 
and
    (iii) To any period after the termination of any judicial proceeding 
described in subdivision (ii) of this subparagraph during which its 
governing instrument or any other instrument does not permit it to meet 
the requirements of section 508(e)(1).
    (2) Subparagraph (1) of this paragraph shall apply only to gifts or 
bequests referred to in section 508(d)(2)(A) that are made before the 
transitional date.
    (3) For purposes of this paragraph the term transitional dates means 
the earlier of the following dates:
    (i) In the case of a medical research organization, May 21, 1976 or 
in the case of a community trust February 10, 1977, or

[[Page 105]]

    (ii) The 91st day after the date an organization receives a final 
ruling or determination letter that it is a private foundation under 
section 509(a).

[T.D. 7232, 37 FR 28292, Dec. 22, 1972, as amended by T.D. 7440, 41 FR 
50656, Nov. 17, 1976; T.D. 7678, 45 FR 12415, Feb. 26, 1980]