[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR53.4942(a)-1]

[Page 72-75]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 53_FOUNDATION AND SIMILAR EXCISE TAXES--Table of Contents
 
             Subpart C_Taxes on Failure To Distribute Income
 
Sec. 53.4942(a)-1  Taxes for failure to distribute income.

    Source: T.D. 7249, 38 FR 768, Jan. 4, 1973, unless otherwise noted.


    (a) Imposition of tax--(1) Initial tax. Except as provided in 
paragraph (b) of this section, section 4942(a) imposes an excise tax of 
15 percent on the undistributed income (as defined in paragraph (a) of 
Sec. 53.4942(a)-2) of a private foundation for any taxable year which

[[Page 73]]

has not been distributed before the first day of the second (or any 
succeeding) taxable year following such taxable year (if such first day 
falls within the taxable period as defined in paragraph (c)(1) of this 
section). For purposes of section 4942 and this section, the term 
distributed means distributed as qualifying distributions under section 
4942(g). See paragraph (d)(2) of Sec. 53.4942(a)-3 with respect to 
correction of deficient distributions for prior taxable years.
    (2) Additional tax. In any case in which an initial excise tax is 
imposed by section 4942(a) on the undistributed income of a private 
foundation for any taxable year, section 4942(b) imposes an additional 
excise tax on any portion of such income remaining undistributed at the 
close of the correction period (as defined in paragraph (c)(1) of this 
section). The tax imposed by section 4942(b) is equal to 100 percent of 
the amount remaining undistributed at the close of the taxable period.
    (3) Payment of tax. Payment of the excise taxes imposed by section 
4942 (a) or (b) is in addition to, and not in lieu of, making the 
distribution of such undistributed income as required by section 4942. 
See section 507(a)(2) and the regulations thereunder.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). M, a private foundation which uses the calendar year as 
its taxable year, has at the end of 1981, $50,000 of undistributed 
income (as defined in paragraph (a) of Sec. 53.4942 (a)-2) for 1981. As 
of January 1, 1983, $40,000 is still undistributed. On August 15, 1983, 
a notice of deficiency with respect to the excise taxes imposed by 
section 4942 (a) and (b) is mailed to M under section 6212 (a) and the 
taxable period ends. Thus, under these facts, an initial excise tax of 
$6,000 (15 percent of $40,000) is imposed upon M. An additional excise 
tax of $40,000 (100 percent of $40,000) is imposed by section 4942(b). 
Under section 4961(a), however, if the undistributed income is reduced 
to zero during the correction period, this latter tax will not be 
assessed, and if assessed, it will be abated, and if collected, it will 
be credited or refunded as an overpayment.
    Example (2). Assume the facts as stated in example (1), except that 
the notice of deficiency is mailed to M on September 7, 1984, and as of 
January 1, 1984, only $10,000 of the $50,000 of undistributed income 
with respect to 1981 is undistributed. Therefore, initial excise taxes 
of $6,000 (15 percent of $40,000, M's undistributed income from 1981, as 
of January 1, 1983) and $1,500 (15 percent of $10,000, M's undistributed 
income from 1981 as of January 1, 1984) are imposed by section 4942(a). 
If the $10,000 remains undistributed as of September 7, 1984, the end of 
the taxable period, an additional excise tax of $10,000 (100 percent of 
$10,000, M's undistributed income from 1981, as of September 7, 1984) is 
imposed by section 4942(b).

    (b) Exceptions--(1) In general. The initial excise tax imposed by 
section 4942(a) shall not apply to the undistributed income of a private 
foundation:
    (i) For any taxable year for which it is an operating foundation (as 
defined in section 4942(j)(3) and the regulations thereunder), or
    (ii) To the extent that the foundation failed to distribute any 
amount solely because of incorrect valuation of assets under paragraph 
(c)(4) of Sec. 53.4942(a)-2, if:
    (a) The failure to value the assets properly was not willful and was 
due to reasonable cause,
    (b) Such amount is distributed as qualifying distributions (within 
the meaning of paragraph (a) of Sec. 53.4942 (a)-3) by the foundation 
during the allowable distribution period (as defined in paragraph (c)(2) 
of this section),
    (c) The foundation notifies the Commissioner that such amount has 
been distributed (within the meaning of subdivision (ii)(b) of this 
subparagraph) to correct such failure, and
    (d) Such distribution is treated under paragraph (d)(2) of Sec. 
53.4942(a)-3 as made out of the undistributed income for the taxable 
year for which a tax would (except for this subdivision) have been 
imposed by section 4942(a).
    (2) Improper valuation. For purposes of subparagraph (1)(ii) of this 
paragraph, failure to value an asset properly shall be regarded as ``not 
willful'' and ``due to reasonable cause'' whenever, under all the facts 
and circumstances, the foundation can show that it has made all 
reasonable efforts in good faith to value such an asset in accordance 
with the provisions of paragraph (c)(4) of Sec. 53.4942(a)-2. If a 
foundation, after full disclosure of the factual situation, obtains a 
bona fide appraisal of the fair market value of an asset by a person 
qualified to make such an appraisal

[[Page 74]]

(whether or not such a person is a disqualified person with respect to 
the foundation), and such foundation relies upon such appraisal, then 
failure to value the asset properly shall ordinarily be regarded as 
``not willful'' and ``due to reasonable cause''. Notwithstanding the 
preceding sentence, the failure to obtain such a bona fide appraisal 
shall not, by itself, give rise to any inference that a foundation's 
failure to value an asset properly was willful or not due to reasonable 
cause.
    (3) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. In 1976 M, a private foundation which was established in 
1975 and which uses the calendar year as the taxable year, incorrectly 
values its assets under paragraph (c)(4) of Sec. 53.4942(a)-2 in a 
manner which is not willful and is due to reasonable cause. As a result 
of the incorrect valuation of assets, $20,000 which should be 
distributed with respect to 1976 is not distributed, and as of January 
1, 1978, such amount is still undistributed. On March 29, 1978, a notice 
of deficiency with respect to the excise taxes imposed by section 4942 
(a) and (b) is mailed to M under section 6212(a). On May 5, 1978 (within 
the allowable distribution period), M makes a qualifying distribution of 
$20,000 which is treated under paragraph (d)(2) of Sec. 53.4942(a)-3 as 
made out of M's undistributed income for 1976. M notifies the 
Commissioner of its action. Under the stated facts, an initial excise 
tax of $3,000 (15 percent of $20,000) would (except for the exception 
contained in subparagraph (1)(ii) of this paragraph) have been imposed 
by section 4942(a), but since all of the requirements of such 
subparagraph are satisfied no tax is imposed by section 4942(a).

    (c) Certain periods. For purposes of this section--
    (1) Taxable period. (i) The term ``taxable period'' means, with 
respect to the undistributed income of a private foundation for any 
taxable year, the period beginning with the first day of the taxable 
year and ending on the earlier of:
    (A) The date of mailing of a notice of deficiency under section 
6212(a) with respect to the initial excise tax imposed under section 
4942(a), or
    (B) The date on which the initial excise tax imposed under section 
4942(a) is assessed.

For example, assume M, a private foundation which uses the calendar year 
as the taxable year, has $15,000 of undistributed income for 1981. A 
notice of deficiency is mailed to M under section 6212(a) on June 1, 
1983. With respect to the undistributed income of M for 1981, the 
taxable period began on January 1, 1981, and ended on June 1, 1983.
    (ii) Where a notice of deficiency referred to in subdivision (i) of 
this subparagraph is not mailed because there is a waiver of the 
restrictions on assessment and collection of a deficiency, or because 
the deficiency is paid, the date of filing of the waiver or the date of 
such payment, respectively, shall be treated as the end of the taxable 
period.
    (2) Allowable distribution period. (i) The term ``allowable 
distribution period'' means the period beginning with the first day of 
the first taxable year following the taxable year in which the incorrect 
valuation of foundation assets (described in paragraph (b)(1)(ii) of 
this section) occurred and ending 90 days after the date of mailing of a 
notice of deficiency under section 6212(a) with respect to the initial 
excise tax imposed by section 4942(a). This period shall be extended by 
any period in which a deficiency cannot be assessed under section 
6213(a), and any other period which the Commissioner determines is 
reasonable and necessary to permit a distribution of undistributed 
income under section 4942.
    (ii) Where a notice of deficiency referred to in subdivision (i) of 
this subparagraph is not mailed because there is a waiver of the 
restrictions on assessment and collection of a deficiency, or because 
the deficiency is paid, the date of filing of the waiver or the date of 
such payment, respectively, shall be treated as the end of the allowable 
distribution period.
    (3) Cross reference. For rules relating to taxable events that are 
corrected within the correction period, defined in section 4963(e), see 
section 4961 (a) and the regulations thereunder.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). In 1975 M, a private foundation which uses the calendar 
year as the taxable year, made an error in valuing its assets

[[Page 75]]

which was not willful and was due to reasonable cause. The error caused 
M not to distribute $25,000 that should have been distributed with 
respect to 1975. On March 1, 1978, a notice of deficiency with respect 
to the excise taxes imposed by section 4942 (a) and (b) was mailed to M 
under section 6212(a). With respect to the undistributed income for 
1975, the taxable period is the period from January 1, 1975, through 
March 1, 1978, and the allowable distribution period is the period from 
January 1, 1976, through May 30, 1978 (90 days after the mailing of the 
notice of deficiency).
    Example (2). Assume the facts as stated in example (1), except that 
the Commissioner determines that it is reasonable and necessary to 
extend the period for distribution through June 15, 1978. Thus, the 
allowable distribution period is from January 1, 1976, through June 15, 
1978.

    (d) Effective date. Except as otherwise specifically provided, 
section 4942 and the regulations thereunder shall only apply with 
respect to taxable years beginning after December 31, 1969.

[T.D. 7256, 38 FR 3317, Feb. 7, 1973, as amended by T.D. 8084, 51 FR 
16302, May 2, 1986]