§ 4940 — Excise Tax Based On Investment Income

(a) There is hereby imposed on each private foundation which is exempt from taxation under section 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to 1.39 percent of the net investment income of such foundation for the taxable year. (b) There is hereby imposed on each private foundation which is not exempt from taxation under section 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to— (1) the amount (if any) by which the sum of (A) the tax imposed under subsection (a) (computed as if such subsection applied to such private foundation for the taxable year), plus (B) the amount of the tax which would have been imposed under section 511 for the taxable year if such private foundation had been exempt from taxation under section 501(a), exceeds (2) the tax imposed under subtitle A on such private foundation for the taxable year. (1) For purposes of subsection (a), the net investment income is the amount by which (A) the sum of the gross investment income and the capital gain net income exceeds (B) the deductions allowed by paragraph (3). Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A. (2) For purposes of paragraph (1), the term “gross investment income” means the gross amount of income from interest, dividends, rents, payments with respect to securities loans (as defined in section 512(a)(5)), and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. Such term shall also include income from sources similar to those in the preceding sentence. (A) For purposes of paragraph (1), there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred for the production or collection of gross investment income or for the management, conservation, or maintenance of property held for the production of such income, determined with the modifications set forth in subparagraph (B). (B) For purposes of subparagraph (A)— (i) The deduction provided by section 167 shall be allowed, but only on the basis of the straight line method of depreciation. (ii) The deduction for depletion provided by section 611 shall be allowed, but such deduction shall be determined without regard to section 613 (relating to percentage depletion). (4) For purposes of paragraph (1) in determining capital gain net income— (A) There shall not be taken into account any gain or loss from the sale or other disposition of property to the extent that such gain or loss is taken into account for purposes of computing the tax imposed by section 511. (B) The basis for determining gain in the case of property held by the private foundation on December 31, 1969, and continuously thereafter to the date of its disposition shall be deemed to be not less than the fair market value of such property on December 31, 1969. (C) Losses from sales or other dispositions of property shall be allowed only to the extent of gains from such sales or other dispositions, and there shall be no capital loss carryovers or carrybacks. (D) Except to the extent provided by regulation, under rules similar to the rules of section 1031 (including the exception under subsection (a)(2) thereof), no gain or loss shall be taken into account with respect to any portion of property used for a period of not less than 1 year for a purpose or function constituting the basis of the private foundation’s exemption if the entire property is exchanged immediately following such period solely for property of like kind which is to be used primarily for a purpose or function constituting the basis for such foundation’s exemption. (5) For purposes of this section, net investment income shall be determined by applying section 103 (relating to State and local bonds) and section 265 (relating to expenses and interest relating to tax-exempt income). (1) No tax shall be imposed by this section on any private foundation which is an exempt operating foundation for the taxable year. (2) For purposes of this subsection, the term “exempt operating foundation” means, with respect to any taxable year, any private foundation if— (A) such foundation is an operating foundation (as defined in section 4942(j)(3)), (B) such foundation has been publicly supported for at least 10 taxable years, (C) at all times during the taxable year, the governing body of such foundation— (i) consists of individuals at least 75 percent of whom are not disqualified individuals, and (ii) is broadly representative of the general public, and (D) at no time during the taxable year does such foundation have an officer who is a disqualified individual. (3) For purposes of this subsection— (A) A private foundation is publicly supported for a taxable year if it meets the requirements of section 170(b)(1)(A)(vi) or 509(a)(2) for such taxable year. (B) The term “disqualified individual” means, with respect to any private foundation, an individual who is— (i) a substantial contributor to the foundation, (ii) an owner of more than 20 percent of— (I) the total combined voting power of a corporation, (II) the profits interest of a partnership, or (III) the beneficial interest of a trust or unincorporated enterprise, (iii) a member of the family of any individual described in clause (i) or (ii). (C) The term “substantial contributor” means a person who is described in section 507(d)(2). (D) The term “family” has the meaning given to such term by section 4946(d). (E) The rules of paragraphs (3) and (4) of section 4946(a) shall apply for purposes of subparagraph (B)(ii).