
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC507]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                   Subchapter F--Exempt Organizations
 
                      PART II--PRIVATE FOUNDATIONS
 
Sec. 507. Termination of private foundation status


(a) General rule

    Except as provided in subsection (b), the status of any organization 
as a private foundation shall be terminated only if--
        (1) such organization notifies the Secretary (at such time and 
    in such manner as the Secretary may by regulations prescribe) of its 
    intent to accomplish such termination, or
        (2)(A) with respect to such organization, there have been either 
    willful repeated acts (or failures to act), or a willful and 
    flagrant act (or failure to act), giving rise to liability for tax 
    under chapter 42, and
        (B) the Secretary notifies such organization that, by reason of 
    subparagraph (A), such organization is liable for the tax imposed by 
    subsection (c),

and either such organization pays the tax imposed by subsection (c) (or 
any portion not abated under subsection (g)) or the entire amount of 
such tax is abated under subsection (g).

(b) Special rules

          (1) Transfer to, or operation as, public charity

        The status as a private foundation of any organization, with 
    respect to which there have not been either willful repeated acts 
    (or failures to act) or a willful and flagrant act (or failure to 
    act) giving rise to liability for tax under chapter 42, shall be 
    terminated if--
            (A) such organization distributes all of its net assets to 
        one or more organizations described in section 170(b)(1)(A) 
        (other than in clauses (vii) and (viii)) each of which has been 
        in existence and so described for a continuous period of at 
        least 60 calendar months immediately preceding such 
        distribution, or
            (B)(i) such organization meets the requirements of paragraph 
        (1), (2), or (3) of section 509(a) by the end of the 12-month 
        period beginning with its first taxable year which begins after 
        December 31, 1969, or for a continuous period of 60 calendar 
        months beginning with the first day of any taxable year which 
        begins after December 31, 1969,
            (ii) such organization notifies the Secretary (in such 
        manner as the Secretary may by regulations prescribe) before the 
        commencement of such 12-month or 60-month period (or before the 
        90th day after the day on which regulations first prescribed 
        under this subsection become final) that it is terminating its 
        private foundation status, and
            (iii) such organization establishes to the satisfaction of 
        the Secretary (in such manner as the Secretary may by 
        regulations prescribe) immediately after the expiration of such 
        12-month or 60-month period that such organization has complied 
        with clause (i).

    If an organization gives notice under subparagraph (B)(ii) of the 
    commencement of a 60-month period and such organization fails to 
    meet the requirements of paragraph (1), (2), or (3) of section 
    509(a) for the entire 60-month period, this part and chapter 42 
    shall not apply to such organization for any taxable year within 
    such 60-month period for which it does meet such requirements.

                     (2) Transferee foundations

        For purposes of this part, in the case of a transfer of assets 
    of any private foundation to another private foundation pursuant to 
    any liquidation, merger, redemption, recapitalization, or other 
    adjustment, organization, or reorganization, the transferee 
    foundation shall not be treated as a newly created organization.

(c) Imposition of tax

    There is hereby imposed on each organization which is referred to in 
subsection (a) a tax equal to the lower of--
        (1) the amount which the private foundation substantiates by 
    adequate records or other corroborating evidence as the aggregate 
    tax benefit resulting from the section 501(c)(3) status of such 
    foundation, or
        (2) the value of the net assets of such foundation.

(d) Aggregate tax benefit

                           (1) In general

        For purposes of subsection (c), the aggregate tax benefit 
    resulting from the section 501(c)(3) status of any private 
    foundation is the sum of--
            (A) the aggregate increases in tax under chapters 1, 11, and 
        12 (or the corresponding provisions of prior law) which would 
        have been imposed with respect to all substantial contributors 
        to the foundation if deductions for all contributions made by 
        such contributors to the foundation after February 28, 1913, had 
        been disallowed, and
            (B) the aggregate increases in tax under chapter 1 (or the 
        corresponding provisions of prior law) which would have been 
        imposed with respect to the income of the private foundation for 
        taxable years beginning after December 31, 1912, if (i) it had 
        not been exempt from tax under section 501(a) (or the 
        corresponding provisions of prior law), and (ii) in the case of 
        a trust, deductions under section 642(c) (or the corresponding 
        provisions of prior law) had been limited to 20 percent of the 
        taxable income of the trust (computed without the benefit of 
        section 642(c) but with the benefit of section 170(b)(1)(A)), 
        and
            (C) interest on the increases in tax determined under 
        subparagraphs (A) and (B) from the first date on which each such 
        increase would have been due and payable to the date on which 
        the organization ceases to be a private foundation.

                     (2) Substantial contributor

        (A) Definition

            For purposes of paragraph (1), the term ``substantial 
        contributor'' means any person who contributed or bequeathed an 
        aggregate amount of more than $5,000 to the private foundation, 
        if such amount is more than 2 percent of the total contributions 
        and bequests received by the foundation before the close of the 
        taxable year of the foundation in which the contribution or 
        bequest is received by the foundation from such person. In the 
        case of a trust, the term ``substantial contributor'' also means 
        the creator of the trust.

        (B) Special rules

            For purposes of subparagraph (A)--
                (i) each contribution or bequest shall be valued at fair 
            market value on the date it was received,
                (ii) in the case of a foundation which is in existence 
            on October 9, 1969, all contributions and bequests received 
            on or before such date shall be treated (except for purposes 
            of clause (i)) as if received on such date,
                (iii) an individual shall be treated as making all 
            contributions and bequests made by his spouse, and
                (iv) any person who is a substantial contributor on any 
            date shall remain a substantial contributor for all 
            subsequent periods.

        (C) Person ceases to be substantial contributor in certain cases

            (i) In general

                A person shall cease to be treated as a substantial 
            contributor with respect to any private foundation as of the 
            close of any taxable year of such foundation if--
                    (I) during the 10-year period ending at the close of 
                such taxable year such person (and all related persons) 
                have not made any contribution to such private 
                foundation,
                    (II) at no time during such 10-year period was such 
                person (or any related person) a foundation manager of 
                such private foundation, and
                    (III) the aggregate contributions made by such 
                person (and related persons) are determined by the 
                Secretary to be insignificant when compared to the 
                aggregate amount of contributions to such foundation by 
                one other person.

          For purposes of subclause (III), appreciation on contributions 
            while held by the foundation shall be taken into account.
            (ii) Related person

                For purposes of clause (i), the term ``related person'' 
            means, with respect to any person, any other person who 
            would be a disqualified person (within the meaning of 
            section 4946) by reason of his relationship to such person. 
            In the case of a contributor which is a corporation, the 
            term also includes any officer or director of such 
            corporation.

                           (3) Regulations

        For purposes of this section, the determination as to whether 
    and to what extent there would have been any increase in tax shall 
    be made in accordance with regulations prescribed by the Secretary.

(e) Value of assets

    For purposes of subsection (c), the value of the net assets shall be 
determined at whichever time such value is higher: (1) the first day on 
which action is taken by the organization which culminates in its 
ceasing to be a private foundation, or (2) the date on which it ceases 
to be a private foundation.

(f) Liability in case of transfers of assets from private foundation

    For purposes of determining liability for the tax imposed by 
subsection (c) in the case of assets transferred by the private 
foundation, such tax shall be deemed to have been imposed on the first 
day on which action is taken by the organization which culminates in its 
ceasing to be a private foundation.

(g) Abatement of taxes

    The Secretary may abate the unpaid portion of the assessment of any 
tax imposed by subsection (c), or any liability in respect thereof, if--
        (1) the private foundation distributes all of its net assets to 
    one or more organizations described in section 170(b)(1)(A) (other 
    than in clauses (vii) and (viii)) each of which has been in 
    existence and so described for a continuous period of at least 60 
    calendar months, or
        (2) following the notification prescribed in section 6104(c) to 
    the appropriate State officer, such State officer within one year 
    notifies the Secretary, in such manner as the Secretary may by 
    regulations prescribe, that corrective action has been initiated 
    pursuant to State law to insure that the assets of such private 
    foundation are preserved for such charitable or other purposes 
    specified in section 501(c)(3) as may be ordered or approved by a 
    court of competent jurisdiction, and upon completion of the 
    corrective action, the Secretary receives certification from the 
    appropriate State officer that such action has resulted in such 
    preservation of assets.

(Added Pub. L. 91-172, title I, Sec. 101(a), Dec. 30, 1969, 83 Stat. 
492; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 
1976, 90 Stat. 1834; Pub. L. 98-369, div. A, title III, Sec. 313(a), 
July 18, 1984, 98 Stat. 786.)


                               Amendments

    1984--Subsec. (d)(2)(C). Pub. L. 98-369 added subpar. (C).
    1976--Pub. L. 94-455 struck out ``or his delegate'' after 
``Secretary'' wherever appearing.


                    Effective Date of 1984 Amendment

    Section 313(b) of Pub. L. 98-369 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to taxable years 
beginning after December 31, 1984.''


                             Effective Date

    Section effective Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91-
172, set out as a note under section 4940 of this title.


Applicability to Determination of Status as Substantial Contributor for 
Purposes of Taxes on Self-Dealing of Contributions Made Prior to October 
                                 9, 1969

    Pub. L. 95-170, Sec. 3, Nov. 12, 1977, 91 Stat. 1352, as amended by 
Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: 
``In determining whether a person is a substantial contributor within 
the meaning of section 507(d)(2) of the Internal Revenue Code of 1986 
[formerly I.R.C. 1954] for purposes of applying section 4941 of such 
Code (relating to taxes on self-dealing), contributions made before 
October 9, 1969, which--
        ``(1) were made on account of or in lieu of payments required 
    under a lease in effect before such date, and
        ``(2) were coincident with or by reason of the reduction in the 
    required payments under such lease,
shall not be taken into account. For purposes of applying section 
507(d)(2)(B)(iv) of such Code, the preceding sentence shall be treated 
as having taken effect on January 1, 1970.''

                  Section Referred to in Other Sections

    This section is referred to in sections 508, 509, 4940, 4946, 4947, 
4948, 6104, 6214, 6501, 6503 of this title.
