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					                                                                                       Title 26—Internal
                                                                                            Revenue
                                                                                                    (This book contains parts 50 to 299)




                                                                                                                                                                         Part

                                                                    CHAPTER I—Internal    Revenue Service, Department of the
                                                                        Treasury (Continued) .........................................................                    50
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                                                                        CHAPTER I—INTERNAL REVENUE SERVICE,
                                                                      DEPARTMENT OF THE TREASURY (CONTINUED)
                                                                                                                    (Parts 50 to 299)




                                                                      EDITORIAL NOTE: IRS published a document at 45 FR 6088, Jan. 25, 1980, deleting statutory
                                                                    sections from their regulations. In Chapter I cross references to the deleted material have
                                                                    been changed to the corresponding sections of the IRS Code of 1954 or to the appropriate regu-
                                                                    lations sections. When either such change produced a redundancy, the cross reference has
                                                                    been deleted. For further explanation, see 45 FR 20795, March 31, 1980.

                                                                            SUBCHAPTER D—MISCELLANEOUS EXCISE TAXES (CONTINUED)

                                                                    Part                                                                                                  Page
                                                                    50              Regulations relating to the tax imposed with re-
                                                                                      spect to certain hydraulic mining ........................                            5
                                                                    52              Environmental taxes ...............................................                     7
                                                                    53              Foundation and similar excise taxes .......................                            41
                                                                    54              Pension excise taxes ................................................                 248
                                                                    55              Excise tax on real estate investment trusts and
                                                                                      regulated investment companies .........................                            435
                                                                    56              Public charity excise taxes .....................................                     441
                                                                    141             Temporary excise tax regulations under the Em-
                                                                                      ployee Retirement Income Security Act of 1974 ...                                   480
                                                                    143             Temporary excise tax regulations under the Tax
                                                                                      Reform Act of 1969 ................................................                 480
                                                                    145             Temporary excise tax regulations under the High-
                                                                                      way Revenue Act of 1982 (Pub. L. 97–424) ..............                             482
                                                                    148             Certain excise tax matters under the Excise Tax
                                                                                      Technical Changes Act of 1958 ..............................                        492
                                                                    151–155         [Reserved]
                                                                    156             Excise tax on greenmail ..........................................                    494
                                                                    157             Excise tax on structured settlement factoring
                                                                                      transactions .........................................................              500
                                                                    158–169         [Reserved]
                                                                                                        SUBCHAPTER E [RESERVED]

                                                                    170–299         [Reserved]
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                                                                    SUPPLEMENTARY PUBLICATIONS: Internal Revenue Service Looseleaf Regulations System.

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                                                                                                                                            26 CFR Ch. I (4–1–09 Edition)

                                                                     Additional supplementary publications are issued covering Alcohol, Tobacco and Firearms
                                                                    Regulations, and Regulations Under Tax Conventions.
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                                                                                 SUBCHAPTER D—MISCELLANEOUS EXCISE TAXES
                                                                                              (CONTINUED)

                                                                    PART 50—REGULATIONS RELATING                                 SEC. 13. That in case a majority of the
                                                                                                                               members of said Commission, within thirty
                                                                      TO THE TAX IMPOSED WITH RE-                              days after the time so fixed, concur in the
                                                                      SPECT TO CERTAIN HYDRAULIC                               decision in favor of the petitioner or peti-
                                                                      MINING                                                   tioners, the said Commission shall thereupon
                                                                                                                               make an order directing the methods and
                                                                                                                               specifying in detail the manner in which op-
                                                                    Sec.
                                                                                                                               erations shall proceed in such mine or mines;
                                                                    50.1 Introduction.                                         * * *
                                                                    50.2 Scope of regulations.                                   SEC. 23. Upon the construction by the said
                                                                    50.3 General definitions and use of terms.                 commission of dams or other works for the
                                                                    50.4 Rates of tax.                                         detention of debris from hydraulic mines and
                                                                    50.5 Liability for the tax.                                the issuing of the order provided for by this
                                                                    50.6 Ascertainment of quantity mined.                      Act to any individual, company, or corpora-
                                                                    50.7 Returns.                                              tion to work any mine or mines by hydraulic
                                                                    50.8 Due date and place for filing returns                 process, the individual, company, or corpora-
                                                                        and paying tax.                                        tion operating thereunder working any mine
                                                                                                                               or mines by hydraulic process, the debris
                                                                      AUTHORITY: Sec. 23, 27, Stat. 510, as amend-             from which flows into or is in whole or in
                                                                    ed; 33 U.S.C. 683.                                         part restrained by such dams or other works
                                                                                                                               erected by said commission, shall pay for
                                                                     SOURCE: T.D. 6419, 24 FR 8546, Oct. 22, 1959,
                                                                                                                               each cubic yard mined from the natural bank
                                                                    unless otherwise noted.
                                                                                                                               a tax equal to the total capital cost of the
                                                                                                                               dam, reservoir, and rights of way divided by
                                                                    § 50.1      Introduction.                                  the total capacity of the reservoir for the re-
                                                                      The Act entitled ‘‘An Act to create                      straint of debris, as determined in each case
                                                                    the California Debris Commission and                       by the California Debris Commission, which
                                                                    regulate hydraulic mining in the State                     tax shall be paid annually on a date fixed by
                                                                                                                               said commission and in accordance with reg-
                                                                    of California’’, approved March 1, 1893,                   ulations to be adopted by the Secretary of
                                                                    as amended, 27 Stat. 507; 34 Stat. 1001;                   the Treasury, and the Treasurer of the
                                                                    48 Stat. 1118; 52 Stat. 1040; 61 Stat. 501;                United States is hereby authorized to receive
                                                                    33 U.S.C. 661–687, provides in part as                     the same. * * * The Secretary of the Army is
                                                                    follows:                                                   authorized to enter into contracts to supply
                                                                                                                               storage for water and use of outlet facilities
                                                                       That a commission is hereby created, to be              from debris storage reservoirs, for domestic
                                                                    known as the California Debris Commission,                 and irrigation purposes and power develop-
                                                                    consisting of three members. * * *                         ment upon such conditions of delivery, use,
                                                                       SEC. 3. That the jurisdiction of said com-              and payment as he may approve: Provided,
                                                                    mission, insofar as the same affects mining                That the moneys received from such con-
                                                                    carried on by the hydraulic process, shall ex-             tracts shall be deposited to the credit of the
                                                                    tend to all such mining in the territory                   reservoir project from which the water is
                                                                    drained by the Sacramento and San Joaquin                  supplied, and the total capital cost of said
                                                                    river systems in the State of California. * * *            reservoir, which is to be repaid by tax on
                                                                       SEC. 8. That for the purposes of this act               mining operations as herein provided, shall
                                                                    ‘‘hydraulic mining’’ and ‘‘mining by the hy-               be reduced in the amount so received.
                                                                    draulic process,’’ are hereby declared to have
                                                                    the meaning and application given to said                  § 50.2 Scope of regulations.
                                                                    terms in said State.                                          (a) In general. The regulations in this
                                                                       SEC. 9. That the individual proprietor or               part relate to the tax imposed with re-
                                                                    proprietors, or in the case of a corporation
                                                                    its manager or agent appointed for that pur-
                                                                                                                               spect to hydraulic mining, the debris
                                                                    pose, owning mining ground in the territory                from which flows into or is in whole or
                                                                    in the State of California mentioned in sec-               in part restrained by dams or other
                                                                    tion three hereof, which it is desired to work             works erected for the detention of de-
                                                                    by the hydraulic process, must file with said              bris by the California Debris Commis-
                                                                    commission a verified petition, setting forth              sion in the area drained by the Sac-
                                                                    such facts as will comply with law and the                 ramento and San Joaquin river sys-
                                                                    rules prescribed by said commission.                       tems in the State of California. The
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                                                                                                                               regulations have application to taxable
                                                                           *         *         *         *          *          years beginning after August 31, 1959.

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                                                                    § 50.3                                                                  26 CFR Ch. I (4–1–09 Edition)

                                                                    For definition of the term taxable year,                   § 50.5 Liability for the tax.
                                                                    see § 50.3(g).                                                Liability for tax attaches to any per-
                                                                      (b) Extent to which the regulations in                   son engaged at any time during the
                                                                    this part supersede prior regulations. The                 taxable year in hydraulic mining in the
                                                                    regulations in this part, with respect                     area identified in paragraph (a) of § 50.2,
                                                                    to the subject matter within the scope                     if the debris from such mining oper-
                                                                    thereof, supersede Treasury Decision                       ations is in whole or in part restrained
                                                                    4952 (26 CFR (1939) part 317).                             by any of the debris dams or works
                                                                                                                               constructed by the California Debris
                                                                    § 50.3 General definitions and use of                      Commission.
                                                                         terms.
                                                                      As used in the regulations in this                       § 50.6 Ascertainment     of    quantity
                                                                                                                                    mined.
                                                                    part:
                                                                      (a) The term Act means ‘‘An Act to                          Each person engaged in hydraulic
                                                                    create the California Debris Commis-                       mining operations within the scope of
                                                                    sion and regulate hydraulic mining in                      the tax shall make or cause to be made
                                                                    the State of California’’ approved                         appropriate surveys of the premises on
                                                                    March 1, 1893, as amended, 27 Stat. 507;                   which such hydraulic mining oper-
                                                                    34 Stat. 1001; 48 Stat. 1118; 52 Stat. 1040;               ations are conducted for the purpose of
                                                                                                                               determining the cubic yardage mined
                                                                    61 Stat. 501; 33 U.S.C. 661–687.
                                                                                                                               from the natural bank. Such surveys
                                                                      (b) The term person means an indi-                       shall be made at the beginning and end
                                                                    vidual, a trust, estate, partnership,                      of hydraulic mining operations in each
                                                                    company, or corporation.                                   taxable year by a licensed engineer or
                                                                      (c) The term Secretary means the Sec-                    other qualified agency having prior ap-
                                                                    retary of the Treasury.                                    proval of the California Debris Com-
                                                                      (d) The term Commissioner means the                      mission, and shall conform to require-
                                                                    Commissioner of Internal Revenue.                          ments prescribed by the California De-
                                                                      (e) The term district director means                     bris Commission.
                                                                    the district director of internal rev-
                                                                    enue.                                                      § 50.7 Returns.
                                                                      (f) The terms hydraulic mining and                          (a) Form of return. Every person liable
                                                                    mining by the hydraulic process shall                      for tax for any taxable year shall pre-
                                                                    have the meaning and application                           pare for such year a return on Form 1
                                                                    given said terms in the State of Cali-                     (California Debris) in accordance with
                                                                    fornia.                                                    the instructions thereon and in accord-
                                                                      (g) The term taxable year means the                      ance with the regulations in this part.
                                                                    twelve-month period ending on August                          (b) Content of return. The return shall
                                                                    31 of each year for which the tax im-                      show:
                                                                    posed by the Act is payable.                                  (1) The identity of the particular dam
                                                                                                                               or other works restraining debris from
                                                                    § 50.4      Rates of tax.                                  the mine;
                                                                                                                                  (2) The name and location of the
                                                                      (a) Determination of rate. Under the                     mine;
                                                                    Act the California Debris Commission                          (3) The name and address of the per-
                                                                    will determine and prescribe with re-                      son to whom the California Debris
                                                                    spect to each debris dam or other                          Commission has issued a license to op-
                                                                    works the rate of tax payable in the                       erate the mine;
                                                                    area served by the particular debris                          (4) The number and date of the li-
                                                                    dam or works. The Secretary of the                         cense;
                                                                    Army will notify the Secretary of the                         (5) The name and address of the
                                                                    Treasury of the rate of tax fixed with                     owner of the mine;
                                                                    respect to each debris dam or works as                        (6) The dates on which hydraulic
                                                                    such rate becomes known.                                   mining operations began and ended
                                                                      (b) Measure of tax. The tax is payable                   during the taxable year for which the
                                                                    annually on the basis of the number of                     return is made;
                                                                    cubic yards mined from the natural                            (7) The number of cubic yards mined
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                                                                    bank by the hydraulic process during                       by the hydraulic process at the mine
                                                                    the taxable year.                                          during the taxable year;

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4681–1

                                                                      (8) The rate of tax per cubic yard de-                   and deposits of taxes imposed by chap-
                                                                    termined by the California Debris Com-                     ter 38.
                                                                    mission applicable to the particular
                                                                                                                               [T.D. 8442, 57 FR 48186, Oct. 22, 1992]
                                                                    mine; and
                                                                      (9) The amount of tax due and pay-                       § 52.4681–1 Taxes imposed with re-
                                                                    able (cubic yards mined multiplied by                           spect to ozone-depleting chemicals.
                                                                    the rate of tax per cubic yard).
                                                                                                                                  (a) Taxes imposed. Sections 4681 and
                                                                      (c) Supporting statement. With each                      4682 impose the following taxes with re-
                                                                    return there must be submitted a sup-                      spect to ozone-depleting chemicals
                                                                    porting statement of the person who                        (ODCs):
                                                                    made the surveys at the mine for the                          (1) Tax on ODCs. Section 4681(a)(1)
                                                                    mining season covered by the return                        imposes a tax on ODCs that are sold or
                                                                    (see § 50.6), stating that such surveys                    used by the manufacturer or importer
                                                                    were made in accordance with require-                      thereof. Except as otherwise provided
                                                                    ments prescribed by the California De-                     in § 52.4682–1 (relating to the tax on
                                                                    bris Commission.                                           ODCs), the amount of the tax is equal
                                                                      (d) Verification of return and sup-                      to the product of—
                                                                    porting statement. The return and the                         (i) The weight (in pounds) of the
                                                                    supporting statement shall be verified                     ODC;
                                                                    by written declarations that they are                         (ii) The base tax amount (determined
                                                                    made under the penalties of perjury.                       under section 4681(b)(1) (B) or (C)) for
                                                                    § 50.8 Due date and place for filing re-                   the calendar year in which the sale or
                                                                         turns and paying tax.                                 use occurs; and
                                                                                                                                  (iii) The ozone-depletion factor (de-
                                                                       The return for a taxable year shall be                  termined under section 4682(b)) for the
                                                                    filed with, and the tax shall be paid to,                  ODC.
                                                                    the district director at San Francisco,                       (2) Tax on imported taxable products.
                                                                    California, on or before September 30 of                   Section 4681(a)(2) imposes a tax on im-
                                                                    the calendar year in which the taxable                     ported taxable products that are sold
                                                                    year ends. The tax is due and payable                      or used by the importer thereof. Except
                                                                    on such date without assessment by, or                     as otherwise provided in § 52.4682–3 (re-
                                                                    notice from, the district director.                        lating to the tax on imported taxable
                                                                                                                               products), the tax is computed by ref-
                                                                      PART 52—ENVIRONMENTAL TAXES                              erence to the weight of the ODCs used
                                                                                                                               as materials in the manufacture of the
                                                                    Sec.                                                       product. The amount of tax is equal to
                                                                    52.0–1 Introduction.                                       the tax that would have been imposed
                                                                    52.4681–1 Taxes imposed with respect to                    on the ODCs under section 4681(a)(1) if
                                                                        ozone-depleting chemicals.                             the ODCs had been sold in the United
                                                                    52.4682–1 Ozone-depleting chemicals.                       States on the date of the sale or use of
                                                                    52.4682–2 Qualifying sales.                                the imported product. The weight of
                                                                    52.4682–3 Imported taxable products.                       such ODCs is determined under
                                                                    52.4682–4 Floor stocks tax.                                § 52.4682–3.
                                                                    52.4682–5 Exports.                                            (3) Floor stocks tax—(i) Imposition of
                                                                      AUTHORITY: 26 U.S.C. 7805.                               tax. Section 4682(h) imposes a floor
                                                                      Section 52.4682–3 also issued under 26 U.S.C.            stocks tax on ODCs that—
                                                                    4682(c)(2);                                                   (A) Are held by any person other
                                                                      Section 52.4682–5 also issued under 26 U.S.C.            than the manufacturer or importer of
                                                                    4662(e)(4).                                                the ODC on a date specified in para-
                                                                                                                               graph (a)(3)(ii) of this section; and
                                                                    § 52.0–1     Introduction.                                    (B) Are held on such date for sale or
                                                                      The regulations in this part 52 are                      for use in further manufacture.
                                                                    designated ‘‘Environmental Tax Regu-                          (ii) Dates on which tax imposed. The
                                                                    lations.’’ The regulations relate to the                   floor stocks tax is imposed on January
                                                                    environmental taxes imposed by chap-                       1 of each calendar year after 1989.
                                                                    ter 38 of the Internal Revenue Code.                          (iii) Amount of tax. Except as other-
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                                                                    See part 40 of this chapter for regula-                    wise provided in § 52.4682–4 (relating to
                                                                    tions relating to returns, payments,                       the floor stocks tax), the amount of the

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                                                                    § 52.4681–1                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                    floor stocks tax is equal to the excess                      (B) Foreign trade zones of the United
                                                                    of—                                                        States.
                                                                       (A) The tax that would be imposed on                      (3) Manufacture; manufacturer. The
                                                                    the ODC under section 4681(a)(1) if a                      term ‘‘manufacture’’ when used with
                                                                    sale or use of the ODC by its manufac-                     respect to any ODC or imported prod-
                                                                    turer or importer occurred on the date                     uct includes its production, and the
                                                                    the floor stocks tax is imposed (the                       term ‘‘manufacturer’’ includes a pro-
                                                                    tentative tax amount), over                                ducer.
                                                                       (B) The sum of the taxes previously                       (4) Entry into United States for con-
                                                                    imposed (if any) on the ODC under sec-                     sumption, use, or warehousing—(i) In
                                                                    tions 4681 and 4682.                                       general. Except as otherwise provided
                                                                       (b) Cross-references—(1) Tax on ODCs.                   in this paragraph (c)(4), the term ‘‘en-
                                                                    Additional rules relating to the tax on                    tered into the United States for con-
                                                                    ODCs are contained in §§ 52.4682–1 and                     sumption, use, or warehousing’’ when
                                                                    52.4682–2.                                                 used with respect to any goods means—
                                                                       (2) Tax on imported taxable products.                     (A) Brought into the customs terri-
                                                                    Additional rules relating to the tax on                    tory of the United States (the customs
                                                                    imported taxable products are con-                         territory) if applicable customs law re-
                                                                    tained in § 52.4682–3.                                     quires that the goods be entered into
                                                                       (3) Floor stocks tax. Additional rules                  the customs territory for consumption,
                                                                    relating to the floor stocks tax are con-                  use, or warehousing;
                                                                    tained in § 52.4682–4.                                       (B) Admitted into a foreign trade
                                                                       (4) Returns, payments, and deposits of                  zone for any purpose if like goods
                                                                    tax. Rules requiring returns reporting                     brought into the customs territory for
                                                                    the taxes imposed by sections 4681 and                     such purpose would be entered into the
                                                                    4682 are contained in part 40 of this                      customs territory for consumption,
                                                                    chapter. Part 40 of this chapter also                      use, or warehousing; or
                                                                    provides rules relating to the use of                        (C) Imported into any other part of
                                                                    Government depositaries and to the                         the United States (as defined in para-
                                                                    time for filing returns and making pay-                    graph (c)(2) of this section) for any pur-
                                                                    ments of tax.                                              pose if like goods brought into the cus-
                                                                       (c) Definitions of general application.                 toms territory for such purpose would
                                                                    The following definitions set forth the                    be entered into the customs territory
                                                                    meaning of certain terms for purposes                      for consumption, use, or warehousing.
                                                                    of the regulations under sections 4681                       (ii) Entry for transportation and expor-
                                                                    and 4682:                                                  tation. Goods entered into the customs
                                                                       (1) Ozone-depleting chemical. The term                  territory for transportation and expor-
                                                                    ‘‘ozone-depleting      chemical’’   (ODC)                  tation are not goods entered for con-
                                                                    means any chemical listed in section                       sumption, use, or warehousing.
                                                                    4682(a)(2).                                                  (iii) Entries described in two or more
                                                                       (2) United States. The term ‘‘United                    provisions. In the case of any goods
                                                                    States’’ has the meaning given such                        with respect to which entries are de-
                                                                    term by section 4612(a)(4). Under sec-                     scribed in two or more provisions of
                                                                    tion 4612(a)(4)—                                           paragraph (c)(4)(i) of this section, only
                                                                       (i) The term ‘‘United States’’ means                    the first such entry is taken into ac-
                                                                    the 50 States, the District of Columbia,                   count. Thus, if the admission of goods
                                                                    the Commonwealth of Puerto Rico, any                       into a foreign trade zone is an entry
                                                                    possession of the United States, the                       into the United States for consump-
                                                                    Commonwealth of the Northern Mar-                          tion, use, or warehousing, the subse-
                                                                    iana Islands, and the Trust Territory of                   quent entry of such goods into the cus-
                                                                    the Pacific Islands; and                                   toms territory will not be treated as an
                                                                       (ii) The term includes—                                 entry into the United States for con-
                                                                       (A) Submarine seabed and subsoil                        sumption, use, or warehousing.
                                                                    that would be treated as part of the                         (iv) Certain imported products not en-
                                                                    United States (as defined in paragraph                     tered    for    consumption,     use,   or
                                                                    (c)(2)(i) of this section) under the prin-                 warehousing. Imported products that
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                                                                    ciples of section 638 relating to conti-                   are entered into the United States for
                                                                    nental shelf areas; and                                    consumption, use, or warehousing do

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–1

                                                                    not include any imported products                             (B) Section 52.4682–3(c)(2) (relating to
                                                                    that—                                                      the election to treat entry of an im-
                                                                      (A) Are entered into the customs ter-                    ported taxable product as use); and
                                                                    ritory under Harmonized Tariff Sched-                         (C) Section 52.4682–3(c)(3) (relating to
                                                                    ule (HTS) heading 9801, 9802, 9803, or                     treating sale of an article incor-
                                                                    9813;                                                      porating an imported taxable product
                                                                      (B) Would, if entered into the cus-                      as the first sale or use of the product).
                                                                    toms territory, be entered under any                          (8) Pound. The term ‘‘pound’’ means a
                                                                    such heading; or                                           unit of weight that is equal to 16 avoir-
                                                                      (C) Are brought into the United                          dupois ounces.
                                                                    States by an individual if the product                        (9) Post-1990 ODC; post-1989 ODC. The
                                                                    is brought in for use by the individual                    term ‘‘post-1990 ODC’’ means any ODC
                                                                    and is not expected to be used in a                        that is listed below Halon–2402 in the
                                                                    trade or business other than a trade or                    table contained in section 4682(a)(2).
                                                                    business of performing services as an                      The term ‘‘post-1989 ODC’’ means any
                                                                    employee.                                                  ODC other than a post-1990 ODC.
                                                                      (5) Importer. The term ‘‘importer’’                         (d) Effective date. Sections 52.4681–0,
                                                                    means the person that first sells or                       52.4681–1, 52.4682–1, 52.4682–2, 52.4682–3,
                                                                    uses goods after their entry into the                      and 52.4682–4 are effective as of January
                                                                    United States for consumption, use, or                     1, 1990, and apply to—
                                                                    warehousing (within the meaning of                            (1) Post-1989 ODCs that the manufac-
                                                                    paragraph (c)(4) of this section).                         turer or importer thereof first sells or
                                                                      (6) Sale. The term ‘‘sale’’ means the                    uses after December 31, 1989, and post-
                                                                    transfer of title or of substantial inci-                  1990 ODCs that the manufacturer or
                                                                    dents of ownership (whether or not de-                     importer thereof first sells or uses
                                                                    livery to, or payment by, the buyer has                    after December 31, 1990;
                                                                    been made) for consideration which                            (2) Imported taxable products that
                                                                    may include money, services, or prop-                      the importer thereof first sells or uses
                                                                    erty. The determination as to the time                     after December 31, 1989 (but, in the case
                                                                    a sale occurs shall be made under appli-                   of products first sold or used before
                                                                    cable local law.                                           January 1, 1991, by taking into account
                                                                      (7) Use—(i) In general. Except as oth-                   only the post-1989 ODCs used as mate-
                                                                    erwise provided in regulations under                       rials in their manufacture); and
                                                                    sections 4681 and 4682, ODCs and im-                          (3) Post-1989 ODCs held for sale or for
                                                                    ported taxable products are used when                      use in further manufacture by any per-
                                                                    they are—                                                  son other than the manufacturer or im-
                                                                      (A) Used as a material in the manu-                      porter thereof on January 1, 1990, and
                                                                    facture of an article, whether by incor-                   post-1989 and post-1990 ODCs that are
                                                                    poration into such article, chemical                       so held on January 1 of each calendar
                                                                    transformation, release into the atmos-                    year after 1990.
                                                                    phere, or otherwise; or                                    [T.D. 8370, 56 FR 56305, Nov. 4, 1991, as amend-
                                                                      (B) Put into service in a trade or                       ed by T.D. 8442, 57 FR 48186, Oct. 22, 1992; T.D.
                                                                    business or for production of income.                      8622, 60 FR 52849, Oct. 11, 1995]
                                                                      (ii)   Loss,    destruction,    packaging,
                                                                    warehousing, and repair. The loss, de-                     § 52.4682–1 Ozone-depleting chemicals.
                                                                    struction, packaging (including re-                           (a) Overview. This section provides
                                                                    packaging), warehousing, or repair of                      rules relating to the tax imposed on
                                                                    ODCs and imported taxable products is                      ozone-depleting     chemicals     (ODCs)
                                                                    not a use of the ODC or product lost,                      under section 4681, including rules for
                                                                    destroyed, packaged, warehoused, or                        identifying taxable ODCs and deter-
                                                                    repaired.                                                  mining when the tax is imposed, and
                                                                      (iii) Cross-references to exceptions. For                rules prescribing special treatment for
                                                                    exceptions to the rule contained in                        certain ODCs. See § 52.4681–1(a)(1) and
                                                                    paragraph (c)(7)(i) of this section, see—                  (c) for general rules and definitions re-
                                                                      (A) Section 52.4682–1(b)(2)(iii) (relat-                 lating to the tax on ODCs.
                                                                    ing to mixture elections), § 52.4682–                         (b) Taxable ODCs; taxable event—(1)
                                                                    1(b)(2)(iv) (relating to mixtures for ex-                  Taxable ODCs—(i) In general. Except as
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                                                                    port), and § 52.4682–1(b)(2)(v) (relating to               provided in paragraphs (c) through (g)
                                                                    mixtures for use as a feedstock);                          of this section, an ODC is taxable if—

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                                                                    § 52.4682–1                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                      (A) It is listed in section 4682(a)(2) on                mixtures created after December 31,
                                                                    the date it is sold or used by its manu-                   1989, or on the post-1990 ODCs (as de-
                                                                    facturer or importer; and                                  fined in § 52.4681–1(c)(9)) contained in
                                                                      (B) It is manufactured in the United                     mixtures created after December 31,
                                                                    States or entered into the United                          1990, is imposed when the mixture is
                                                                    States for consumption, use, or                            created and not on any subsequent sale
                                                                    warehousing.                                               or use of the mixture; and
                                                                      (ii) Storage containers. An ODC de-                        (B) No tax is imposed under section
                                                                    scribed in paragraph (b)(1)(i) of this                     4681 on the post-1989 ODCs contained in
                                                                    section is taxable without regard to                       mixtures created before January 1,
                                                                    the type or size of storage container in                   1990, or on the post-1990 ODCs con-
                                                                    which the ODC is held.                                     tained in mixtures created before Janu-
                                                                      (iii) Example. The application of this                   ary 1, 1991.
                                                                    paragraph (b)(1) may be illustrated by                       (iii) Mixture elections—(A) Permitted
                                                                    the following example:                                     elections. The only elections permitted
                                                                      Example. A brings CFC–12, an ODC listed in               under this paragraph (b)(2)(iii) are—
                                                                    section 4682(a)(2), into the customs territory               (1) An election for the first calendar
                                                                    and enters the CFC–12 for transportation and               quarter beginning after December 31,
                                                                    exportation. The ODC is not taxable because                1989, and all subsequent periods (the
                                                                    it is not entered for consumption, use, or                 1990 election); and
                                                                    warehousing. The ODC also would not be tax-                  (2) An election for the first calendar
                                                                    able if it were admitted to a foreign trade
                                                                    zone (rather than brought into the customs                 quarter beginning after December 31,
                                                                    territory) for transportation and expor-                   1990, and all subsequent periods (the
                                                                    tation.                                                    1991 election).
                                                                                                                                 (B) In general. A manufacturer or im-
                                                                      (2) Taxable event—(i) In general—(A)                     porter may elect to treat the sale or
                                                                    General rule. The tax on an ODC is im-
                                                                                                                               use of mixtures containing ODCs as the
                                                                    posed when the ODC is first sold or
                                                                                                                               first sale or use of the ODCs contained
                                                                    used (as defined in § 52.4681–1(c)(6) and
                                                                                                                               in the mixtures. If a 1990 election is
                                                                    (7)) by its manufacturer or importer.
                                                                                                                               made under this paragraph (b)(2)(iii),
                                                                      (B) Example. The application of this
                                                                                                                               the tax on post-1989 ODCs contained in
                                                                    paragraph (b)(2)(i) may be illustrated
                                                                                                                               a mixture sold or used after December
                                                                    by the following example:
                                                                                                                               31, 1989 (including any such mixture
                                                                       Example. A enters CFC–113, an ODC listed                created before January 1, 1990) is im-
                                                                    in section 4682(a)(2), into the United States              posed on the date of such sale or use.
                                                                    for consumption, use, or warehousing. A                    Similarly, if a 1991 election is made
                                                                    warehouses the CFC–113 and then decides to
                                                                    ship the ODC to its factory outside the
                                                                                                                               under this paragraph (b)(2)(iii), the tax
                                                                    United States (as defined in § 52.4681–1 (c)(2)).          on post-1990 ODCs contained in a mix-
                                                                    The CFC–113 is a taxable ODC because the re-               ture sold or used after December 31,
                                                                    quirements of paragraph (b)(1)(i) of this sec-             1990 (including any such mixture cre-
                                                                    tion have been met. However, tax is not im-                ated before January 1, 1991) is imposed
                                                                    posed on the ODC because there is no taxable               on the date of such sale or use.
                                                                    event. A did not sell the ODC and, under                     (C) Applicability of elections. An elec-
                                                                    § 52.4681–1(c)(7), warehousing is not a use.
                                                                                                                               tion under this paragraph (b)(2)(iii) ap-
                                                                      (ii) Mixtures. Except as provided in                     plies—
                                                                    paragraphs (b)(2)(iii), (iv), and (v) of                     (1) In the case of a 1990 election, to
                                                                    this section, the creation of a mixture                    all post-1989 ODCs contained in mix-
                                                                    containing two or more ingredients is                      tures sold or used by the manufacturer
                                                                    treated as a taxable use of the ODCs                       or importer after December 31, 1989 (in-
                                                                    contained in the mixture. For this pur-                    cluding any such mixture created be-
                                                                    pose, a mixture cannot be represented                      fore January 1, 1990); and
                                                                    by a chemical formula, and an ODC is                         (2) In the case of a 1991 election, to
                                                                    contained in a mixture only if the                         all post-1990 ODCs contained in mix-
                                                                    chemical identity of the ODC is not                        tures sold or used by the manufacturer
                                                                    changed. Thus, except as provided in                       or importer after December 31, 1990 (in-
                                                                    paragraphs (b)(2)(iii), (iv), and (v) of                   cluding any such mixture created be-
                                                                    this section—                                              fore January 1, 1991).
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                                                                      (A) The tax on the post-1989 ODCs (as                      (D) Making the election; revocation. An
                                                                    defined in § 52.4681–1(c)(9)) contained in                 election under this paragraph (b)(2)(iii)

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–1

                                                                    shall be made in accordance with the                       chloric acid during petroleum refining
                                                                    instructions for the return on which                       or incineration) is treated as use as a
                                                                    the manufacturer or importer reports                       feedstock. On the other hand, the ODCs
                                                                    liability for tax under section 4681.                      used in a mixture (including an
                                                                    After October 9, 1990, the election may                    azeotrope such as R–500 or R–502) are
                                                                    be revoked only with the consent of the                    not used as a feedstock.
                                                                    Commissioner.                                                (4) Qualifying sale. A sale of ODCs for
                                                                       (iv) Special rule for exports. The cre-                 use as a feedstock is a qualifying sale if
                                                                    ation of a mixture for export is not a                     the requirements of § 52.4682–2(b)(1) are
                                                                    taxable use of the ODCs contained in                       satisfied with respect to such sale.
                                                                    the mixture. If a manufacturer or im-                        (d) ODCs used in the manufacture of
                                                                    porter sells a mixture for export,                         rigid foam insulation—(1) Phase-in of
                                                                    § 52.4682–5 applies to the ODCs con-                       tax—(i) In general. The amount of tax
                                                                    tained in the mixture. See § 52.4682–5(e)                  imposed on an ODC is determined
                                                                    for rules relating to liability of a pur-                  under section 4682(g) if the manufac-
                                                                    chaser for tax if the mixture is not ex-                   turer or importer of the ODC—
                                                                    ported.                                                      (A) Uses the ODC during 1990, 1991,
                                                                       (v) Special rule for use as a feedstock.                1992, or 1993 in the manufacture of rigid
                                                                    The creation of a mixture for use as a                     foam insulation; or
                                                                    feedstock (within the meaning of para-                       (B) Sells the ODC in a qualifying sale
                                                                    graph (c) of this section) is not a tax-                   (within the meaning of paragraph (d)(5)
                                                                    able use of the ODCs contained in the                      of this section) during 1990, 1991, 1992,
                                                                    mixture.                                                   or 1993.
                                                                       (c) ODCs used as a feedstock—(1) Ex-                      (ii) Amount of tax. Under section
                                                                    emption from tax. No tax is imposed on                     4682(g), ODCs described in paragraph
                                                                    an ODC if the manufacturer or im-                          (d)(1)(i) of this section are not taxed if
                                                                    porter of the ODC—                                         sold or used during 1990 and are taxed
                                                                       (i) Uses the ODC as a feedstock in the                  at a reduced rate if sold or used during
                                                                    manufacture of another chemical; or                        1991, 1992, or 1993.
                                                                       (ii) Sells the ODC in a qualifying sale                   (2) Excess payments—(i) In general.
                                                                    (within the meaning of paragraph (c)(4)                    Under section 4682(g)(3), a credit
                                                                    of this section) for use as a feedstock.                   against income tax or a refund is al-
                                                                       (2) Excess payments—(i) In general.                     lowed to a person if—
                                                                    Under section 4682(d)(2)(B), a credit or                     (A) The person uses an ODC during
                                                                    refund is allowed to a person if—                          1990, 1991, 1992, or 1993 in the manufac-
                                                                       (A) The person uses an ODC as a feed-                   ture of rigid foam insulation; and
                                                                    stock; and                                                   (B) The amount of any tax paid with
                                                                       (B) The amount of any tax paid with                     respect to the ODC under section 4681
                                                                    respect to the ODC under section 4681                      or 4682 was not determined under sec-
                                                                    or 4682 was not determined under sec-                      tion 4682(g).
                                                                    tion 4682(d)(2)(A).                                          (ii) Procedural rules—(A) The amount
                                                                       (ii) Procedural rules. See section 6402                 determined under section 4682(g)(3)
                                                                    and the regulations thereunder for                         shall be treated as a credit described in
                                                                    rules relating to claiming a credit or                     section 34(a) (relating to credits for
                                                                    refund of tax paid with respect to ODCs                    gasoline and special fuels) unless a
                                                                    that are used as a feedstock. A credit                     claim for refund has been filed.
                                                                    against the income tax is not allowed                        (B) See section 6402 and the regula-
                                                                    for the amount determined under sec-                       tions thereunder for rules relating to
                                                                    tion 4682(d)(2)(B).                                        claiming a credit or refund of the tax
                                                                       (3) Definition. An ODC is used as a                     paid with respect to ODCs that are
                                                                    feedstock only if the ODC is entirely                      used in the manufacture of rigid foam
                                                                    consumed (except for trace amounts) in                     insulation.
                                                                    the manufacture of another chemical.                         (3) Definition—(i) Rigid foam insula-
                                                                    Thus, the transformation of an ODC                         tion. The term ‘‘rigid foam insulation’’
                                                                    into one or more new compounds (such                       means any rigid foam that is designed
                                                                    as the transformation of CFC–113 into                      for use as thermal insulation in build-
                                                                    chlorotrifluoroethylene (CTFE or 1113),                    ings, equipment, appliances, tanks,
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                                                                    of CFC–113 into CFC–115 and CFC–116,                       railcars, trucks, or vessels, or on pipes,
                                                                    or of carbon tetrachloride into hydro-                     including any such rigid foam actually

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                                                                    § 52.4682–1                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                    used for purposes other than insula-                       section 4682(g)(4) if the manufacturer
                                                                    tion. Information such as test reports                     or importer of the ODC—
                                                                    on R-values and advertising material                          (i) Uses the ODC during 1993 as a
                                                                    reflecting R-value claims for a par-                       medical sterilant; or
                                                                    ticular rigid foam may be used to show                        (ii) Sells the ODC in a qualifying sale
                                                                    that such rigid foam is designed for use                   (within the meaning of paragraph (g)(4)
                                                                    as thermal insulation.                                     of this section) during 1993.
                                                                      (ii) Rigid foam—(A) In general. The                         (2) Excess payments—(i) In general.
                                                                    term ‘‘rigid foam’’ means any closed                       Under section 4682(g)(4)(B), a credit
                                                                    cell polymeric foam (whether or not                        against income tax (without interest)
                                                                    rigid) in which chlorofluorocarbons are                    or a refund of tax (without interest) is
                                                                    used to fill voids within the polymer.                     allowed to a person if—
                                                                      (B) Examples of rigid foam products.                        (A) The person uses an ODC during
                                                                    Rigid foam includes extruded poly-                         1993 as a medical sterilant; and
                                                                    styrene foam, polyisocyanurate foam,                          (B) The amount of any tax paid with
                                                                    spray and pour-in-place polyurethane                       respect to the ODC under section 4681
                                                                    foam, polyethylene foam, phenolic                          or 4682 exceeds the amount that would
                                                                    foam, and any other product that the                       have been determined under section
                                                                    Commissioner identifies as rigid foam                      4682(g)(4).
                                                                    in a pronouncement of general applica-                        (ii) Amount of credit or refund. The
                                                                    bility. The form of a product identified                   amount of credit or refund of tax is
                                                                    under this paragraph (d)(3)(ii)(B) does                    equal to the excess of—
                                                                    not affect its character as rigid foam.
                                                                                                                                  (A) The tax that was paid with re-
                                                                    Thus, such products are rigid foam
                                                                                                                               spect to the ODCs under sections 4681
                                                                    whether in the form of a board, sheet,
                                                                                                                               and 4682; over
                                                                    backer rod, or wrapping, or in a form
                                                                                                                                  (B) The tax that would have been im-
                                                                    applied by spraying, pouring, or froth-
                                                                                                                               posed under section 4682(g)(4).
                                                                    ing.
                                                                      (4) Use in manufacture. An ODC is                           (iii) Procedural rules. (A) The amount
                                                                    used in the manufacture of rigid foam                      determined under section 4682(g)(4)(B)
                                                                    insulation if it is incorporated into                      and paragraph (g)(2)(ii) of this section
                                                                    such product or is expended as a pro-                      is treated as a credit described in sec-
                                                                    pellant or otherwise in the manufac-                       tion 34(a) (relating to credits for gaso-
                                                                    ture or application of such product.                       line and special fuels) unless a claim
                                                                      (5) Qualifying sale. A sale of an ODC                    for refund has been filed.
                                                                    for use in the manufacture of rigid                           (B) See section 6402 and the regula-
                                                                    foam insulation is a qualifying sale if                    tions under that section for procedural
                                                                    the requirements of § 52.4682–2(b)(2) are                  rules relating to claiming a credit or
                                                                    satisfied with respect to such sale.                       refund of tax.
                                                                      (e) Halons; phase-in of tax. The                            (3) Definition of use as a medical
                                                                    amount of tax imposed on Halon-1211,                       sterilant. An ODC is used as a medical
                                                                    Halon-1301, or Halon-2402 (Halons) is                      sterilant if it is used in the manufac-
                                                                    determined under section 4682(g) if the                    ture of sterilant gas.
                                                                    manufacturer or importer of Halons                            (4) Qualifying sale. A sale of an ODC
                                                                    sells or uses Halons during 1990, 1991,                    for use as a medical sterilant is a quali-
                                                                    1992, or 1993. Under section 4682(g),                      fying sale if the requirements of
                                                                    Halons are not taxed if sold or used                       § 52.4682–2(b)(3) are satisfied with re-
                                                                    during 1990 and are taxed at a reduced                     spect to the sale.
                                                                    rate if sold or used during 1991, 1992, or                    (h) ODCs used as propellants in me-
                                                                    1993.                                                      tered-dose inhalers—(1) Reduced rate of
                                                                      (f) Methyl chloroform; reduced rate of                   tax. The amount of tax imposed on an
                                                                    tax in 1993. The amount of tax imposed                     ODC is determined under section
                                                                    on methyl chloroform is determined                         4682(g)(4) if the manufacturer or im-
                                                                    under section 4682(g)(5) if the manufac-                   porter of the ODC—
                                                                    turer or importer of the methyl chloro-                       (i) Uses the ODC after 1992 as a pro-
                                                                    form sells or uses it during 1993.                         pellant in a metered-dose inhaler; or
                                                                      (g) ODCs used as medical sterilants—(1)                     (ii) Sells the ODC in a qualifying sale
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                                                                    Phase-in of tax. The amount of tax im-                     (within the meaning of paragraph (h)(4)
                                                                    posed on an ODC is determined under                        of this section) after 1992.

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–2

                                                                       (2) Excess payments—(i) In general.                     ODCs used in the manufacture of rigid
                                                                    Under section 4682(g)(4)(B), a credit                      foam insulation), ODCs sold in quali-
                                                                    against income tax (without interest)                      fying sales are not taxed in 1990 and are
                                                                    or a refund of tax (without interest) is                   taxed at a reduced rate in 1991, 1992,
                                                                    allowed to a person if—                                    and 1993.
                                                                       (A) The person uses an ODC after 1992                      (iii) Under section 4682(g)(4) and
                                                                    as a propellant in a metered-dose in-                      § 52.4682–1(g) (relating to ODCs used as
                                                                    haler; and                                                 medical sterilants), ODCs sold in quali-
                                                                       (B) The amount of any tax paid with                     fying sales are taxed at a reduced rate
                                                                    respect to the ODC under section 4681                      in 1993.
                                                                    or 4682 exceeds the amount that would                         (iv) Under section 4682(g)(4) and
                                                                    have been determined under section                         § 52.4682–1(h) (relating to ODCs used as
                                                                    4682(g)(4).                                                propellants in metered-dose inhalers),
                                                                       (ii) Amount of credit or refund. The                    ODCs sold in qualifying sales are taxed
                                                                    amount of credit or refund of tax is                       at a reduced rate in years after 1992.
                                                                    equal to the excess of—                                       (2) Qualifying sales. A sale of ODCs is
                                                                       (A) The tax that was paid with re-                      not a qualifying sale unless the re-
                                                                    spect to the ODCs under sections 4681                      quirements of this section are satisfied.
                                                                    and 4682; over                                             Although registration with the Inter-
                                                                       (B) The tax that would have been im-                    nal Revenue Service is not required to
                                                                    posed under section 4682(g)(4).                            establish that a sale of ODCs is a quali-
                                                                       (iii) Procedural rules—(A) The amount
                                                                                                                               fying sale, the certificates required by
                                                                    determined under section 4682(g)(4)(B)
                                                                                                                               this section shall be made available for
                                                                    and paragraph (h)(2)(ii) of this section
                                                                                                                               inspection by internal revenue agents
                                                                    is treated as a credit described in sec-
                                                                                                                               and officers.
                                                                    tion 34(a) (relating to credits for gaso-
                                                                                                                                  (b) Requirements for qualification—(1)
                                                                    line and special fuels) unless a claim
                                                                                                                               Use as a feedstock. A sale of ODCs is a
                                                                    for refund has been filed.
                                                                       (B) See section 6402 and the regula-                    qualifying      sale   for   purposes      of
                                                                    tions under that section for procedural                    §§ 52.4682–1(c) and 52.4682–4(b)(2)(v) if the
                                                                    rules relating to claiming a credit or                     manufacturer or importer of the
                                                                    refund of tax.                                             ODCs—
                                                                       (3) Definition of metered-dose inhaler. A                  (i) Obtains a certificate in substan-
                                                                    metered-dose inhaler is an aerosol de-                     tially the form set forth in paragraph
                                                                    vice that delivers a precisely-measured                    (d)(2) of this section from the purchaser
                                                                    dose of a therapeutic drug.                                of the ODCs; and
                                                                       (4) Qualifying sale. A sale of an ODC                      (ii) Relies on the certificate in good
                                                                    for use as a propellant for a metered-                     faith.
                                                                    dose inhaler is a qualifying sale if the                      (2) Use in the manufacture of rigid foam
                                                                    requirements of § 52.4682–2(b)(4) are sat-                 insulation. A sale of ODCs is a quali-
                                                                    isfied with respect to the sale.                           fying sale for purposes of §§ 52.4682–1(d)
                                                                       (i) [Reserved]                                          and 52.4682–4(d)(2) if the manufacturer
                                                                       (j) Exports; cross-reference. For the                   or importer of the ODCs—
                                                                    treatment of exports of ODCs, see                             (i) Obtains a certificate in substan-
                                                                    § 52.4682–5.                                               tially the form set forth in paragraph
                                                                       (k) Recycling. [Reserved]                               (d)(3) of this section from the purchaser
                                                                    [T.D. 8370, 56 FR 56307, Nov. 4, 1991, as amend-
                                                                                                                               of the ODCs; and
                                                                    ed by T.D. 8622, 60 FR 52849, Oct. 11, 1995]                  (ii) Relies on the certificate in good
                                                                                                                               faith.
                                                                    § 52.4682–2 Qualifying sales.                                 (3) Use as medical sterilants. A sale of
                                                                       (a) In general—(1) Special rules appli-                 ODCs is a qualifying sale for purposes
                                                                    cable to certain sales. Special rules apply                of § 52.4682–1(g) if the manufacturer or
                                                                    to sales of ODCs in the following cases:                   importer of the ODCs—
                                                                       (i) Under section 4682(d)(2), § 52.4682–                   (i) Obtains a certificate in substan-
                                                                    1(c), and § 52.4682–4(b)(2)(v) (relating to                tially the form set forth in paragraph
                                                                    ODCs used as a feedstock), ODCs sold                       (d)(4) of this section from the purchaser
                                                                    in qualifying sales are not taxed.                         of the ODCs; and
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                                                                       (ii) Under section 4682(g), § 52.4682–                     (ii) Relies on the certificate in good
                                                                    1(d), and § 52.4682–4(d)(2) (relating to                   faith.

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                                                                    § 52.4682–2                                                                26 CFR Ch. I (4–1–09 Edition)

                                                                       (4) Use as propellants in metered-dose                  supplier if any information on the cur-
                                                                    inhalers. A sale of ODCs is a qualifying                   rent certificate changes. The certifi-
                                                                    sale for purposes of §§ 52.4682–1(h) and                   cate may be included as part of any
                                                                    52.4682–4(b)(2)(vii) if the manufacturer                   business records normally used to doc-
                                                                    or importer of the ODCs—                                   ument a sale.
                                                                       (i) Obtains a certificate in substan-                     (ii) Special rule relating to certificates
                                                                    tially the form set forth in paragraph                     executed before January 1, 1992. Certifi-
                                                                    (d)(5) of this section from the purchaser                  cates provided under this paragraph
                                                                    of the ODCs; and                                           (d)(2) and executed before January 1,
                                                                       (ii) Relies on the certificate in good                  1992, satisfy the requirements of para-
                                                                    faith.                                                     graph (b) of this section if they are in
                                                                       (c) Good faith reliance—(1) In general.                 substantially the same form as certifi-
                                                                    The requirements of paragraph (b) of                       cates set forth in § 52.4682–2T.
                                                                    this section are not satisfied with re-                      (2) Certificate relating to ODCs used as
                                                                    spect to a sale of ODCs and the sale is                    a feedstock—(i) ODCs that will be resold
                                                                    not a qualifying sale if at the time of                    for use by the second purchaser as a feed-
                                                                    the sale—                                                  stock. If the purchaser will resell the
                                                                       (i) The manufacturer or importer has                    ODCs to a second purchaser for use by
                                                                    reason to believe that the purchaser                       such second purchaser as a feedstock,
                                                                    will use the ODCs other than for the                       the certificate provided by the pur-
                                                                    purpose set forth in the certificate; or                   chaser must be in substantially the fol-
                                                                       (ii) The Internal Revenue Service has                   lowing form:
                                                                    notified the manufacturer or importer
                                                                                                                               CERTIFICATE OF PURCHASER OF CHEMICALS
                                                                    that the purchaser’s right to provide a                     THAT WILL BE RESOLD FOR USE BY THE SEC-
                                                                    certificate has been withdrawn.                             OND PURCHASER AS A FEEDSTOCK
                                                                       (2) Withdrawal of right to provide a cer-
                                                                    tificate. The Internal Revenue Service                     (To support tax-free sales under section
                                                                                                                               4682(d)(2) of the Internal Revenue Code.)
                                                                    may withdraw the right of a purchaser
                                                                    to provide a certificate to its supplier                   Date lllllllllllllllllllll
                                                                                                                                 The undersigned purchaser (‘‘Purchaser’’)
                                                                    if such purchaser uses the ODCs to                         hereby certifies the following under pen-
                                                                    which its certificate applies other than                   alties of perjury:
                                                                    for the purpose set forth in such cer-                       The following percentage of ozone-deplet-
                                                                    tificate, or otherwise fails to comply                     ing chemicals purchased from
                                                                    with the terms of the certificate. The                     llllllllllllllllllllllll
                                                                    Internal Revenue Service may notify                        (name and address of seller)
                                                                    the supplier to whom the purchaser                         will be resold by Purchaser to persons (Sec-
                                                                    provided the certificate that the pur-                     ond Purchasers) that certify to Purchaser
                                                                    chaser’s right to provide a certificate                    that they are purchasing the ozone-depleting
                                                                    has been withdrawn.                                        chemicals for use as a feedstock (as defined
                                                                       (d) Certificate—(1) In general—(i) Rules                in § 52.4682–1(c)(3) of the Environmental Tax
                                                                                                                               Regulations).
                                                                    relating to all certificates. This para-
                                                                    graph (d) sets forth certificates that                                       Product                  Percentage
                                                                    satisfy the requirements of paragraphs
                                                                                                                               CFC–11.
                                                                    (b)(1) through (4) of this section. The                    CFC–12.
                                                                    certificate shall consist of a statement                   CFC–113.
                                                                    executed and signed under penalties of                     CFC–114.
                                                                                                                               CFC–115.
                                                                    perjury by a person with authority to                      Carbon tetrachloride.
                                                                    bind the purchaser. A certificate pro-                     Methyl chloroform.
                                                                    vided under paragraph (d)(2) or (5) of                     Other (specify).
                                                                    this section may apply to a single pur-
                                                                    chase or to multiple purchases and                           This certificate applies to (check and com-
                                                                    need not specify an expiration date. A                     plete as applicable):
                                                                    certificate provided under paragraph                       lll All shipments to Purchaser at the fol-
                                                                    (d)(3) or (4) of this section may apply to                 lowing location(s):
                                                                    a single purchase or multiple pur-                         llllllllllllllllllllllll
                                                                    chases, and will expire as of December                     llllllllllllllllllllllll
                                                                    31, 1993, unless an earlier expiration                     llllllllllllllllllllllll
cprice-sewell on PRODPC61 with CFR




                                                                    date is specified in the certificate. A                    lll All shipments to Purchaser under the
                                                                    new certificate must be given to the                       following Purchaser account number(s):

                                                                                                                          14



                                     VerDate Nov<24>2008   15:28 May 15, 2009   Jkt 217100   PO 00000   Frm 00024   Fmt 8010   Sfmt 8010    Y:\SGML\217100.XXX   217100
                                                                    Internal Revenue Service, Treasury                                                                § 52.4682–2
                                                                    llllllllllllllllllllllll                                   certificate provided by the purchaser
                                                                    llllllllllllllllllllllll                                   must be in substantially the following
                                                                    llllllllllllllllllllllll                                   form:
                                                                    lll All shipments to Purchaser under the                   CERTIFICATE OF PURCHASER OF CHEMICALS
                                                                    following purchase order(s):
                                                                                                                                THAT WILL BE USED BY THE PURCHASER AS
                                                                    llllllllllllllllllllllll                                    A FEEDSTOCK
                                                                    llllllllllllllllllllllll
                                                                                                                               (To support tax-free sales under section
                                                                    llllllllllllllllllllllll                                   4682(d)(2) of the Internal Revenue Code.)
                                                                    lll One or more shipments to Purchaser                     Date lllllllllllllllllllll
                                                                    identified as follows:                                       The undersigned purchaser (‘‘Purchaser’’)
                                                                    llllllllllllllllllllllll                                   hereby certifies the following under pen-
                                                                    llllllllllllllllllllllll                                   alties of perjury:
                                                                                                                                 The following percentage of ozone-deplet-
                                                                    llllllllllllllllllllllll
                                                                                                                               ing chemicals purchased from
                                                                      Purchaser will not claim a credit or refund
                                                                                                                               llllllllllllllllllllllll
                                                                    under section 4682(d)(2)(B) of the Internal
                                                                                                                               (name and address of seller)
                                                                    Revenue Code for any ozone-depleting chemi-
                                                                    cals covered by this certificate.                          will be used by Purchaser as a feedstock (as
                                                                      Purchaser understands that any use by                    defined in § 52.4682–1(c)(3) of the Environ-
                                                                    Purchaser of the ozone-depleting chemicals                 mental Tax Regulations).
                                                                    to which this certificate applies other than
                                                                                                                                                                          Kilograms to
                                                                    for the purpose set forth in this certificate                       Product          Percentage         be trans-
                                                                    may result in the withdrawal by the Internal                                                             formed
                                                                    Revenue Service of Purchaser’s right to pro-
                                                                                                                               CFC–11.
                                                                    vide a certificate.
                                                                                                                               CFC–12.
                                                                      Purchaser will retain the business records               CFC–113.
                                                                    needed to document the sales covered by this               CFC–114.
                                                                    certificate and will make such records avail-              CFC–115.
                                                                    able for inspection by Government officers.                Carbon tetrachloride.
                                                                    Purchaser also will retain and make avail-                 Methyl chloroform.
                                                                    able for inspection by Government officers                 Other (specify).
                                                                    the certificates of its Second Purchasers.
                                                                      Purchaser has not been notified by the In-                 This certificate applies to (check and com-
                                                                    ternal Revenue Service that its right to pro-              plete as applicable):
                                                                    vide a certificate has been withdrawn. In ad-              lll All shipments to Purchaser at the fol-
                                                                    dition, the Internal Revenue Service has not               lowing location(s):
                                                                    notified Purchaser that the right to provide               llllllllllllllllllllllll
                                                                    a certificate has been withdrawn from any                  llllllllllllllllllllllll
                                                                    Second Purchaser who will purchase ozone-                  llllllllllllllllllllllll
                                                                    depleting chemicals to which this certificate
                                                                    applies.                                                   lll All shipments to Purchaser under the
                                                                      Purchaser understands that the fraudulent                following Purchaser account number(s):
                                                                    use of this certificate may subject Purchaser              llllllllllllllllllllllll
                                                                    and all parties making such fraudulent use                 llllllllllllllllllllllll
                                                                    of this certificate to a fine or imprisonment,             llllllllllllllllllllllll
                                                                    or both, together with the costs of prosecu-
                                                                    tion.                                                      lll All shipments to Purchaser under the
                                                                    llllllllllllllllllllllll                                   following purchase order(s):
                                                                    Signature                                                  llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    Printed or typed name of person signing                    llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                   lll One or more shipments to Purchaser
                                                                    Title of person signing                                    identified as follows:
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    Name of Purchaser
                                                                                                                               llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll
                                                                                                                               llllllllllllllllllllllll
                                                                    Address
                                                                                                                                 Purchaser will not claim a credit or refund
                                                                    llllllllllllllllllllllll                                   under section 4682(d)(2)(B) of the Internal
                                                                    llllllllllllllllllllllll                                   Revenue Code for any ozone-depleting chemi-
                                                                    Taxpayer Identifying Number                                cals covered by this certificate.
                                                                                                                                 Purchaser understands that any use of the
                                                                      (ii) ODCs that will be used by the pur-                  ozone-depleting chemicals to which this cer-
cprice-sewell on PRODPC61 with CFR




                                                                    chaser as a feedstock. If the purchaser                    tificate applies other than as a feedstock
                                                                    will use the ODCs as a feedstock, the                      may result in the withdrawal by the Internal

                                                                                                                          15



                                     VerDate Nov<24>2008   15:28 May 15, 2009   Jkt 217100   PO 00000   Frm 00025   Fmt 8010   Sfmt 8010    Y:\SGML\217100.XXX   217100
                                                                    § 52.4682–2                                                                26 CFR Ch. I (4–1–09 Edition)
                                                                    Revenue Service of Purchaser’s right to pro-               that they are purchasing the ozone-depleting
                                                                    vide a certificate.                                        chemicals for use in the manufacture of rigid
                                                                      Purchaser will retain the business records               foam insulation (as defined in § 52.4682–1(d)(3)
                                                                    needed to document the use as a feedstock of               and (4) of the Environmental Tax Regula-
                                                                    the ozone-depleting chemicals to which this                tions).
                                                                    certificate applies and will make such
                                                                    records available for inspection by Govern-                                  Product                  Percentage
                                                                    ment officers.                                             CFC–11.
                                                                      Purchaser has not been notified by the In-               CFC–12.
                                                                    ternal Revenue Service that its right to pro-              CFC–113.
                                                                    vide a certificate has been withdrawn.                     CFC–114.
                                                                      Purchaser understands that the fraudulent                CFC–115.
                                                                    use of this certificate may subject Purchaser              Carbon tetrachloride.
                                                                    and all parties making such fraudulent use                 Methyl chloroform.
                                                                                                                               Other (specify).
                                                                    of this certificate to a fine or imprisonment,
                                                                    or both, together with the costs of prosecu-
                                                                                                                                 This certificate applies to (check and com-
                                                                    tion.
                                                                                                                               plete as applicable):
                                                                    llllllllllllllllllllllll
                                                                                                                               lll All shipments to Purchaser at the fol-
                                                                    Signature
                                                                                                                               lowing location(s):
                                                                    llllllllllllllllllllllll
                                                                                                                               llllllllllllllllllllllll
                                                                    Printed or typed name of person signing
                                                                                                                               llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll
                                                                    Title of person signing                                    llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                     lll All shipments to Purchaser under
                                                                    Name of Purchaser                                          the following Purchaser account number(s):
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    Address                                                    llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                   lll All shipments to Purchaser under the
                                                                    Taxpayer Identifying Number                                following purchase order(s):
                                                                      (3) Certificate relating to ODCs used in                 llllllllllllllllllllllll
                                                                    the manufacture of rigid foam insula-                      llllllllllllllllllllllll
                                                                    tion—(i) ODCs that will be resold to a sec-                llllllllllllllllllllllll
                                                                    ond purchaser for use by the second pur-                   lll One or more shipments to Purchaser
                                                                    chaser in the manufacture of rigid foam                    identified as follows:
                                                                    insulation. If the purchaser will resell                   llllllllllllllllllllllll
                                                                    the ODCs to a second purchaser for use                     llllllllllllllllllllllll
                                                                    by such second purchaser in the manu-
                                                                                                                               llllllllllllllllllllllll
                                                                    facture of rigid foam insulation, the                        Purchaser will not claim a credit or refund
                                                                    certificate provided by the purchaser                      under section 4682(g)(3) of the Internal Rev-
                                                                    must be in substantially the following                     enue Code for any ozone-depleting chemicals
                                                                    form:                                                      covered by this certificate.
                                                                                                                                 Purchaser understands that any use by
                                                                    CERTIFICATE OF PURCHASER OF CHEMICALS                      Purchaser of the ozone-depleting chemicals
                                                                     THAT WILL BE RESOLD FOR USE BY THE SEC-                   to which this certificate applies other than
                                                                     OND PURCHASER IN THE MANUFACTURE OF                       for the purpose set forth in this certificate
                                                                     RIGID FOAM INSULATION                                     may result in the withdrawal by the Internal
                                                                    (To support tax-free or tax-reduced sales                  Revenue Service of Purchaser’s right to pro-
                                                                    under section 4682(g) of the Internal Revenue              vide a certificate.
                                                                    Code.)                                                       Purchaser will retain the business records
                                                                    Effective Date llllllllllllllll                            needed to document the sales covered by this
                                                                    Expiration Date lllllllllllllll                            certificate and will make such records avail-
                                                                    (not after 12/31/93)                                       able for inspection by Government officers.
                                                                                                                               Purchaser also will retain and make avail-
                                                                      The undersigned purchaser (‘‘Purchaser’’)                able for inspection by Government officers
                                                                    hereby certifies the following under pen-                  the certificates of its Second Purchasers.
                                                                    alties of perjury:                                           Purchaser has not been notified by the In-
                                                                      The following percentage of ozone-deplet-                ternal Revenue Service that its right to pro-
                                                                    ing chemicals purchased from                               vide a certificate has been withdrawn. In ad-
                                                                    llllllllllllllllllllllll                                   dition, the Internal Revenue Service has not
                                                                    (name and address of seller)                               notified Purchaser that the right to provide
cprice-sewell on PRODPC61 with CFR




                                                                    will be resold by Purchaser to persons (Sec-               a certificate has been withdrawn from any
                                                                    ond Purchasers) that certify to Purchaser                  Second Purchaser who will purchase ozone-

                                                                                                                          16



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                                                                    Internal Revenue Service, Treasury                                                                  § 52.4682–2
                                                                    depleting chemicals to which this certificate                    lll All shipments to Purchaser at the fol-
                                                                    applies.                                                         lowing location(s):
                                                                      Purchaser understands that the fraudulent                      llllllllllllllllllllllll
                                                                    use of this certificate may subject Purchaser
                                                                                                                                     llllllllllllllllllllllll
                                                                    and all parties making such fraudulent use
                                                                    of this certificate to a fine or imprisonment,                   llllllllllllllllllllllll
                                                                    or both, together with the costs of prosecu-                     lll All shipments to Purchaser under the
                                                                    tion.                                                            following Purchaser account number(s):
                                                                    llllllllllllllllllllllll                                         llllllllllllllllllllllll
                                                                    Signature                                                        llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                         llllllllllllllllllllllll
                                                                    Printed or typed name of person signing
                                                                                                                                     lll All shipments to Purchaser under the
                                                                    llllllllllllllllllllllll                                         following purchase order(s):
                                                                    Title of person signing
                                                                                                                                     llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll
                                                                                                                                     llllllllllllllllllllllll
                                                                    Name of Purchaser
                                                                                                                                     llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll
                                                                    Address                                                          lll One or more shipments to Purchaser
                                                                                                                                     identified as follows:
                                                                    llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                         llllllllllllllllllllllll
                                                                    Taxpayer Identifying Number                                      llllllllllllllllllllllll
                                                                      (ii) ODCs that will be used by the pur-                        llllllllllllllllllllllll
                                                                                                                                       Purchaser will not claim a credit or refund
                                                                    chaser in the manufacture of rigid foam                          under section 4682(g)(3) of the Internal Rev-
                                                                    insulation. If the purchaser will use the                        enue Code for any ozone-depleting chemicals
                                                                    ODCs in the manufacture of rigid foam                            covered by this certificate.
                                                                    insulation, the certificate provided by                            Purchaser understands that any use by
                                                                    the purchaser must be in substantially                           Purchaser of the ozone-depleting chemicals
                                                                    the following form:                                              to which this certificate applies other than
                                                                                                                                     in the manufacture of rigid foam insulation
                                                                    CERTIFICATE OF PURCHASER OF CHEMICALS                            may result in the withdrawal by the Internal
                                                                     THAT WILL BE USED BY THE PURCHASER IN                           Revenue Service of Purchaser’s right to pro-
                                                                     THE MANUFACTURE OF RIGID FOAM INSULA-                           vide a certificate.
                                                                       TION                                                            Purchaser will retain the business records
                                                                    (To support tax-free or tax-reduced sales                        needed to document the use in the manufac-
                                                                    under section 4682(g) of the Internal Revenue                    ture of rigid foam insulation of the ozone-de-
                                                                    Code.)                                                           pleting chemicals to which this certificate
                                                                                                                                     applies and will make such records available
                                                                    Effective Date llllllllllllllll                                  for inspection by Government officers.
                                                                    Expiration Date lllllllllllllll                                    Purchaser has not been notified by the In-
                                                                    (not after 12/31/93)                                             ternal Revenue Service that its right to pro-
                                                                       The undersigned purchaser (‘‘Purchaser’’)                     vide a certificate has been withdrawn.
                                                                    hereby certifies the following under pen-                          Purchaser understands that the fraudulent
                                                                    alties of perjury:                                               use of this certificate may subject Purchaser
                                                                       The following percentage of ozone-deplet-                     and all parties making such fraudulent use
                                                                    ing chemicals purchased from                                     of this certificate to a fine or imprisonment,
                                                                    llllllllllllllllllllllll                                         or both, together with the costs of prosecu-
                                                                    (name and address of seller)                                     tion.
                                                                    will be used by Purchaser in the manufac-                        llllllllllllllllllllllll
                                                                    ture of rigid foam insulation (as defined in                     Signature
                                                                    § 52.4682–1(d) (3) and (4) of the Environmental                  llllllllllllllllllllllll
                                                                    Tax Regulations).                                                Printed or typed name of person signing
                                                                                       Product                     Percentage        llllllllllllllllllllllll
                                                                                                                                     Title of person signing
                                                                     CFC–11.                                                         llllllllllllllllllllllll
                                                                     CFC–12.                                                         Name of Purchaser
                                                                     CFC–113.
                                                                     CFC–114.
                                                                                                                                     llllllllllllllllllllllll
                                                                     CFC–115.                                                        Address
                                                                     Carbon tetrachloride.                                           llllllllllllllllllllllll
                                                                     Methyl chloroform.                                              llllllllllllllllllllllll
                                                                     Other (specify).                                                Taxpayer Identifying Number
cprice-sewell on PRODPC61 with CFR




                                                                      This certificate applies to (check and com-                     (4) Certificate relating to ODCs used as
                                                                    plete as applicable):                                            medical sterilants—(i) ODCs that will be

                                                                                                                                17



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                                                                    § 52.4682–2                                                                                            26 CFR Ch. I (4–1–09 Edition)

                                                                    resold for use by the second purchaser as                                                 to which this certificate applies other than
                                                                    medical sterilants. If the purchaser will                                                 for the purpose set forth in this certificate
                                                                    resell the ODCs to a second purchaser                                                     may result in the withdrawal by the Internal
                                                                                                                                                              Revenue Service of Purchaser’s right to pro-
                                                                    for use by such second purchaser as                                                       vide a certificate.
                                                                    medical sterilants, the certificate pro-                                                    Purchaser will retain the business records
                                                                    vided by the purchaser must be in sub-                                                    needed to document the sales covered by this
                                                                    stantially the following form:                                                            certificate and will make such records avail-
                                                                                                                                                              able for inspection by Government officers.
                                                                    CERTIFICATE OF PURCHASER OF CHEMI-                                                        Purchaser also will retain and make avail-
                                                                     CALS THAT WILL BE RESOLD FOR USE                                                         able for inspection by Government officers
                                                                     BY THE SECOND PURCHASER AS MED-                                                          the certificates of its Second Purchasers.
                                                                     ICAL STERILANTS                                                                            Purchaser has not been notified by the In-
                                                                                                                                                              ternal Revenue Service that its right to pro-
                                                                      (To support tax-reduced sales under section
                                                                                                                                                              vide a certificate has been withdrawn. In ad-
                                                                        4682(g)(4) of the Internal Revenue Code.)
                                                                                                                                                              dition, the Internal Revenue Service has not
                                                                    Effective Date llllllllllllllll                                                           notified Purchaser that the right to provide
                                                                    Expiration Date lllllllllllllll                                                           a certificate has been withdrawn from any
                                                                                        (not after 12/31/93)                                                  Second Purchaser who will purchase ozone-
                                                                      The undersigned purchaser (Purchaser)                                                   depleting chemicals to which this certificate
                                                                    certifies the following under penalties of per-                                           applies.
                                                                    jury:                                                                                       Purchaser understands that the fraudulent
                                                                      The following percentage of ozone-deplet-                                               use of this certificate may subject Purchaser
                                                                    ing chemicals purchased from:                                                             and all parties making such fraudulent use
                                                                    llllllllllllllllllllllll                                                                  of this certificate to a fine or imprisonment,
                                                                    (Name of seller)                                                                          or both, together with the costs of prosecu-
                                                                    llllllllllllllllllllllll                                                                  tion.
                                                                    (Address of seller)                                                                       llllllllllllllllllllllll
                                                                    will be resold by Purchaser to persons (Sec-                                              Name of Purchaser
                                                                    ond Purchasers) that certify to Purchaser                                                 llllllllllllllllllllllll
                                                                    that they are purchasing the ozone-depleting                                              Address of Purchaser
                                                                                                                                                              llllllllllllllllllllllll
                                                                    chemicals for use as medical sterilants (as
                                                                                                                                                              llllllllllllllllllllllll
                                                                    defined in § 52.4682–1(g)(3) of the Environ-
                                                                                                                                                              Taxpayer Identifying Number of Purchaser
                                                                    mental Tax Regulations).
                                                                                                                                                              llllllllllllllllllllllll
                                                                                                 Product                                    Percentage        Title of person signing
                                                                                                                                                              llllllllllllllllllllllll
                                                                     CFC–12 .............................................................   lllll             Printed or typed name of person signing
                                                                                                                                                              llllllllllllllllllllllll
                                                                      This certificate applies to (check and com-                                             Signature
                                                                    plete as applicable):
                                                                                                                                                                (ii) ODCs that will be used by the pur-
                                                                    lll All shipments to Purchaser at the fol-
                                                                                                                                                              chaser as medical sterilants. If the pur-
                                                                        lowing location(s):
                                                                    llllllllllllllllllllllll                                                                  chaser will use the ODCs as medical
                                                                    llllllllllllllllllllllll                                                                  sterilants, the certificate provided by
                                                                    llllllllllllllllllllllll                                                                  the purchaser must be in substantially
                                                                    lll All shipments to Purchaser under the                                                  the following form:
                                                                        following Purchaser account number(s):
                                                                    llllllllllllllllllllllll                                                                  CERTIFICATE OF PURCHASER OF CHEMI-
                                                                    llllllllllllllllllllllll                                                                   CALS THAT WILL BE USED BY THE
                                                                    llllllllllllllllllllllll                                                                   PURCHASER        AS      MEDICAL
                                                                    lll All shipments to Purchaser under the                                                   STERILANTS
                                                                        following purchase order(s):
                                                                    llllllllllllllllllllllll                                                                  (To support tax-reduced sales under section
                                                                    llllllllllllllllllllllll                                                                    4682(g)(4) of the Internal Revenue Code.)
                                                                    llllllllllllllllllllllll                                                                  Effective Date llllllllllllllll
                                                                    lll One or more shipments to Purchaser                                                    Expiration Date lllllllllllllll
                                                                        identified as follows:                                                                                    (not after 12/31/93)
                                                                    llllllllllllllllllllllll                                                                    The undersigned purchaser (Purchaser)
                                                                    llllllllllllllllllllllll                                                                  certifies the following under penalties of per-
                                                                    llllllllllllllllllllllll                                                                  jury:
                                                                      Purchaser will not claim a credit or refund                                               The following percentage of ozone-deplet-
                                                                    under section 4682(g)(4) of the Internal Rev-                                             ing chemicals purchased from:
                                                                    enue Code for any ozone-depleting chemicals                                               llllllllllllllllllllllll
                                                                    covered by this certificate.                                                              (Name of seller)
cprice-sewell on PRODPC61 with CFR




                                                                      Purchaser understands that any use by                                                   llllllllllllllllllllllll
                                                                    Purchaser of the ozone-depleting chemicals                                                (Address of seller)

                                                                                                                                                         18



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                                                                    Internal Revenue Service, Treasury                                                                                                                       § 52.4682–2
                                                                    will be used by Purchaser as medical                                                      Signature
                                                                    sterilants (as defined in § 52.4682–1(g)(3) of the
                                                                    Environmental Tax Regulations).                                                             (5) Certificate relating to ODCs used as
                                                                                                                                                              propellants in metered-dose inhalers—(i)
                                                                                                 Product                                    Percentage        ODCs that will be resold for use by the
                                                                     CFC–12 .............................................................   lllll
                                                                                                                                                              second purchaser as propellants in me-
                                                                                                                                                              tered-dose inhalers. If the purchaser will
                                                                      This certificate applies to (check and com-                                             resell the ODCs to a second purchaser
                                                                    plete as applicable):                                                                     for use by such second purchaser as
                                                                    lll All shipments to Purchaser at the fol-                                                propellants in metered-dose inhalers,
                                                                        lowing location(s):                                                                   the certificate provided by the pur-
                                                                    llllllllllllllllllllllll                                                                  chaser must be in substantially the fol-
                                                                    llllllllllllllllllllllll                                                                  lowing form:
                                                                    llllllllllllllllllllllll
                                                                    lll All shipments to Purchaser under the                                                  CERTIFICATE OF PURCHASER OF CHEMI-
                                                                        following Purchaser account number(s):                                                 CALS THAT WILL BE RESOLD FOR USE
                                                                    llllllllllllllllllllllll                                                                   BY THE SECOND PURCHASER AS PRO-
                                                                    llllllllllllllllllllllll                                                                   PELLANTS IN METERED-DOSE INHAL-
                                                                    llllllllllllllllllllllll                                                                   ERS
                                                                    lll All shipments to Purchaser under the
                                                                        following purchase order(s):                                                           (To support tax-reduced sales under section
                                                                    llllllllllllllllllllllll                                                                     4682(g)(4) of the Internal Revenue Code.)
                                                                    llllllllllllllllllllllll                                                                  Date lllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                                                    The undersigned purchaser (Purchaser)
                                                                    lll One or more shipments to Purchaser                                                    certifies the following under penalties of per-
                                                                        identified as follows:                                                                jury:
                                                                    llllllllllllllllllllllll                                                                    The following percentage of ozone-deplet-
                                                                    llllllllllllllllllllllll                                                                  ing chemicals purchased from:
                                                                    llllllllllllllllllllllll                                                                  llllllllllllllllllllllll
                                                                      Purchaser will not claim a credit or refund                                             (Name of seller)
                                                                    under section 4682(g)(4) of the Internal Rev-                                             llllllllllllllllllllllll
                                                                    enue Code for any ozone-depleting chemicals                                               (Address of seller)
                                                                    covered by this certificate.
                                                                                                                                                              will be resold by Purchaser to persons (Sec-
                                                                      Purchaser understands that any use by
                                                                                                                                                              ond Purchasers) that certify to Purchaser
                                                                    Purchaser of the ozone-depleting chemicals
                                                                                                                                                              that they are purchasing the ozone-depleting
                                                                    to which this certificate applies other than
                                                                                                                                                              chemicals for use as propellants in metered-
                                                                    as medical sterilants may result in the with-
                                                                                                                                                              dose inhalers (as defined in § 52.4682–1(h)(3) of
                                                                    drawal by the Internal Revenue Service of
                                                                                                                                                              the Environmental Tax Regulations).
                                                                    Purchaser’s right to provide a certificate.
                                                                      Purchaser will retain the business records                                                                          Product                                    Percentage
                                                                    needed to document the use as medical
                                                                    sterilants of the ozone-depleting chemicals                                               CFC–11 .............................................................     llll
                                                                    to which this certificate applies and will                                                CFC–12 .............................................................     llll
                                                                    make such records available for inspection                                                CFC–114 ...........................................................      llll
                                                                    by Government officers.
                                                                      Purchaser has not been notified by the In-                                                This certificate applies to (check and com-
                                                                    ternal Revenue Service that its right to pro-                                             plete as applicable):
                                                                    vide a certificate has been withdrawn.                                                    llll All shipments to Purchaser at the
                                                                      Purchaser understands that the fraudulent                                                   following location(s):
                                                                    use of this certificate may subject Purchaser                                             llllllllllllllllllllllll
                                                                    and all parties making such fraudulent use                                                llllllllllllllllllllllll
                                                                    of this certificate to a fine or imprisonment,                                            llllllllllllllllllllllll
                                                                    or both, together with the costs of prosecu-                                              llll All shipments to Purchaser under
                                                                    tion.                                                                                         the following Purchaser account num-
                                                                    llllllllllllllllllllllll                                                                      ber(s):
                                                                    Name of Purchaser                                                                         llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                                                  llllllllllllllllllllllll
                                                                    Address of Purchaser                                                                      llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                                                  llll All shipments to Purchaser under
                                                                    llllllllllllllllllllllll                                                                      the following purchase order(s):
                                                                    Taxpayer Identifying Number of Purchaser                                                  llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                                                  llllllllllllllllllllllll
                                                                    Title of person signing                                                                   llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                                                  llll One or more shipments to Purchaser
cprice-sewell on PRODPC61 with CFR




                                                                    Printed or typed name of person signing                                                       identified as follows:
                                                                    llllllllllllllllllllllll                                                                  llllllllllllllllllllllll

                                                                                                                                                         19



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                                                                    § 52.4682–2                                                                       26 CFR Ch. I (4–1–09 Edition)
                                                                    llllllllllllllllllllllll                                     The undersigned purchaser (Purchaser)
                                                                    llllllllllllllllllllllll                                   certifies the following under penalties of per-
                                                                      Purchaser will not claim a credit or refund              jury:
                                                                    under section 4682(g)(4) of the Internal Rev-                The following percentage of ozone-deplet-
                                                                    enue Code for any ozone-depleting chemicals                ing chemicals purchased from:
                                                                    covered by this certificate.                               llllllllllllllllllllllll
                                                                      Purchaser understands that any use by                    (Name of seller)
                                                                    Purchaser of the ozone-depleting chemicals                 llllllllllllllllllllllll
                                                                    to which this certificate applies other than               (Address of seller)
                                                                    for the purpose set forth in this certificate              will be used by Purchaser as propellants in
                                                                    may result in the withdrawal by the Internal               metered-dose inhalers (as defined in § 52.4682–
                                                                    Revenue Service of Purchaser’s right to pro-               1(h)(3) of the Environmental Tax Regula-
                                                                    vide a certificate.                                        tions).
                                                                      Purchaser will retain the business records
                                                                    needed to document the sales covered by this                                           Product                                    Percentage
                                                                    certificate and will make such records avail-              CFC–11 .............................................................     llll
                                                                    able for inspection by Government officers.                CFC–12 .............................................................     llll
                                                                    Purchaser also will retain and make avail-                 CFC–114 ...........................................................      llll
                                                                    able for inspection by Government officers
                                                                    the certificates of its Second Purchasers.                   This certificate applies to (check and com-
                                                                      Purchaser has not been notified by the In-               plete as applicable):
                                                                    ternal Revenue Service that its right to pro-              llll All shipments to Purchaser at the
                                                                    vide a certificate has been withdrawn. In ad-                  following location(s):
                                                                    dition, the Internal Revenue Service has not               llllllllllllllllllllllll
                                                                    notified Purchaser that the right to provide               llllllllllllllllllllllll
                                                                    a certificate has been withdrawn from any                  llllllllllllllllllllllll
                                                                    Second Purchaser who will purchase ozone-                  llll All shipments to Purchaser under
                                                                    depleting chemicals to which this certificate                  the following Purchaser account num-
                                                                    applies.                                                       ber(s):
                                                                      Purchaser understands that the fraudulent                llllllllllllllllllllllll
                                                                    use of this certificate may subject Purchaser              llllllllllllllllllllllll
                                                                    and all parties making such fraudulent use                 llllllllllllllllllllllll
                                                                    of this certificate to a fine or imprisonment,             llll All shipments to Purchaser under
                                                                    or both, together with the costs of prosecu-                   the following purchase order(s):
                                                                    tion.                                                      llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    Name of Purchaser                                          llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                   llll One or more shipments to Purchaser
                                                                    Address of Purchaser                                           identified as follows:
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    Taxpayer Identifying Number of Purchaser                   llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                     Purchaser will not claim a credit or refund
                                                                    Title of person signing                                    under section 4682(g)(4) of the Internal Rev-
                                                                    llllllllllllllllllllllll                                   enue Code for any ozone-depleting chemicals
                                                                    Printed or typed name of person signing                    covered by this certificate.
                                                                                                                                 Purchaser understands that any use by
                                                                    llllllllllllllllllllllll
                                                                                                                               Purchaser of the ozone-depleting chemicals
                                                                    Signature
                                                                                                                               to which this certificate applies other than
                                                                      (ii) ODCs that will be used by the pur-                  as propellants in metered-dose inhalers may
                                                                    chaser as propellants in metered-dose in-                  result in the withdrawal by the Internal Rev-
                                                                    halers. If the purchaser will use the                      enue Service of Purchaser’s right to provide
                                                                                                                               a certificate.
                                                                    ODCs as propellants in metered-dose                          Purchaser will retain the business records
                                                                    inhalers, the certificate provided by                      needed to document the use as propellants in
                                                                    the purchaser must be in substantially                     metered-dose inhalers of the ozone-depleting
                                                                    the following form:                                        chemicals to which this certificate applies
                                                                                                                               and will make such records available for in-
                                                                    CERTIFICATE OF PURCHASER OF CHEMI-                         spection by Government officers.
                                                                     CALS THAT WILL BE USED BY THE                               Purchaser has not been notified by the In-
                                                                     PURCHASER AS PROPELLANTS IN ME-                           ternal Revenue Service that its right to pro-
                                                                     TERED-DOSE INHALERS                                       vide a certificate has been withdrawn.
                                                                                                                                 Purchaser understands that the fraudulent
                                                                     (To support tax-reduced sales under section
                                                                                                                               use of this certificate may subject Purchaser
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                                                                       4682(g)(4) of the Internal Revenue Code.)
                                                                                                                               and all parties making such fraudulent use
                                                                    Date lllllllllllllllllllll                                 of this certificate to a fine or imprisonment,

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–3
                                                                    or both, together with the costs of prosecu-                 (ii) Example. The application of this
                                                                    tion.                                                      paragraph (b)(1) may be illustrated by
                                                                    llllllllllllllllllllllll                                   the following example:
                                                                    Name of Purchaser
                                                                    llllllllllllllllllllllll                                     Example. A brings a light truck with a Har-
                                                                    Address of Purchaser                                       monized Tariff Schedule classification of 8704
                                                                                                                               into the customs territory and enters the
                                                                    llllllllllllllllllllllll
                                                                                                                               truck for transportation and exportation. Al-
                                                                    llllllllllllllllllllllll
                                                                                                                               though the truck is listed in the current
                                                                    Taxpayer Identifying Number of Purchaser                   Table, it is not an imported taxable product
                                                                    llllllllllllllllllllllll                                   because it is not entered for consumption,
                                                                    Title of person signing                                    use, or warehousing. The truck also would
                                                                    llllllllllllllllllllllll                                   not be an imported taxable product if it were
                                                                    Printed or typed name of person signing                    admitted to a foreign trade zone (rather than
                                                                    llllllllllllllllllllllll                                   brought into the customs territory) for
                                                                    Signature                                                  transportation and exportation.
                                                                    [T.D. 8370, 56 FR 56308, Nov. 4, 1991, as amend-             (2) Exceptions—(i) In general. A prod-
                                                                    ed by T.D. 8622, 60 FR 52850, Oct. 11, 1995]               uct is not treated as an imported tax-
                                                                                                                               able product if—
                                                                    § 52.4682–3      Imported taxable products.                  (A) The product is listed in Part I of
                                                                      (a) Overview; references to Tables; spe-                 the current Table and the adjusted tax
                                                                    cial rule for 1990—(1) Overview. This sec-                 with respect to the product is de mini-
                                                                    tion provides rules relating to the tax                    mis (within the meaning of paragraph
                                                                    imposed on imported taxable products                       (b)(2)(ii) of this section); or
                                                                    under section 4681, including rules for                      (B) The product is listed in Part II of
                                                                    identifying imported taxable products,                     the current Table, the adjusted tax
                                                                    determining the weight of the ozone-                       with respect to the product is de mini-
                                                                    depleting chemicals (ODCs) used as ma-                     mis (within the meaning of paragraph
                                                                    terials in the manufacture of such                         (b)(2)(ii) of this section), and the ODCs
                                                                    products, and computing the amount of                      (other than methyl chloroform) used as
                                                                    tax on such products. See § 52.4681–                       materials in the manufacture of the
                                                                    1(a)(2) and (c) for general rules and                      product were not used for purposes of
                                                                    definitions relating to the tax on im-                     refrigeration or air conditioning, cre-
                                                                    ported taxable products.                                   ating an aerosol or foam, or manufac-
                                                                      (2) References to Tables. When used in                   turing electronic components.
                                                                    this section—                                                (ii) De minimis adjusted tax. The ad-
                                                                                                                               justed tax with respect to a product is
                                                                      (i) The term Imported Products Table
                                                                                                                               de minimis if such tax is less than one/
                                                                    (Table) refers to the Table set forth in
                                                                                                                               tenth of one percent of the importer’s
                                                                    paragraph (f)(6) of this section; and
                                                                                                                               cost of acquiring such product. The
                                                                      (ii) The term current Imported Prod-                     term adjusted tax means the tax that
                                                                    ucts Table (current Table) used with re-                   would be imposed under section 468l on
                                                                    spect to a product refers to the Table                     the ODCs used as materials in the man-
                                                                    in effect on the date such product is                      ufacture of such product if such ODCs
                                                                    first sold or used by the importer                         were sold in the United States and the
                                                                    thereof.                                                   base tax amount were $1.00.
                                                                      (3) Special rule for 1990. In the case of                  (c) Taxable event—(1) In general. Ex-
                                                                    products first sold or used before Janu-                   cept as otherwise provided in para-
                                                                    ary 1, 1991, post-1990 ODCs (as defined                    graphs (c) (2) and (3) of this section, the
                                                                    in § 52.4681–1(c)(9)) shall not be taken                   tax on an imported taxable product is
                                                                    into account in applying the rules of                      imposed when the product is first sold
                                                                    this section.                                              or used (as defined in § 52.4681–1(c) (6)
                                                                      (b) Imported taxable products—(1) In                     and (7)) by its importer. Thus, for ex-
                                                                    general—(i) Rule. Except as provided in                    ample, imported taxable products that
                                                                    paragraph (b)(2) of this section, the                      are warehoused or repackaged after
                                                                    term ‘‘imported taxable product’’                          entry and then exported without being
                                                                    means any product that—                                    sold or used in the United States are
                                                                      (A) Is entered into the United States                    not subject to tax.
                                                                    for consumption, use, or warehousing;                        (2) Election to treat importation as
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                                                                    and                                                        use—(i) In general. An importer may
                                                                      (B) Is listed in the current Table.                      elect to treat the entry of products

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                                                                    § 52.4682–3                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                    into the United States as the use of                         (A) Has consistently treated the sale
                                                                    such products. In the case of imported                     of similar articles as the first sale or
                                                                    taxable products to which an election                      use of similar imported taxable prod-
                                                                    under this paragraph (c)(2) applies—                       ucts; and
                                                                      (A) Tax is imposed on the products                         (B) Has not made an election under
                                                                    on the date of entry (as determined                        paragraph (c)(2) of this section.
                                                                    under paragraph (c)(2)(ii) of this sec-                      (ii) Similar articles and imported tax-
                                                                    tion) if the products are entered into                     able products. An importer may estab-
                                                                    the United States after the election be-                   lish any reasonable criteria for deter-
                                                                    comes effective;                                           mining whether articles or imported
                                                                      (B) Tax is imposed on the products on                    taxable products are similar for pur-
                                                                    the date the election becomes effective                    poses of this paragraph (c)(3).
                                                                    if the products were entered into the                        (iii) Establishment of consistent treat-
                                                                    United States after December 3l, 1989,                     ment. An importer has consistently
                                                                    and before the election becomes effec-                     treated the sale of similar articles as
                                                                    tive; and                                                  the first sale or use of similar imported
                                                                      (C) No tax is imposed if the products                    taxable products only if such treat-
                                                                    were entered into the United States be-                    ment is reflected in the computation of
                                                                    fore January 1, 1990.                                      tax on the importer’s returns for all
                                                                      (ii) Date of entry. The date of entry is                 prior calendar quarters in which such
                                                                    determined by reference to customs                         treatment would affect tax liability.
                                                                    law. If the actual date is unknown, the                      (iv) Example. The application of this
                                                                    importer may use any reasonable and                        paragraph (c)(3) may be illustrated by
                                                                    consistent method to determine the                         the following example:
                                                                    date of entry, provided that such date                       Example. (a) An importer of printed cir-
                                                                    is within 10 business days of arrival of                   cuits and other electronic components uses
                                                                    products in the United States.                             those products in assembling television re-
                                                                      (iii) Applicability of election. An elec-                ceivers in the United States and also uses
                                                                    tion under this paragraph (c)(2) applies                   the printed circuits in assembling VCRs in
                                                                    to all imported taxable products that                      the United States. Under the importer’s cri-
                                                                                                                               teria for determining similarity, printed cir-
                                                                    are owned (and have not been used) by                      cuits are similar to other printed circuits,
                                                                    the importer at the time the election                      but not to the other electronic components.
                                                                    becomes effective and all imported tax-                    In addition, television receivers are similar
                                                                    able products that are entered into the                    to other television receivers, but not to
                                                                    United States by the importer after the                    VCRs. The importer has not made an elec-
                                                                    election becomes effective. An election                    tion under paragraph (c)(2) of this section.
                                                                    under this paragraph (c)(2) becomes ef-                      (b) Under this paragraph (c)(3), the im-
                                                                    fective at the beginning of the first cal-                 porter may treat the sale of the television
                                                                                                                               receivers as the first sale or use of the im-
                                                                    endar quarter to which the election ap-                    ported printed circuits incorporated into the
                                                                    plies. After October 9, 1990, the election                 television receivers. In that case, the tax on
                                                                    may be revoked only with the consent                       the printed circuits would be imposed when
                                                                    of the Commissioner.                                       the television receivers are sold rather than
                                                                      (iv) Making the election. An election                    when the printed circuits are used in assem-
                                                                    under this paragraph (c)(2) shall be                       bling the television receivers.
                                                                    made in accordance with the instruc-                         (c) The importer may treat the sale of the
                                                                    tions for the return on which the im-                      television receivers as the first sale or use of
                                                                                                                               the printed circuits incorporated into the
                                                                    porter is required to report liability for                 television receivers even if the sale of the
                                                                    tax under section 4681.                                    television receivers is not treated as the first
                                                                      (3) Treating the sale of an article incor-               sale or use of the other electronic compo-
                                                                    porating an imported taxable product as                    nents incorporated into the television re-
                                                                    the first sale or use of such product—(i)                  ceivers and even if the sale of VCRs is not
                                                                    In general. In the case of articles to be                  treated as the first sale or use of the printed
                                                                    sold, an importer may treat the sale of                    circuits incorporated into the VCRs. Under
                                                                                                                               paragraph (c)(3)(i)(A) of this section, how-
                                                                    an article manufactured or assembled
                                                                                                                               ever, the importer must have consistently
                                                                    in the United States as the first sale or                  treated the sale of television receivers as the
                                                                    use of an imported taxable product in-                     first sale or use of printed circuits incor-
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                                                                    corporated in such article, but only if                    porated into the receivers. Thus, in the case
                                                                    the importer—                                              of television receivers that were assembled

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–3
                                                                    before January 1, 1990, and sold after Decem-              paragraph (d)(3) of this section, the ODCs
                                                                    ber 31, 1989, the importer must have treated               used in the manufacture of the protective
                                                                    the sale of the television receivers as the                packing material are not treated as ODCs
                                                                    first sale or use of the printed circuits incor-           used as a material in the manufacture of the
                                                                    porated into the television receivers when                 television receivers.
                                                                    reporting tax under section 4681 with respect
                                                                    to such printed circuits.                                    (e) Methods of determining ODC
                                                                                                                               weight; computation of tax—(1) In gen-
                                                                      (d) ODCs used as materials in the man-
                                                                                                                               eral. This paragraph (e) sets forth the
                                                                    ufacture of imported taxable products—(1)
                                                                    ODC weight. The tax imposed on an im-                      methods to be used for determining the
                                                                    ported taxable product under section                       ODC weight of an imported taxable
                                                                    4681 is computed by reference to the                       product and a method to be used in
                                                                    weight of the ODCs used as materials                       computing the tax when the ODC
                                                                    in the manufacture of the product                          weight cannot be determined. The
                                                                    (ODC weight). The ODC weight of a                          amount of tax is computed separately
                                                                    product includes the weight of ODCs                        for each imported taxable product and
                                                                    used as materials in the manufacture                       the method to be used in determining
                                                                    of any components of the product.                          the ODC weight or otherwise com-
                                                                      (2) ODCs used as materials in the manu-                  puting the tax is separately determined
                                                                    facture of a product. Except as provided                   for each such product. Thus, an im-
                                                                    in paragraph (d)(3) of this section, an                    porter may use one method in com-
                                                                    ODC is used as a material in the manu-                     puting the tax on some imported tax-
                                                                    facture of a product if the ODC is—                        able products and different methods in
                                                                      (i) Incorporated into the product;                       computing the tax on other products.
                                                                      (ii) Released into the atmosphere in                     For example, an importer of telephone
                                                                    the process of manufacturing the prod-                     sets may compute the tax using the
                                                                    uct; or                                                    exact method described in paragraph
                                                                      (iii) Otherwise used in the manufac-                     (e)(2) of this section for determining
                                                                    ture of the product (but only to the ex-                   the ODC weight of telephone sets sup-
                                                                    tent the cost of the ODC is properly al-                   plied by one manufacturer and using
                                                                    locable to the product).                                   the Table method described in para-
                                                                      (3) Protective packaging. ODCs used in                   graph (e)(3) of this section for tele-
                                                                    the manufacture of the protective ma-                      phone sets supplied by other manufac-
                                                                    terial in which a product is packaged                      turers that have not provided sufficient
                                                                    are not treated as ODCs used as mate-                      information to allow the importer to
                                                                    rials in the manufacture of such prod-
                                                                                                                               use the exact method.
                                                                    uct.
                                                                      (4) Examples. The provisions of this                       (2) Exact method. If the importer de-
                                                                    paragraph (d) may be illustrated by the                    termines the weight of each ODC used
                                                                    following examples:                                        as a material in the manufacture of an
                                                                                                                               imported taxable product and supports
                                                                      Example 1. A, a manufacturer located out-                that determination with sufficient and
                                                                    side the United States, uses ODCs as a sol-                reliable information, the ODC weight
                                                                    vent to clean the printed circuits it manu-
                                                                    factures and as a coolant in the air-condi-
                                                                                                                               of the product is the weight so deter-
                                                                    tioning system of the factory in which the                 mined. Under this method, the ODC
                                                                    printed circuits are manufactured. The ODCs                weight of a mixture is equal to the
                                                                    used as a solvent are released into the at-                weight of the ODCs contained in the
                                                                    mosphere, and, under paragraph (d)(2)(ii) of               mixture. Representations by the manu-
                                                                    this section, are used as materials in the                 facturer of the product to the importer
                                                                    manufacture of the printed circuits. The
                                                                                                                               as to the weight of the ODCs used as
                                                                    ODCs used as a coolant in the air-condi-
                                                                    tioning system are also used in the manufac-               materials in the manufacture of the
                                                                    ture of the printed circuits. Under paragraph              product may be sufficient and reliable
                                                                    (d)(2)(iii) of this section, these ODCs are used           information for this purpose. Thus, a
                                                                    as materials in the manufacture of the print-              letter to the importer signed by the
                                                                    ed circuits only to the extent the cost of the             manufacturer may constitute suffi-
                                                                    ODCs is properly allocable to the printed cir-             cient and reliable information if the
                                                                    cuits.
                                                                      Example 2. B manufactures television re-
                                                                                                                               letter adequately identifies the product
                                                                    ceivers outside the United States and wraps                and states the weight of each ODC used
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                                                                    them for shipping in a protective packing                  as a material in the product’s manufac-
                                                                    material manufactured with ODCs. Under                     ture.

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                                                                    § 52.4682–3                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                      (3) Table method—(i) In general. If the                  weight specified in the Table for CFC–
                                                                    ODC weight of an imported taxable                          113 and the actual weight determined
                                                                    product is not determined using the                        by the importer for CFC–12 in deter-
                                                                    exact method described in paragraph                        mining the ODC weight of the product.
                                                                    (e)(2) of this section and the current                        (C) ODCs used in the manufacture of
                                                                    Table specifies an ODC weight for the                      rigid foam insulation. In computing the
                                                                    product, the ODC weight of the product                     tax using the method described in this
                                                                    is the Table ODC weight, regardless of                     paragraph (e)(3), any ODC for which the
                                                                    what ODCs were used in the manufac-                        Table specifies a weight followed by an
                                                                    ture of the product. In computing the                      asterisk (*) shall be treated as an ODC
                                                                    amount of tax, the Table ODC weight                        used in the manufacture of rigid foam
                                                                    shall not be rounded.                                      insulation (as defined in § 52.4682–1(d)
                                                                      (ii) Special rules—(A) Articles assem-
                                                                                                                               (3) and (4)).
                                                                    bled in the United States. An importer
                                                                                                                                  (4) Value method—(i) General rule. If
                                                                    that assembles finished articles in the
                                                                    United States may compute the                              the importer cannot determine the
                                                                    amount of tax imposed on the imported                      ODC weight of an imported taxable
                                                                    taxable products incorporated into the                     product under the exact method de-
                                                                    finished article by using the Table ODC                    scribed in paragraph (e)(2) of this sec-
                                                                    weight specified for the article instead                   tion and the Table ODC weight of the
                                                                    of the Table ODC weights specified for                     product is not specified, the tax im-
                                                                    the components. In order to compute                        posed on the product under section 4681
                                                                    the tax under this special rule, the im-                   is one percent of the entry value of the
                                                                    porter must determine the actual num-                      product.
                                                                    ber of articles manufactured. For ex-                         (ii) Special rule for mixtures. If, in the
                                                                    ample, if an importer manufactures 100                     case of an imported taxable product
                                                                    camcorders using imported subassem-                        that is a mixture, the tax was deter-
                                                                    blies, the importer may compute the                        mined under the method described in
                                                                    amount of tax on the subassemblies by                      this paragraph (e)(4), the Commissioner
                                                                    using the Table ODC weight specified                       may redetermine the tax based on the
                                                                    for camcorders. Thus, the tax imposed                      ODC weight of the mixture.
                                                                    on the subassemblies is equal to the                          (5) Adjustment for prior taxes—(i) In
                                                                    tax that would be imposed on 100                           general. If any manufacture with re-
                                                                    camcorders.                                                spect to an imported taxable product
                                                                      (B) Combination method. This para-                       occurred in the United States or the
                                                                    graph (e)(3)(ii)(B) applies to an im-                      product incorporates a taxed compo-
                                                                    ported taxable product if the current                      nent or a taxed chemical was used in
                                                                    Table specifies weights for two or more                    its manufacture, the product’s ODC
                                                                    ODCs with respect to the product and                       weight (or value) attributable to manu-
                                                                    the importer of the product can deter-                     facture within the United States or to
                                                                    mine the weight of any such ODC (and                       taxed components or taxed chemicals
                                                                    of any ODC used as a substitute for                        shall be disregarded in computing the
                                                                    such ODC) and can support such deter-
                                                                                                                               tax on such product using a method de-
                                                                    mination with sufficient and reliable
                                                                                                                               scribed in paragraph (e) (2), (3), or (4) of
                                                                    information. In determining the ODC
                                                                                                                               this section.
                                                                    weight of any such product, the im-
                                                                    porter may replace the weight specified                       (ii) Taxed component. The term
                                                                    in the Table for such ODC with the                         ‘‘taxed component’’ means any compo-
                                                                    weight (as determined by the importer)                     nent that previously was subject to tax
                                                                    of such ODC and its substitutes. For                       as an imported taxable product or that
                                                                    example, if an importer has sufficient                     would have been so taxed if section 4681
                                                                    and reliable information to determine                      had been in effect for periods before
                                                                    the amount of CFC–12 included in a                         January 1, 1990.
                                                                    product as a coolant (and to determine                        (iii) Taxed chemical. The term ‘‘taxed
                                                                    that no ODCs have been used as sub-                        chemical’’ means any ODC that pre-
                                                                    stitutes for CFC–12) but cannot deter-                     viously was subject to tax.
                                                                    mine the amount of CFC–113 used in                            (6) Examples. The application of this
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                                                                    manufacturing the product’s electronic                     paragraph (e) may be illustrated by the
                                                                    components, the importer may use the                       following examples:

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–3
                                                                       Example 1. A is an importer (as defined in                 (f) Imported Products Table—(1) In gen-
                                                                    § 52.4681–1(c)(5)) of VCRs. The HTS classifica-            eral. This paragraph (f) contains rules
                                                                    tion for the VCRs is 8528.10.40. VCRs classi-              relating to the Imported Products
                                                                    fied under HTS heading 8528.10.40 are im-
                                                                    ported taxable products because they are
                                                                                                                               Table (Table) and sets forth the Table.
                                                                    listed in the Table (contained in paragraph                The Table lists all the products that
                                                                    (f)(6) of this section) by name and HTS head-              are subject to the tax on imported tax-
                                                                    ing (as described in paragraph (f)(3)(i) of this           able products and specifies the Table
                                                                    section). Each VCR is wrapped in protective                ODC weight of each product for which
                                                                    packing material manufactured with ODCs.                   such a weight has been determined.
                                                                    A imports and sells 100 VCRs during the first                 (2) Applicability of Table—(i) In gen-
                                                                    calendar quarter of 1991. A may determine
                                                                    the ODC weight for the VCRs by reference to
                                                                                                                               eral. Except as provided in paragraph
                                                                    the Table. The Table ODC weight specified                  (f)(2)(ii) of this section, the Table con-
                                                                    for VCRs classified under HTS heading                      tained in paragraph (f)(6) of this sec-
                                                                    8528.10.40 is 0.0586 pound of CFC–113. This                tion is effective on January 1, 1990.
                                                                    weight does not take protective packaging                     (ii) Treatment of certain products—(A)
                                                                    into account. The amount of tax for the first              Products included in a listing that is
                                                                    quarter of 1991 is $6.42 (0.0586 (the ODC                  preceded by a double asterisk (**) in
                                                                    weight) × 100 (the number of VCRs sold in the
                                                                                                                               the Table shall not be treated as im-
                                                                    quarter) × $1.37 (the base tax amount for
                                                                    CFC–113 in 1991) × 0.8 (the ozone-depletion                ported taxable products until October
                                                                    factor for CFC–113)). If A uses the exact                  1, 1990.
                                                                    method (as described in paragraph (e)(2) of                   (B) Products included in a listing
                                                                    this section) to determine the ODC weight                  that is preceded by a triple asterisk
                                                                    for the VCRs, A does not take into account                 (***) in the Table shall not be treated
                                                                    the ODCs used in the manufacture of the pro-               as imported taxable products until
                                                                    tective packaging. (Imported protective
                                                                                                                               January l, 1992.
                                                                    packaging containing foams made with ODCs
                                                                    other than foams defined in § 52.4682–1(d)(3) is              (3) Identification of products—(i) In
                                                                    subject to tax, however, if the packaging is               general. Each listing in the Table iden-
                                                                    sold as packaging or first used as packaging               tifies a product by name and includes
                                                                    in the United States.)                                     only products that are described by
                                                                       Example 2. The facts are the same as in Ex-             that name. Most listings (other than
                                                                    ample 1, except that A’s VCRs are manufac-                 listings for mixtures) identify a prod-
                                                                    tured using methyl chloroform as the sol-
                                                                                                                               uct by both name and HTS heading. In
                                                                    vent instead of CFC–113. If A does not use the
                                                                    exact method to determine the weight of the                such cases, a product is included in
                                                                    methyl chloroform used in the manufacture                  that listing only if the product is de-
                                                                    of the VCRs, A must, under paragraphs                      scribed by that name and the rate of
                                                                    (e)(3)(i) and (e)(4)(i) of this section, deter-            duty on the product is determined by
                                                                    mine the ODC weight by reference to the                    reference to that HTS heading. How-
                                                                    Table. If A uses the Table ODC weight, the                 ever, the product is included in that
                                                                    computation of tax is the same as in Example               listing even if it is manufactured with
                                                                    1, using the base tax amount and ozone-de-
                                                                    pletion factor for CFC–113. A does not sub-                or contains a different ODC than the
                                                                    stitute the base tax amount and ozone-deple-               ODC specified in the Table.
                                                                    tion factor of methyl chloroform for those of                 (ii) Electronic items not listed by spe-
                                                                    CFC–113.                                                   cific name—(A) In general. Part II of the
                                                                       Example 3. B imports and sells mixtures of              Table contains listings for electronic
                                                                    ethylene oxide and CFC–12. The mixture is 88               items that are not included within any
                                                                    percent CFC–12 by weight. B also imports                   other listing in the Table. An imported
                                                                    and sells R–502. The R–502 is 51 percent CFC–
                                                                                                                               product is included in these listings
                                                                    115 by weight. In the first calendar quarter of
                                                                    1991 B sells 100 pounds of imported ethylene               only if such imported product—
                                                                    oxide/CFC–12 mixture and 10,000 pounds of                     (1) Is an electronic component listed
                                                                    imported R–502. The ethylene/CFC–12 mix-                   in chapters 84, 85, or 90 of the Har-
                                                                    ture and the R–502 are imported taxable                    monized Tariff Schedule; or
                                                                    products because they are listed in Part I of                 (2) Contains components described in
                                                                    the Table (contained in paragraph (f)(6) of                paragraph (f)(3)(ii)(A)(1) of this section
                                                                    this section). Under the exact method de-                  and more than 15 percent of the cost of
                                                                    scribed in paragraph (e)(2) of this section, B
                                                                                                                               the imported product is attributable to
                                                                    computes the tax based on 88 pounds of CFC–
                                                                    12, the amount of ODCs contained in the im-                such components.
                                                                    ported ethylene oxide mixture, and based on                   (B) Electronic component. For purposes
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                                                                    5100 pounds of CFC–115, the amount of ODCs                 of this paragraph (f)(3)(ii), an elec-
                                                                    in the imported R–502.                                     tronic component is a component

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                                                                    § 52.4682–3                                                                        26 CFR Ch. I (4–1–09 Edition)

                                                                    whose operation involves the use of                                ODCs will be listed in part I of a re-
                                                                    nonmechanical       amplification      or                          vised Table if the Commissioner has
                                                                    switching devices such as tubes, tran-                             determined that—
                                                                    sistors, and integrated circuits. Such                               (A) The ODC weight of the product is
                                                                    components do not include passive                                  not de minimis when the product is pro-
                                                                    electrical devices such as resistors and                           duced using the predominant method of
                                                                    capacitors.                                                        manufacturing the product; and
                                                                      (C) Certain items not included. Items                              (B) None of the ODCs used as mate-
                                                                    such as screws, nuts, bolts, plastic                               rials in the manufacture of the product
                                                                    parts, and similar specially fabricated                            under the predominant method are
                                                                    parts that may be used to construct an                             used for purposes of refrigeration or air
                                                                    electronic item are not themselves in-                             conditioning, creating an aerosol or
                                                                    cluded in the listing for electronic                               foam, or manufacturing electronic
                                                                    items not otherwise listed in the Table.                           components.
                                                                      (iii) Examples. The application of this                            (ii) Listing in part II. A product is list-
                                                                    paragraph (f)(3) may be illustrated by                             ed in part II of the Table if the Com-
                                                                    the following examples:                                            missioner has determined that the
                                                                      Example 1. The Table lists ‘‘electronic inte-                    ODCs used as materials in the manu-
                                                                    grated circuits and microassemblies; HTS                           facture of the product under the pre-
                                                                    heading 8542.’’ A bipolar transistor under                         dominant method are used for purposes
                                                                    HTS heading 8542.11.00.05 is included in this                      of refrigeration or air conditioning,
                                                                    listing because a bipolar transistor is a type                     creating an aerosol or foam, or manu-
                                                                    of electronic integrated circuit and HTS                           facturing electronic components.
                                                                    heading 8542.11.00.05 is included within HTS                         (iii) Listing in part III. A product is
                                                                    heading 8542.
                                                                      Example 2. The Table lists ‘‘radios; HTS                         listed in part III of the Table if the
                                                                    heading 8527.19,’’ ‘‘radio combinations; HTS                       Commissioner has determined that the
                                                                    heading 8527.11’’ and ‘‘radio combinations;                        product is not an imported taxable
                                                                    HTS heading 8527.31.’’ A radio classified                          product and the product would other-
                                                                    under HTS heading 8527.19 is not included                          wise be included within a listing in
                                                                    within either listing for radio combinations.                      part II of the Table. For example, flop-
                                                                    However, a radio classified under HTS head-                        py disk drive units are listed in part III
                                                                    ing 8527.19.00.20 is included within the listing
                                                                                                                                       because they are not imported taxable
                                                                    for radios; HTS heading 8527.19. A radio com-
                                                                    bination classified under HTS heading                              products and they would, but for their
                                                                    8527.11.20 is included within the listing for                      listing in part III, be included within
                                                                    radio combinations; HTS heading 8527.11 but                        the part II listing for electronic items
                                                                    not the listing for radio combinations; HTS                        not specifically identified.
                                                                    heading 8527.31. Any radio or radio combina-                         (5) Table ODC weight. The Table ODC
                                                                    tion not classified under the HTS heading for                      weight of a product is the weight, de-
                                                                    any other listing is included in the listing                       termined by the Commissioner, of the
                                                                    for electronic items not otherwise listed.
                                                                                                                                       ODCs that are used as materials in the
                                                                      (4) Rules for listing products. Products                         manufacture of the product under the
                                                                    are listed in the Table in accordance                              predominant method of manufacturing.
                                                                    with the following rules:                                          The Table ODC weight is given in
                                                                      (i) Listing in part I. A product is listed                       pounds per single unit of product un-
                                                                    in part I of the Table if it is a mixture                          less otherwise specified.
                                                                    containing ODCs. In addition, a prod-                                (6) Table. The Table is set forth
                                                                    uct other than a mixture containing                                below:
                                                                                                                   IMPORTED PRODUCTS TABLE
                                                                                                                                                     Harmonized
                                                                                                    Product name                                    tariff schedule   ODC            ODC weight
                                                                                                                                                        heading

                                                                     Part I—Products that are mixtures containing ODCs:
                                                                     Mixtures containing ODCs, including but not limited to:
                                                                              —anti-static sprays.
                                                                              —automotive products such as ‘‘carburetor cleaner,’’ ‘‘stop leak,’’
                                                                                and ‘‘oil charge’’.
                                                                              —cleaning solvents.
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                                                                              —contact cleaners.
                                                                              —degreasers.


                                                                                                                                  26



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                                                                    Internal Revenue Service, Treasury                                                                                                                                      § 52.4682–3

                                                                                                                             IMPORTED PRODUCTS TABLE—Continued
                                                                                                                                                                                             Harmonized
                                                                                                                   Product name                                                             tariff schedule                   ODC                  ODC weight
                                                                                                                                                                                                heading

                                                                                  —dusting sprays.
                                                                                  —electronic circuit board coolants.
                                                                                  —electronic solvents.
                                                                                  —ethylene oxide/CFC–12.
                                                                                  —fire extinguisher preparations and charges.
                                                                                  —flux removers for electronics.
                                                                                  —insect and wasp sprays.
                                                                                  —mixtures of ODCs.
                                                                                  —propellants.
                                                                                  —refrigerants .......................................................................................


                                                                                                                                                                                   Harmonized
                                                                                                               Product name                                                       tariff schedule                    ODC                        ODC weight
                                                                                                                                                                                      heading

                                                                     Part II—Products in which ODCs are used for purposes of refrigeration
                                                                       or air conditioning, creating an aerosol or form or manufacturing
                                                                       electronic components:
                                                                              Rigid foam insulation defined in § 52.4682–1(d)(3) ...................                              ........................   .........................
                                                                              Foams made with ODCs, other than foams defined in                                                   ........................   .........................
                                                                                § 52.4682–1(d)(3).
                                                                              Scrap flexible foams made with ODCs ......................................                          ........................   .........................
                                                                              Medical products containing ODCs:
                                                                                        Surgical staplers ..........................................................              ........................   .........................
                                                                                        Cryogenic medical instruments ...................................                         ........................   .........................
                                                                                        Drug delivery systems .................................................                   ........................   .........................
                                                                                        Inhalants ......................................................................          ........................   .........................
                                                                              Dehumidifiers, household ..........................................................                  8415.82.00.50             CFC–12 ..........            0.344
                                                                              Chillers: ......................................................................................     8415.82.00.65             .........................
                                                                                        Charged with CFC–12 .................................................                     ........................   CFC–12 ..........            1600.
                                                                                        Charged with CFC–114 ...............................................                      ........................   CFC–114 ........             1250.
                                                                                        Charged with R–500 ....................................................                   ........................   CFC–12 ..........            1920.
                                                                              Refrigerator-freezers, household:
                                                                                        Not > 184 liters ............................................................             8418.10.00.10              CFC–11 ..........            11.08

                                                                                                                                                                                                             CFC–12 ..........            0.13
                                                                                               > 184 liters but not > 269 liters ...................................               8418.10.00.20             CFC–11 ..........            11.32

                                                                                                                                                                                                             CFC–12 ..........            0.26
                                                                                               > 269 liters but not > 382 liters ...................................               8418.10.00.30             CFC–11 ..........            11.54

                                                                                                                                                                                                             CFC–12 ..........            0.35
                                                                                               > 382 liters ...................................................................    8418.10.00.40             CFC-11 ...........           11.87

                                                                                                                                                                                                             CFC–12 ..........            0.35
                                                                                  Refrigerators, household:
                                                                                           Not > 184 liters ............................................................          8418.21.00.10              CFC–11 ..........            11.08

                                                                                                                                                                                                             CFC–12 ..........            0.13
                                                                                               > 184 liters but not > 269 liters ...................................               8418.21.00.20             CFC–11 ..........            11.32

                                                                                                                                                                                                             CFC–12 ..........            0.26
                                                                                               > 269 liters but not > 382 liters ...................................               8418.21.00.30             CFC–11 ..........            11.54

                                                                                                                                                                                                             CFC–12 ..........            0.35
                                                                                               > 382 liters ...................................................................    8418.21.00.90             CFC–11 ..........            11.87

                                                                                                                                                                                                             CFC–12 ..........            0.35
                                                                                  Freezers, household ..................................................................                     8418.30         CFC–11 ..........            1 2.0

                                                                                                                                                                                                             CFC–12 ..........            0.4
                                                                                  Freezers, household ..................................................................                     8418.40         CFC–11 ..........            12.0

                                                                                                                                                                                                             CFC–12 ..........            0.4
                                                                                  Refrigerating display counters not > 227 kg .............................                                  8418.50         CFC–11 ..........            1 50.0

                                                                                                                                                                                                             CFC–12 ..........            260.0
                                                                                  Icemaking machines ..................................................................                      8418.69         .........................
                                                                                           Charged with CFC–12 .................................................                  ........................   CFC–12 ..........            1.4
                                                                                           Charged with R–502 ....................................................                ........................   CFC–115 ........             3.39
                                                                                  Drinking water coolers ...............................................................                     8418.69         .........................
                                                                                           Charged with CFC–12 .................................................                  ........................   CFC–12 ..........            0.21
                                                                                           Charged with R–500 ....................................................                ........................   CFC–12 ..........            0.22
                                                                                  Centrifugal chillers, hermetic .....................................................                       8418.69         .........................
                                                                                           Charged with CFC–12 .................................................                  ........................   CFC–12 ..........            1600.
                                                                                           Charged with CFC–114 ...............................................                   ........................   CFC–114 ........             1250.
                                                                                           Charged with R–500 ....................................................                ........................   CFC–12 ..........            1920.
                                                                                  Reciprocating chillers .................................................................                   8418.69         .........................
                                                                                           Charged with CFC–12 .................................................                  ........................   CFC–12 ..........            200.
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                                                                                  Mobile refrigeration systems ......................................................                        8418.99         .........................
                                                                                           Containers ...................................................................         ........................   CFC–12 ..........            15.


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                                                                    § 52.4682–3                                                                                                              26 CFR Ch. I (4–1–09 Edition)

                                                                                                                                                                               Harmonized
                                                                                                         Product name                                                         tariff schedule                    ODC                        ODC weight
                                                                                                                                                                                  heading

                                                                                       Trucks ..........................................................................      ........................   CFC–12 ..........            11.
                                                                                       Trailers .........................................................................     ........................   CFC–12 ..........            20.
                                                                            Refrigeration condensing units:
                                                                                       not > 746W ..................................................................          8418.99.00.05              CFC–12 ..........            0.3
                                                                                       > 746W but not > 2.2KW ............................................                    8418.99.00.10              CFC–12 ..........            1.0
                                                                                       > 2.2KW but not > 7.5KW ...........................................                    8418.99.00.15              CFC–12 ..........            3.0
                                                                                       > 7.5KW but not > 22.3KW .........................................                     8418.99.00.20              CFC–12 ..........            8.5
                                                                                       > 22.3 KW ...................................................................          8418.99.00.25              CFC–12 ..........            17.0
                                                                            Fire extinguishers, charged w/ODCs .........................................                               8424              .........................
                                                                            Electronic typewriters and word processors ..............................                                  8469              CFC–113 ........             0.2049
                                                                            Electronic calculators .................................................................                8470.10              CFC–113 ........             0.0035
                                                                            Electronic calculators w/printing device .....................................                          8470.21              CFC–113 ........             0.0057
                                                                            Electronic calculators .................................................................                8470.29              CFC–113 ........             0.0035
                                                                            Account machines ......................................................................                 8470.40              CFC–113 ........             0.1913
                                                                            Cash registers ............................................................................            8470.50               CFC–113 ........             0.1913
                                                                            Digital automatic data processing machines w/cathode ray                                                8471.20              CFC–113 ........             0.3663
                                                                               tube, not included in subheading 8471.20.00.90.
                                                                            Laptops, notebooks, and pocket computers ..............................                            8471.20.00.90             CFC–113 ........             0.03567
                                                                            Digital processing units w/entry value:
                                                                                       Not > $100K ................................................................                     8471.91          CFC–113          ........    0.4980
                                                                                       > $100K .......................................................................                  8471.91          CFC–113          ........    27.6667
                                                                            Combined input/output units (terminals) ....................................                                8471.92          CFC–113          ........    0.3600
                                                                            Keyboards ..................................................................................                8471.92          CFC–113          ........    0.0742
                                                                            Display units ...............................................................................               8471.92          CFC–113          ........    0.0386
                                                                            Printer units ................................................................................              8471.92          CFC–113          ........    0.1558
                                                                            lnput or output units ...................................................................                   8471.92          CFC–113          ........    0.1370
                                                                            Hard magnetic disk drive units not included in subheading
                                                                               8471.93.10 for a disk of a diameter:
                                                                                       Not > 9 cm (31⁄2 inches) ..............................................                        8471.93            CFC–113          ........    0.2829
                                                                                       > 9 cm (31⁄2 inches) but not > 21 cm (81⁄4 inches) .....                                       8471.93            CFC–113          ........    1.1671
                                                                            Nonmagnetic storage units w/ entry value > $1,000 .................                                       8471.93            CFC–113          ........    2.7758
                                                                            Magnetic disk drive units for a disk of a diameter over 21 cm                                           8471.93.10           CFC–113          ........    4.0067
                                                                               (81⁄4 inches).
                                                                            Power supplies ...........................................................................              8471.99.30           CFC–113 ........             0.0655
                                                                            Electronic office machines .........................................................                          8472           CFC–113 ........             0.001
                                                                            Populated cards for digital processing units in subheading
                                                                               8471.91 w/value:
                                                                                       Not > $100K ................................................................                      8473.30         CFC–113 ........             0.1408
                                                                                       > $100K .......................................................................                   8473.30         CFC–113 ........             4.82
                                                                            Automatic goods-vending machines with refrigerating device ..                                                8476.11         CFC–12 ..........            0.45
                                                                            Microwave ovens with electronic controls, with capacity of ......                                            8516.50         .........................
                                                                                       0.99 cu. ft. or less ........................................................          ........................   CFC–113 ........             0.0300
                                                                                       1.0 through 1.3 cu. ft ...................................................             ........................   CFC–113 ........             0.0441
                                                                                       1.31 cu. ft. or greater ...................................................            ........................   CFC–113 ........             0.0485
                                                                            Microwave oven combinations with electronic controls .............                                 8516.60.40.60             CFC–113 ........             0.0595
                                                                            Telephone sets w/entry value:
                                                                                       Not > $11.00 ................................................................                   8517.10           CFC–113          ........    0.0225
                                                                                       > $11.00 ......................................................................                 8517.10           CFC–113          ........    0.1
                                                                            Teleprinters and teletypewriters .................................................                         8517.20           CFC–113          ........    0.1
                                                                            Switching equipment not included in subheading 8517.30.20 ..                                               8517.30           CFC–113          ........    0.1267
                                                                            Private branch exchange switching equipment .........................                                   8517.30.20           CFC–113          ........    0.0753
                                                                            Modems .....................................................................................              8517.40            CFC–113          ........    0.0225
                                                                            Intercoms ...................................................................................             8517.81            CFC–113          ........    0.0225
                                                                            Facsimile machines ...................................................................                      85l7.82          CFC–113          ........    0.0225
                                                                            Loudspeakers, microphones, headphones, and electric sound                                                     8518           CFC–113          ........    0.0022
                                                                               amplifier sets, not included in subheading 8518.30.10.
                                                                            Telephone handsets ..................................................................                   8518.30.10           CFC–113 ........             0.042
                                                                            Turntables, record players, cassette players, and other sound                                                 8519           CFC–113 ........             0.0022
                                                                               reproducing apparatus.
                                                                            Magnetic tape recorders and other sound recording appa-                                                           8520       CFC–113 ........             0.0022
                                                                               ratus, not included in subheading 8520.20.
                                                                            Telephone answering machines ................................................                           8520.20              CFC–113          ........    0.1
                                                                            Color video recording/reproducing apparatus ...........................                           8521.10.00.20              CFC–113          ........    0.0586
                                                                            Videodisc players .......................................................................              8521.90               CFC–113          ........    0.0106
                                                                            Cordless handset telephones ....................................................                     8525.20.50              CFC–113          ........    0.1
                                                                            Cellular communication equipment ............................................                        8525.20.60              CFC–113          ........    0.4446
                                                                            TV cameras ................................................................................             8525.30              CFC–113          ........    1.423
                                                                            Camcorders ................................................................................             8525.30              CFC–113          ........    0.0586
                                                                            Radio combinations ...................................................................                  8527.11              CFC–113          ........    0.0022
                                                                            Radios ........................................................................................         8527.19              CFC–113          ........    0.0014
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                                                                            Motor Vehicle radios with or w/o tape player ............................                               8527.21              CFC–113          ........    0.0021
                                                                            Radio combinations ...................................................................                  8527.31              CFC–113          ........    0.0022


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                                                                    Internal Revenue Service, Treasury                                                                                                                                         § 52.4682–3

                                                                                                                                                                                       Harmonized
                                                                                                               Product name                                                           tariff schedule                    ODC                        ODC weight
                                                                                                                                                                                          heading

                                                                                 Radios ........................................................................................            8527.32              CFC–113          ........    0.0014
                                                                                 Tuners w/o speaker ...................................................................               8527.39.00.20              CFC–113          ........    0.0022
                                                                                 Television receivers ...................................................................                      8528              CFC–113          ........    0.0386
                                                                                 VCRs ..........................................................................................         8528.10.40              CFC–113          ........    0.0586
                                                                                 Home satellite earth stations .....................................................                  8528.10.80.55              CFC–113          ........    0.0106
                                                                                 Electronic assemblies for HTS headings 8525, 8527, & 8528                                                  8529.90              CFC–113          ........    0.0816
                                                                                 Indicator panels incorporating liquid crystal devices or light                                             8531.20              CFC–113          ........    0.0146
                                                                                   emitting diodes.
                                                                                 Printed circuits ...........................................................................                  8534              CFC–113 ........             0.001
                                                                                 Computerized numerical controls ..............................................                        8537.10.00.30             CFC–113 ........             0.1306
                                                                                 Diodes, crystals, transistors and other similar discrete semi-                                                 8541             CFC–113 ........             0.0001
                                                                                   conductor devices.
                                                                                 Electronic integrated circuits and microassemblies ...................                                               8542       CFC–113 ........             0.0002
                                                                                 Signal generators .......................................................................                       8543.20         CFC–113 ........             0.6518
                                                                                 Avionics ......................................................................................            8543.90.40           CFC–113 ........             0.915
                                                                                 Signal generators subassemblies ..............................................                             8543.90.80           CFC–113 ........             0.1265
                                                                                 Insulated or refrigerated railway freight cars .............................                                         8606       CFC–11 ..........            1100.

                                                                                 Passenger automobiles .............................................................                                  8703       .........................
                                                                                            Foams (interior) ...........................................................              ........................   CFC–11 ..........            0.8
                                                                                            Foams (exterior) ..........................................................               ........................   CFC–11 ..........            0.7
                                                                                            With charged a/c .........................................................                ........................   CFC–12 ..........            2.0
                                                                                            Without charged a/c ....................................................                  ........................   CFC–12 ..........            0.2
                                                                                            Electronics ...................................................................           ........................   CFC–113 ........             0.5
                                                                                 Light trucks .................................................................................                       8704       .........................
                                                                                            Foams (interior) ...........................................................              ........................   CFC–11 ..........            0.6
                                                                                            Foams (exterior) ..........................................................               ........................   CFC–11 ..........            0.1
                                                                                            With charged a/c .........................................................                ........................   CFC–12 ..........            2.0
                                                                                            Without charged a/c ....................................................                  ........................   CFC–12 ..........            0.2
                                                                                            Electronics ...................................................................           ........................   CFC–113 ........             0.4
                                                                                 Heavy trucks and tractors, GVW 33,001 lbs or more: 2 ............                                                    8704       .........................
                                                                                            Foams (interior) ...........................................................              ........................   CFC–11 ..........            0.6
                                                                                            Foams (exterior) ..........................................................               ........................   CFC–11 ..........            0.1
                                                                                            With charged a/c .........................................................                ........................   CFC–12 ..........            3.0
                                                                                            Without charged a/c ....................................................                  ........................   CFC–12 ..........            0.2
                                                                                            Electronics ...................................................................           ........................   CFC–113 ........             0.4
                                                                                 Motorcycles with seat foamed with ODCs .................................                                             8711       CFC–11 ..........            0.04
                                                                                 Bicycles with seat foamed with ODCs .......................................                                          8712       CFC–11 ..........            0.04
                                                                                 Seats foamed with ODCs ..........................................................                               8714.95         CFC–11 ..........            0.04
                                                                                 Aircraft ........................................................................................                    8802       CFC–12 ..........            0.25 lb/1000 lbs
                                                                                                                                                                                                                                                Operating Empty
                                                                                                                                                                                                                                                Weight (OEW).
                                                                                                                                                                                      ........................   CFC–113 ........             30.0 lbs./1000
                                                                                                                                                                                                                                                lbs.OEW
                                                                                 Optical fibers ..............................................................................                        9001       CFC–12 ..........            0.005 lb/thousand
                                                                                                                                                                                                                                                feet.
                                                                                 Electronic cameras ....................................................................                         9006            CFC–113 ........             0.01
                                                                                 Photocopiers ..............................................................................                     9009            CFC–113 ........             0.0426
                                                                                 Avionics ......................................................................................              9014.20            CFC–113 ........             0.915
                                                                                 Electronic drafting machines ......................................................                             9017            CFC–113 ........             0.12
                                                                                 Complete patient monitoring systems .......................................                                9018.19.80           CFC–12 ..........            0.94
                                                                                                                                                                                                                 CFC–113 ........             3.4163
                                                                                 Complete patient monitoring systems; subassemblies thereof                                            9018.19.80.60             CFC–113 ........             1.9320
                                                                                 Physical or chemical analysis instruments ................................                                    9027              CFC–12 ..........            0.0003
                                                                                                                                                                                                                 CFC–113 ........             0.0271
                                                                                 Oscilloscopes .............................................................................                          9030       CFC–11 ..........            0.49
                                                                                                                                                                                                                 CFC–12 ..........            0.5943
                                                                                                                                                                                                                 CFC–113 ........             0.2613
                                                                              Foam chairs ...............................................................................                           9401         CFC–11 ..........            0.30
                                                                              Foam sofas ................................................................................                           9401         CFC–11 ..........            0.75
                                                                              Foam mattresses .......................................................................                            9404.21         CFC–11 ..........            1.60
                                                                              Electronic games and electronic components thereof ..............                                                     9504         CFC-113 .........
                                                                     Electronic items not otherwise listed in the Table:
                                                                              Included in HTS chapters 84, 85, 90 .........................................                                                      CFC–113 ........             0.0004 pound/$1.00
                                                                                                                                                                                                                                                of entry value.
                                                                                 Not included in HTS chapters 84, 85,                      90 3    ................................                              CFC–113 ........             0.0004 pound/$1.00
                                                                                                                                                                                                                                                of entry value.
                                                                     PART III—Products that are not Imported Taxable Products:
                                                                             Room air conditioners ................................................................                    8415.10.00.60             .........................
                                                                             Dishwashers ...............................................................................                    8422.11              .........................
                                                                             Clothes washers ........................................................................                       8450.11              .........................
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                                                                             Clothes dryers ............................................................................                    8451.21              .........................
                                                                             Floppy disk drive units ...............................................................                         8471.93             .........................


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                                                                    § 52.4682–4                                                                                                         26 CFR Ch. I (4–1–09 Edition)

                                                                                                                                                                                Harmonized
                                                                                                           Product name                                                        tariff schedule           ODC                     ODC weight
                                                                                                                                                                                   heading

                                                                              Transformers and inductors .......................................................                       8504      .........................
                                                                              Toasters .....................................................................................         8516.72     .........................
                                                                              Unrecorded media .....................................................................                    8523     .........................
                                                                              Recorded media .........................................................................                 8524      .........................
                                                                              Capacitors ..................................................................................             8532     .........................
                                                                              Resistors ....................................................................................           8533      .........................
                                                                              Switching apparatus ...................................................................                   8536     .........................
                                                                              Cathode tubes ............................................................................               8540      .........................
                                                                      1 See   paragraph (e)(3)(ii)(C) of this section. Denotes an ODC used in the manufacture of rigid foam insulation.
                                                                      2 See   paragraph (f)(2)(ii)(A) of this section. Denotes product for which the effective date is October 1, 1990.
                                                                      3 See   paragraph (f)(2)(ii)(B) of this section. Denotes products for which the effective date is January 1, 1992.



                                                                      (g) Requests for modification of Table—                                                        § 52.4682–4 Floor stocks tax.
                                                                    (1) In general. Any manufacturer or im-                                                             (a) Overview. This section provides
                                                                    porter of a product may request that                                                             rules for identifying ozone-depleting
                                                                    the Secretary modify the Table in any                                                            chemicals (ODCs) that are subject to
                                                                    of the following respects:                                                                       the floor stocks tax imposed by section
                                                                      (i) Adding a product to the Table and                                                          4682(h)(1), determining the person that
                                                                    specifying its Table ODC weight.                                                                 is liable for the tax, and computing the
                                                                      (ii) Removing a product from the                                                               amount of the tax. See § 52.4681–1(a)(3)
                                                                    Table.                                                                                           and (c) for general rules and definitions
                                                                      (iii) Changing or specifying the Table                                                         relating to the floor stocks tax.
                                                                    ODC weight of a product.                                                                            (b) Identifying rules—(1) ODCs subject
                                                                      (2) Form of request. The Secretary will                                                        to floor stocks tax; ODCs held for sale or
                                                                    consider a request for modification                                                              for use in further manufacture—(i) In
                                                                    that includes the following:                                                                     general. The floor stocks tax is imposed
                                                                      (i) The name, address, taxpayer iden-                                                          only on an ODC that is held for sale or
                                                                    tifying number, and principal place of                                                           for use in further manufacture on the
                                                                    business of the requester.                                                                       date the tax is imposed. This paragraph
                                                                      (ii) For each product with respect to                                                          (b)(1) provides rules for identifying
                                                                    which a modification is requested:                                                               ODCs held for sale or for use in further
                                                                      (A) The name of the product;                                                                   manufacture.
                                                                      (B) The HTS heading or subheading;                                                                (ii) Held for sale—(A) In general. For
                                                                      (C) The type of modification re-                                                               purposes of determining whether an
                                                                    quested;                                                                                         ODC is held for sale, the term sale shall
                                                                      (D) The Table ODC weight that                                                                  have the meaning set forth in § 52.4681–
                                                                    should be specified for the product if                                                           1(c)(6). ODCs held for sale include ODCs
                                                                    the request relates to adding a product                                                          that will be sold in connection with the
                                                                    or changing or specifying its Table                                                              provision of services or in connection
                                                                    ODC weight; and                                                                                  with the sale of a manufactured article
                                                                      (E) The data supporting the request.                                                           and, in such cases, include ODCs that
                                                                                                                                                                     will be sold without the statement of a
                                                                      (3) Address. The address for submis-
                                                                                                                                                                     separate charge for those ODCs.
                                                                    sion of requests under this paragraph
                                                                                                                                                                        (B) ODCs held by a government. An
                                                                    (g) is: Internal Revenue Service, P.O.
                                                                                                                                                                     ODC that is held by a government for
                                                                    Box 7604, Ben Franklin Station, Attn:
                                                                                                                                                                     its own use is not held for sale even if
                                                                    CC:CORP:T:R       (Imported      Products
                                                                                                                                                                     the ODC will be transferred between
                                                                    Table), room 5228, Washington, DC
                                                                                                                                                                     agencies or other subdivisions that
                                                                    20044.
                                                                                                                                                                     have or are required to have different
                                                                      (4) Public inspection and copying. Re-                                                         employer identification numbers.
                                                                    quests submitted under this paragraph                                                               (iii) Held for use in further manufac-
                                                                    (g) will be available in the Internal                                                            ture. Except as otherwise provided in
                                                                    Revenue Service Freedom of Informa-                                                              paragraph (b)(2)(v) of this section, an
                                                                    tion Reading Room for public inspec-                                                             ODC is held for use in further manufac-
                                                                    tion and copying.                                                                                ture if—
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                                                                    [T.D. 8370, 56 FR 56311, Nov. 4, 1991, as amend-                                                    (A) The ODC will be used as a mate-
                                                                    ed by T.D. 8370, 58 FR 14518, Mar. 18, 1993]                                                     rial (within the meaning of paragraph

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–4

                                                                    (b)(1)(iv) of this section) in the manu-                   does not hold the ODC for sale or for use in
                                                                    facture of an article; and                                 further manufacture.
                                                                      (B) Such article will be held for sale.                    Example 6. F, a bank, holds an ODC for use
                                                                                                                               in its fire extinguishers to protect the com-
                                                                      (iv) Use as material—(A) In general.
                                                                                                                               puter system. F does not hold the ODC for
                                                                    Except as provided in paragraph                            sale or for use in further manufacture.
                                                                    (b)(1)(iv)(B) of this section, an ODC will                   Example 7. G, a government agency, holds
                                                                    be used as a material in the manufac-                      an ODC for use in the refrigeration equip-
                                                                    ture of an article if the ODC will be—                     ment of its various units. The units have
                                                                      (1) Incorporated into the article; or                    separate employer identification numbers.
                                                                      (2) Released into the atmosphere in                      The ODC is stored in a central warehouse
                                                                    the process of manufacturing the arti-                     until needed by a unit and then transferred
                                                                    cle.                                                       to the unit upon request. G does not hold the
                                                                                                                               ODC for sale or for use in further manufac-
                                                                      (B) ODCs used in equipment. For pur-
                                                                                                                               ture.
                                                                    poses of the floor stocks tax, an ODC is
                                                                    not used as a material in the manufac-                       (2)(i) Mixtures—(A) Tax imposed on
                                                                    ture of an article if the ODC is (or will                  January 1, 1990. In the case of the floor
                                                                    be) contained in equipment used in                         stocks tax imposed on January l, 1990,
                                                                    such manufacture and the ODC will be                       the tax is not imposed on an ODC that
                                                                    used for its intended purpose without                      has been mixed with any other ingredi-
                                                                    being released from such equipment.                        ents.
                                                                    Thus, ODCs that are (or will be) used as                     (B) Taxes imposed after 1990—(1) In
                                                                    coolants in a factory’s air-conditioning                   general. In the case of the floor stocks
                                                                    system are not used as materials in the                    tax imposed on January 1 of a calendar
                                                                    manufacture of articles produced in the                    year after 1990, the tax is not imposed
                                                                    factory.                                                   on an ODC that has been mixed with
                                                                      (v) Storage containers. The floor                        any other ingredients, but only if it is
                                                                    stocks tax is imposed on an ODC with-                      established that such ingredients con-
                                                                    out regard to the type or size of the                      tribute to the accomplishment of the
                                                                    storage container in which the ODC is                      purpose for which the mixture will be
                                                                    held. Thus, the tax may apply to an                        used. A mixture is not exempt from tax
                                                                    ODC whether it is in a 14-ounce can or                     under this paragraph (b)(2)(i)(B), how-
                                                                    a 30-pound tank.                                           ever, if it contains only an ODC and an
                                                                      (vi) Examples. The provisions of this                    inert ingredient that does not con-
                                                                    paragraph (b)(1) may be illustrated by                     tribute to the accomplishment of the
                                                                    the following examples:                                    purpose for which the mixture will be
                                                                      Example 1. A, a manufacturer of air condi-               used.
                                                                    tioners, holds an ODC for use in air condi-                  (2) Exception. In the case of a floor
                                                                    tioners that it will manufacture and sell. A               stocks tax imposed on or after January
                                                                    holds the ODC for use in further manufac-                  1, 1992, a mixture is not exempt from
                                                                    ture.                                                      floor stocks tax under this paragraph
                                                                      Example 2. B, a manufacturer of electronic               (b)(2)(i)(B) if it contains only ODCs and
                                                                    components, holds an ODC for use as a sol-                 one or more stabilizers. For this pur-
                                                                    vent to clean printed circuits that it will sell
                                                                    to computer manufacturers. B holds the ODC
                                                                                                                               pose, the term stabilizer means an in-
                                                                    for use in further manufacture.                            gredient needed to maintain the chem-
                                                                      Example 3. C, an automobile dealer, holds                ical integrity of the ODC.
                                                                    an ODC for use in charging air conditioners                  (C) Examples. The provisions of this
                                                                    installed in automobiles that it sells to re-              paragraph (b)(2)(i) may be illustrated
                                                                    tail customers. C does not hold the ODC for                by the following examples:
                                                                    use in further manufacture. C does, however,
                                                                    hold the ODC for sale, even if the customers                 Example 1. The floor stocks tax is not im-
                                                                    are not separately charged for ODCs used in                posed on the ODCs contained in refrigerants
                                                                    the automobile air conditioners.                           such as R–500 and R–502 because such prod-
                                                                      Example 4. D operates an air-conditioning                ucts are mixtures of ODCs and other chemi-
                                                                    repair service and holds an ODC for use in re-             cals that contribute to the accomplishment
                                                                    pairing air conditioners for its customers. D              of the purpose for which the mixture will be
                                                                    holds the ODC for sale even if the customers               used.
                                                                    are not separately charged for ODCs used in                  Example 2. The floor stocks tax is not im-
                                                                    the repairs.                                               posed on the ODCs contained in automotive
cprice-sewell on PRODPC61 with CFR




                                                                      Example 5. E, a grocery-store chain, holds               products used for checking for leaks because
                                                                    an ODC for use in its refrigeration units. E               such products are a mixture of ODCs and

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                                                                    § 52.4682–4                                                             26 CFR Ch. I (4–1–09 Edition)
                                                                    small amounts of dyes and oils that con-                   paragraph (b)(2)(v), as an ODC that was
                                                                    tribute to the accomplishment of the pur-                  sold in a qualifying sale for purposes of
                                                                    pose for which the mixture will be used.                   § 52.4682–1(c) if the ODC will be used as
                                                                      Example 3. The floor stocks tax is not im-
                                                                    posed on Halon 1301 pressurized with nitro-
                                                                                                                               a feedstock (within the meaning of
                                                                    gen. Although nitrogen is an inert ingre-                  § 52.4682–2(c)(3)).
                                                                    dient, it contributes to the accomplishment                   (vi) ODCs to be exported—(A) In gen-
                                                                    of the purpose for which the mixture will be               eral. The floor stocks tax is not im-
                                                                    used.                                                      posed on any ODC that was sold in a
                                                                      Example 4. On January 1, 1993, the floor                 qualifying sale for export (as defined in
                                                                    stocks tax is imposed on methyl chloroform                 § 52.4682–5(d)(1)).
                                                                    that is stabilized to prevent hydrolization or
                                                                    chemical reaction during transportation or
                                                                                                                                  (B) ODCs sold before January 1, 1993.
                                                                    use, unless the stabilized methyl chloroform               An ODC that was sold by its manufac-
                                                                    has also been mixed with other ingredients                 turer or importer before January 1,
                                                                    that contribute to the accomplishment of                   1993, is treated, for purposes of this
                                                                    the purpose for which the mixture will be                  paragraph (b)(2)(vi), as an ODC that
                                                                    used.                                                      was sold in a qualifying sale for export
                                                                      (ii) Manufactured articles. The floor                    for purposes of § 52.4682–5(d)(1) if the
                                                                    stocks tax is not imposed on an ODC                        ODC will be exported.
                                                                    that is contained in a manufactured ar-                       (vii) ODCs used as propellants in me-
                                                                    ticle in which the ODC will be used for                    tered-dose inhalers; years after 1992—(A)
                                                                    its intended purpose without being re-                     In general. The floor stocks tax is not
                                                                    leased from such article. For example,                     imposed on January 1 of calendar years
                                                                    the tax is not imposed on the ODCs                         after 1992 on any ODC that was sold in
                                                                    contained in the cooling coils of a re-                    a qualifying sale for use as a propellant
                                                                    frigerator even if the refrigerator is                     in a metered-dose inhaler (as defined in
                                                                    held for sale. However, the tax is im-                     § 52.4682–1(h)).
                                                                    posed on a can of ODC used to recharge                        (B) ODCs sold before January 1, 1993.
                                                                    an air conditioning unit because the                       An ODC that was sold by its manufac-
                                                                    ODC must be expelled from the can in                       turer or importer before January 1,
                                                                    order to be used. Similarly, beginning                     1993, is treated, for purposes of this
                                                                    in 1991, the tax is imposed on Halons                      paragraph (b)(2)(vii), as an ODC that
                                                                    contained in a fire extinguisher held                      was sold in a qualifying sale for pur-
                                                                    for sale because such ODCs must be ex-                     poses of § 52.4682–1(h) if the ODC will be
                                                                    pelled from the fire extinguisher in                       used as a propellant in a metered-dose
                                                                    order to be used.                                          inhaler     (within    the   meaning     of
                                                                      (iii) Recycled ODCs. The floor stocks                    § 52.4682–1(h)).
                                                                    tax is not imposed on ODCs that have                          (viii) ODCs used as medical sterilants;
                                                                    been reclaimed or recycled. For exam-                      1993. The floor stocks tax is not im-
                                                                    ple, the tax is not imposed on an ODC                      posed in 1993 on any ODC held for use
                                                                    that is held for use in further manufac-                   as a medical sterilant (as defined in
                                                                    ture after being used as a solvent and                     § 52.4682–1(g)).
                                                                    recycled.                                                     (c) Person liable for tax—(1) In general.
                                                                      (iv) ODCs held by the manufacturer or                    The person liable for the floor stocks
                                                                    importer. The floor stocks tax is not im-                  tax on an ODC is the person that holds
                                                                    posed on ODCs held by their manufac-                       the ODC on a date on which the tax is
                                                                    turer or importer.                                         imposed. The person who holds the
                                                                      (v) ODCs used as a feedstock—(A) In                      ODC is the person who has title to the
                                                                    general. The floor stocks tax is not im-                   ODC (whether or not delivery to such
                                                                    posed on any ODC that was sold in a                        person has been made) as of the first
                                                                    qualifying sale for use as a feedstock                     moment of such date. The person who
                                                                    (as defined in § 52.4682–1(c)).                            has title at such time is determined
                                                                      (B) Post-1989 ODCs sold before January                   under applicable local law.
                                                                    1, 1990; post-1990 ODCs sold before Janu-                     (2) Special rule. Each business unit
                                                                    ary 1, 1991. A post-1989 ODC that was                      that has, or is required to have, its own
                                                                    sold by its manufacturer or importer                       employer identification number is
                                                                    before January 1, 1990, or a post-1990                     treated as a separate person for pur-
                                                                    ODC that was sold by its manufacturer                      poses of the floor stocks tax. For exam-
cprice-sewell on PRODPC61 with CFR




                                                                    or importer before January 1, 1991,                        ple, a chain of automotive parts stores
                                                                    shall be treated, for purposes of this                     that has one employer identification

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–4

                                                                    number is one person for purposes of                       ceeds the amount of taxes previously
                                                                    the floor stocks tax, and a parent cor-                    imposed on the ODC.
                                                                    poration and subsidiary corporation                          (B) Example. The application of this
                                                                    that each have a different employer                        paragraph (d)(1)(iv) may be illustrated
                                                                    identification number are two persons                      by the following example:
                                                                    for purposes of the floor stocks tax.                        Example. The floor stocks tax imposed on
                                                                      (d) Computation of tax; tentative tax                    one pound of CFC–12 held for sale on January
                                                                    amount—(1) In general—(i) Generally ap-                    1, 1992, is $0.30 (the amount by which $1.67,
                                                                    plicable rules. This paragraph (d) pro-                    the tentative tax, exceeds $1.37, the tax pre-
                                                                    vides rules for determining the ten-                       viously imposed on CFC–12).
                                                                    tative tax amount and the amount of                          (2) ODCs used in the manufacture of
                                                                    the floor stocks tax. Section 52.4681–                     rigid foam insulation; 1990, 1991, 1992, and
                                                                    1(a)(3) provides that the amount of the                    1993—(i) In general. In the case of an
                                                                    floor stocks tax on an ODC is deter-                       ODC that was sold in a qualifying sale
                                                                    mined by reference to a tentative tax                      for purposes of § 52.4682–1(d) (relating to
                                                                    amount. The tentative tax amount is                        use in the manufacture of rigid foam
                                                                    the amount of tax that would be im-                        insulation) the tentative tax amount is
                                                                    posed on the ODC under section                             determined under section 4682(g) for
                                                                    4681(a)(1) if a sale of the ODC by the                     purposes of computing the floor stocks
                                                                    manufacturer or importer had occurred                      tax imposed on the ODC on January 1,
                                                                    on the date the floor stocks tax is im-                    1990, 1991, 1992 or 1993. For purposes of
                                                                    posed. The amount of the floor stocks                      computing the floor stocks tax imposed
                                                                    tax imposed on the ODCs contained in                       on the ODC on January 1, 1990, the ten-
                                                                    a nonexempt mixture is computed on                         tative tax amount is zero. The floor
                                                                    the basis of the weight of the ODCs in                     stocks tax is not imposed on ODCs for
                                                                    that mixture.                                              use in the manufacture of rigid foam
                                                                      (ii) Floor stocks tax imposed on post-                   insulation in 1992 and 1993.
                                                                    1989 ODCs on January 1, 1990. The floor                      (ii) Post-1989 ODCs sold before January
                                                                    stocks tax imposed on post-1989 ODCs                       1, 1990; post-1990 ODCs sold before Janu-
                                                                    (as defined in § 52.4681–1(c)(9)) on Janu-                 ary 1, 1991. A post-1989 ODC that was
                                                                    ary 1, 1990, is equal to the tentative tax                 sold by its manufacturer or importer
                                                                    amount. See paragraph (d)(2) of this                       before January 1, 1990, or a post-1990
                                                                    section for rules relating to the floor                    ODC that was sold by its manufacturer
                                                                    stocks tax imposed on ODCs used in                         or importer before January 1, 1991,
                                                                    the manufacture of rigid foam insula-                      shall be treated, for purposes of para-
                                                                    tion. See paragraph (d)(3) of this sec-                    graphs (d)(2) and (e) of this section, as
                                                                    tion for rules relating to the floor                       an ODC that was sold in a qualifying
                                                                    stocks tax imposed on Halons.                              sale for purposes of § 52.4682–1(d) if the
                                                                      (iii) Floor stocks tax imposed on post-                  ODC wi11 be used in the manufacture of
                                                                    1990 ODCs on January 1, 1991. The floor                    rigid foam insulation (within the
                                                                    stocks tax imposed on post-1990 ODCs                       meaning of §§ 52.4682–1(d) (3) and (4)).
                                                                    (as defined in § 52.4681–1(c)(9)) on Janu-                   (3) Halons; 1990, 1991, 1992, and 1993. In
                                                                    ary 1, 1991, is equal to the tentative tax                 the case of Halon-1211, Halon-1301, or
                                                                    amount.                                                    Halon-2402 (Halons), the tentative tax
                                                                      (iv) Other floor stocks taxes—(A) In                     amount is determined under section
                                                                    general. The following rules apply for                     4682(g) for purposes of computing the
                                                                    floor stocks taxes imposed on post-1989                    floor stocks tax imposed on Halons on
                                                                    ODCs after January 1, 1990, and on                         January 1, 1990, 1991, 1992, or 1993. For
                                                                    post-1990 ODCs after January 1, 1991:                      purposes of computing the floor stocks
                                                                      (1) The tentative tax amount is de-                      tax imposed on Halons on January 1,
                                                                    termined, except as provided in para-                      1990, the tentative tax amount is zero.
                                                                    graph (d)(2), (3), or (4) of this section,                 The floor stocks tax is not imposed on
                                                                    by reference to the rate of tax pre-                       Halons in 1992 and 1993.
                                                                    scribed in section 4681(b)(1)(B) and the                     (4) Methyl chloroform; 1993. In the case
                                                                    ozone-depletion factors prescribed in                      of methyl chloroform, the tentative
                                                                    section 4682(b).                                           tax amount is determined under sec-
                                                                      (2) The amount of the floor stocks                       tion 4682(g)(5) for purposes of com-
cprice-sewell on PRODPC61 with CFR




                                                                    tax on an ODC is equal to the amount                       puting the floor stocks tax imposed on
                                                                    by which the tentative tax amount ex-                      January 1, 1993.

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                                                                    § 52.4682–4                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                      (e) De minimis exception—(1) 1990 and                      (iii) At least 1000 pounds of ODCs
                                                                    1992. In the case of the floor stocks tax                  that are described in paragraph (d)(4) of
                                                                    imposed on January 1, 1990 or 1992, a                      this section and are otherwise subject
                                                                    person is liable for the tax only if, on                   to tax.
                                                                    the date the tax is imposed, the person                      (6) Examples. The rules of this para-
                                                                    holds at least 400 pounds of post-1989                     graph (e) may be illustrated by the fol-
                                                                    ODCs that are not described in para-                       lowing examples:
                                                                    graph (d) (2) or (3) of this section and                     Example 1. On January 1, 1990, A holds for
                                                                    are otherwise subject to tax.                              sale 300 pounds of CFC–12 (a post-1989 ODC
                                                                      (2) 1991. In the case of the floor                       not described in paragraph (d)(2) or (d)(3) of
                                                                    stocks tax imposed on January 1, 1991,                     this section)) and 500 pounds of R–500 (a mix-
                                                                    a person is liable for the tax only if, on                 ture). A does not hold at least 400 pounds of
                                                                    such date, the person holds at least 400                   ODCs that are taken into account under
                                                                    pounds of ODCs subject to the 1991                         paragraph (e)(1) of this section and, under
                                                                    floor stocks tax. For this purpose,                        paragraph (b)(2)(i) of this section, mixtures
                                                                                                                               are not subject to the floor stocks tax. Thus,
                                                                    ODCs subject to the 1991 floor stocks                      A is not liable for the floor stocks tax im-
                                                                    tax are—                                                   posed on January 1, 1990.
                                                                      (i) Post-1990 ODCs that are subject to                     Example 2. On January 1, 1990, B holds for
                                                                    tax; and                                                   sale 250 pounds of CFC–12 and 250 pounds of
                                                                      (ii) Post-1989 ODCs that are described                   CFC–113 (post-1989 ODCs not described in
                                                                    in paragraph (d) (2) or (3) of this sec-                   paragraph (d) (2) or (3) of this section). B
                                                                    tion and are otherwise subject to tax.                     holds 500 pounds of ODCs that are taken into
                                                                                                                               account under paragraph (e)(1) of this sec-
                                                                      (3) 1993. In the case of the floor
                                                                                                                               tion. Thus, B is liable for the floor stocks tax
                                                                    stocks tax imposed on January 1, 1993,                     imposed on January 1, 1990, because B holds
                                                                    a person is liable for the tax only if, on                 at least 400 pounds of ODCs for sale.
                                                                    such date, the person holds at least 400                     Example 3. On January 1, 1990, C holds 200
                                                                    pounds of ODCs that are not described                      pounds of post-1990 ODCs and 500 pounds of
                                                                    in paragraph (d) (2) or (3) of this sec-                   post-1989 ODCs for use in further manufac-
                                                                    tion and are otherwise subject to tax.                     ture. C will use 300 pounds of the post-1989
                                                                      (4) 1994. In the case of the floor                       ODCs in the manufacture of rigid foam insu-
                                                                                                                               lation (as defined in § 52.4682–1(d) (3) and (4)).
                                                                    stocks tax imposed on January 1, 1994,
                                                                                                                               The remainder of the ODCs are not described
                                                                    a person is liable for the tax only if, on                 in paragraph (d) (2) or (3) of this section.
                                                                    such date, the person holds—                               Under paragraph (e)(1) of this section, post-
                                                                      (i) At least 400 pounds of ODCs that                     1990 ODCs and ODCs that will be used in the
                                                                    are not described in paragraph (d)(2) or                   manufacture of rigid foam insulation are dis-
                                                                    (d)(3) of this section and are otherwise                   regarded in determining whether the de mini-
                                                                    subject to tax;                                            mis exception is applicable in 1990. Thus, C
                                                                      (ii) At least 200 pounds of ODCs that                    holds only 200 pounds of ODCs that are taken
                                                                                                                               into account under paragraph (e)(1) of this
                                                                    are described in paragraph (d)(2) of this
                                                                                                                               section and is not liable for the floor stocks
                                                                    section and are otherwise subject to                       tax imposed on January 1, 1990.
                                                                    tax; or                                                      Example 4. (a) The facts are the same as in
                                                                      (iii) At least 20 pounds of ODCs that                    Example 3, except that the ODCs are held on
                                                                    are described in paragraph (d)(3) of this                  January 1, 1991. Under paragraph (e)(2) of
                                                                    section and are otherwise subject to                       this section, the 200 pounds of post-1990 ODCs
                                                                    tax.                                                       and the 300 pounds of post-1989 ODCs that
                                                                      (5) Calendar years after 1994. In the                    will be used in the manufacture of rigid foam
                                                                                                                               insulation are taken into account in deter-
                                                                    case of the floor stocks tax imposed on
                                                                                                                               mining whether the de minimis exception is
                                                                    January 1 of 1995 and each following                       applicable in 1991. Under paragraph (b)(2) of
                                                                    calendar year, a person is liable for the                  this section, the remaining 200 pounds of
                                                                    tax only if, on such date, the person                      post-1989 ODCs are not taken into account
                                                                    holds—                                                     because the base tax amount applicable to
                                                                      (i) At least 400 pounds of ODCs that                     post-1989 ODCs does not increase in 1991.
                                                                    are not described in paragraph (d)(3) or                   Thus, C holds 500 pounds of ODCs that are
                                                                    (d)(4) of this section and are otherwise                   taken into account under paragraph (e)(2) of
                                                                                                                               this section and is liable for the floor stocks
                                                                    subject to tax;
                                                                                                                               tax imposed on January 1, 1991.
                                                                      (ii) At least 50 pounds of ODCs that                       (b) The amount of the floor stocks tax im-
                                                                    are described in paragraph (d)(3) of this                  posed on the 200 pounds of post-1990 ODCs
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                                                                    section and are otherwise subject to                       and the 300 pounds of post-1989 ODCs that
                                                                    tax; or                                                    will be used in the manufacture of rigid foam

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–4
                                                                    insulation is equal to the tentative tax                   not to be filed with the Internal Rev-
                                                                    amount because those ODCs were not pre-                    enue Service.
                                                                    viously subject to tax.
                                                                      Example 5. (a) On January 1, 1994, D holds
                                                                                                                                 (2) Circumstances in which an inven-
                                                                    for sale 300 pounds of CFC–113 (an ODC not                 tory is not required. The inventory re-
                                                                    described in paragraph (d)(2) or (d)(3) of this            quirement of paragraph (f)(1) of this
                                                                    section) and 25 pounds of Halon-1301 (an ODC               section does not apply to any person
                                                                    described in paragraph (d)(3) of this section).            holding, on a date on which floor
                                                                    D is liable for the floor stocks tax imposed               stocks tax is imposed, only ODCs that
                                                                    on January 1, 1994, because 25 pounds of
                                                                    Halon-1301 exceeds the de minimis amount                   are not subject to tax by reason of a
                                                                    specified in paragraph (e)(4)(iii) of this sec-            statutory exemption (e.g., use as a
                                                                    tion. The 300 pounds of CFC–113 is less than               feedstock) or regulatory exclusion
                                                                    the amount specified in paragraph (e)(4)(i) of             other than the de minimis exception
                                                                    this section. Nevertheless, tax is imposed on              provided by paragraph (e) of this sec-
                                                                    both the 25 pounds of Halon-1301 and the 300
                                                                                                                               tion (e.g., mixtures). In addition, any
                                                                    pounds of CFC–113.
                                                                      (b) The amount of the floor stocks tax is                person that holds ODCs subject to the
                                                                    determined separately for the 300 pounds of                floor stocks tax and also holds ODCs
                                                                    CFC–113 and the 25 pounds of Halon-1301 and                that are nontaxable under the provi-
                                                                    is equal to the difference between the ten-                sions of paragraph (b)(2) of this section,
                                                                    tative tax amount and the amount of tax                    is not required to inventory the non-
                                                                    previously imposed on those ODCs. For
                                                                    Halon-1301, for example, the tax is deter-
                                                                                                                               taxable ODCs. However, any person
                                                                    mined as follows. The tentative tax amount                 that holds any ODCs that either are
                                                                    is $1,087.50 ($4.35 (the base tax amount in                subject to the floor stocks tax or would
                                                                    1994) × 10 (the ozone-depletion factor for                 be subject to the floor stocks tax but
                                                                    Halon-1301) × 25 (the number of pounds held)).             for the de minimis exception must in-
                                                                    The tax previously imposed on the Halon-                   ventory those ODCs.
                                                                    1301 is $6.28 ($3.35 (the base tax amount in
                                                                    1993) × 10 (the ozone-depletion factor for                   (3) Examples. The rules of this para-
                                                                    Halon-1301) × 0.75 percent (the applicable per-            graph (f) may be illustrated by the fol-
                                                                    centage       determined      under     section            lowing examples:
                                                                    4682(g)(2)(A)) × 25 (the number of pounds
                                                                    held)). Thus, the floor stocks tax imposed on                 Example 1. On January 1, 1990, A holds for
                                                                    the 25 pounds of Halon-1301 in 1994 is                     sale 300 pounds of CFC–12 (a post-1989 ODC
                                                                    $1,081.22, the difference between $1,087.50 (the           not described in paragraph (d)(2) or (d)(3) of
                                                                    tentative tax amount) and $6.28 (the tax pre-              this section) and 500 pounds of R–500 (a mix-
                                                                    viously imposed).                                          ture). As required by paragraph (f)(1) of this
                                                                                                                               section, A must prepare an inventory of the
                                                                      (f) Inventory—(1) In general. If, on the                 CFC–12 A holds for sale on that date even
                                                                    date on which the floor stocks tax is                      though, under paragraph (e)(1) of this sec-
                                                                    imposed, a person holds ODCs for sale                      tion, the 300 pounds of CFC–12 is not taken
                                                                    or for use in further manufacture and                      into account because it is de minimis. How-
                                                                    the ODCs were not manufactured or                          ever, as provided in paragraph (f)(2) of this
                                                                    imported by such person, the following                     section, A is not required to inventory the
                                                                    rules apply:                                               R–500 because, under paragraph (b)(2) of this
                                                                      (i) The person shall prepare an inven-                   section, mixtures are not subject to the floor
                                                                    tory of all such ODCs that the person                      stocks tax.
                                                                    holds on the date on which the tax is                         Example 2. On January 1, 1991, B holds for
                                                                                                                               sale 1,000 pounds of CFC–12 (a post-1989 ODC
                                                                    imposed.
                                                                                                                               not described in paragraph (d)(2) or (d)(3) of
                                                                      (ii) The inventory shall be taken as
                                                                                                                               this section). As provided under paragraph
                                                                    of the first moment of the date on                         (f)(2) of this section, B is not required to pre-
                                                                    which the tax is imposed, but work-                        pare an inventory because CFC–12 is not sub-
                                                                    back or work-forward inventories will                      ject to the floor stocks tax in 1991.
                                                                    be acceptable if supported by adequate
                                                                    commercial records of receipt, use, and                      (g) Time for paying tax. The floor
                                                                    disposition of ODCs held for sale or for                   stocks tax imposed under section
                                                                    use in further manufacture.                                4682(h) shall be paid without assess-
                                                                      (iii) The person must maintain                           ment or notice. In the case of the floor
                                                                    records of the inventory and make such                     stocks tax imposed on January 1, 1990,
                                                                    records available for inspection and                       the tax shall be paid by April 1, 1990. In
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                                                                    copying by internal revenue agents and                     the case of floor stocks taxes imposed
                                                                    officers. Records of the inventory are                     after January 1, 1990, the tax shall be

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                                                                    § 52.4682–5                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                    paid by June 30 of the year in which                         (ii) Post–1990 ODCs. The tax imposed
                                                                    the tax is imposed.                                        on post–1990 ODCs that a manufacturer
                                                                    [T.D. 8370, 56 FR 56317, Nov. 4, 1991, as amend-           or importer sells in qualifying sales for
                                                                    ed by T.D. 8622, 60 FR 52852, Oct. 11, 1995]               export during a calendar year is equal
                                                                                                                               to the excess (if any) of—
                                                                    § 52.4682–5 Exports.                                         (A) The tax that would be imposed on
                                                                       (a) Overview. This section provides                     the ODCs but for section 4682(d)(3) and
                                                                    rules relating to the tax imposed under                    this section; over
                                                                    section 4681 on ozone-depleting chemi-                       (B) The post–1990 ODC exemption
                                                                    cals (ODCs) that are exported. In gen-                     amount for the calendar year deter-
                                                                    eral, tax is not imposed on ODCs that a                    mined under paragraph (c)(2) of this
                                                                    manufacturer or importer sells for ex-                     section.
                                                                    port, or for resale by the purchaser to                      (iii) Allocation of tax—(A) Post–1989
                                                                    a second purchaser for export, if the                      ODCs. The tax (if any) determined
                                                                    procedural requirements set forth in                       under paragraph (b)(2)(i) of this section
                                                                    paragraph (d) of this section are met.                     may be allocated among the post–1989
                                                                    The tax benefit of this exemption is
                                                                                                                               ODCs on which it is imposed in any
                                                                    limited, however, to the manufactur-
                                                                                                                               manner, provided that the amount al-
                                                                    er’s or importer’s exemption amount.
                                                                    Thus, if the tax that would otherwise                      located to any post–1989 ODC does not
                                                                    be imposed under section 4681 on ODCs                      exceed the tax that would be imposed
                                                                    that a manufacturer or importer sells                      on such ODC but for section 4682(d)(3)
                                                                    for export exceeds this exemption                          and this section.
                                                                    amount, a tax equal to the excess is                         (B) Post–1990 ODCs. The tax (if any)
                                                                    imposed on the ODCs. The exemption                         determined under paragraph (b)(2)(ii) of
                                                                    amount, which is determined sepa-                          this section may be allocated among
                                                                    rately for post-1989 ODCs and post–1990                    the post–1990 ODCs on which it is im-
                                                                    ODCs, is calculated for each calendar                      posed in any manner, provided that the
                                                                    year in accordance with the rules of                       amount allocated to any post–1990 ODC
                                                                    paragraph (c) of this section. This sec-                   does not exceed the tax that would be
                                                                    tion also provides rules under which a                     imposed on such ODC but for section
                                                                    tax imposed under section 4681 on ex-                      4682(d)(3) and this section.
                                                                    ported ODCs may be credited or re-                           (c) Exemption amount—(1) Post–1989
                                                                    funded, subject to the same limit on                       ODC exemption amount. A manufactur-
                                                                    tax benefits, if the procedural require-                   er’s or importer’s post–1989 ODC ex-
                                                                    ments set forth in paragraph (f) of this                   emption amount for a calendar year is
                                                                    section are met. See § 52.4681–1(c) for                    the sum of the following amounts:
                                                                    definitions relating to the tax on ODCs.                     (i) The 1986 export percentage of the
                                                                       (b) Exemption or partial exemption from                 aggregate tax that would (but for sec-
                                                                    tax—(1) In general. Except as provided                     tion 4682(d), section 4682(g), and this
                                                                    in paragraph (b)(2) of this section, no                    section) be imposed under section 4681
                                                                    tax is imposed on an ODC if the manu-                      on the maximum quantity, determined
                                                                    facturer or importer of the ODC sells
                                                                                                                               without regard to additional produc-
                                                                    the ODC in a qualifying sale for export
                                                                                                                               tion allowances, of post–1989 ODCs that
                                                                    (within the meaning of paragraph (d)(1)
                                                                                                                               the person is permitted to manufacture
                                                                    of this section).
                                                                                                                               during the calendar year under rules
                                                                       (2) Tax imposed if exemption amount ex-
                                                                    ceeded—(i) Post–1989 ODCs. The tax im-                     prescribed by the Environmental Pro-
                                                                    posed on post–1989 ODCs that a manu-                       tection Agency (40 CFR part 82).
                                                                    facturer or importer sells in qualifying                     (ii) The aggregate tax that would
                                                                    sales for export during a calendar year                    (but for section 4682(d), section 4682(g),
                                                                    is equal to the excess (if any) of—                        and this section) be imposed under sec-
                                                                       (A) The tax that would be imposed on                    tion 4681 on post–1989 ODCs that the
                                                                    the ODCs but for section 4682(d)(3) and                    person manufactures during the cal-
                                                                    this section; over                                         endar year under any additional pro-
                                                                       (B) The post–1989 ODC exemption                         duction allowance granted by the Envi-
                                                                    amount for the calendar year deter-                        ronmental Protection Agency.
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                                                                    mined under paragraph (c)(1) of this                         (iii) The aggregate tax that would
                                                                    section.                                                   (but for section 4682(d), section 4682(g),

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                                                                    Internal Revenue Service, Treasury                                                            § 52.4682–5

                                                                    and this section) be imposed under sec-                      (ii) Qualifying resale. A sale of ODCs
                                                                    tion 4681 on post–1989 ODCs imported                       is a qualifying resale for export if—
                                                                    by the person during the calendar year.                      (A) The seller acquired the ODCs in a
                                                                      (2) Post–1990 ODC exemption amount. A                    qualifying sale for export and the pur-
                                                                    manufacturer’s or importer’s post–1990                     chaser is a second purchaser for export;
                                                                    ODC exemption amount for a calendar                          (B) At the time of the sale, the seller
                                                                    year is the sum of the following                           and the purchaser are registered with
                                                                    amounts:                                                   the Internal Revenue Service; and
                                                                      (i) The 1989 export percentage of the                      (C) At the time of the sale, the sell-
                                                                    aggregate tax that would (but for sec-                     er—
                                                                    tion 4682(d), section 4682(g), and this                      (1) Has an unexpired certificate in
                                                                    section) be imposed under section 4681                     substantially the form set forth in
                                                                    on the maximum quantity, determined                        paragraph (d)(3)(ii)(A) of this section
                                                                    without regard to additional produc-                       from the purchaser of the ODCs; and
                                                                    tion allowances, of post–1990 ODCs the                       (2) Relies on the certificate in good
                                                                    person is permitted to manufacture                         faith.
                                                                    during the calendar year under rules
                                                                                                                                 (iii) Special rule relating to sales made
                                                                    prescribed by the Environmental Pro-
                                                                                                                               before July 1, 1993. If a sale for export
                                                                    tection Agency.
                                                                                                                               made before July 1, 1993, satisfies all
                                                                      (ii) The aggregate tax that would                        the requirements of paragraph (d)(1)(i)
                                                                    (but for section 4682(d), section 4682(g),                 or (ii) of this section other than those
                                                                    and this section) be imposed under sec-                    relating to registration, the sale will
                                                                    tion 4681 on post–1990 ODCs that the                       be treated as a qualifying sale (or re-
                                                                    person manufactures during the cal-                        sale) for export. Thus, a sale made be-
                                                                    endar year under any additional pro-                       fore July 1, 1993, may be a qualifying
                                                                    duction allowance granted by the Envi-                     sale (or resale) even if the parties to
                                                                    ronmental Protection Agency.                               the sale are not registered and the re-
                                                                      (iii) The aggregate tax that would                       quired certificate does not contain
                                                                    (but for section 4682(d), section 4682(g),                 statements regarding registration.
                                                                    and this section) be imposed under sec-                      (iv) Registration. Application for reg-
                                                                    tion 4681 on post–1990 ODCs imported                       istration is made on Form 637 (or any
                                                                    by the person during the calendar year.                    other form designated for the same use
                                                                      (3) Definitions—(i) 1986 export percent-                 by the Commissioner) according to the
                                                                    age. See section 4682(d)(3)(B)(ii) for the                 instructions applicable to the form. A
                                                                    meaning of the term 1986 export percent-                   person is registered only if the district
                                                                    age.                                                       director has issued that person a letter
                                                                      (ii) 1989 export percentage. See section                 of registration and it has not been re-
                                                                    4682(d)(3)(C) for the meaning of the                       voked or suspended. The effective date
                                                                    term 1989 export percentage.                               of the registration must be no earlier
                                                                      (d) Procedural requirements relating to                  than the date on which the district di-
                                                                    tax-free sales for export—(1) Qualifying                   rector signs the letter of registration.
                                                                    sales—(i) In general. A sale of ODCs is a                  Each business unit that has, or is re-
                                                                    qualifying sale for export if—                             quired to have, a separate employer
                                                                      (A) The seller is the manufacturer or                    identification number is treated as a
                                                                    importer of the ODCs and the pur-                          separate person.
                                                                    chaser is a purchaser for export or for                      (2) Good faith reliance. The require-
                                                                    resale to a second purchaser for export;                   ments of paragraph (d)(1) of this sec-
                                                                      (B) At the time of the sale, the seller                  tion are not satisfied with respect to a
                                                                    and the purchaser are registered with                      sale of ODCs and the sale is not a quali-
                                                                    the Internal Revenue Service; and                          fying sale (or resale) if, at the time of
                                                                      (C) At the time of the sale, the sell-                   the sale—
                                                                    er—                                                          (i) The seller has reason to believe
                                                                      (1) Has an unexpired certificate in                      that the ODCs are not purchased for
                                                                    substantially the form set forth in                        export; or
                                                                    paragraph (d)(3)(ii) of this section from                    (ii) The Internal Revenue Service has
                                                                    the purchaser; and                                         notified the seller that the purchaser’s
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                                                                      (2) Relies on the certificate in good                    registration has been revoked or sus-
                                                                    faith.                                                     pended.

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                                                                    § 52.4682–5                                                                       26 CFR Ch. I (4–1–09 Edition)

                                                                      (3) Certificate—(i) In general. The cer-                                             Product                                    Percentage
                                                                    tificate required under paragraph (d)(1)
                                                                                                                               CFC–11 .............................................................   lllll
                                                                    of this section consists of a statement                    CFC–12 .............................................................   lllll
                                                                    executed and signed under penalties of                     CFC–113 ...........................................................    lllll
                                                                    perjury by a person with authority to                      CFC–114 ...........................................................    lllll
                                                                                                                               CFC–115 ...........................................................    lllll
                                                                    bind the purchaser, in substantially                       Halon-1211 ........................................................    lllll
                                                                    the same form as model certificates                        Halon-1301 ........................................................    lllll
                                                                    provided in paragraph (d)(3)(ii) of this                   Halon-2402 ........................................................    lllll
                                                                                                                               Carbon tetrachloride ..........................................        lllll
                                                                    section, and containing all information                    Methyl chloroform ..............................................       lllll
                                                                    necessary to complete such model cer-                        Other (specify)
                                                                                                                                 lllllll ..............................................               lllll
                                                                    tificate. A new certificate must be
                                                                    given if any information in the current                      This certificate applies to (check and com-
                                                                    certificate changes. The certificate                       plete as applicable):
                                                                    may be included as part of any business                    lll All shipments to Purchaser at the fol-
                                                                    records normally used to document a                            lowing location(s):
                                                                    sale. The certificate expires on the ear-                  llllllllllllllllllllllll
                                                                    liest of the following dates—                              llllllllllllllllllllllll
                                                                      (A) The date one year after the effec-                   llllllllllllllllllllllll
                                                                    tive date of the certificate;                              lll All shipments to Purchaser under the
                                                                                                                                   following Purchaser account number(s):
                                                                      (B) The date the purchaser provides a                    llllllllllllllllllllllll
                                                                    new certificate to the seller; or                          llllllllllllllllllllllll
                                                                      (C) The date the seller is notified by                   llllllllllllllllllllllll
                                                                    the Internal Revenue Service or the                        lll All shipments to Purchaser under the
                                                                    purchaser that the purchaser’s reg-                            following purchase order(s):
                                                                                                                               llllllllllllllllllllllll
                                                                    istration has been revoked or sus-                         llllllllllllllllllllllll
                                                                    pended.                                                    llllllllllllllllllllllll
                                                                      (ii) Model certificates—(A) ODCs sold                    lll One or more shipments to Purchaser
                                                                    for export by the purchaser. If the pur-                       identified as follows:
                                                                    chaser will export the ODCs, the cer-                      llllllllllllllllllllllll
                                                                    tificate must be in substantially the                      llllllllllllllllllllllll
                                                                                                                               llllllllllllllllllllllll
                                                                    following form:                                              Purchaser understands that Purchaser will
                                                                    CERTIFICATE OF PURCHASER OF CHEMI-                         be liable for tax imposed under section 4681 if
                                                                     CALS FOR EXPORT BY THE PUR-                               Purchaser does not export the ODCs to which
                                                                     CHASER                                                    this certificate applies.
                                                                                                                                 Purchaser understands that any use of the
                                                                        (To support tax-free sales under section               ODCs to which this certificate applies other
                                                                        4682(d)(3) of the Internal Revenue Code.)              than for export may result in the revocation
                                                                                                                               of Purchaser’s registration.
                                                                    Effective Date llllllllllllllll
                                                                                                                                 Purchaser will retain the business records
                                                                    Expiration Date lllllllllllllll
                                                                                                                               needed to document the export of the ozone-
                                                                                        (not more than one year                depleting chemicals to which this certificate
                                                                                          after effective date)                applies and will make such records available
                                                                      The undersigned purchaser (Purchaser)                    for inspection by Government officers.
                                                                    certifies the following under penalties of per-
                                                                                                                                 Purchaser has not been notified by the In-
                                                                    jury:
                                                                                                                               ternal Revenue Service that its registration
                                                                      Purchaser is registered with the Internal                has been revoked or suspended.
                                                                    Revenue Service as a purchaser of ozone-de-
                                                                    pleting chemicals for export under registra-                 Purchaser understands that the fraudulent
                                                                    tion number lllll. Purchaser’s registra-                   use of this certificate may subject Purchaser
                                                                    tion has not been suspended or revoked by                  and all parties making such fraudulent use
                                                                    the Internal Revenue Service.                              of this certificate to a fine or imprisonment,
                                                                                                                               or both, together with the costs of prosecu-
                                                                      The following percentage of ozone-deplet-
                                                                                                                               tion.
                                                                    ing chemicals purchased from:
                                                                    llllllllllllllllllllllll
                                                                    (Name of seller)
                                                                    llllllllllllllllllllllll                                   llllllllllllllllllllllll
                                                                    (Address of seller)                                        Name of Purchaser
                                                                                                                               llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll
                                                                                                                               Address of Purchaser
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                                                                    (Taxpayer identifying number of seller)                    llllllllllllllllllllllll
                                                                    are purchased for export by Purchaser.                     llllllllllllllllllllllll

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                                                                    Internal Revenue Service, Treasury                                                                                           § 52.4682–5
                                                                    Taxpayer Identifying Number of Purchaser                                                  lll All shipments to Purchaser at the fol-
                                                                    llllllllllllllllllllllll                                                                      lowing location(s):
                                                                    Title of person signing                                                                   llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                                                  llllllllllllllllllllllll
                                                                    Printed or typed name of person signing                                                   llllllllllllllllllllllll
                                                                    llllllllllllllllllllllll                                                                  lll All shipments to Purchaser under the
                                                                    Signature                                                                                     following Purchaser account number(s):
                                                                                                                                                              llllllllllllllllllllllll
                                                                      (B) ODCs sold by the purchaser for re-
                                                                                                                                                              llllllllllllllllllllllll
                                                                    sale for export by the second purchaser. If                                               llllllllllllllllllllllll
                                                                    the purchaser will resell the ODCs to a                                                   lll All shipments to Purchaser under the
                                                                    second purchaser for export by the sec-                                                       following purchase order(s):
                                                                    ond purchaser, the certificate must be                                                    llllllllllllllllllllllll
                                                                    in substantially the following form:                                                      llllllllllllllllllllllll
                                                                                                                                                              llllllllllllllllllllllll
                                                                    CERTIFICATE OF PURCHASER OF CHEMI-                                                        lll One or more shipments to Purchaser
                                                                     CALS FOR RESALE FOR EXPORT BY                                                                identified as follows:
                                                                     THE SECOND PURCHASER                                                                     llllllllllllllllllllllll
                                                                          (To support tax-free sales under section                                            llllllllllllllllllllllll
                                                                          4682(d)(3) of the Internal Revenue Code.)                                           llllllllllllllllllllllll
                                                                                                                                                                Purchaser understands that Purchaser will
                                                                    Effective Date llllllllllllllll                                                           be liable for tax imposed under section 4681 if
                                                                    Expiration Date lllllllllllllll                                                           Purchaser does not resell the ODCs to which
                                                                                        (not more than one year                                               this certificate applies to a Second Pur-
                                                                                          after effective date)                                               chaser for export or export those ODCs.
                                                                      The undersigned purchaser (Purchaser)                                                     Purchaser understands that any use of the
                                                                    certifies the following under penalties of per-                                           ODCs to which this certificate applies other
                                                                    jury:                                                                                     than for resale to Second Purchasers for ex-
                                                                      Purchaser is registered with the Internal                                               port may result in the revocation of Pur-
                                                                    Revenue Service as a purchaser of ozone-de-                                               chaser’s registration.
                                                                    pleting chemicals for export under registra-                                                Purchaser will retain the business records
                                                                    tion number lllll. Purchaser’s registra-                                                  needed to document the sales to Second Pur-
                                                                    tion has not been suspended or revoked by                                                 chasers for export covered by this certificate
                                                                    the Internal Revenue Service.                                                             and will make such records available for in-
                                                                      The following percentage of ozone-deplet-                                               spection by Government officers. Purchaser
                                                                    ing chemicals purchased from:                                                             also will retain and make available for in-
                                                                    llllllllllllllllllllllll                                                                  spection by Government officers the certifi-
                                                                    (Name of seller)                                                                          cates of its Second Purchasers.
                                                                    llllllllllllllllllllllll                                                                    Purchaser has not been notified by the In-
                                                                    (Address of seller)                                                                       ternal Revenue Service that its registration
                                                                    llllllllllllllllllllllll                                                                  has been revoked or suspended. In addition,
                                                                    (Taxpayer identifying number of seller)                                                   the Internal Revenue Service has not noti-
                                                                    will be resold by Purchaser to persons (Sec-                                              fied Purchaser of the revocation or suspen-
                                                                    ond Purchasers) that certify to Purchaser                                                 sion of the registration of any Second Pur-
                                                                    that they are (1) registered with the Internal                                            chaser who will purchase ozone-depleting
                                                                    Revenue Service as purchasers of ozone-de-                                                chemicals to which this certificate applies.
                                                                    pleting chemicals for export and (2) pur-                                                   Purchaser understands that the fraudulent
                                                                    chasing the ozone-depleting chemicals for                                                 use of this certificate may subject Purchaser
                                                                    export.                                                                                   and all parties making such fraudulent use
                                                                                                                                                              of this certificate to a fine or imprisonment,
                                                                                                 Product                                    Percentage        or both, together with the costs of prosecu-
                                                                                                                                                              tion.
                                                                     CFC–11 .............................................................   lllll
                                                                                                                                                              llllllllllllllllllllllll
                                                                     CFC–12 .............................................................   lllll
                                                                     CFC–113 ...........................................................    lllll             Name of Purchaser
                                                                     CFC–114 ...........................................................    lllll             llllllllllllllllllllllll
                                                                     CFC–115 ...........................................................    lllll             Address of Purchaser
                                                                     Halon-1211 ........................................................    lllll             llllllllllllllllllllllll
                                                                     Halon-1301 ........................................................    lllll             llllllllllllllllllllllll
                                                                     Halon-2402 ........................................................    lllll
                                                                                                                                                              Taxpayer Identifying Number of Purchaser
                                                                     Carbon tetrachloride ..........................................        lllll
                                                                     Methyl chloroform ..............................................       lllll             llllllllllllllllllllllll
                                                                       Other (specify)                                                                        Title of person signing
                                                                     lllllll ..................................................             lllll             llllllllllllllllllllllll
                                                                                                                                                              Printed or typed name of person signing
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                                                                      This certificate applies to (check and com-                                             llllllllllllllllllllllll
                                                                    plete as applicable):                                                                     Signature

                                                                                                                                                         39



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                                                                    § 52.4682–5                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                       (4) Documentation of export—(i) After                      (i) In the case of tax paid on post-1989
                                                                    December 31, 1992. After December 31,                      ODCs sold during a calendar year, to
                                                                    1992, to document the exportation of                       the amount (if any) by which the post-
                                                                    any ODCs, a person must have the evi-                      1989 exemption amount for the year ex-
                                                                    dence required by the Environmental                        ceeds the tax benefit provided to such
                                                                    Protection Agency as proof that the                        post-1989 ODCs under paragraph (b) of
                                                                    ODCs were exported.                                        this section; and
                                                                       (ii) Before January 1, 1993. Before Jan-                   (ii) In the case of tax paid on post-
                                                                    uary 1, 1993, to document the expor-                       1990 ODCs sold during a calendar year,
                                                                    tation of any ODCs, a person must have                     to the amount (if any) by which the
                                                                    evidence substantially similar to that                     post-1990 exemption amount for the
                                                                    required by the Environmental Protec-                      year exceeds the tax benefit provided
                                                                    tion Agency as proof that the ODCs                         to such post-1990 ODCs under paragraph
                                                                    were exported.                                             (b) of this section.
                                                                       (e) Purchaser liable for tax—(1) Pur-                      (3) Conditions to allowance of credit or
                                                                                                                               refund. The conditions of this para-
                                                                    chaser in qualifying sale. The purchaser
                                                                                                                               graph (f)(3) are met if the manufac-
                                                                    of ODCs in a qualifying sale for export
                                                                                                                               turer or importer—
                                                                    is treated as the manufacturer of the
                                                                                                                                  (i) Documents the exportation of the
                                                                    ODC and is liable for any tax imposed
                                                                                                                               ODCs in accordance with paragraph
                                                                    under section 4681 (determined without
                                                                                                                               (d)(4) of this section; and
                                                                    regard to exemptions for qualifying
                                                                                                                                  (ii) Establishes that it has—
                                                                    sales under this section or § 52.4682–1)                      (A) Repaid or agreed to repay the
                                                                    when it sells or uses the ODCs if that                     amount of the tax to the person that
                                                                    purchaser does not-                                        exported the ODC; or
                                                                       (i) Export the ODCs and document                           (B) Obtained the written consent of
                                                                    the exportation of the ODCs in accord-                     the exporter to the allowance of the
                                                                    ance with paragraph (d)(4) of this sec-                    credit or the making of the refund.
                                                                    tion; or                                                      (4) Procedural rules. See section 6402
                                                                       (ii) Sell the ODCs in a qualifying re-                  and the regulations under that section
                                                                    sale for export.                                           for procedural rules relating to filing a
                                                                       (2) Purchaser in qualifying resale. The                 claim for credit or refund of tax.
                                                                    purchaser of ODCs in a qualifying re-                         (g) Examples. The following examples
                                                                    sale for export is treated as the manu-                    illustrate the provisions of this sec-
                                                                    facturer of the ODC and is liable for                      tion. In each example, the sales are
                                                                    any tax imposed under section 4681 (de-                    qualifying sales for export (within the
                                                                    termined without regard to exemptions                      meaning of paragraph (d)(1) of this sec-
                                                                    for qualifying sales under this section                    tion), all registration, certification,
                                                                    or § 52.4682–1) when it sells or uses the                  and documentation requirements of
                                                                    ODCs if that purchaser does not export                     this section are met, and the ODCs sold
                                                                    the ODCs and document the expor-                           for export are exported:
                                                                    tation of the ODCs in accordance with                        Example 1. (i) Facts. D, a corporation, man-
                                                                    paragraph (d)(4) of this section.                          ufactures CFC–11, a post-1989 ODC, and does
                                                                       (f) Credit or refund—(1) In general. Ex-                not manufacture or import any other ODCs.
                                                                    cept as provided in paragraph (f)(2) of                    In 1993, D manufactures 100,000 pounds of
                                                                    this section, a manufacturer or im-                        CFC–11, the maximum quantity D is allowed
                                                                    porter that meets the conditions of                        to manufacture in 1993 under EPA regula-
                                                                                                                               tions. D has no additional production allow-
                                                                    paragraph (f)(3) of this section is al-
                                                                                                                               ance from EPA for 1993. In 1993, the tax on
                                                                    lowed a credit or refund (without inter-                   CFC–11 is $3.35 per pound. D’s 1986 export per-
                                                                    est) of the tax it paid to the govern-                     centage for post-1989 ODCs is 50%. In 1993, D
                                                                    ment under section 4681 on ODCs that                       sells 80,000 pounds of CFC–11 in qualifying
                                                                    are exported. Persons other than man-                      sales for export. The remainder of D’s pro-
                                                                    ufacturers and importers of ODCs can-                      duction is not exported.
                                                                    not file claims for credit or refund of                      (ii) Components of limit on tax benefit. Under
                                                                    tax imposed under section 4681 on ODCs                     paragraph (c)(1) of this section, D’s exemp-
                                                                                                                               tion amount for 1993 is equal to the sum of—
                                                                    that are exported.                                           (A) D’s 1986 export percentage multiplied
                                                                       (2) Limitation. The amount of credits                   by the aggregate tax that would (but for sec-
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                                                                    or refunds of tax under this paragraph                     tion 4682(d), section 4682(g), and § 52.4682–5) be
                                                                    (f) is limited—                                            imposed under section 4681 on the maximum

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                                                                    Internal Revenue Service, Treasury                                                                    Pt. 53
                                                                    quantity of post-1989 ODCs D is permitted to               40,000 pounds. F has no additional production
                                                                    manufacture during 1993;                                   allowance from EPA for 1993. In 1993, the tax
                                                                      (B) The aggregate tax that would (but for                on CFC–11 is $3.35 per pound. F’s 1986 export
                                                                    section 4682(d), section 4682(g), and § 52.4682–5)         percentage for post-1989 ODCs is 50%. In 1993,
                                                                    be imposed under section 4681 on post-1989                 F sells 45,000 pounds of CFC–11 tax free in
                                                                    ODCs that D manufactures during 1993 under                 qualifying sales for export and pays tax
                                                                    an additional production allowance; and                    under section 4681 on an additional 35,000
                                                                      (C) The aggregate tax that would (but for                pounds of exported CFC–11. The remainder of
                                                                    section 4682(d), section 4682(g), and § 52.4682–5)         F’s production is not exported.
                                                                    be imposed under section 4681 on post-1989                   (ii) Limit on tax benefit. F’s 1993 exemption
                                                                    ODCs imported by D during 1993.                            amount is $301,500, ($167,500 (50% of $335,000
                                                                      (iii) Limit on tax benefit. The amounts de-              (the tax that would otherwise be imposed on
                                                                    scribed in paragraphs (ii)(B) and (C) of this              100,000 pounds of CFC–11 in 1993) plus $134,000
                                                                    Example 1 are equal to zero. Thus, D’s 1993 ex-            (the tax that would otherwise be imposed on
                                                                    emption amount is $167,500 (50% of $335,000                the 40,000 pounds imported)). The credit or
                                                                    (the tax that would otherwise be imposed on                refund allowed to F under paragraph (f) of
                                                                    100,000 pounds of CFC–11 in 1993)).                        this section is limited under paragraph (f)(2)
                                                                      (iv) Application of limit on tax benefit. Under          of this section to the amount by which F’s
                                                                    paragraph (b)(2) of this section, the tax im-              1993 exemption amount exceeds F’s 1993 tax
                                                                    posed on the CFC–11 D sells for export is                  benefit under paragraph (b) of this section.
                                                                    equal to the excess of the tax that would                    (iii) Application of limit on tax benefit. Be-
                                                                    have been imposed on those ODCs but for                    cause F sold 45,000 pounds of CFC–11 tax free
                                                                    section 4682(d) and § 52.4682–5, over D’s 1993             in qualifying sales for export in 1993, F’s 1993
                                                                    exemption amount. But for § 52.4682–5,                     tax benefit under paragraph (b) of this sec-
                                                                    $268,000 ($3.35 × 80,000) of tax would have been           tion is $150,750 ($3.35 × 45,000). Thus, the cred-
                                                                    imposed on the CFC–11 sold for export. Thus,
                                                                                                                               it or refund allowed to F under paragraph (f)
                                                                    $100,500 ($268,000 ¥ $167,500) of tax is imposed
                                                                                                                               of this section is limited to $150,750
                                                                    on the CFC–11 sold for export.
                                                                                                                               ($301,500¥$150,750). The limitation does not
                                                                      Example 2. (i) Facts. E, a corporation, man-
                                                                                                                               affect F’s credit or refund because the tax F
                                                                    ufactures CFC–11, a post-1989 ODC, and does
                                                                                                                               paid on exported ODCs is only $117,250 ($3.35
                                                                    not manufacture or import any other ODCs.
                                                                                                                               × 35,000).
                                                                    In 1993, E manufactures 100,000 pounds of
                                                                    CFC–11, the maximum quantity E is allowed                    (h) Effective date. This section is ef-
                                                                    to manufacture in 1993 under EPA regula-                   fective January 1, 1993.
                                                                    tions. E has no additional production allow-
                                                                    ance from EPA for 1993. In 1993, the tax on                [T.D. 8622, 60 FR 52853, Oct. 11, 1995]
                                                                    CFC–11 is $3.35 per pound. E’s 1986 export per-
                                                                    centage for post-1989 ODCs is 50%. In 1993, E
                                                                    sells 45,000 pounds of CFC–11 tax free in                      PART 53—FOUNDATION AND
                                                                    qualifying sales for export and pays tax                         SIMILAR EXCISE TAXES
                                                                    under section 4681 on an additional 35,000
                                                                    pounds of exported CFC–11. The remainder of                 Subpart A—Taxes on Investment Income
                                                                    E’s production is not exported.
                                                                      (ii) Limit on tax benefit. E’s 1993 exemption            Sec.
                                                                    amount is $167,500, (50% of $335,000 (the tax              53.4940–1 Excise tax on net investment in-
                                                                    that would otherwise be imposed on 100,000                     come.
                                                                    pounds of CFC–11 in 1993)). The credit or re-
                                                                    fund allowed to E under paragraph (f) of this                   Subpart B—Taxes on Self-Dealing
                                                                    section is limited under paragraph (f)(2) of
                                                                    this section to the amount by which E’s 1993               53.4941(a)–1    Imposition of initial taxes.
                                                                    exemption amount exceeds E’s 1993 tax ben-                 53.4941(b)–1    Imposition     of    additional
                                                                    efit under paragraph (b) of this section.                      taxes.
                                                                      (iii) Application of limit on tax benefit. Be-           53.4941(c)–1    Special rules.
                                                                    cause E sold 45,000 pounds of CFC–11 tax free              53.4941(d)–1    Definition of self-dealing.
                                                                    in qualifying sales for export in 1993, E’s 1993           53.4941(d)–2    Specific acts of self-dealing.
                                                                    tax benefit under paragraph (b) of this sec-               53.4941(d)–3    Exceptions to self-dealing.
                                                                    tion is $150,750 ($3.35 × 45,000). Thus, the cred-         53.4941(d)–4    Transitional rules.
                                                                    it or refund allowed to E under paragraph (f)              53.4941(e)–1    Definitions.
                                                                    of this section is limited to $16,750                      53.4941(f)–1    Effective dates.
                                                                    ($167,500¥$150,750).
                                                                      Example 3. (i) Facts. F, a corporation, man-              Subpart C—Taxes on Failure To Distribute
                                                                    ufactures CFC–11, a post-1989 ODC, and does                               Income
                                                                    not manufacture any other ODCs. F also im-
                                                                    ports CFC–11. In 1993, F manufactures 60,000               53.4942(a)–1    Taxes for failure to distribute
                                                                    pounds of CFC–11 (100,000 pounds is the max-                   income.
cprice-sewell on PRODPC61 with CFR




                                                                    imum quantity F is allowed to manufacture                  53.4942(a)–2    Computation of undistributed
                                                                    in 1993 under EPA regulations) and imports                     income.

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                                                                    Pt. 53                                                                  26 CFR Ch. I (4–1–09 Edition)
                                                                    53.4942(a)–3  Qualifying distributions de-                 53.4947–2   Special rules.
                                                                        fined.
                                                                    53.4942(b)–1  Operating foundations.                       Subpart I—Tax on Investment Income of
                                                                    53.4942(b)–2  Alternative tests.                              and Denial of Exemption to Certain
                                                                    53.4942(b)–3  Determination of compliance                     Foreign Organizations
                                                                        with operating foundation tests.
                                                                                                                               53.4948–1 Application of taxes and denial of
                                                                                                                                   exemption with respect to certain for-
                                                                        Subpart D—Taxes on Excess Business
                                                                                                                                   eign organizations.
                                                                                    Holdings
                                                                    53.4943–1 General rule; purpose.
                                                                                                                               Subpart J—Black Lung Benefit Trust Excise
                                                                    53.4943–2 Imposition of tax on excess busi-
                                                                                                                                               Taxes
                                                                        ness holdings of private foundations.                  53.4951–1 Black lung trusts—taxes on self-
                                                                    53.4943–3 Determination of excess business                     dealing.
                                                                        holdings.                                              53.4952–1 Black lung trusts—taxes on tax-
                                                                    53.4943–4 Present holdings.                                    able expenditures.
                                                                    53.4943–5 Present holdings acquired by trust
                                                                        or a will.                                                Subpart K—Second Tier Excise Taxes
                                                                    53.4943–6 Five-year period to dispose of
                                                                                                                               53.4955–1 Tax on political expenditures.
                                                                        gifts, bequests, etc.
                                                                                                                               53.4958–0 Table of contents.
                                                                    53.4943–7 Special rules for readjustments in-              53.4958–1 Taxes on excess benefit trans-
                                                                        volving grandfathered holdings.                            actions.
                                                                    53.4943–8 Business holdings; constructive                  53.4958–2 Definition of applicable tax-ex-
                                                                        ownership.                                                 empt organization.
                                                                    53.4943–9 Business holdings; certain periods.              53.4958–3 Definition of disqualified person.
                                                                    53.4943–10 Business enterprise; definition.                53.4958–4 Excess benefit transaction.
                                                                    53.4943–11 Effective date.                                 53.4958–5 Transaction in which the amount
                                                                                                                                   of the economic benefit is determined in
                                                                       Subpart E—Taxes on Investments Which                        whole or in part by the revenues of one
                                                                          Jeopardize Charitable Purpose                            or more activities of the organization.
                                                                                                                                   [Reserved]
                                                                    53.4944–1 Initial taxes.                                   53.4958–6 Rebuttable presumption that a
                                                                    53.4944–2 Additional taxes.                                    transaction is not an excess benefit
                                                                    53.4944–3 Exception for program-related in-                    transaction.
                                                                                                                               53.4958–7 Correction.
                                                                        vestments.
                                                                                                                               53.4958–8 Special rules.
                                                                    53.4944–4 Special rules.                                   53.4961–1 Abatement of second tier taxes for
                                                                    53.4944–5 Definitions.                                         correction within correction period.
                                                                    53.4944–6 Special rules for investments made               53.4961–2 Court proceedings to determine li-
                                                                        prior to January 1, 1970.                                  ability for second tier tax.
                                                                                                                               53.4963–1 Definitions.
                                                                     Subpart F—Taxes on Taxable Expenditures
                                                                                                                                Subpart L—Procedure and Administration
                                                                    53.4945–1 Taxes on taxable expenditures.
                                                                    53.4945–2 Propaganda influencing legisla-                  53.6001–1 Notice or regulations requiring
                                                                        tion.                                                      records, statements, and special returns.
                                                                    53.4945–3 Influencing elections and carrying               53.6011–1 General requirement of return,
                                                                        on voter registration drives.                              statement or list.
                                                                    53.4945–4 Grants to individuals.                           53.6011–4 Requirement of statement dis-
                                                                                                                                   closing participation in certain trans-
                                                                    53.4945–5 Grants to organizations.
                                                                                                                                   actions by taxpayers.
                                                                    53.4945–6 Expenditures for noncharitable                   53.6060–1 Reporting requirements for tax re-
                                                                        purposes.                                                  turn preparers.
                                                                                                                               53.6061–1 Signing of returns and other docu-
                                                                      Subpart G—Definitions and Special Rules                      ments.
                                                                                                                               53.6065–1 Verification of returns.
                                                                    53.4946–1    Definitions and special rules.                53.6071–1 Time for filing returns.
                                                                                                                               53.6071–1T Time for filing returns (tem-
                                                                          Subpart H—Application to Certain                         porary).
                                                                                  Nonexempt Trusts                             53.6081–1 Automatic extension of time for
                                                                                                                                   filing the return to report taxes due
                                                                    53.4947–1    Application of tax.                               under section 4951 for self-dealing with a
                                                                                                                                   nuclear decommissioning fund.
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                                                                                                                               53.6091–1 Place for filing chapter 42 tax re-
                                                                                                                                   turns.

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                                                                    Internal Revenue Service, Treasury                                                             § 53.4940–1
                                                                    53.6091–2 Exceptional cases.                                come. This tax will be reported on the
                                                                    53.6107–1 Tax return preparer must furnish                  form the foundation is required to file
                                                                        copy of return or claim for refund to tax-              under section 6033 for the taxable year
                                                                        payer and must retain a copy or record.
                                                                    53.6109–1 Tax return preparers furnishing                   and will be paid annually at the time
                                                                        identifying numbers for returns or                      prescribed for filing such annual return
                                                                        claims for refund filed.                                (determined without regard to any ex-
                                                                    53.6151–1 Time and place for paying tax                     tension of time for filing). In addition,
                                                                        shown on returns.                                       an excise tax is imposed in the manner
                                                                    53.6161–1 Extension of time for paying tax                  prescribed in paragraph (b) of this sec-
                                                                        or deficiency.                                          tion on certain non-exempt private
                                                                    53.6165–1 Bonds where time to pay tax or de-
                                                                        ficiency has been extended.
                                                                                                                                foundations (including certain non-ex-
                                                                    53.6601–1 Interest on underpayment, non-                    empt charitable trusts). Except as pro-
                                                                        payment, or extensions of time for pay-                 vided in the succeeding sentence, this
                                                                        ment, of tax.                                           tax is to be reported by means of a
                                                                    53.6651–1 Failure to file tax return or to pay              schedule attached to the organization’s
                                                                        tax.                                                    income tax return. For taxable years
                                                                    53.6694–1 Section 6694 penalties applicable to              ending on or after December 31, 1975,
                                                                        tax return preparer.
                                                                                                                                the tax imposed by section 4940(b) and
                                                                    53.6694–2 Penalties for understatement due
                                                                        to an unreasonable position.                            paragraph (b) of this section on a trust
                                                                    53.6694–3 Penalty for understatement due to                 described in section 4947(a)(1) which is
                                                                        willful, reckless, or intentional conduct.              a private foundation shall be reported
                                                                    53.6694–4 Extension of period of collection                 on Form 5227. The tax imposed by sec-
                                                                        when tax return preparer pays 15 percent                tion 4940(b) and this section is to be
                                                                        of a penalty for understatement of tax-                 paid annually at the time the organiza-
                                                                        payer’s liability and certain other proce-              tion is required to pay its income taxes
                                                                        dural matters.
                                                                    53.6695–1 Other assessable penalties with re-               imposed under subtitle A. Except as
                                                                        spect to the preparation of tax returns or              otherwise provided herein, no exclu-
                                                                        claims for refund for other persons.                    sions or deductions from gross invest-
                                                                    53.6696–1 Claims for credit or refund by tax                ment income or credits against tax are
                                                                        return preparers.                                       allowable under this section.
                                                                    53.7101–1 Form of bonds.                                      (b) Taxable foundations. (1) The excise
                                                                    53.7701–1 Tax return preparer.                              tax imposed under section 4940 on pri-
                                                                      AUTHORITY: 26 U.S.C. 7805.                                vate foundations which are not exempt
                                                                      Section 53.6060–1 also issued      under 26 U.S.C.        from taxation under section 501(a) is
                                                                    6060(a);                                                    equal to:
                                                                      Section 53.6081–1 also issued      under 26 U.S.C.
                                                                                                                                  (i) The amount (if any) by which the
                                                                    6081(a);
                                                                      Section 53.6109–1 also issued      under 26 U.S.C.        sum of
                                                                    6109(a);                                                      (A) The tax on net investment in-
                                                                      Section 53.6109–2 also issued      under 26 U.S.C.        come imposed under section 4940(a),
                                                                    6109(a);                                                    computed as if such private foundation
                                                                      Section 53.6695–1 also issued      under 26 U.S.C.        were exempt from taxation under sec-
                                                                    6695(b).                                                    tion 501(a) and described in section
                                                                                                                                501(c)(3) for the taxable year, plus
                                                                      Subpart A—Taxes on Investment                               (B) The amount of the tax which
                                                                                Income                                          would have been imposed under section
                                                                                                                                511 for such taxable year if such private
                                                                    § 53.4940–1 Excise tax on net invest-                       foundation had been exempt from tax-
                                                                         ment income.                                           ation under section 501(a), exceeds.
                                                                       (a) In general. For taxable years be-                      (ii) The tax imposed under subtitle A
                                                                    ginning after September 30, 1977, sec-                      on such private foundation for the tax-
                                                                    tion 4940 imposes an excise tax of 2 per-                   able year.
                                                                    cent of the net investment income (as                         (2) The provisions of this paragraph
                                                                    defined in section 4940(c) and paragraph                    may be illustrated by the following ex-
                                                                    (c) of this section) of a tax-exempt pri-                   amples:
                                                                    vate foundation (as defined in section
                                                                                                                                  Example 1. Assume that the tax liability
                                                                    509). For taxable years beginning after                     under subtitle A for private foundation X,
                                                                    December 31, 1969, and before October 1,                    which is not exempt from taxation under
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                                                                    1977, the tax imposed by section 4940 is                    section 501(a) for 1970, is $10,000. Had X been
                                                                    4 percent of the net investment in-                         exempt under section 501(a) for 1970, the tax

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                                                                    § 53.4940–1                                                             26 CFR Ch. I (4–1–09 Edition)
                                                                    imposed under section 4940(a) would have                   ment income. Therefore, for example,
                                                                    been $4,000 and the tax imposed under sec-                 interest received on a student loan
                                                                    tion 511 would have been $7,000. The excess of             would be includible in the gross invest-
                                                                    the sum of the taxes which would have been
                                                                    imposed under sections 4940(a) and 511
                                                                                                                               ment income of a private foundation
                                                                    ($11,000) over the tax that was imposed under              making such loan. For purposes of
                                                                    subtitle A ($10,000) is $1,000, the amount of              paragraph (c) of this section, gross in-
                                                                    the tax imposed on such organization under                 vestment income also includes the
                                                                    section 4940(b).                                           items of investment income described
                                                                      Example 2. Assume the facts stated in Ex-                in § 1.512(b)–1(a).
                                                                    ample (1), except that the tax liability under                (2) Certain estate and trust disburse-
                                                                    subtitle A is $15,000 rather than $10,000. Be-
                                                                    cause the sum of the taxes which would have
                                                                                                                               ments. In the case of a distribution
                                                                    been imposed under sections 4940(a) and 511                from an estate or a trust described in
                                                                    ($11,000) does not exceed the tax that was im-             section 4947(a) (1) or (2), such distribu-
                                                                    posed under subtitle A ($15,000), there is no              tion shall not retain its character in
                                                                    tax imposed under section 4940(b) with re-                 the hands of the distributee for pur-
                                                                    spect to such foundation.                                  poses of computing the tax under sec-
                                                                      (c) Net investment income defined—(1)                    tion 4940; except that, in the case of a
                                                                    In general. For purposes of section                        distribution from a trust described in
                                                                    4940(a), net investment income of a pri-                   section 4947(a)(2), the income of such
                                                                    vate foundation is the amount by                           trust attributable to transfers in trust
                                                                    which:                                                     after May 26, 1969, shall retain its char-
                                                                      (i) The sum of the gross investment                      acter in the hands of a distributee pri-
                                                                    income (as defined in section 4940(c)(2)                   vate foundation for purposes of section
                                                                    and paragraph (d) of this section) and                     4940 (unless such income is taken into
                                                                    the capital gain net income (net cap-                      account because of the application of
                                                                    ital gain for taxable years beginning                      section 671).
                                                                    before January 1, 1977) (within the                           (3) Treatment of certain distributions in
                                                                    meaning of section 4940(c)(4) and para-                    redemption of stock. For purposes of ap-
                                                                    graph (f) of this section) exceeds                         plying section 302(b)(1), any distribu-
                                                                      (ii) The deductions allowed by sec-                      tion made to a private foundation by a
                                                                    tion 4940(c)(3) and paragraph (e) of this                  disqualified person (as defined in sec-
                                                                    section.                                                   tion 4946(a)), in redemption of stock
                                                                    Except to the extent inconsistent with                     held by such private foundation in a
                                                                    the provisions of this section, net in-                    business enterprise shall be treated as
                                                                    vestment income shall be determined                        not essentially equivalent to a dividend
                                                                    under the principles of Subtitle A.                        if all of the following conditions are
                                                                      (2) Tax-exempt income. For purposes of                   satisfied: (i) Such redemption is of
                                                                    computing net investment income                            stock which was owned by a private
                                                                    under section 4940, the provisions of                      foundation on May 26, 1969 (or which is
                                                                    section 103 (relating to interest on cer-                  acquired by a private foundation under
                                                                    tain governmental obligations) and                         the terms of a trust which was irrev-
                                                                    section 265 (relating to expenses and in-                  ocable on May 26, 1969, or under the
                                                                    terest relating to tax-exempt income)                      terms of a will executed on or before
                                                                    and the regulations thereunder shall                       such date, which is in effect on such
                                                                    apply.                                                     date and at all times thereafter, or
                                                                      (d) Gross investment income—(1) In gen-                  would have passed under such a will
                                                                    eral. For purposes of paragraph (c) of                     but before that time actually passes
                                                                    this section, ‘‘gross investment in-                       under a trust which would have met
                                                                    come’’ means the gross amounts of in-                      the test of this subdivision but for the
                                                                    come from interest, dividends, rents,                      fact that the trust was revocable (but
                                                                    and royalties (including overriding roy-                   was not in fact revoked)); (ii) such
                                                                    alties) received by a private foundation                   foundation is required to dispose of
                                                                    from all sources, but does not include                     such property in order not to be liable
                                                                    such income to the extent included in                      for tax under section 4943 (relating to
                                                                    computing the tax imposed by section                       taxes on excess business holdings); and
                                                                    511. Under this definition, interest,                      (iii) such foundation receives in return
                                                                    dividends, rents, and royalties derived                    an amount which equals or exceeds the
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                                                                    from assets devoted to charitable ac-                      fair market value of such property at
                                                                    tivities are includible in gross invest-                   the time of such disposition or at the

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                                                                    Internal Revenue Service, Treasury                                                            § 53.4940–1

                                                                    time a contract for such disposition                       property is used for exempt purposes,
                                                                    was previously executed in a trans-                        the deductions allowed by section
                                                                    action which would not constitute a                        4940(c)(3) shall be apportioned between
                                                                    prohibited transaction (within the                         the exempt and non-exempt uses.
                                                                    meaning of section 503(b) or the cor-                        (iii) No amount is allowable as a de-
                                                                    responding provisions of prior law). In                    duction under this section to the ex-
                                                                    the case of a disposition before Janu-                     tent it is paid or incurred for purposes
                                                                    ary 1, 1975, section 4943 shall be applied                 other than those described in subdivi-
                                                                    without taking section 4943(c) (4) into                    sion (i) of this subparagraph. Thus, for
                                                                    account. A distribution which other-                       example, the deductions prescribed by
                                                                    wise qualifies under section 302 as a                      the following sections are not allow-
                                                                    distribution in part or full payment in                    able: (1) The charitable deduction pre-
                                                                    exchange for stock shall not be treated                    scribed under section 170 and 642(c); (2)
                                                                    as essentially equivalent to a dividend                    the net operating loss deduction pre-
                                                                    because it does not meet the require-                      scribed under section 172; and (3) the
                                                                    ments of this subparagraph.                                special deductions prescribed under
                                                                      (e) Deductions—(1) In general. (i) For                   Part VIII, Subchapter B, Chapter 1.
                                                                    purposes of computing net investment                         (2) Deduction modifications. The fol-
                                                                    income, there shall be allowed as a de-                    lowing modifications shall be made in
                                                                    duction from gross investment income                       determining deductions otherwise al-
                                                                    all the ordinary and necessary expenses                    lowable under this paragraph:
                                                                    paid or incurred for the production or                       (i) The depreciation deduction shall
                                                                    collection of gross investment income                      be allowed, but only on the basis of the
                                                                    or for the management, conservation,                       straight line method provided in sec-
                                                                    or maintenance of property held for the                    tion 167(b)(1).
                                                                    production of such income, determined                        (ii) The depletion deduction shall be
                                                                    with the modifications set forth in sub-                   allowed, but such deduction shall be
                                                                    paragraph (2) of this paragraph. Such                      determined without regard to section
                                                                    expenses include that portion of a pri-                    613, relating to percentage depletion.
                                                                    vate foundation’s operating expenses                         (iii) The basis to be used for purposes
                                                                    which is paid or incurred for the pro-                     of the deduction allowed for deprecia-
                                                                    duction or collection of gross invest-                     tion or depletion shall be the basis de-
                                                                    ment income. Taxes paid or incurred                        termined under the rules of Part II of
                                                                    under this section are not paid or in-                     Subchapter O of Chapter 1, subject to
                                                                    curred for the production or collection                    the provisions of section 4940(c)(3)(B),
                                                                    of gross investment income. A private                      and     without    regard    to   section
                                                                    foundation’s operating expenses in-                        4940(c)(4)(B), relating to the basis for
                                                                    clude compensation of officers, other                      determining gain, or section 362(c).
                                                                    salaries and wages of employees, out-                      Thus, a private foundation must reduce
                                                                    side professional fees, interest, and                      the cost or other substituted or trans-
                                                                    rent and taxes upon property used in                       ferred basis by an amount equal to the
                                                                    the foundation’s operations. Where a                       straight line depreciation or cost de-
                                                                    private foundation’s officers or em-                       pletion, without regard to whether the
                                                                    ployees engage in activities on behalf                     foundation deducted such depreciation
                                                                    of the foundation for both investment                      or depletion during the period prior to
                                                                    purposes and for exempt purposes, com-                     its first taxable year beginning after
                                                                    pensation and salaries paid to such of-                    December 31, 1969. However, where a
                                                                    ficers or employees must be allocated                      private foundation has previously
                                                                    between the investment activities and                      taken depreciation or depletion deduc-
                                                                    the exempt activities. To the extent a                     tions in excess of the amount which
                                                                    private foundation’s expenses are                          would have been taken had the straight
                                                                    taken into account in computing the                        line or cost method been employed,
                                                                    tax imposed by section 511, they shall                     such excess depreciation or depletion
                                                                    not be deductible for purposes of com-                     also shall be taken into account to re-
                                                                    puting the tax imposed by section 4940.                    duce basis. If the facts necessary to de-
                                                                      (ii) Where only a portion of property                    termine the basis of property in the
                                                                    produces, or is held for the production                    hands of the donor or the last pre-
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                                                                    of, income subject to the section 4940                     ceding owner by whom it was not ac-
                                                                    excise tax, and the remainder of the                       quired by gift are unknown to a donee

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                                                                    § 53.4940–1                                                             26 CFR Ch. I (4–1–09 Edition)

                                                                    private foundation, then the original                      but also incidentally derives income
                                                                    basis to such foundation of such prop-                     from such property which is subject to
                                                                    erty shall be determined under the                         the tax imposed by section 4940(a), any
                                                                    rules of § 1.1015–1(a)(3).                                 gain or loss resulting from the sale or
                                                                      (iv) The deduction for expenses paid                     other disposition of such property is
                                                                    or incurred in any taxable year for the                    not subject to the tax imposed by sec-
                                                                    production of gross investment income                      tion 4940(a). For example, if a tax-ex-
                                                                    earned as an incident to a charitable                      empt private foundation maintains
                                                                    function shall be no greater than the                      buildings of a historical nature and
                                                                    income earned from such function                           keeps them open for public inspection,
                                                                    which is includible as gross investment                    but requires a number of its employees
                                                                    income for such year. For example,                         to live in these buildings and charges
                                                                    where rental income is incidentally re-                    the employees rent, the rent would be
                                                                    alized in 1971 from historic buildings                     subject to the tax imposed by section
                                                                    held open to the public, deductions for                    4940(a), but any gain or loss resulting
                                                                    amounts paid or incurred in 1971 for                       from the sale of such property would
                                                                    the production of such income shall be                     not be subject to such tax. However,
                                                                    limited to the amount of rental income                     where the foundation uses property for
                                                                    includible as gross investment income                      both exempt purposes and (other than
                                                                    for 1971.                                                  incidentally) for investment purposes
                                                                      (f) Capital gain and losses—(1) General                  (for example, a building in which the
                                                                    rule. In determining capital gain net                      foundation’s charitable and investment
                                                                    income (net capital gain for taxable                       activities are carried on), that portion
                                                                    years beginning before January 1, 1977)                    of any gain or loss from the sale or
                                                                    for purposes of the tax imposed by sec-                    other disposition of such property
                                                                    tion 4940, there shall be taken into ac-                   which is allocable to the investment
                                                                    count only capital gains and losses                        use of such property must be taken
                                                                    from the sale or other disposition of                      into account in computing capital gain
                                                                    property held by a private foundation                      net income (net capital gain for tax-
                                                                    for investment purposes (other than                        able years beginning before January 1,
                                                                    program-related investments, as de-                        1977) for such taxable year. For pur-
                                                                    fined in section 4944(c)), and property                    poses of this paragraph, a distribution
                                                                    used for the production of income in-                      of property for purposes described in
                                                                    cluded in computing the tax imposed                        section 170(c) (1) or (2)(B) which is a
                                                                    by section 511 except to the extent gain                   qualifying distribution under section
                                                                    or loss from the sale or other disposi-                    4942 shall not be treated as a sale or
                                                                    tion of such property is taken into ac-                    other disposition of property.
                                                                    count for purposes of such tax. For tax-                     (2) Basis. (i) The basis for purposes of
                                                                    able years beginning after December 31,                    determining gain from the sale or
                                                                    1972, property shall be treated as held                    other disposition of property shall be
                                                                    for investment purposes even though                        the greater of:
                                                                    such property is disposed of by the
                                                                                                                                 (A) Fair market value on December
                                                                    foundation immediately upon its re-
                                                                                                                               31, 1969, plus or minus all adjustments
                                                                    ceipt, if it is property of a type which
                                                                                                                               after December 31, 1969, and before the
                                                                    generally produces interest, dividends,
                                                                                                                               date of disposition under the rules of
                                                                    rents, royalties, or capital gains
                                                                                                                               Part II of Subchapter O of Chapter 1,
                                                                    through appreciation (for example,
                                                                                                                               provided that the property was held by
                                                                    rental real estate, stock, bonds, min-
                                                                                                                               the private foundation on December 31,
                                                                    eral interests, mortgages, and securi-
                                                                                                                               1969, and continuously thereafter to
                                                                    ties). Under this subparagraph, gains
                                                                                                                               the date of disposition, or
                                                                    and losses from the sale or other dis-
                                                                    position of property used for the ex-                        (B) Basis as determined under the
                                                                    empt purposes of the private founda-                       rules of Part II of Subchapter O of
                                                                    tion are excluded. For example, gain or                    Chapter 1,
                                                                    loss on the sale of the buildings used                     subject to the provisions of section
                                                                    for the exempt activities of a private                     4940(c)(3)(B) (and without regard to sec-
                                                                    foundation would not be subject to the                     tion 362(c)).
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                                                                    section 4940 tax. Where the foundation                       (ii) For purposes of determining loss
                                                                    uses property for its exempt purposes,                     from the sale or other disposition of

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(a)–1

                                                                    property, basis as determined in sub-                      ciation of $5,100 ($104,900) exceeds basis as de-
                                                                    division (i)(B) of this subparagraph                       termined by Part II of Subchapter O of Chap-
                                                                    shall apply.                                               ter 1, $96,900 ($102,000 less $5,100), and will be
                                                                                                                               used for purposes of determining gain. Be-
                                                                      (3) Losses. Where the sale or other
                                                                                                                               cause basis for purposes of determining gain
                                                                    disposition of property referred to in                     exceeds sale price, there is no gain. There is
                                                                    section 4940(c)(4)(A) results in a capital                 no loss because basis for purposes of deter-
                                                                    loss, such loss may be subtracted from                     mining loss ($96,900) is less than sale price.
                                                                    capital gains from the sale or other dis-                  [T.D. 7250, 38 FR 868, Jan. 5, 1973; 38 FR 7549,
                                                                    position of other such property during                     Mar. 23, 1973, as amended by T.D. 7407, 41 FR
                                                                    the same taxable year, but only to the                     9321, Mar. 4, 1976; T.D. 7606, 44 FR 18971, Mar.
                                                                    extent of such gains. Should losses                        30, 1979; T.D. 7728, 45 FR 72651, Nov. 3, 1980;
                                                                    from the sale or other disposition of                      T.D. 8423, 57 FR 33444, July 29, 1992]
                                                                    such property exceed gains from the
                                                                    sale or other disposition of such prop-                     Subpart B—Taxes on Self-Dealing
                                                                    erty during the same taxable year,
                                                                    such excess may not be deducted from                        SOURCE: T.D. 7270, 38 FR 9493, Apr. 17, 1973,
                                                                    gross investment income under section                      unless otherwise noted.
                                                                    4940(c)(3) in any taxable year, nor may
                                                                    such excess by used to reduce gains in                     § 53.4941(a)–1 Imposition      of   initial
                                                                    either prior or future taxable years, re-                        taxes.
                                                                    gardless of whether the foundation is a                       (a) Tax on self-dealer—(1) In general.
                                                                    corporation or a trust.                                    Section 4941(a)(1) of the code imposes
                                                                      (4) Examples. The provisions of this                     an excise tax on each act of self-deal-
                                                                    paragraph may be illustrated by the                        ing between a disqualified person (as
                                                                    following examples:                                        defined in section 4946(a)) and a private
                                                                      Example 1. A private foundation holds cer-               foundation. Except as provided in sub-
                                                                    tain depreciable real property on December                 paragraph (2) of this paragraph, this
                                                                    31, 1969, having a basis of $102,000. The fair             tax shall be imposed on a disqualified
                                                                    market value of such property on that date                 person even though he had no knowl-
                                                                    was $100,000. For its taxable year 1970 the                edge at the time of the act that such
                                                                    foundation was allowed depreciation for such               act constituted self-dealing. Notwith-
                                                                    property of $5,100 on the straight line meth-
                                                                    od, the allowable amount computed on the
                                                                                                                               standing the preceding two sentences,
                                                                    $102,000 basis. The property was sold on Jan-              however, a transaction between a dis-
                                                                    uary 1, 1971, for $100,000. Because fair market            qualified person and a private founda-
                                                                    value on December 31, 1969, less straight line             tion will not constitute an act of self-
                                                                    depreciation of $5,100 ($94,900) is less than              dealing if:
                                                                    basis as determined by Part II of Subchapter                  (i) The transaction is a purchase or
                                                                    O of Chapter 1, $96,900 ($102,000 less $5,100), a          sale of securities by a private founda-
                                                                    gain of $3,100 is recognized (i.e., sales price of         tion through a stockbroker where nor-
                                                                    $100,000 less the greater of the two possible              mal trading procedures on a stock ex-
                                                                    bases).
                                                                      Example 2. Assume the same facts in exam-
                                                                                                                               change or recognized over-the-counter
                                                                    ple 1, except that the sale price was $95,000.             market are followed;
                                                                    Because the sale price was $1,900 less than                   (ii) Neither the buyer nor the seller
                                                                    the basis for loss ($96,900 as determined by               of the securities nor the agent of either
                                                                    the application of subparagraph (2)(ii) of this            knows the identity of the other party
                                                                    paragraph), there is a capital loss of $1,900              involved; and
                                                                    which may be deducted against capital gains                   (iii) The sale is made in the ordinary
                                                                    for 1971 (if any) in determining net capital               course of business, and does not involve
                                                                    gain (capital gain net income for taxable
                                                                                                                               a block of securities larger than the av-
                                                                    years beginning after December 31, 1976).
                                                                      Example 3. A private foundation holds cer-               erage daily trading volume of that
                                                                    tain depreciable real property on December                 stock over the previous 4 weeks.
                                                                    31, 1969, having a basis of $102,000. The fair             However, the preceding sentence shall
                                                                    market value of such property on that date                 not apply to a transaction involving a
                                                                    was $110,000. For its taxable year 1970 the                dealer who is a disqualified person act-
                                                                    foundation was allowed depreciation for such
                                                                                                                               ing as a principal or to a transaction
                                                                    property of $5,100 on the straight line meth-
                                                                    od, the allowable amount computed on the                   which is an act of self-dealing pursuant
                                                                    $102,000 basis. The property was sold on Jan-              to section 4941(d)(1)(B) and § 53.4941(d)–2
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                                                                    uary 1, 1971, for $100,000. Fair market value              (c)(1). The tax imposed by section
                                                                    on December 31, 1969, less straight line depre-            4941(a)(1) is at the rate of 5 percent of

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                                                                    § 53.4941(a)–1                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    the amount involved (as defined in sec-                    or act, as well as any affirmative ac-
                                                                    tion 4941(e)(2) and § 53.4941(e)–1(b)) with                tion by such manager. However, a foun-
                                                                    respect to the act of self-dealing for                     dation manager will not be considered
                                                                    each year or partial year in the taxable                   to have participated in an act of self-
                                                                    period (as defined in section 4941(e)(1))                  dealing where he has opposed such act
                                                                    and shall be paid by any disqualified                      in a manner consistent with the fulfill-
                                                                    person (other than a foundation man-                       ment of his responsibilities to the pri-
                                                                    ager acting only in the capacity of a                      vate foundation.
                                                                    foundation manager) who participates                          (3) Knowing. For purposes of section
                                                                    in the act of self-dealing. However, if a                  4941, a person shall be considered to
                                                                    foundation manager is also acting as a                     have participated in a transaction
                                                                    self-dealer, he may be liable for both                     ‘‘knowing’’ that it is an act of self-
                                                                    the tax imposed by section 4941(a)(1)                      dealing only if:
                                                                    and the tax imposed by section                                (i) He has actual knowledge of suffi-
                                                                    4941(a)(2).                                                cient facts so that, based solely upon
                                                                      (2) Government officials. In the case of                 such facts, such transaction would be
                                                                    a government official (as defined in                       an act of self-dealing,
                                                                    sec. 4946(a)), the tax shall be imposed
                                                                                                                                  (ii) He is aware that such an act
                                                                    upon such government official who par-
                                                                                                                               under these circumstances may violate
                                                                    ticipates in an act of self-dealing, only
                                                                                                                               the provisions of Federal tax law gov-
                                                                    if he knows that such act is an act of
                                                                                                                               erning self-dealing, and
                                                                    self-dealing. See paragraph (b)(3) of
                                                                    this section for a definition of knowing.                     (iii) He negligently fails to make rea-
                                                                      (3) Participation. For purposes of this                  sonable attempts to ascertain whether
                                                                    paragraph, a disqualified person shall                     the transaction is an act of self-deal-
                                                                    be treated as participating in an act of                   ing, or he is in fact aware that it is
                                                                    self-dealing in any case in which he en-                   such an act.
                                                                    gages or takes part in the transaction                     For purposes of this part and Chapter
                                                                    by himself or with others, or directs                      42, the term ‘‘knowing’’ does not mean
                                                                    any person to do so.                                       ‘‘having reason to know’’. However,
                                                                      (b) Tax on foundation manager—(1) In                     evidence tending to show that a person
                                                                    general. Section 4941(a)(2) of the code                    has reason to know of a particular fact
                                                                    imposes an excise tax on the participa-                    or particular rule is relevant in deter-
                                                                    tion of any foundation manager in an                       mining whether he had actual knowl-
                                                                    act of self-dealing between a disquali-                    edge of such fact or rule. Thus, for ex-
                                                                    fied person and a private foundation.                      ample, evidence tending to show that a
                                                                    This tax is imposed only in cases in                       person has reason to know of sufficient
                                                                    which the following circumstances are                      facts so that, based solely upon such
                                                                    present:                                                   facts, a transaction would be an act of
                                                                      (i) A tax is imposed by section                          self-dealing is relevant in determining
                                                                    4941(a)(1),                                                whether he has actual knowledge of
                                                                      (ii) Such participating foundation                       such facts.
                                                                    manager knows that the act is an act                          (4) Willful. Participation by a founda-
                                                                    of self-dealing, and                                       tion manager shall be deemed willful if
                                                                      (iii) The participation by the founda-                   it is voluntary, conscious, and inten-
                                                                    tion manager is willful and is not due                     tional. No motive to avoid the restric-
                                                                    to reasonable cause.                                       tions of the law or the incurrence of
                                                                    The tax imposed by section 4941(a)(2) is                   any tax is necessary to make the par-
                                                                    at the rate of 21⁄2 percent of the amount                  ticipation willful. However, participa-
                                                                    involved with respect to the act of self-                  tion by a foundation manager is not
                                                                    dealing for each year or partial year in                   willful if he does not know that the
                                                                    the taxable period and shall be paid by                    transaction in which he is partici-
                                                                    any foundation manager described in                        pating is an act of self-dealing.
                                                                    subdivisions (ii) and (iii) of this sub-                      (5) Due to reasonable cause. A founda-
                                                                    paragraph.                                                 tion manager’s participation is due to
                                                                      (2) Participation. The term ‘‘partici-                   reasonable cause if he has exercised his
                                                                    pation’’ shall include silence or inac-                    responsibility on behalf of the founda-
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                                                                    tion on the part of a foundation man-                      tion with ordinary business care and
                                                                    ager where he is under a duty to speak                     prudence.

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(c)–1

                                                                       (6) Advice of counsel. If a person, after               manager in any case in which a tax is
                                                                    full disclosure of the factual situation                   imposed by section 4941(b)(1) and the
                                                                    to legal counsel (including house coun-                    foundation manager refused to agree to
                                                                    sel), relies on the advice of such coun-                   part or all of the correction of the self-
                                                                    sel expressed in a reasoned written                        dealing act. The tax imposed by section
                                                                    legal opinion that an act is not an act                    4941(b)(2) is at the rate of 50 percent of
                                                                    of self-dealing under section 4941, al-                    the amount involved and shall be paid
                                                                    though such act is subsequently held to                    by any foundation manager who re-
                                                                    be an act of self-dealing, the person’s                    fused to agree to part or all of the cor-
                                                                    participation in such act will ordi-                       rection of the self-dealing act. For the
                                                                    narily not be considered ‘‘knowing’’ or                    limitations on liability of a foundation
                                                                    ‘‘willful’’ and will ordinarily be consid-                 manager, see § 53.4941(c)–1(b).
                                                                    ered ‘‘due to reasonable cause’’ within
                                                                                                                               [T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amend-
                                                                    the meaning of section 4941(a)(2). For
                                                                                                                               ed by T.D. 8084, 51 FR 16301, May 2, 1986]
                                                                    purposes of this subparagraph, a writ-
                                                                    ten legal opinion will be considered                       § 53.4941(c)–1    Special rules.
                                                                    ‘‘reasoned’’ even if it reaches a conclu-
                                                                    sion which is subsequently determined                        (a) Joint and several liability. (1) In
                                                                    to be incorrect so long as such opinion                    any case where more than one person is
                                                                    addresses itself to the facts and appli-                   liable for the tax imposed by any para-
                                                                    cable law. However, a written legal                        graph of section 4941 (a) or (b), all such
                                                                    opinion will not be considered ‘‘rea-                      persons shall be jointly and severally
                                                                    soned’’ if it does nothing more than re-                   liable for the taxes imposed under such
                                                                    cite the facts and express a conclusion.                   paragraph with respect to such act of
                                                                    However, the absence of advice of coun-                    self-dealing.
                                                                    sel with respect to an act shall not, by                     (2) The provisions of this paragraph
                                                                    itself, give rise to any inference that a                  may be illustrated by the following ex-
                                                                    person participated in such act know-                      ample:
                                                                    ingly, willfully, or without reasonable                      Example. A and B, who are managers of pri-
                                                                    cause.                                                     vate foundation X, lend one of the founda-
                                                                       (c) Burden of proof. For provisions re-                 tion’s paintings to G, a disqualified person,
                                                                    lating to the burden of proof in cases                     for display in G’s office, in a transaction
                                                                    involving the issue whether a founda-                      which gives rise to liability for tax under
                                                                    tion manager or a government official                      section 4941(a)(2) (relating to tax on founda-
                                                                                                                               tion managers). An initial tax is imposed on
                                                                    has knowingly participated in an act of                    both A and B with respect to the act of lend-
                                                                    self-dealing, see section 7454(b).                         ing the foundation’s painting to G. A and B
                                                                    [T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amend-           are jointly and severally liable for the tax.
                                                                    ed by T.D. 7299, 38 FR 35304, Dec. 27, 1973]                 (b) Limits on liability for management.
                                                                    § 53.4941(b)–1 Imposition of additional                    (1) The maximum aggregate amount of
                                                                         taxes.                                                tax collectible under section 4941(a)(2)
                                                                                                                               from all foundation managers with re-
                                                                       (a)  Tax    on   self-dealer.  Section                  spect to any one act of self-dealing
                                                                    4941(b)(1) of the Code imposes an excise                   shall be $10,000, and the maximum ag-
                                                                    tax in any case in which an initial tax                    gregate amount of tax collectible
                                                                    is imposed by section 4941(a)(1) on an                     under section 4941(b)(2) from all foun-
                                                                    act of self-dealing by a disqualified per-                 dation managers with respect to any
                                                                    son with a private foundation and the                      one act of self-dealing shall be $10,000.
                                                                    act is not corrected within the taxable                      (2) The provisions of this paragraph
                                                                    period (as defined in § 53.4941(e)–1(a)).                  may be illustrated by the following ex-
                                                                    The tax imposed by section 4941(b)(1) is                   ample:
                                                                    at the rate of 200 percent of the amount
                                                                    involved and shall be paid by any dis-                       Example. A, a disqualified person with re-
                                                                    qualified person (other than a founda-                     spect to private foundation Y, sells certain
                                                                    tion manager action only in the capac-                     real estate having a fair market value of
                                                                                                                               $500,000 to Y for $500,000 in cash. B, C, and D,
                                                                    ity of a foundation manager) who par-                      all the managers of foundation Y, authorized
                                                                    ticipated in the act of self-dealing.                      the purchase on Y’s behalf knowing that
                                                                       (b) Tax on foundation manager. Sec-                     such purchase was an act of self-dealing. The
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                                                                    tion 4941(b)(2) of the Code imposes an                     actions of B, C, and D in approving the pur-
                                                                    excise tax to be paid by a foundation                      chase were willful and not due to reasonable

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                                                                    § 53.4941(d)–1                                                           26 CFR Ch. I (4–1–09 Edition)
                                                                    cause. Initial taxes are imposed upon the                   vere economic hardship to such organi-
                                                                    foundation managers under subsections (a)(2)                zation, or
                                                                    and (c)(2) of section 4941. The tax to be paid
                                                                                                                                   (b) Because of the unique nature of
                                                                    by the foundation managers is $10,000 (the
                                                                    lesser of $10,000 or 21⁄2 percent of the amount             the product or services provided by the
                                                                    involved). The managers are jointly and sev-                organization controlled by the founda-
                                                                    erally liable for this $10,000, and this sum                tion, the disqualified person could not
                                                                    may be collected by the Internal Revenue                    have engaged in the transaction with
                                                                    Service from any one of them.                               anyone else, or could have done so only
                                                                                                                                by incurring severe economic hardship.
                                                                    § 53.4941(d)–1       Definition      of   self-deal-        See example (2) of subparagraph (8) of
                                                                         ing.                                                   this paragraph.
                                                                      (a) In general. For purposes of section                      (2) Grants to intermediaries. The term
                                                                    4941, the term self-dealing means any                       ‘‘indirect self-dealing’’ shall not in-
                                                                    direct or indirect transaction described                    clude a transaction engaged in with a
                                                                    in § 53.4941(d)–2. For purposes of this                     government official by an intermediary
                                                                    section, it is immaterial whether the                       organization which is a recipient of a
                                                                    transaction results in a benefit or a                       grant from a private foundation and
                                                                    detriment to the private foundation.                        which is not controlled by such founda-
                                                                    The term ‘‘self-dealing’’ does not, how-                    tion (within the meaning of paragraph
                                                                    ever, include a transaction between a                       (6) (5) of this section) if the private
                                                                    private foundation and a disqualified                       foundation does not earmark the use of
                                                                    person where the disqualified person                        the grant for any named government
                                                                    status arises only as a result of such                      official and there does not exist an
                                                                    transaction. For example, the bargain                       agreement, oral or written, whereby
                                                                    sale of property to a private foundation                    the grantor foundation may cause the
                                                                    is not a direct act of self-dealing if the                  selection of the government official by
                                                                    seller becomes a disqualified person                        the intermediary organization. A grant
                                                                    only by reason of his becoming a sub-                       by a private foundation is earmarked if
                                                                    stantial contributor as a result of the                     such grant is made pursuant to an
                                                                    bargain element of the sale. For the ef-                    agreement, either oral or written, that
                                                                    fect of sections 4942, 4943, 4944, and 4945                 the grant will be used by any named in-
                                                                    upon an act of self-dealing which also                      dividual. Thus, a grant by a private
                                                                    results in the imposition of tax under                      foundation shall not constitute an indi-
                                                                    one or more of such sections, see the                       rect act of self-dealing even though
                                                                    regulations under those sections.                           such foundation had reason to believe
                                                                      (b) Indirect self-dealing—(1) Certain                     that certain government officials
                                                                    business transactions. The term ‘‘indi-                     would derive benefits from such grant
                                                                    rect self-dealing’’ shall not include any                   so long as the intermediary organiza-
                                                                    transaction described in § 53.4941(d)–2                     tion exercises control, in fact, over the
                                                                    between a disqualified person and an                        selection process and actually makes
                                                                    organization controlled by a private                        the selection completely independently
                                                                    foundation (within the meaning of                           of the private foundation. See example
                                                                    paragraph (6)(5) of this section) if:                       (3) of subparagraph (8) of this para-
                                                                      (i) The transaction results from a                        graph.
                                                                    business relationship which was estab-                         (3) Transactions during the administra-
                                                                    lished before such transaction con-                         tion of an estate or revocable trust. The
                                                                    stituted an act of self-dealing (without                    term ‘‘indirect self-dealing’’ shall not
                                                                    regard to this paragraph),                                  include a transaction with respect to a
                                                                      (ii) The transaction was at least as                      private foundation’s interest or expect-
                                                                    favorable to the organization con-                          ancy in property (whether or not en-
                                                                    trolled by the foundation as an arm’s-                      cumbered) held by an estate (or rev-
                                                                    length transaction with an unrelated                        ocable trust, including a trust which
                                                                    person, and                                                 has become irrevocable on a grantor’s
                                                                      (iii) Either:                                             death), regardless of when title to the
                                                                      (a) The organization controlled by                        property vests under local law, if:
                                                                    the foundation could have engaged in                           (i) The administrator or executor of
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                                                                    the transaction with someone other                          an estate or trustee of a revocable
                                                                    than a disqualified person only at a se-                    trust either:

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(d)–1

                                                                      (a) Possesses a power of sale with re-                   a private foundation if the foundation
                                                                    spect to the property,                                     or one or more of its foundation man-
                                                                      (b) Has the power to reallocate the                      agers (acting only in such capacity)
                                                                    property to another beneficiary, or                        may, only by aggregating their votes
                                                                      (c) Is required to sell the property                     or positions of authority, require the
                                                                    under the terms of any option subject                      organization to engage in a transaction
                                                                    to which the property was acquired by                      which if engaged in with the private
                                                                    the estate (or revocable trust);                           foundation would constitute self-deal-
                                                                      (ii) Such transaction is approved by                     ing. Similarly, for purposes of this
                                                                    the probate court having jurisdiction                      paragraph, an organization is con-
                                                                    over the estate (or by another court                       trolled by a private foundation in the
                                                                    having jurisdiction over the estate (or                    case of such a transaction between the
                                                                    trust) or over the private foundation);                    organization and a disqualified person,
                                                                      (iii) Such transaction occurs before                     if such disqualified person, together
                                                                    the estate is considered terminated for                    with one or more persons who are dis-
                                                                    Federal income tax purposes pursuant                       qualified persons by reason of such a
                                                                    to paragraph (a) of § 1.641(b)–3 of this                   person’s relationship (within the mean-
                                                                    chapter (or in the case of a revocable                     ing of section 4946(a)(1) (C) through (G))
                                                                    trust, before it is considered subject to                  to such disqualified person, may, only
                                                                    sec. 4947);                                                by aggregating their votes or positions
                                                                      (iv) The estate (or trust) receives an                   of authority with that of the founda-
                                                                    amount which equals or exceeds the                         tion, require the organization to en-
                                                                    fair market value of the foundation’s                      gage in such a transaction. The ‘‘con-
                                                                    interest or expectancy in such property                    trolled’’ organization need not be a pri-
                                                                    at the time of the transaction, taking                     vate foundation; for example, it may be
                                                                    into account the terms of any option                       any type of exempt or nonexempt orga-
                                                                    subject to which the property was ac-                      nization including a school, hospital,
                                                                    quired by the estate (or trust); and                       operating foundation, or social welfare
                                                                      (v) With respect to transactions oc-                     organization. For purposes of this para-
                                                                    curring after April 16, 1973, the trans-                   graph, an organization will be consid-
                                                                    action either:                                             ered to be controlled by a private foun-
                                                                      (a) Results in the foundation receiv-                    dation or by a private foundation and
                                                                    ing an interest or expectancy at least                     disqualified persons referred to in the
                                                                    as liquid as the one it gave up,                           second sentence of this subparagraph if
                                                                      (b) Results in the foundation receiv-                    such persons are able, in fact, to con-
                                                                    ing an asset related to the active car-                    trol the organization (even if their ag-
                                                                    rying out of its exempt purposes, or                       gregate voting power is less than 50
                                                                      (c) Is required under the terms of any                   percent of the total voting power of the
                                                                    option which is binding on the estate                      organization’s governing body) or if
                                                                    (or trust).                                                one or more of such persons has the
                                                                      (4) Transactions with certain organiza-                  right to exercise veto power over the
                                                                    tions. A transaction between a private                     actions of such organization relevant
                                                                    foundation and an organization which                       to any potential acts of self-dealing. A
                                                                    is not controlled by the foundation                        private foundation shall not be re-
                                                                    (within the meaning of subparagraph                        garded as having control over an orga-
                                                                    (5) of this paragraph), and which is not                   nization merely because it exercises
                                                                    described in section 4946(a)(1) (E), (F),                  expenditure responsibility (as defined
                                                                    or (G) because persons described in sec-                   in section 4945 (d)(4) and (h)) with re-
                                                                    tion 4946(a)(1) (A), (B), (C), or (D) own                  spect to contributions to such organi-
                                                                    no more than 35 percent of the total                       zation. See example (6) of subparagraph
                                                                    combined voting power or profits or                        (8) of this paragraph.
                                                                    beneficial interest of such organiza-                         (6) Certain transactions involving lim-
                                                                    tion, shall not be treated as an indirect                  ited amounts. The term ‘‘indirect self-
                                                                    act of self-dealing between the founda-                    dealing’’ shall not include any trans-
                                                                    tion and such disqualified persons sole-                   action between a disqualified person
                                                                    ly because of the ownership interest of                    and an organization controlled by a
                                                                    such persons in such organization.                         private foundation (within the meaning
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                                                                      (5) Control. For purposes of this para-                  of subparagraph (5) of this paragraph)
                                                                    graph, an organization is controlled by                    or between two disqualified persons

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                                                                    § 53.4941(d)–1                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    where the foundation’s assets may be                       qualified person with respect to W, owns the
                                                                    affected by the transaction if:                            patent for, and manufactures, one of the es-
                                                                      (i) The transaction arises in the nor-                   sential component parts used in the com-
                                                                                                                               puters. X has been making regular purchases
                                                                    mal and customary course of a retail
                                                                                                                               of the patented component from Y since 1965,
                                                                    business engaged in with the general                       subject to the same terms as all other pur-
                                                                    public,                                                    chasers of such component parts. X could not
                                                                      (ii) In the case of a transaction be-                    buy similar components from another
                                                                    tween a disqualified person and an or-                     source. Consequently, X would suffer severe
                                                                    ganization controlled by a private                         economic hardship if it could not continue to
                                                                    foundation, the transaction is at least                    purchase these components from Y, since it
                                                                    as favorable to the organization con-                      would then be forced to develop a computer
                                                                                                                               which could be constructed with other com-
                                                                    trolled by the foundation as an arm’s-
                                                                                                                               ponents. Under these circumstances, the con-
                                                                    length transaction with an unrelated                       tinued purchase by X from Y of these compo-
                                                                    person, and                                                nents shall not be an indirect act of self-
                                                                      (iii) The total of the amounts in-                       dealing between W and Y.
                                                                    volved in such transactions with re-                         Example 3. Private foundation Y made a
                                                                    spect to any one such disqualified per-                    grant to M University, an organization de-
                                                                    son in any one taxable year does not                       scribed in section 170(b)(1)(A)(ii), for the pur-
                                                                    exceed $5,000.                                             pose of conducting a seminar to study meth-
                                                                                                                               ods for improving the administration of the
                                                                    See example (7) of subparagraph (8) of                     judicial system. M is not controlled by Y
                                                                    this paragraph.                                            within the meaning of subparagraph (5) of
                                                                      (7) Applicability of statutory exceptions                this paragraph. In conducting the seminar,
                                                                    to indirect self-dealing. The term ‘‘indi-                 M made payments to certain government of-
                                                                    rect self-dealing’’ shall not include a                    ficials. By the nature of the grant, Y had
                                                                    transaction involving one or more dis-                     reason to believe that government officials
                                                                                                                               would be compensated for participation in
                                                                    qualified persons to which a private
                                                                                                                               the seminar. M, however, had completely
                                                                    foundation is not a party, in any case                     independent control over the selection of
                                                                    in which the private foundation, by                        such participants. Thus, such grant by Y
                                                                    reason of section 4941(d)(2), could itself                 shall not constitute an indirect act of self-
                                                                    engage in such a transaction. Thus, for                    dealing with respect to the government offi-
                                                                    example, even if a private foundation                      cials.
                                                                    has control (within the meaning of sub-                      Example 4. A, a substantial contributor to
                                                                    paragraph (5) of this paragraph) of a                      P, a private foundation, bequeathed one-half
                                                                                                                               of his estate to his spouse and one-half of his
                                                                    corporation, the corporation may pay                       estate to P. Included in A’s estate is a one-
                                                                    to a disqualified person, except a gov-                    third interest in AB, a partnership. The
                                                                    ernment official, reasonable compensa-                     other two-thirds interest in AB is owned by
                                                                    tion for personal services.                                B, a disqualified person with respect to P.
                                                                      (8) Examples. The provisions of this                     The one-third interest in AB was subject to
                                                                    paragraph may be illustrated by the                        an option agreement when it was acquired by
                                                                    following examples:                                        the estate. The executor of A’s estate sells
                                                                                                                               the one-third interest in AB to B pursuant to
                                                                      Example 1. Private foundation P owns the                 such option agreement at the price fixed in
                                                                    controlling interest of the voting stock of                such option agreement in a sale which meets
                                                                    corporation X, and as a result of such inter-              the requirements of subparagraph (3) of this
                                                                    est, elects a majority of the board of direc-              paragraph. Under these circumstances, the
                                                                    tors of X. Two of the foundation managers, A               sale does not constitute an indirect act of
                                                                    and B, who are also directors of corporation               self-dealing between B and P.
                                                                    X, form corporation Y for the purpose of                     Example 5. A bequeathed $100,000 to his wife
                                                                    building and managing a country club. A and                and a piece of unimproved real estate of
                                                                    B receive a total of 40 percent of Y’s stock,              equivalent value to private foundation Z, of
                                                                    making Y a disqualified person with respect                which A was the creator and a foundation
                                                                    to P under section 4946(a)(1)(E). In order to              manager. Under the laws of State Y, to
                                                                    finance the construction and operation of                  which the estate is subject, title to the real
                                                                    the country club, Y requested and received a               estate vests in the foundation upon A’s
                                                                    loan in the amount of $4 million from X. The               death. However, the executor has the power
                                                                    making of the loan by X to Y shall con-                    under State law to reallocate the property to
                                                                    stitute an indirect act of self-dealing be-                another beneficiary. During a reasonable pe-
                                                                    tween P and Y.                                             riod for administration of the estate, the ex-
                                                                      Example 2. Private foundation W owns the                 ecutor exercises this power and distributes
                                                                    controlling interest of the voting stock of                the $100,000 cash to the foundation and the
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                                                                    corporation X, a manufacturer of certain                   real estate to A’s wife. The probate court
                                                                    electronic computers. Corporation Y, a dis-                having jurisdiction over the estate approves

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(d)–2
                                                                    the executor’s action. Under these cir-                      (2) Mortgaged property. For purposes
                                                                    cumstances, the executor’s action does not                 of subparagraph (1) of this paragraph,
                                                                    constitute an indirect act of self-dealing be-             the transfer of real or personal prop-
                                                                    tween the foundation and A’s wife.
                                                                                                                               erty by a disqualified person to a pri-
                                                                      Example 6. Private foundation P owns 20
                                                                    percent of the voting stock of corporation W.              vate foundation shall be treated as a
                                                                    A, a substantial contributor with respect to               sale or exchange if the foundation as-
                                                                    P, owns 16 percent of the voting stock of cor-             sumes a mortgage or similar lien which
                                                                    poration W. B, A’s son, owns 15 percent of                 was placed on the property prior to the
                                                                    the voting stock of corporation W. The terms               transfer, or takes subject to a mort-
                                                                    of the voting stock are such that P, A, and                gage or similar lien which a disquali-
                                                                    B could vote their stock in a block to elect
                                                                    a majority of the board of directors of W. W
                                                                                                                               fied person placed on the property
                                                                    is treated as controlled by P (within the                  within the 10-year period ending on the
                                                                    meaning of subparagraph (5) of this para-                  date of transfer. For purposes of this
                                                                    graph) for purposes of this example A and B                subparagraph, the term ‘‘similar lien’’
                                                                    also own 50 percent of the stock of corpora-               shall include, but is not limited to,
                                                                    tion Y, making Y a disqualified person with                deeds of trust and vendors’ liens, but
                                                                    respect to P under section 4946(a)(1)(E). W                shall not include any other lien if such
                                                                    makes a loan to Y of $1 million. The making
                                                                    of this loan by W to Y shall constitute an in-
                                                                                                                               lien is insignificant in relation to the
                                                                    direct act of self-dealing between P and Y.                fair market value of the property
                                                                      Example 7. A, a disqualified person with re-             transferred.
                                                                    spect to private foundation P, enters into a                 (b) Leases—(1) In general. Except as
                                                                    contract with corporation M, which is also a               provided in subparagraphs (2) and (3) of
                                                                    disqualified person with respect to P. P owns              this paragraph, the leasing of property
                                                                    20 percent of M’s stock, and controls M with-
                                                                                                                               between a disqualified person and a pri-
                                                                    in the meaning of subparagraph (5) of this
                                                                    paragraph. M is in the retail department                   vate foundation shall constitute an act
                                                                    store business. Purchases by A of goods sold               of self-dealing.
                                                                    by M in the normal and customary course of                   (2) Certain leases without charge. The
                                                                    business at retail or higher prices are not in-            leasing of property by a disqualified
                                                                    direct acts of self-dealing so long as the total           person to a private foundation shall
                                                                    of the amounts involved in all of such pur-
                                                                                                                               not be an act of self-dealing if the lease
                                                                    chases by A in any one year does not exceed
                                                                    $5,000.                                                    is without charge. For purposes of this
                                                                                                                               subparagraph, a lease shall be consid-
                                                                    [T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amend-           ered to be without charge even though
                                                                    ed at 38 FR 12604, May 14, 1973]
                                                                                                                               the private foundation pays for jani-
                                                                    § 53.4941(d)–2       Specific acts of self-deal-           torial services, utilities, or other main-
                                                                         ing.                                                  tenance costs it incurs for the use of
                                                                                                                               the property, so long as the payment is
                                                                       Except as provided in § 53.4941(d)–3 or                 not made directly or indirectly to a
                                                                    § 53.4941(d)–4:                                            disqualified person.
                                                                       (a) Sale or exchange of property—(1) In                   (3) Certain leases of office space. For
                                                                    general. The sale or exchange of prop-
                                                                                                                               taxable years beginning after Decem-
                                                                    erty between a private foundation and
                                                                                                                               ber 31, 1979, the leasing of office space
                                                                    a disqualified person shall constitute
                                                                                                                               by a disqualified person to a private
                                                                    an act of self-dealing. For example, the
                                                                                                                               foundation shall not be an act of self-
                                                                    sale of incidental supplies by a dis-
                                                                                                                               dealing if:
                                                                    qualified person to a private founda-
                                                                    tion shall be an act of self-dealing re-                     (i) The leased space is in a building in
                                                                    gardless of the amount paid to the dis-                    which there are other tenants who are
                                                                    qualified person for the incidental sup-                   not disqualified persons,
                                                                    plies. Similarly, the sale of stock or                       (ii) The lease is pursuant to a binding
                                                                    other securities by a disqualified per-                    lease which was in effect on October 9,
                                                                    son to a private foundation in a ‘‘bar-                    1969, or pursuant to renewals of such a
                                                                    gain sale’’ shall be an act of self-deal-                  lease,
                                                                    ing regardless of the amount paid for                        (iii) The execution of the lease was
                                                                    such stock or other securities. An in-                     not a prohibited transaction (within
                                                                    stallment sale may be subject to the                       the meaning of section 503(b) or the
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                                                                    provisions of both section 4941(d)(1)(A)                   corresponding provisions of prior law)
                                                                    and section 4941(d)(1)(B).                                 at the time of such execution, and

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                                                                    § 53.4941(d)–2                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                       (iv) The terms of the lease (or any re-                 ices are reasonable and necessary to
                                                                    newal) reflect an arm’s length trans-                      carrying out the exempt purposes of
                                                                    action.                                                    the private foundation, if the com-
                                                                    A lease or renewal of such lease is de-                    pensation paid to the bank or trust
                                                                    scribed in this subparagraph (3) only if                   company, taking into account the fair
                                                                    it satisfies the requirements of                           interest rate for the use of the funds by
                                                                    § 53.4941(d)–4(c) (1) and (2), applied with-               the bank or trust company, for such
                                                                    out regard to the December 31, 1979                        services is not excessive. The general
                                                                    deadline described therein.                                banking services allowed by this sub-
                                                                       (c) Loans—(1) In general. Except as                     paragraph are:
                                                                    provided in subparagraphs (2), (3), and                       (i) Checking accounts, as long as the
                                                                    (4) of this paragraph, the lending of                      bank does not charge interest on any
                                                                    money or other extension of credit be-                     overwithdrawals,
                                                                    tween a private foundation and a dis-                         (ii) Savings accounts, as long as the
                                                                    qualified person shall constitute an act                   foundation may withdraw its funds on
                                                                    of self-dealing. Thus, for example, an                     no more than 30-days notice without
                                                                    act of self-dealing occurs where a third                   subjecting itself to a loss of interest on
                                                                    party purchases property and assumes                       its money for the time during which
                                                                    a mortgage, the mortgagee of which is                      the money was on deposit, and
                                                                    a private foundation, and subsequently                        (iii) Safekeeping activities.
                                                                    the third party transfers the property                     See example (3) § 53.4941(d)–3(c)(2).
                                                                    to a disqualified person who either as-                       (d) Furnishing goods, services, or facili-
                                                                    sumes liability under the mortgage or                      ties—(1) In general. Except as provided
                                                                    takes the property subject to the mort-                    in subparagraph (2) or (3) of this para-
                                                                    gage. Similarly, except in the case of                     graph (or § 53.4941(d)–3(b)), the fur-
                                                                    the receipt and holding of a note pursu-                   nishing of goods, services, or facilities
                                                                    ant to a transaction described in                          between a private foundation and a dis-
                                                                    § 53.4941(d)–1(b)(3), an act of self-dealing               qualified person shall constitute an act
                                                                    occurs where a note, the obligor of                        of self-dealing. This subparagraph shall
                                                                    which is a disqualified person, is trans-                  apply, for example, to the furnishing of
                                                                    ferred by a third party to a private                       goods, services, or facilities such as of-
                                                                    foundation which becomes the creditor                      fice space, automobiles, auditoriums,
                                                                    under the note.                                            secretarial help, meals, libraries, publi-
                                                                       (2) Loans without interest. Subpara-                    cations, laboratories, or parking lots.
                                                                    graph (1) of this paragraph shall not                      Thus, for example, if a foundation fur-
                                                                    apply to the lending of money or other                     nishes personal living quarters to a dis-
                                                                    extension of credit by a disqualified                      qualified person (other than a founda-
                                                                    person to a private foundation if the                      tion manager or employee) without
                                                                    loan or other extension of credit is                       charge, such furnishing shall be an act
                                                                    without interest or other charge.                          of self-dealing.
                                                                       (3) Certain evidences of future gifts.                     (2) Furnishing of goods, services, or fa-
                                                                    The making of a promise, pledge, or                        cilities to foundation managers and em-
                                                                    similar arrangement to a private foun-                     ployees. The furnishing of goods, serv-
                                                                    dation by a disqualified person, wheth-                    ices, or facilities such as those de-
                                                                    er evidenced by an oral or written                         scribed in subparagraph (1) of this
                                                                    agreement, a promissory note, or other                     paragraph to a foundation manager in
                                                                    instrument of indebtedness, to the ex-                     recognition of his services as a founda-
                                                                    tent motivated by charitable intent                        tion manager, or to another employee
                                                                    and unsupported by consideration, is                       (including an individual who would be
                                                                    not an extension of credit (within the                     an employee but for the fact that he re-
                                                                    meaning of this paragraph) before the                      ceives no compensation for his serv-
                                                                    date of maturity.                                          ices) in recognition of his services in
                                                                       (4) General banking functions. Under                    such capacity, is not an act of self-
                                                                    section 4941(d)(2)(E) the performance                      dealing if the value of such furnishing
                                                                    by a bank or trust company which is a                      (whether or not includible as com-
                                                                    disqualified person of trust functions                     pensation in his gross income) is rea-
                                                                    and certain general banking services                       sonable and necessary to the perform-
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                                                                    for a private foundation is not an act of                  ance of his tasks in carrying out the
                                                                    self-dealing, where the banking serv-                      exempt purposes of the foundation and,

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(d)–2

                                                                    taken in conjunction with any other                        eral. The transfer to, or use by or for
                                                                    payment of compensation or payment                         the benefit of, a disqualified person of
                                                                    or reimbursement of expenses to him                        the income or assets of a private foun-
                                                                    by the foundation, is not excessive. For                   dation shall constitute an act of self-
                                                                    example, if a foundation furnishes                         dealing. For purposes of the preceding
                                                                    meals and lodging which are reasonable                     sentence, the purchase or sale of stock
                                                                    and necessary (but not excessive) to a                     or other securities by a private founda-
                                                                    foundation manager by reason of his                        tion shall be an act of self-dealing if
                                                                    being a foundation manager, then,                          such purchase or sale is made in an at-
                                                                    without regard to whether such meals                       tempt to manipulate the price of the
                                                                    and lodging are excludable from gross                      stock or other securities to the advan-
                                                                    income under section 119 as furnished                      tage of a disqualified person. Similarly,
                                                                    for the convenience of the employer,                       the indemnification (of a lender) or
                                                                    such furnishing is not an act of self-                     guarantee (of repayment) by a private
                                                                    dealing. For the effect of section                         foundation with respect to a loan to a
                                                                    4945(d)(5) upon an expenditure for un-                     disqualified person shall be treated as a
                                                                    reasonable administrative expenses,                        use for the benefit of a disqualified per-
                                                                    see § 53.4945–6(b)(2).                                     son of the income or assets of the foun-
                                                                       (3) Furnishing of goods, services, or fa-               dation (within the meaning of this sub-
                                                                    cilities by a disqualified person without                  paragraph). In addition, if a private
                                                                    charge. The furnishing of goods, serv-                     foundation makes a grant or other pay-
                                                                    ices, or facilities by a disqualified per-
                                                                                                                               ment which satisfies the legal obliga-
                                                                    son to a private foundation shall not be
                                                                                                                               tion of a disqualified person, such
                                                                    an act of self-dealing if they are fur-
                                                                                                                               grant or payment shall ordinarily con-
                                                                    nished without charge. Thus, for exam-
                                                                                                                               stitute an act of self-dealing to which
                                                                    ple, the furnishing of goods such as
                                                                                                                               this subparagraph applies. However, if
                                                                    pencils, stationery, or other incidental
                                                                    supplies, or the furnishing of facilities                  a private foundation makes a grant or
                                                                    such as a building, by a disqualified                      payment which satisfies a pledge, en-
                                                                    person to a foundation shall be allowed                    forceable under local law, to an organi-
                                                                    if such supplies or facilities are fur-                    zation described in section 501(c)(3),
                                                                    nished without charge. Similarly, the                      which pledge is made on or before April
                                                                    furnishing of services (even though                        16, 1973, such grant or payment shall
                                                                    such services are not personal in na-                      not constitute an act of self-dealing to
                                                                    ture) shall be permitted if such fur-                      which this subparagraph applies so
                                                                    nishing is without charge. For purposes                    long as the disqualified person obtains
                                                                    of this subparagraph, a furnishing of                      no substantial benefit, other than the
                                                                    goods shall be considered without                          satisfaction of his obligation, from
                                                                    charge even though the private founda-                     such grant or payment.
                                                                    tion pays for transportation, insur-                         (2) Certain incidental benefits. The fact
                                                                    ance, or maintenance costs it incurs in                    that a disqualified person receives an
                                                                    obtaining or using the property, so                        incidental or tenuous benefit from the
                                                                    long as the payment is not made di-                        use by a foundation of its income or as-
                                                                    rectly or indirectly to the disqualified                   sets will not, by itself, make such use
                                                                    person.                                                    an act of self-dealing. Thus, the public
                                                                       (e) Payment of compensation. The pay-                   recognition a person may receive, aris-
                                                                    ment of compensation (or payment or                        ing from the charitable activities of a
                                                                    reimbursement of expenses) by a pri-                       private foundation to which such per-
                                                                    vate foundation to a disqualified per-                     son is a substantial contributor, does
                                                                    son shall constitute an act of self-deal-                  not in itself result in an act of self-
                                                                    ing. See, however, § 53.4941(d)–3(c) for                   dealing since generally the benefit is
                                                                    the exception for the payment of com-                      incidental and tenuous. For example, a
                                                                    pensation by a foundation to a dis-                        grant by a private foundation to a sec-
                                                                    qualified person for personal services                     tion 509(a) (1), (2), or (3) organization
                                                                    which are reasonable and necessary to                      will not be an act of self-dealing mere-
                                                                    carry out the exempt purposes of the                       ly because such organization is located
                                                                    foundation.                                                in the same area as a corporation
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                                                                       (f) Transfer or use of the income or as-                which is a substantial contributor to
                                                                    sets of a private foundation—(1) In gen-                   the foundation, or merely because one

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                                                                    § 53.4941(d)–2                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    of the section 509(a) (1), (2), or (3) orga-               which led to such proceeding or to li-
                                                                    nization’s officers, directors, or trust-                  ability for tax under chapter 42.
                                                                    ees is also a manager of or a substan-                        (ii) Similarly, except as provided in
                                                                    tial contributor to the foundation.                        § 53.4941(d)–3(c), section 4941(d)(1) shall
                                                                    Similarly, a scholarship or a fellowship                   not apply to premiums for insurance to
                                                                    grant to a person other than a disquali-                   make or to reimburse a foundation for
                                                                    fied person, which is paid or incurred                     an indemnification payment allowed
                                                                    by a private foundation in accordance                      pursuant to this paragraph (f)(3). Nei-
                                                                    with a program which is consistent                         ther shall an indemnification or pay-
                                                                    with:                                                      ment of insurance allowed pursuant to
                                                                      (i) The requirements of the founda-                      this paragraph (f)(3) be treated as part
                                                                    tion’s exempt status under section                         of the compensation paid to such man-
                                                                    501(c)(3),                                                 ager for purposes of determining
                                                                      (ii) The requirements for the allow-                     whether the compensation is reason-
                                                                    ance of deductions under section 170 for                   able under chapter 42.
                                                                    contributions made to the foundation,                         (4) Compensatory indemnification of
                                                                    and                                                        foundation managers against liability for
                                                                      (iii) The requirements of section                        defense in civil proceedings. (i) The in-
                                                                    4945(g)(1),                                                demnification by a private foundation
                                                                                                                               of a foundation manager for compen-
                                                                    will not be an act of self-dealing under                   satory expenses shall be an act of self-
                                                                    section 4941(d)(1) merely because a dis-                   dealing under this paragraph unless
                                                                    qualified person indirectly receives an                    when such payment is added to other
                                                                    incidental benefit from such grant.                        compensation paid to such manager
                                                                    Thus, a scholarship or a fellowship                        the total compensation is reasonable
                                                                    grant made by a private foundation in                      under chapter 42. A compensatory ex-
                                                                    accordance with a program to award                         pense for purposes of this paragraph (f)
                                                                    scholarships or fellowship grants to the                   is—
                                                                    children of employees of a substantial                        (A) Any penalty, tax (including a tax
                                                                    contributor shall not constitute an act                    imposed by chapter 42), or expense of
                                                                    of self-dealing if the requirements of                     correction that is owed by the founda-
                                                                    the preceding sentence are satisfied.                      tion manager;
                                                                    For an example of the kind of scholar-                        (B) Any expense not reasonably in-
                                                                    ship program with an employment                            curred by the manager in connection
                                                                    nexus that meets the above require-                        with a civil judicial or civil adminis-
                                                                    ments, see § 53.4945–4(b)(5) (example 1).                  trative proceeding arising out of the
                                                                      (3) Non-compensatory indemnification                     manager’s performance of services on
                                                                    of foundation managers against liability                   behalf of the foundation; or
                                                                    for defense in civil proceedings. (i) Except                  (C) Any expense resulting from an
                                                                    as provided in § 53.4941(d)–3(c), section                  act or failure to act with respect to
                                                                    4941(d)(1) shall not apply to the indem-                   which the manager has acted willfully
                                                                    nification by a private foundation of a                    and without reasonable cause.
                                                                    foundation manager, with respect to                           (ii) Similarly, the payment by a pri-
                                                                    the manager’s defense in any civil judi-                   vate foundation of the premiums for an
                                                                    cial or civil administrative proceeding                    insurance policy providing liability in-
                                                                    arising out of the manager’s perform-                      surance to a foundation manager for
                                                                    ance of services (or failure to perform                    expenses described in this paragraph
                                                                    services) on behalf of the foundation,                     (f)(4) shall be an act of self-dealing
                                                                    against all expenses (other than taxes,                    under this paragraph (f) unless when
                                                                    including taxes imposed by chapter 42,                     such premiums are added to other com-
                                                                    penalties, or expenses of correction) in-                  pensation paid to such manager the
                                                                    cluding attorneys’ fees, judgments and                     total compensation is reasonable under
                                                                    settlement expenditures if—                                chapter 42.
                                                                      (A) Such expenses are reasonably in-                        (5) Insurance allocation. A private
                                                                    curred by the manager in connection                        foundation shall not be engaged in an
                                                                    with such proceeding; and                                  act of self-dealing if the foundation
                                                                      (B) The manager has not acted will-                      purchases a single insurance policy to
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                                                                    fully and without reasonable cause                         provide its managers both the non-
                                                                    with respect to the act or failure to act                  compensatory and the compensatory

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(d)–3

                                                                    coverage discussed in this paragraph                       4945(g)(1). A scholarship grant to a person
                                                                    (f), provided that the total insurance                     not a disqualified person with respect to X
                                                                    premium is allocated and that each                         paid or incurred by X in accordance with
                                                                                                                               such program shall not be an indirect act of
                                                                    manager’s portion of the premium at-
                                                                                                                               self-dealing between X and M.
                                                                    tributable to the compensatory cov-                          Example 3. Private foundation Y owns vot-
                                                                    erage is included in that manager’s                        ing stock in corporation Z, the management
                                                                    compensation for purposes of deter-                        of which includes certain disqualified per-
                                                                    mining reasonable compensation under                       sons with respect to Y. Prior to Z’s annual
                                                                    chapter 42.                                                stockholder meeting, the management solic-
                                                                       (6) Indemnification. For purposes of                    its and receives the foundation’s proxies. The
                                                                    this paragraph (f), the term indem-                        transfer of such proxies in and of itself shall
                                                                                                                               not be an act of self-dealing.
                                                                    nification shall include not only reim-                      Example 4. A, a disqualified person with re-
                                                                    bursement by the foundation for ex-                        spect to private foundation S, contributes
                                                                    penses that the foundation manager                         certain real estate to S for the purpose of
                                                                    has already incurred or anticipates in-                    building a neighborhood recreation center in
                                                                    curring but also direct payment by the                     a particular underprivileged area. As a con-
                                                                    foundation of such expenses as the ex-                     dition of the gift, S agrees to name the recre-
                                                                    penses arise.                                              ation center after A. Since the benefit to A
                                                                       (7) Taxable income. The determination                   is only incidental and tenuous, the naming
                                                                                                                               of the recreation center, by itself, will not be
                                                                    of whether any amount of indemnifica-
                                                                                                                               an act of self-dealing.
                                                                    tion or insurance premium discussed in
                                                                    this paragraph (f) is included in the                        (g) Payment to a government official.
                                                                    manager’s gross income for individual                      Except     as    provided    in   section
                                                                    income tax purposes is made on the                         4941(d)(2)(G) or § 53.4941(d)–3(e), the
                                                                    basis of the provisions of chapter 1 and                   agreement by a private foundation to
                                                                    without regard to the treatment of                         make any payment of money or other
                                                                    such amount for purposes of deter-                         property to a government official, as
                                                                    mining whether the manager’s com-                          defined in section 4946(c), shall con-
                                                                    pensation is reasonable under chapter                      stitute an act of self-dealing. For pur-
                                                                    42.                                                        poses of this paragraph, an individual
                                                                       (8) De minimis items. Any property or                   who is otherwise described in section
                                                                    service that is excluded from income                       4946(c) shall be treated as a government
                                                                    under section 132(a)(4) may be dis-                        official while on leave of absence from
                                                                    regarded for purposes of determining                       the government without pay.
                                                                    whether the recipient’s compensation                       [T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amend-
                                                                    is reasonable under chapter 42.                            ed by T.D. 7938, 49 FR 3848, Jan. 31, 1984; T.D.
                                                                       (9) Examples. The provisions of this                    8639, 60 FR 65568, Dec. 20, 1995]
                                                                    paragraph may be illustrated by the
                                                                    following examples:                                        § 53.4941(d)–3 Exceptions to self-deal-
                                                                                                                                    ing.
                                                                      Example 1. M, a private foundation, makes
                                                                    a grant of $50,000 to the governing body of N                 (a) General rule. In general, a trans-
                                                                    City for the purpose of alleviating the slum               action described in section 4941(d)(2)
                                                                    conditions which exist in a particular neigh-              (B), (C), (D), (E), (F), (G), or (H) is not
                                                                    borhood of N. Corporation P, a substantial                 an act of self-dealing. Section 4941(d)(2)
                                                                    contributor to M, is located in the same area              (B), (C), and (H) provide limited excep-
                                                                    in which the grant is to be used. Although                 tions to certain specific transactions,
                                                                    the general improvement of the area may
                                                                                                                               as described in paragraphs (b)(2), (b)(3),
                                                                    constitute an incidental and tenuous benefit
                                                                    to P, such benefit by itself will not con-                 (c)(2), and (d)(3) of § 53.4941(d)–2. Section
                                                                    stitute an act of self-dealing.                            4941(d)(2) (D), (E), (F), and (G) and para-
                                                                      Example 2. Private foundation X estab-                   graphs (b) through (e) of this section
                                                                    lished a program to award scholarship grants               described certain transactions which
                                                                    to the children of employees of corporation                are not acts of self-dealing.
                                                                    M, a substantial contributor to X. After dis-                 (b) Furnishing of goods, services, or fa-
                                                                    closure of the method of carrying out such                 cilities to a disqualified person—(1) In
                                                                    program, X received a determination letter
                                                                                                                               general. Under section 4941(d)(2)(D), the
                                                                    from the Internal Revenue Service stating
                                                                    that X is exempt from taxation under sec-                  furnishing of goods, services, or facili-
                                                                    tion 501(c)(3), that contributions to X are de-            ties by a private foundation to a dis-
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                                                                    ductible under section 170, and that X’s                   qualified person shall not be an act of
                                                                    scholarship program qualifies under section                self-dealing if such goods, services, or

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                                                                    § 53.4941(d)–3                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    facilities are made available to the                       bursement of expenses, including rea-
                                                                    general public on at least as favorable                    sonable advances for expenses antici-
                                                                    a basis as they are made available to                      pated in the immediate future) by a
                                                                    the disqualified person. This subpara-                     private foundation to a disqualified
                                                                    graph shall not apply, however, in the                     person for the performance of personal
                                                                    case of goods, services, or facilities fur-                services which are reasonable and nec-
                                                                    nished later than May 16, 1973, unless                     essary to carry out the exempt purpose
                                                                    such goods, services, or facilities are                    of the private foundation shall not be
                                                                    functionally related, within the mean-                     an act of self-dealing if such compensa-
                                                                    ing of section 4942(j)(5), to the exercise                 tion (or payment or reimbursement) is
                                                                    or performance by a private foundation                     not excessive. For purposes of this sub-
                                                                    of its charitable, educational, or other                   paragraph the term ‘‘personal services’’
                                                                    purpose or function constituting the                       includes the services of a broker serv-
                                                                    basis for its exemption under section                      ing as agent for the private foundation,
                                                                    501(c)(3).                                                 but not the services of a dealer who
                                                                      (2) General public. For purposes of this                 buys from the private foundation as
                                                                    paragraph, the term ‘‘general public’’                     principal and resells to third parties.
                                                                    shall include those persons who, be-                       For the determination whether com-
                                                                    cause of the particular nature of the                      pensation is excessive, see § 1.162–7 of
                                                                    activities of the private foundation,                      this chapter (Income Tax Regulations).
                                                                    would be reasonably expected to utilize                    This paragraph applies without regard
                                                                    such goods, services, or facilities. This                  to whether the person who receives the
                                                                    paragraph shall not apply, however,                        compensation (or payment or reim-
                                                                    unless there is a substantial number of                    bursement) is an individual. The por-
                                                                    persons other than disqualified persons                    tion of any payment which represents
                                                                    who are actually utilizing such goods,                     payment for property shall not be
                                                                    services, or facilities. Thus, a private                   treated as payment of compensation
                                                                    foundation      which     furnishes    rec-                (or payment or reimbursement of ex-
                                                                    reational or park facilities to the gen-                   penses) for the performance of personal
                                                                    eral public may furnish such facilities                    services for purposes of this paragraph.
                                                                    to a disqualified person provided they                     For rules with respect to the perform-
                                                                    are furnished to him on a basis which                      ance of general banking services, see
                                                                    is not more favorable than that on                         § 53.4941(d)–2(c)(4). Further, the making
                                                                    which they are furnished to the general                    of a cash advance to a foundation man-
                                                                    public. Similarly, the sale of a book or                   ager or employee for expenses on be-
                                                                    magazine by a private foundation to                        half of the foundation is not an act of
                                                                    disqualified persons shall not be an act                   self-dealing, so long as the amount of
                                                                    of self-dealing if the publication of                      the advance is reasonable in relation to
                                                                    such book or magazine is functionally                      the duties and expense requirements of
                                                                    related to a charitable or educational                     the foundation manager. Except where
                                                                    activity of the foundation and the book                    reasonably allowable pursuant to sub-
                                                                    or magazine is made available to the                       division (iii) of this subparagraph, such
                                                                    disqualified persons and the general                       advances shall not ordinarily exceed
                                                                    public at the same price. In addition, if                  $500. For example, if a foundation
                                                                    the terms of the sale require, for exam-                   makes an advance to a foundation
                                                                    ple, payment within 60 days from the                       manager to cover anticipated out-of-
                                                                    date of delivery of the book or maga-                      pocket current expenses for a reason-
                                                                    zine, such terms are consistent with                       able period (such as a month) and the
                                                                    normal commercial practices, and pay-                      manager accounts to the foundation
                                                                    ment is made within the 60-day period,                     under a periodic reimbursement pro-
                                                                    the transaction shall not be treated as                    gram for actual expenses incurred, the
                                                                    a loan or other extension of credit                        foundation will not be regarded as hav-
                                                                    under § 53.4941(d)–2(c)(1).                                ing engaged in an act of self-dealing:
                                                                      (c) Payment of compensation for certain                     (i) When it makes the advance,
                                                                    personal services—(1) In general. Under                       (ii) When it replenishes the funds
                                                                    section 4941(d)(2)(E), except in the case                  upon receipt of supporting vouchers
                                                                    of a Government official (as defined in                    from the foundation manager, or
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                                                                    section 4946(c)), the payment of com-                         (iii) If it temporarily adds to the ad-
                                                                    pensation (and the payment or reim-                        vance to cover extraordinary expenses

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(d)–3

                                                                    anticipated to be incurred in fulfill-                     foundation are subject to the same
                                                                    ment of a special assignment (such as                      terms and such terms provide for re-
                                                                    long distance travel).                                     ceipt by the foundation of no less than
                                                                      (2) Examples. The provisions of this                     fair market value. For purposes of this
                                                                    paragraph may be illustrated by the                        paragraph, all of the securities are not
                                                                    following examples:                                        ‘‘subject to the same terms unless, pur-
                                                                                                                               suant to such transaction,’’ The cor-
                                                                       Example 1. M, a partnership, is a firm of 10
                                                                    lawyers engaged in the practice of law. A and              poration makes a bona fide offer on a
                                                                    B, partners in M, serve as trustees to private             uniform basis to the foundation and
                                                                    foundation W and, therefore, are disqualified              every other person who holds such se-
                                                                    persons. In addition, A and B own more than                curities. The fact that a private foun-
                                                                    35 percent of the profits interest in M, there-            dation receives property, such as de-
                                                                    by making M a disqualified person. M per-                  bentures, while all other persons hold-
                                                                    forms various legal services for W from time               ing securities of the same class receive
                                                                    to time as such services are requested. The                cash for their interests, will be evi-
                                                                    payment of compensation by W to M shall
                                                                                                                               dence that such offer was not made on
                                                                    not constitute an act of self-dealing if the
                                                                    services performed are reasonable and nec-                 a uniform basis. This paragraph may
                                                                    essary for the carrying out of W’s exempt                  apply even if no other person holds any
                                                                    purposes and the amount paid by W for such                 securities of the class held by the foun-
                                                                    services is not excessive.                                 dation. In such event, however, the
                                                                       Example 2. C, a manager of private founda-              consideration received by holders of
                                                                    tion X, owns an investment counseling busi-                other classes of securities, or the inter-
                                                                    ness. Acting in his capacity as an investment              ests retained by holders of such other
                                                                    counselor, C manages X’s investment port-                  classes, when considered in relation to
                                                                    folio for which he receives an amount which
                                                                    is determined to be not excessive. The pay-
                                                                                                                               the consideration received by the foun-
                                                                    ment of such compensation to C shall not                   dation, must indicate that the founda-
                                                                    constitute an act of self-dealing.                         tion received at least as favorable
                                                                       Example 3. M, a commercial bank, serves as              treatment in relation to its interests
                                                                    a trustee for private foundation Y. In addi-               as the holders of any other class of se-
                                                                    tion to M’s duties as trustee, M maintains                 curities. In addition, the foundation
                                                                    Y’s checking and savings accounts and rents                must receive no less than the fair mar-
                                                                    a safety deposit box to Y. The use of the                  ket value of its interests.
                                                                    funds by M and the payment of compensa-                       (2) Examples. The provisions of this
                                                                    tion by Y to M for such general banking
                                                                    services shall be treated as the payment of
                                                                                                                               paragraph may be illustrated by the
                                                                    compensation for the performance of per-                   following examples:
                                                                    sonal services which are reasonable and nec-                 Example 1. Private foundation X owns 50
                                                                    essary to carry out the exempt purposes of Y               percent of the class A preferred stock of cor-
                                                                    if such compensation is not excessive.                     poration M, which is a disqualified person
                                                                       Example 4. D, a substantial contributor to              with respect to X. The terms of such securi-
                                                                    private foundation Z, owns a factory which                 ties provide that the stock may be called for
                                                                    manufactures microscopes. D contracts with                 redemption at any time by M at 105 percent
                                                                    Z to manufacture 100 microscopes for Z. Any                of the face amount of the stock. M exercises
                                                                    payment to D under the contract shall con-                 this right and calls all the class A preferred
                                                                    stitute an act of self-dealing, since such pay-            stock by paying 105 percent of the face
                                                                    ment does not constitute the payment of                    amount in cash. At the time of the redemp-
                                                                    compensation for the performance of per-                   tion of the class A preferred stock, it is de-
                                                                    sonal services.                                            termined that the fair market value of the
                                                                                                                               preferred stock is equal to its face amount.
                                                                      (d) Certain transactions between a
                                                                                                                               In such case, the redemption by M of the pre-
                                                                    foundation and a corporation—(1) In gen-                   ferred stock of X is not an act of self-dealing.
                                                                    eral. Under section 4941(d)(2)(F), any                       Example 2. Private foundation Y, which is
                                                                    transaction between a private founda-                      on a calendar year basis, acquires 60 percent
                                                                    tion and a corporation which is a dis-                     of the class A preferred stock of corporation
                                                                    qualified person will not be an act of                     N by will on January 10, 1970. N, which is
                                                                    self-dealing if such transaction is en-                    also on a calendar year basis, is a disquali-
                                                                    gaged in pursuant to a liquidation,                        fied person with respect to Y. In 1971, N of-
                                                                                                                               fers to redeem all of the class A preferred
                                                                    merger, redemption, recapitalization,
                                                                                                                               stock for a consideration equal to 100 percent
                                                                    or other corporate adjustment, organi-                     of the face amount of such stock by the
                                                                    zation, or reorganization, so long as all                  issuance of debentures. The offer expires
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                                                                    the securities of the same class as that                   January 2, 1972. Both Y and all other holders
                                                                    held (prior to such transaction) by the                    of the class A preferred stock accept the

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                                                                    § 53.4941(d)–3                                                          26 CFR Ch. I (4–1–09 Edition)
                                                                    offer and enter into the transaction on Janu-              meaning of section 162(a)(2), and in-
                                                                    ary 2, 1972, at which time it is determined                cluding reasonable advances for such
                                                                    that the fair market value of the debentures               expenses anticipated in the immediate
                                                                    is no less than the fair market value of the
                                                                    preferred stock. The transaction on January                future) for travel solely from one point
                                                                    2, 1972, shall not be treated as an act of self-           in the United States to another in con-
                                                                    dealing for 1972. However, because under                   nection with one or more purposes de-
                                                                    § 53.4941 (e)–1 (e)(1)(i) an act of self dealing           scribed in section 170(c) (1) or (2)(B),
                                                                    occurs on the first day of each taxable year               but only if such payment or reimburse-
                                                                    or portion of a taxable year that an exten-                ment does not exceed the actual cost of
                                                                    sion of credit from a foundation to a dis-
                                                                                                                               the transportation involved plus an
                                                                    qualified person goes uncorrected, if such de-
                                                                    bentures are held by Y after December 31,                  amount for all other traveling expenses
                                                                    1972, except as provided in § 53.4941(d)–4(c)(4),          not in excess of 125 percent of the max-
                                                                    such extension of credit shall not be ex-                  imum amount payable under 5 U.S.C.
                                                                    cepted from the definition of an act of self               5702(a) for like travel by employees of
                                                                    dealing by reason of the January 2, 1972,                  the United States;
                                                                    transaction. See § 53.4941(d)–4(c)(4) for rules              (8) Any agreement to employ or
                                                                    indicating that under certain circumstances
                                                                    such debentures could be held by Y until De-
                                                                                                                               make a grant to a government official
                                                                    cember 31, 1979.                                           for any period after the termination of
                                                                                                                               his government service if such agree-
                                                                       (e) Certain payments to government of-                  ment is entered into within 90 days
                                                                    ficials. Under section 4941(d)(2)(G), in                   prior to such termination;
                                                                    the case of a government official, in                        (9) If a government official attends or
                                                                    addition to the exceptions provided in                     participates in a conference sponsored
                                                                    section 4941(d)(2) (B), (C), and (D), sec-
                                                                                                                               by a private foundation, the allocable
                                                                    tion 4941(d)(1) shall not apply to:
                                                                                                                               portion of the cost of such conference
                                                                       (1) A prize or award which is not in-
                                                                                                                               and other nonmonetary benefits (for
                                                                    cludible in gross income under section
                                                                                                                               example, benefits of a professional, in-
                                                                    74(b), if the government official receiv-
                                                                                                                               tellectual, or psychological nature, or
                                                                    ing such prize or award is selected from
                                                                                                                               benefits resulting from the publication
                                                                    the general public;
                                                                                                                               or the distribution to participants of a
                                                                       (2) A scholarship or a fellowship
                                                                    grant which is excludable from gross                       record of the conference), as well as the
                                                                    income under section 117(a) and which                      payment or reimbursement of expenses
                                                                    is to be utilized for study at an edu-                     (including reasonable advances for ex-
                                                                    cational institution described in sec-                     penses anticipated in connection with
                                                                    tion 151(e)(4);                                            such a conference in the near future),
                                                                       (3) Any annuity or other payment                        received by such government official as
                                                                    (forming part of a stock-bonus, pen-                       a result of such attendance or partici-
                                                                    sion, or profit sharing plan) by a trust                   pation shall not be subject to section
                                                                    which constitutes a qualified trust                        4941(d)(1), so long as the conference is
                                                                    under section 401;                                         in furtherance of the exempt purposes
                                                                       (4) Any annuity or other payment                        of the foundation; or
                                                                    under a plan which meets the require-                        (10) In the case of any government of-
                                                                    ments of section 404(a)(2);                                ficial who was on leave of absence
                                                                       (5) Any contribution or gift (other                     without pay on December 31, 1969, pur-
                                                                    than a contribution or gift of money)                      suant to a commitment entered into on
                                                                    to, or services or facilities made avail-                  or before such date for the purpose of
                                                                    able to, any government official, if the                   engaging in certain activities for which
                                                                    aggregate value of such contributions,                     such individual was to be paid by one
                                                                    gifts, services, and facilities does not                   or more private foundations, any pay-
                                                                    exceed $25 during any calendar year;                       ment of compensation (or payment or
                                                                       (6) Any payment made under 5 U.S.C.                     reimbursement of expenses, including
                                                                    Chapter 41 (relating to government em-                     reasonable advances for expenses an-
                                                                    ployees’ training programs);                               ticipated in the immediate future) by
                                                                       (7) Any payment or reimbursement of                     such private foundations to such indi-
                                                                    traveling expenses (including amounts                      vidual for any continuous period after
                                                                    expended for meals and lodging, re-                        December 31, 1969, and prior to January
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                                                                    gardless of whether the government of-                     1, 1971, during which such individual re-
                                                                    ficial is away from home within the                        mains on leave of absence to engage in

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(d)–4

                                                                    such activities. A commitment is con-                      and as if every disposition by the foun-
                                                                    sidered entered into on or before De-                      dation were made to disqualified per-
                                                                    cember 31, 1969, if on or before such                      sons) and if such disposition satisfies
                                                                    date, the amount and nature of the                         the requirements of subparagraph (2) of
                                                                    payments to be made and the name of                        this paragraph. For purposes of apply-
                                                                    the individual receiving such payments                     ing this paragraph in the case of a dis-
                                                                    were entered on the records of the                         position completed before January 1,
                                                                    payor, or were otherwise adequately                        1975, or after October 4, 1976, and before
                                                                    evidenced, or the notice of the payment                    January 1, 1977, the amount of excess
                                                                    to be received was communicated to                         business holdings is determined under
                                                                    the payee orally or in writing.                            section 4943(c) without taking sub-
                                                                                                                               section (c)(4) into account.
                                                                    [T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amend-
                                                                    ed by T.D. 7938, 49 FR 3848, Jan. 31, 1984]                  (2) Terms of the disposition. Subpara-
                                                                                                                               graph (1) of this paragraph shall not
                                                                    § 53.4941(d)–4       Transitional rules.                   apply unless:
                                                                                                                                 (i) The private foundation receives an
                                                                       (a) Certain transactions involving secu-
                                                                                                                               amount which equals or exceeds the
                                                                    rities acquired by a foundation before
                                                                                                                               fair market value of the business hold-
                                                                    May 27, 1969—(1) In general. Under sec-
                                                                                                                               ings at the time of disposition or at the
                                                                    tion 101(l)(2)(A) of the Tax Reform Act
                                                                                                                               time a contract for such disposition
                                                                    of 1969 (83 Stat. 533), any transaction
                                                                                                                               was previously executed; and
                                                                    between a private foundation and a
                                                                                                                                 (ii) At the time with respect to which
                                                                    corporation which is a disqualified per-
                                                                                                                               subdivision (i) of this subparagraph is
                                                                    son shall not be an act of self-dealing if
                                                                                                                               applied, the transaction would not
                                                                    such transaction is pursuant to the
                                                                                                                               have constituted a prohibited trans-
                                                                    terms of securities of such corporation,
                                                                                                                               action within the meaning of section
                                                                    if such terms were in existence at the
                                                                                                                               503(b) or the corresponding provisions
                                                                    time such securities were acquired by
                                                                                                                               of prior law if such provisions had been
                                                                    the foundation, and if such securities
                                                                                                                               applied at such time.
                                                                    were acquired by the foundation before
                                                                                                                                 (3) Property received under a trust or
                                                                    May 27, 1969.
                                                                                                                               will. For purposes of this paragraph,
                                                                       (2) Example. The provisions of this
                                                                                                                               property shall be considered as owned
                                                                    paragraph may be illustrated by the
                                                                                                                               by a private foundation on May 26, 1969,
                                                                    following example:
                                                                                                                               if such property is acquired by such
                                                                      Example. Private foundation X purchased                  foundation under the terms of a will
                                                                    preferred stock of corporation M, a disquali-              executed on or before such date, under
                                                                    fied person with respect to X, on March 15,                the terms of a trust which was irrev-
                                                                    1969. The terms of such securities on such                 ocable on such date, or under the terms
                                                                    date provided that the stock could be called
                                                                    by M at any time if M paid the outstanding
                                                                                                                               of a revocable trust executed on or be-
                                                                    shareholders cash equal to 105 percent of the              fore such date if the property would
                                                                    face amount of the stock. If M exercises this              have passed under a will which would
                                                                    right and calls the stock owned by X on Feb-               have met the requirements of this sub-
                                                                    ruary 15, 1970, such call shall not constitute             paragraph but for the fact that a grant-
                                                                    an act of self-dealing even if such price is not           or dies without having revoked the
                                                                    equivalent to fair market value on such date               trust. An amendment or republication
                                                                    and even if not all of the securities of that              of a will which was executed on or be-
                                                                    class are called.
                                                                                                                               fore May 26, 1969, does not prevent any
                                                                      (b) Disposition of certain business hold-                interest in a business enterprise which
                                                                    ings—(1) In general. Under section                         was to pass under the terms of such
                                                                    101(l)(2)(B) of the Tax Reform Act of                      will (which terms were in effect on May
                                                                    1969 (83 Stat. 533), the sale, exchange,                   26, 1969, and at all times thereafter)
                                                                    or other disposition of property which                     from being treated as owned by a pri-
                                                                    is owned by a private foundation on                        vate foundation on or before May 26,
                                                                    May 26, 1969, to a disqualified person                     1969, solely because:
                                                                    shall not be an act of self-dealing if the                   (i) There is a reduction in the inter-
                                                                    foundation is required to dispose of                       est in the business enterprise which the
                                                                    such property in order not to be liable                    foundation was to receive under the
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                                                                    for tax under section 4943 (determined                     terms of the will (for example, if the
                                                                    without regard to section 4943(c)(2)(C)                    foundation is to receive the residuary

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                                                                    § 53.4941(d)–4                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    estate and one class of stock is dis-                      under section 503(b), or unless the trans-
                                                                    posed of by the decedent during his                        action does not remain throughout its life at
                                                                    lifetime or by a subsequent codicil),                      least as favorable as an arm’s-length con-
                                                                                                                               tract negotiated currently. See paragraph (c)
                                                                       (ii) Such amendment or republication
                                                                                                                               of this section.
                                                                    is necessary in order to comply with
                                                                    section 508(e) and the regulations                           (c) Existing leases and loans—(1) In
                                                                    thereunder,                                                general. Under section 101(1)(2)(C) of the
                                                                       (iii) There is a change in the executor                 Tax Reform Act of 1969 (83 Stat. 533),
                                                                    of the will, or                                            the leasing of property or the lending
                                                                       (iv) There is any other change which                    of money (or other extension of credit)
                                                                    does not otherwise change the rights of                    between a disqualified person and a pri-
                                                                    the foundation with respect to such in-                    vate foundation pursuant to a binding
                                                                    terest in the business enterprise.                         contract which was in effect on Octo-
                                                                    However, if under such amendment or                        ber 9, 1969 (or pursuant to a renewal or
                                                                    republication there is an increase of                      modification of such a contract, as de-
                                                                    the interest in the business enterprise                    scribed in subparagraph (2) of this
                                                                    which the foundation was to receive                        paragraph), shall not be an act of self-
                                                                    under the terms of the will in effect on                   dealing until taxable years beginning
                                                                    May 26, 1969, such increase shall not be                   after December 31, 1979, if:
                                                                    treated as owned by the private foun-                        (i) At the time the contract was exe-
                                                                    dation on or before May 26, 1969, but                      cuted, such contract was not a prohib-
                                                                    under such circumstances the interest                      ited transaction (within the meaning of
                                                                    which would have been acquired before                      section 503(b) or the corresponding pro-
                                                                    such increase shall be treated as owned                    visions of prior law), and
                                                                    by the private foundation on or before                       (ii) The leasing or lending of money
                                                                    May 26, 1969.                                              (or other extension of credit) remains
                                                                       (4) Examples. The provisions of this                    throughout the term of the lease or ex-
                                                                    paragraph may be illustrated by the                        tension of credit at least as favorable
                                                                    following examples:                                        as a current arm’s-length transaction
                                                                                                                               with an unrelated person.
                                                                      Example 1. On May 26, 1969, private founda-
                                                                                                                                 (2) Renewal or modification of existing
                                                                    tion X owns 10 percent of corporation Y’s
                                                                    voting stock, which is traded on the New                   contracts. A renewal or a modification
                                                                    York Stock Exchange. Disqualified persons                  of an existing contract is referred to in
                                                                    with respect to X own an additional 40 per-                subparagraph (1) of this paragraph only
                                                                    cent of such voting stock. X is on a calendar              if any modifications of the terms of
                                                                    year basis. Prior to January 1, 1975, X pri-               such contract are not substantial and
                                                                    vately sold its entire 10 percent for cash to              the relative advantages of the modified
                                                                    B, a disqualified person, at the price quoted              contract compared with contracts en-
                                                                    on the stock exchange at the close of the day
                                                                                                                               tered into at arm’s-length with an un-
                                                                    less commissions. Since the 10 percent owned
                                                                    by X would constitute excess business hold-                related person at the time of the re-
                                                                    ings without the application of section                    newal or modification are at least as
                                                                    4943(c) (2)(C) or (4), the disposition will not            favorable to the private foundation as
                                                                    constitute an act of self-dealing.                         the relative advantages of the original
                                                                      Example 2. Assume the facts as stated in                 contract compared with contracts en-
                                                                    example (1), except that the only stock of                 tered into at arm’s-length with an un-
                                                                    corporation Y which X owns is 1.5 percent of               related person at the time of execution
                                                                    Y’s voting stock. Since the 1.5 percent owned
                                                                                                                               of the original contract. Such renewal
                                                                    by X would constitute excess business hold-
                                                                    ings without the application of section                    or modification need not be provided
                                                                    4943(c) (2)(C) or (4), the disposition of the              for in the original contract; it may
                                                                    stock to B for cash will not constitute an act             take place before or after the expira-
                                                                    of self-dealing.                                           tion of the original contract and at any
                                                                      Example 3. Assume the facts as stated in                 time before the first day of the first
                                                                    example (1), except that B, instead of paying              taxable year of the private foundation
                                                                    cash as consideration for the stock, issued a              beginning after December 31, 1979.
                                                                    10-year secured promissory note as consider-
                                                                                                                               Where, in a normal commercial set-
                                                                    ation for the stock. The issuance of such
                                                                    promissory note will not be treated as an act              ting, an unrelated party in the position
                                                                    of self-dealing until taxable years beginning              of a private foundation could be ex-
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                                                                    after December 31, 1979, unless such issuance              pected to insist upon a renegotiation or
                                                                    would have been a prohibited transaction                   termination of a binding contract, the

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(d)–4

                                                                    private foundation must so act. Thus,                      acquired by a private foundation in ex-
                                                                    for example, if a disqualified person                      change for stock or securities which it
                                                                    leases office space from a private foun-                   held on October 9, 1969, and at all times
                                                                    dation on a month-to-month basis, and                      thereafter, such indebtedness shall be
                                                                    a party in the position of the private                     treated as an extension of credit pursu-
                                                                    foundation could be expected to re-                        ant to a binding contract in effect on
                                                                    negotiate the rent required in such                        October 9, 1969, to which this paragraph
                                                                    contract because of a rise in the fair                     applies. Thus, so long as the extension
                                                                    market value of such office space, the                     of credit remains at least as favorable
                                                                    private foundation must so act in order                    as an arm’s-length transaction with an
                                                                    to avoid participation in an act of self-                  unrelated person and neither the acqui-
                                                                    dealing. Where the private foundation                      sition of the securities which were ex-
                                                                    has no right to insist upon renegoti-                      changed for the indebtedness nor the
                                                                    ation, an act of self-dealing shall occur                  exchange of such securities for the in-
                                                                    if the terms of the contract become                        debtedness was a prohibited trans-
                                                                    less favorable to the foundation than                      action within the meaning of section
                                                                    an arm’s-length contract negotiated                        503(b) (or the corresponding provisions
                                                                    currently, unless:                                         of prior law) at the time of such acqui-
                                                                      (i) The variation from current fair                      sition, such extension of credit shall
                                                                    market value is de minimis, or                             not be an act of self-dealing until tax-
                                                                      (ii) The contract is renegotiated by                     able years beginning after December 31,
                                                                    the foundation and the disqualified                        1979.
                                                                    person so that the foundation will re-                       (ii) The provisions of this subpara-
                                                                    ceive no less than fair market value.                      graph may be illustrated by the fol-
                                                                    For purposes of subdivision (i) of this                    lowing examples:
                                                                    subparagraph de minimis ordinarily                            Example 1. Assume the facts as stated in
                                                                    shall be no more than one-half of 1 per-                   example (2) of § 53.4941 (d)–3 (d)(2), except
                                                                    cent in the rate of return in the case of                  that the preferred stock was held by Y on Oc-
                                                                    a loan, or 10 percent of the rent in the                   tober 9, 1969, and at all times thereafter until
                                                                    case of a lease.                                           the redemption occurred on January 2, 1972.
                                                                                                                               In addition, assume that the acquisition of
                                                                      (3) Example. The provisions of sub-                      the preferred stock was not a prohibited
                                                                    paragraphs (1) and (2) of this paragraph                   transaction within the meaning of section
                                                                    may be illustrated by the following ex-                    503(b) at the time of such acquisition and the
                                                                    ample.                                                     exchange of the preferred stock for the de-
                                                                                                                               bentures would not have been a prohibited
                                                                      Example. Under a binding contract entered                transaction within the meaning of section
                                                                    into on January 1, 1964, X, a private founda-              503(b). For 1973 through 1979, the extension of
                                                                    tion, leases a building for 10 years from Z, a             credit arising from the holding of the deben-
                                                                    disqualified person. At the time the contract              tures is not an act of self-dealing so long as
                                                                    was executed, the lease was not a ‘‘prohib-                the extension of credit remains at least as
                                                                    ited transaction’’ within the meaning of sec-              favorable as an arm’s-length transaction
                                                                    tion 503(b), since the rent charged X was only             with an unrelated person. See, however, ex-
                                                                    50 percent of the rent which would have been               ample (3) of § 53.4941 (e)–1 (e)(1)(ii).
                                                                    charged in an arm’s-length transaction with                   Example 2. Assume the same facts as stated
                                                                    an unrelated person. On January 1, 1974, X                 in example (1) of § 53.4941 (d)–4 (b)(4), except
                                                                    renewed the lease for 5 additional years. The              that private foundation X sold its entire 10
                                                                    terms of the renewal agreement provided for                percent of corporation Y’s voting stock in
                                                                    a 20 percent increase in the amount of rent                exchange for Y’s secured notes which mature
                                                                    charged X. However, at the time of such re-                on December 31, 1985. For taxable years be-
                                                                    newal, the rent which would have been                      ginning before January 1, 1980, the extension
                                                                    charged in an arm’s-length transaction had                 of credit arising from the holding of such
                                                                    also increased by 20 percent from that of                  notes by X is not an act of self-dealing so
                                                                    1964. The renewal agreement shall not be                   long as the extension of credit remains at
                                                                    treated as an act of self-dealing.                         least as favorable as an arm’s-length trans-
                                                                       (4) Certain exchanges of stock or securi-               action with an unrelated person and neither
                                                                    ties for bonds, debentures or other indebt-                the acquisition of the securities which were
                                                                                                                               exchanged for the indebtedness nor the ex-
                                                                    edness. (i) In the case of a transaction
                                                                                                                               change of such securities for the indebted-
                                                                    described in paragraph (a) or (b) of this                  ness was a prohibited transaction within the
                                                                    section or paragraph (d) of § 53.4941(d)–                  meaning of section 503(b) (or the cor-
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                                                                    3, where a bond, debenture, or other in-                   responding provisions of prior law). Under
                                                                    debtedness of a disqualified person is                     § 53.4941(e)–1, a new extension of credit occurs

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                                                                    § 53.4941(d)–4                                                          26 CFR Ch. I (4–1–09 Edition)
                                                                    on the first day of each taxable year in                   disqualified person have a joint or com-
                                                                    which an indebtedness is outstanding; there-               mon interest will not be an act of self-
                                                                    fore, if the secured notes are held by X after
                                                                                                                               dealing if the interests of both in such
                                                                    December 31, 1979, a new extension of credit
                                                                    not excepted from the definition of an act of              property were acquired before October
                                                                    self-dealing will occur on the first day of the            9, 1969.
                                                                    first taxable year beginning after December                   (2) The provisions of this paragraph
                                                                    31, 1979, and on the first day of each suc-                may be illustrated by the following ex-
                                                                    ceeding taxable year in which X holds such                 ample:
                                                                    secured notes.
                                                                                                                                 Example. Prior to October 9, 1969, C, a dis-
                                                                       (d) Sharing of goods, services, or facili-
                                                                                                                               qualified person, gave beachfront property to
                                                                    ties before January 1, 1980. (1) Under sec-                private foundation X for use as a rec-
                                                                    tion 101(1)(2)(D) of the Tax Reform Act                    reational facility for underprivileged, inner-
                                                                    of 1969 (83 Stat. 533), the use (other                     city children during the summer months.
                                                                    than leasing) of goods, services, or fa-                   However, C retained the right to use such
                                                                    cilities which are shared by a private                     property for his life. The use of such prop-
                                                                    foundation and a disqualified person                       erty by C or X is not an act of self-dealing.
                                                                    shall not be an act of self-dealing until
                                                                                                                                  (f) Disposition of leased property—(1) In
                                                                    taxable years beginning after Decem-
                                                                    ber 31, 1979, if:                                          general. Under section 101(l)(2)(F) of the
                                                                       (i) The use is pursuant to an arrange-                  Tax Reform Act of 1969, as amended by
                                                                    ment in effect before October 9, 1969,                     the Tax Reform Act of 1976 (90 Stat.
                                                                    and at all times thereafter;                               1713), the sale, exchange or other dis-
                                                                       (ii) The arrangement was not a pro-                     position (other than by lease) to a dis-
                                                                    hibited transaction (within the mean-                      qualified person of property being
                                                                    ing of sec. 503(b) or the corresponding                    leased to the disqualified person by a
                                                                    provisions of prior law) at the time it                    private foundation is not an act of self-
                                                                    was made; and                                              dealing if:
                                                                       (iii) The arrangement would not be a                       (i) The private foundation is leasing
                                                                    prohibited transaction if section 503(b)                   substantially all of the property to the
                                                                    continued to apply.                                        disqualified person under a lease to
                                                                    For purposes of this paragraph, such                       which paragraph (c) of this section ap-
                                                                    arrangement need not be a binding con-                     plies;
                                                                    tract.                                                        (ii) The disposition occurs after Octo-
                                                                       (2) The provisions of this paragraph                    ber 4, 1976, and before January 1, 1978;
                                                                    may be illustrated by the following ex-                    and
                                                                    ample:                                                        (iii) The disposition satisfies the re-
                                                                      Example. In 1964 X, a private foundation,                quirements of paragraph (f)(2) of this
                                                                    and B, a disqualified person, arranged for the             section.
                                                                    sharing of computer time in B’s son’s com-                    (2) Terms of disposition. Paragraph
                                                                    pany for a 10-year period commencing Janu-                 (f)(1) of this section applies only if:
                                                                    ary 1, 1965. B’s son has the unilateral right to              (i) The private foundation receives an
                                                                    terminate the arrangement at any time. X
                                                                    uses the computer facilities in connection                 amount that equals or exceeds the fair
                                                                    with an analysis of its grant-making activi-               market value of the property either at
                                                                    ties, while B’s use is related to his business             the time of the disposition or at the
                                                                    affairs. Both X and B make reasonable fixed                time (after June 30, 1976) the contract
                                                                    payments to the computer company based on                  for such disposition was executed;
                                                                    the number of hours of computer use and                       (ii) In computing the fair market
                                                                    comparable to fees charged in arm’s-length
                                                                    transactions with unrelated parties. The
                                                                                                                               value of the property, no diminution of
                                                                    company imposes a maximum limit per                        that value results from the fact that
                                                                    month on the sum of the number of hours for                the property is subject to any lease to
                                                                    which X and B use the computer facilities.                 disqualified persons; and
                                                                    Under these circumstances, the sharing of                     (iii) At the time with respect to
                                                                    computer time is not an act of self-dealing.               which paragraph (f)(2)(i) of this section
                                                                      (e) Use of certain property acquired be-                 is applied, the transaction would not
                                                                    fore October 9, 1969. (1) Under section                    have constituted a prohibited trans-
                                                                    101(1)(2)(E) of the Tax Reform Act of                      action within the meaning of section
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                                                                    1969 (83 Stat. 533), the use of property                   503(b) or the corresponding provisions
                                                                    in which a private foundation and a                        of prior law if those provisions had

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(e)–1

                                                                    been applied at the time of the trans-                     on the sale under section 4941(a)(1). The tax-
                                                                    action.                                                    able period with respect to the act of self-
                                                                                                                               dealing for both A and F is July 16, 1970,
                                                                    [T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amend-           through March 25, 1973.
                                                                    ed by T.D. 7678, 45 FR 12416, Feb. 26, 1980]                  Example 2. Assume the facts as stated in
                                                                                                                               example (1), except that the act of self-deal-
                                                                    § 53.4941(e)–1 Definitions.                                ing is corrected by A on March 17, 1971. The
                                                                                                                               taxable period with respect to the act of self-
                                                                       (a) Taxable period—(1) In general. For
                                                                                                                               dealing for both A and F is July 16, 1970,
                                                                    purposes of any act of self-dealing, the                   through March 17, 1971.
                                                                    term ‘‘taxable period’’ means the pe-                         Example 3. Assume the facts as stated in
                                                                    riod beginning with the date on which                      example (1), except that on August 20, 1972, A
                                                                    the act of self-dealing occurs and end-                    files a waiver of the restrictions on assess-
                                                                    ing on the earliest of:                                    ment and collection of the tax imposed on
                                                                       (i) The date of mailing of a notice of                  the sale under section 4941(a)(1) which is ac-
                                                                                                                               cepted. The taxable period with respect to
                                                                    deficiency under section 6212 with re-
                                                                                                                               the act of self-dealing for both A and F is
                                                                    spect to the tax imposed by section                        July 16, 1970, through August 20, 1972.
                                                                    4941(a)(1),
                                                                       (ii) The date on which correction of                      (b) Amount involved—(1) In general.
                                                                    the act of self-dealing is completed, or                   Except as provided in subparagraph (2)
                                                                       (iii) The date on which the tax im-                     of this paragraph, for purposes of any
                                                                    posed by section 4941(a)(1) is assessed.                   act of self-dealing, the term ‘‘amount
                                                                       (2) Date of occurrence. An act of self-                 involved’’ means the greater of the
                                                                    dealing occurs on the date on which all                    amount of money and the fair market
                                                                    the terms and conditions of the trans-                     value of the other property given or
                                                                    action and the liabilities of the parties                  the amount of money and the fair mar-
                                                                    have been fixed. Thus, for example, if a                   ket value of the other property re-
                                                                    private foundation gives a disqualified                    ceived.
                                                                    person a binding option on June 15,                          (2) Exceptions. (i) In the case of the
                                                                    1971, to purchase property owned by the                    payment of compensation for personal
                                                                    foundation at any time before June 15,                     services to persons other than Govern-
                                                                    1972, the act of self-dealing has oc-                      ment officials, the amount involved
                                                                    curred on June 15, 1971. Similarly, in                     shall be only the excess compensation
                                                                    the case of a conditional sales con-                       paid by the private foundation.
                                                                    tract, the act of self-dealing shall be                      (ii) Where the use of money or other
                                                                    considered as occurring on the date the                    property is involved, the amount in-
                                                                    property is transferred subject only to                    volved shall be the greater of the
                                                                    the condition that the buyer make pay-                     amount paid for such use or the fair
                                                                    ment for receipt of such property.                         market value of such use for the period
                                                                       (3) Special rule. Where a notice of defi-               for which the money or other property
                                                                    ciency referred to in subparagraph                         is used. Thus, for example, in the case
                                                                    (1)(i) of this paragraph is not mailed                     of a lease of a building by a private
                                                                    because a waiver of the restrictions on                    foundation to a disqualified person, the
                                                                    assessment and collection of a defi-                       amount involved is the greater of the
                                                                    ciency has been accepted, or because                       amount of rent received by the private
                                                                    the deficiency is paid, the date of filing                 foundation from the disqualified person
                                                                    of the waiver or the date of such pay-                     or the fair rental value of the building
                                                                    ment, respectively, shall be treated as                    for the period such building is used by
                                                                    the end of the taxable period.                             the disqualified person.
                                                                                                                                 (iii) In cases in which a transaction
                                                                       (4) Examples. The provisions of this
                                                                                                                               would not have been an act of self-deal-
                                                                    paragraph may be illustrated by the
                                                                                                                               ing had the private foundation received
                                                                    following examples:
                                                                                                                               fair market value, the amount involved
                                                                      Example 1. On July 16, 1970, F, a manager of             is the excess of the fair market value of
                                                                    private foundation X acting on behalf of the               the property transferred by the private
                                                                    foundation, knowing his act to be one of self-             foundation over the amount which the
                                                                    dealing, willfully and without reasonable
                                                                                                                               private foundation receives, but only if
                                                                    cause engaged in an act of self-dealing by
                                                                    selling certain real estate to A, a disquali-              the parties have made a good faith ef-
                                                                    fied person. On March 25, 1973, the Internal               fort to determine fair market value.
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                                                                    Revenue Service mailed a notice of defi-                   For purposes of this subdivision a good
                                                                    ciency to A with respect to the tax imposed                faith effort to determine fair market

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                                                                    § 53.4941(e)–1                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    value shall ordinarily have been made                        Example 1. A, a disqualified person with re-
                                                                    where:                                                     spect to private foundation M, uses an air-
                                                                      (a) The person making the valuation                      plane owned by M on June 15 and June 16,
                                                                                                                               1970, for a 2-day trip to New York City on
                                                                    is not a disqualified person with re-
                                                                                                                               personal business and pays M $500 for the use
                                                                    spect to the foundation and is both                        of such airplane. The fair rental value for the
                                                                    competent to make the valuation and                        use of the airplane for those 2 days is $3,000.
                                                                    not in a position, whether by stock                        For purposes of section 4941(a), the amount
                                                                    ownership or otherwise, to derive an                       involved with respect to the act of self-deal-
                                                                    economic benefit from the value uti-                       ing is $3,000.
                                                                    lized, and                                                   Example 2. On April 10, 1970, B, a manager
                                                                      (b) The method utilized in making                        of private foundation P, borrows $100,000
                                                                    the valuation is a generally accepted                      from P at 6 percent interest per annum. Both
                                                                    method for valuing comparable prop-                        principal and interest are to be paid 1 year
                                                                                                                               from the date of the loan. The fair market
                                                                    erty, stock, or securities for purposes
                                                                                                                               value of the use of the money on April 10,
                                                                    of arm’s-length business transactions                      1970, is 10 percent per annum. Six months
                                                                    where valuation is a significant factor.                   later, B and P terminate the loan, and B re-
                                                                    See       section     4941(d)(2)(F)   and                  pays the $100,000 principal plus $3,000
                                                                    §§ 53.4941(d)–1(b)(3), 53.4941(d)–3 (d)(1)                 ($100,000×6 percent for one-half year) interest.
                                                                                                                               For purposes of section 4941(a), the amount
                                                                    and 53.4941(d)–4(b). Thus, for example, if                 involved with respect to the act of self-deal-
                                                                    a corporation which is a disqualified                      ing is $5,000 ($100,000×10 percent for one-half
                                                                    person with respect to a private foun-                     year) for each year or partial year in the tax-
                                                                    dation recapitalizes in a transaction                      able period.
                                                                    which would be described in section                          Example 3. C, a substantial contributor to
                                                                    4941(d)(2)(F) but for the fact that the                    private foundation S, leases office space in a
                                                                    private foundation receives new stock                      building owned by S for $3,600 for 1 year be-
                                                                    worth only $95,000 in exchange for the                     ginning on January 1, 1971. The fair rental
                                                                    stock which it previously held in the                      value of the building for a 1-year lease on
                                                                    corporation and which has a fair mar-                      January 1, 1971, is $5,600. On December 31,
                                                                                                                               1971, the lease is terminated. For purposes of
                                                                    ket value of $100,000 at the time of the                   section 4941(a), the amount involved with re-
                                                                    recapitalization, the amount involved                      spect to the act of self-dealing is $5,600 for
                                                                    would be $5,000 ($100,000—$95,000) if                      each year or partial year in the taxable pe-
                                                                    there had been a good faith attempt to                     riod.
                                                                    value the stock. Similarly, if an estate                     Example 4. D, a disqualified person with re-
                                                                    enters into a transaction with a dis-                      spect to private foundation T, purchases 100
                                                                    qualified person with respect to a foun-                   shares of stock from T for $5,000 on June 15,
                                                                    dation and such transaction would be                       1982. The fair market value of the 100 shares
                                                                    described in § 53.4941(d)–1(b)(3) but for                  of stock on that date is $4,800. D sells the 100
                                                                                                                               shares of stock on December 20, 1983, for
                                                                    the fact that the estate receives less                     $6,000. On December 27, 1983, a notice of defi-
                                                                    than fair market value for the property                    ciency with respect to the taxes imposed
                                                                    exchanged, the amount involved is the                      under subsections (a) and (b) of section 4941
                                                                    excess of the fair market value of the                     is mailed to D and the taxable period ends. D
                                                                    property the estate transfers to the                       fails to correct during the taxable period. Be-
                                                                    disqualified person over the money and                     tween June 15, 1982, and the end of the tax-
                                                                    the fair market value of the property                      able period, the stock was quoted on the New
                                                                    received by the estate.                                    York Stock Exchange at a high of $67 per
                                                                                                                               share. The amount involved with respect to
                                                                       (3) Time for determining fair market
                                                                                                                               the tax imposed under subsection (a) is
                                                                    value. The fair market value of the                        $5,000, and the amount involved with respect
                                                                    property or the use thereof, as the case                   to the tax imposed under subsection (b) for
                                                                    may be, shall be determined as of the                      failure to correct is $6,700 (100 shares at $67
                                                                    date on which the act of self-dealing                      per share), the highest fair market value
                                                                    occurred in the case of the initial taxes                  during the taxable period.
                                                                    imposed by section 4941(a) and shall be                      Example 5. Corporation M, a disqualified
                                                                    the highest fair market value during                       person with respect to private foundation V,
                                                                    the taxable period in the case of the ad-                  redeems all of its Class B common stock,
                                                                                                                               some of which is held by V. The redemption
                                                                    ditional taxes imposed by section                          of V’s stock would be described in section
                                                                    4941(b).                                                   4941(d)(2)(F) but for the fact that V receives
                                                                       (4) Examples. The provisions of this                    only $95,000 in exchange for stock which has
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                                                                    paragraph may be illustrated by the                        a fair market value of $100,000 at the time of
                                                                    following examples:                                        the transaction. The $95,000 value of V’s

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(e)–1
                                                                    stock, which is not publicly traded, was de-               over to the foundation any income de-
                                                                    termined by investment bankers in accord-                  rived by him from the property he re-
                                                                    ance with accepted methods of valuation                    ceived from the original sale to the ex-
                                                                    that would be utilized if the M stock held by
                                                                    V were to be offered for sale to the public.
                                                                                                                               tent such income during the correction
                                                                    Therefore, the amount involved with respect                period exceeds the income derived by
                                                                    to the transaction will ordinarily be limited              the foundation during the correction
                                                                    to $5,000 ($100,000—$95,000).                              period from the cash which the dis-
                                                                                                                               qualified person originally paid to the
                                                                      (c) Correction—(1) In general. Correc-
                                                                                                                               foundation.
                                                                    tion shall be accomplished by undoing                        (ii) If, prior to the end of the correc-
                                                                    the transaction which constituted the                      tion period, the disqualified person re-
                                                                    act of self-dealing to the extent pos-                     sells the property in an arm’s-length
                                                                    sible, but in no case shall the resulting                  transaction to a bona fide purchaser
                                                                    financial position of the private foun-                    who is not the foundation or another
                                                                    dation be worse than that which it                         disqualified person, no rescission is re-
                                                                    would be if the disqualified person were                   quired. In such case, the disqualified
                                                                    dealing under the highest fiduciary                        person must pay over to the foundation
                                                                    standards. For example, where a dis-                       the excess (if any) of the greater of the
                                                                    qualified person sells property to a pri-                  fair market value of such property on
                                                                    vate foundation for cash, correction                       the date on which correction of the act
                                                                    may be accomplished by recasting the                       of self-dealing occurs or the amount re-
                                                                    transaction in the form of a gift by re-                   alized by the disqualified person from
                                                                    turning the cash to the foundation.                        such arm’s length resale over the
                                                                    Subparagraphs (2) through (6) of this                      amount which would have been re-
                                                                    paragraph illustrate the minimum                           turned to the disqualified person pursu-
                                                                    standards of correction in the case of                     ant to subdivision (i) of this subpara-
                                                                    certain specific acts of self-dealing.                     graph if rescission had been required.
                                                                    Principles similar to the principles                       In addition, the disqualified person is
                                                                    contained in such subparagraphs shall                      required to pay over to the foundation
                                                                    be applied with respect to other acts of                   any net profits he realized, as described
                                                                    self-dealing. Any correction pursuant                      in subdivision (i) of this subparagraph.
                                                                    to this paragraph and section 4941 shall                     (iii) Examples. The provisions of this
                                                                    not be an act of self-dealing.                             subparagraph may be illustrated by the
                                                                      (2) Sales by foundation. (i) In the case                 following examples:
                                                                    of a sale of property by a private foun-
                                                                    dation to a disqualified person for cash,                    Example 1. On July 1, 1970, private founda-
                                                                    undoing the transaction includes, but                      tion M sold a painting to A, a disqualified
                                                                    is not limited to, requiring recission of                  person, for $5,000, in a transaction not within
                                                                                                                               any of the exceptions to self-dealing. The
                                                                    the sale where possible. However, in
                                                                                                                               fair market value of the painting on such
                                                                    order to avoid placing the foundation                      date was $6,000. On March 25, 1971, the paint-
                                                                    in a position worse than that in which                     ing is still owned by A and has a fair market
                                                                    it would be if rescission were not re-                     value of $7,200. A did not derive any income
                                                                    quired, the amount returned to the dis-                    as a result of purchasing the painting. In
                                                                    qualified person pursuant to the rescis-                   order to correct the act of self-dealing under
                                                                    sion shall not exceed the lesser of the                    this subparagraph on March 25, 1971, the sale
                                                                    cash received by the private foundation                    must be rescinded by the return of the paint-
                                                                    or the fair market value of the prop-                      ing to M. However, pursuant to such rescis-
                                                                                                                               sion, M must not pay A more than $5,000, the
                                                                    erty received by the disqualified per-
                                                                                                                               original consideration received by M.
                                                                    son. For purposes of the preceding sen-                      Example 2. Assume the facts as stated in
                                                                    tence, fair market value shall be the                      Example (1), except that A sold the painting
                                                                    lesser of the fair market value at the                     on December 15, 1970, in an arm’s-length
                                                                    time of the act of self-dealing or the                     transaction to C, a bona fide purchaser who
                                                                    fair market value at the time of rescis-                   is not a disqualified person, for $6,100. In ad-
                                                                    sion. In addition to rescission, the dis-                  dition, assume that the fair market value of
                                                                    qualified person is required to pay over                   the painting on March 25, 1971, is $7,600. In
                                                                                                                               order to correct the act of self-dealing under
                                                                    to the private foundation any net prof-
                                                                                                                               this subparagraph on March 25, 1971, A must
                                                                    its he realized after the original sale                    pay M $2,600 ($7,600, the fair market value at
                                                                    with respect to the property he re-                        the time of correction, less $5,000, the
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                                                                    ceived from the sale. Thus, for exam-                      amount which would have been returned to
                                                                    ple, the disqualified person must pay                      A if rescission had been required). Since the

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                                                                    § 53.4941(e)–1                                                          26 CFR Ch. I (4–1–09 Edition)
                                                                    painting was sold to C in an arm’s-length                  $2,500 in a transaction which does not fall
                                                                    transaction prior to correction, no rescission             within any of the exceptions to selfdealing.
                                                                    is required.                                               The fair market value of the 100 shares of X
                                                                      (3) Sales to foundation. (i) In the case                 stock on February 10, 1972, is $3,200. On June
                                                                                                                               1, 1973, the 100 shares of X stock have a fair
                                                                    of a sale of property to a private foun-
                                                                                                                               market value of $2,900. From February 10,
                                                                    dation by a disqualified person for
                                                                                                                               1972, through June 1, 1973, P has received
                                                                    cash, undoing the transaction includes,                    dividends of $90 from the stock, and D has re-
                                                                    but is not limited to, requiring rescis-                   ceived interest of $300 from the $2,500 which
                                                                    sion of the sale where possible. How-                      D received as consideration for the stock. In
                                                                    ever, in order to avoid placing the                        order to correct the act of self-dealing under
                                                                    foundation in a position worse than                        this subparagraph on June 1, 1973, the sale
                                                                    that in which it would be if rescission                    must be rescinded by the return of the stock
                                                                    were not required, the amount received                     to D. However, pursuant to such rescission,
                                                                    from the disqualified person pursuant                      D must pay P $3,200, the fair market value of
                                                                    to the rescission shall be the greatest                    the stock on the date of sale. In addition, D
                                                                    of the cash paid to the disqualified per-                  must pay P $210, the amount of income de-
                                                                    son, the fair market value of the prop-                    rived by D during the correction period from
                                                                    erty at the time of the original sale, or                  the $2,500 received from P ($300) minus the
                                                                    the fair market value of the property                      income derived by P during the correction
                                                                    at the time of rescission. In addition to                  period from the stock sold to P ($90).
                                                                    rescission, the disqualified person is re-                   Example 2. Assume the facts as stated in
                                                                                                                               Example (1), except that on September 1,
                                                                    quired to pay over to the private foun-
                                                                                                                               1972, P sells the 100 shares of X stock to E, a
                                                                    dation any net profits he realized after
                                                                                                                               bona fide purchaser who is not a disqualified
                                                                    the original sale with respect to the                      person, in an arm’s-length transaction for
                                                                    consideration he received from the                         $2,750. Assume further that P has not re-
                                                                    sale. Thus, for example, the disquali-                     ceived any dividends from the stock prior to
                                                                    fied person must pay over to the foun-                     the sale to E, but that P receives interest of
                                                                    dation any income derived by him from                      $260 from the $2,750 received as consideration
                                                                    the cash he received from the original                     for the stock for the period from September
                                                                    sale to the extent such income during                      1, 1972, to June 1, 1973. In order to correct the
                                                                    the correction period exceeds the in-                      act of self-dealing under this subparagraph
                                                                    come derived by the foundation during                      on June 1, 1973, D must pay P $450 ($3,200, the
                                                                    the correction period from the property                    amount which would have been received
                                                                    which the disqualified person origi-                       from D if rescission had been required, less
                                                                    nally transferred to the foundation.                       $2,750, the amount realized by P from the
                                                                      (ii) If, prior to the end of the correc-                 sale to E). In addition, D must pay P $40, the
                                                                                                                               amount of income derived by D during the
                                                                    tion period, the foundation resells the
                                                                                                                               correction period from the $2,500 received
                                                                    property in an arm’s-length trans-
                                                                                                                               from P ($300) minus the income derived by P
                                                                    action to a bona fide purchaser who is                     during the correction period from the stock
                                                                    not a disqualified person, no rescission                   sold to P ($260 from the $2,750 received as
                                                                    is required. In such case, the disquali-                   consideration for the stock). Since the stock
                                                                    fied person must pay over to the foun-                     was sold to E in an arm’s-length transaction
                                                                    dation the excess (if any) of the                          prior to correction, no rescission is required.
                                                                    amount which would have been re-
                                                                    ceived from the disqualified person                          (4) Use of property by a disqualified
                                                                    pursuant to subdivision (i) of this sub-                   person. (i) In the case of the use by a
                                                                    paragraph, if recission had been re-                       disqualified person of property owned
                                                                    quired over the amount realized by the                     by a private foundation, undoing the
                                                                    foundation upon resale of the property.                    transaction includes, but is not limited
                                                                    In addition, the disqualified person is                    to, terminating the use of such prop-
                                                                    required to pay over to the foundation                     erty. In addition to termination, the
                                                                    any net profits he realized, as described                  disqualified person must pay the foun-
                                                                    in subdivision (i) of this subparagraph.                   dation:
                                                                      (iii) Examples. The provisions of this                     (a) The excess (if any) of the fair
                                                                    subparagraph may be illustrated by the                     market value of the use of the property
                                                                    following examples:                                        over the amount paid by the disquali-
                                                                      Example 1. On February 10, 1972, D, a dis-               fied person for such use until such ter-
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                                                                    qualified person with respect to private foun-             mination, and
                                                                    dation P, sells 100 shares of X stock to P for

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(e)–1

                                                                      (b) The excess (if any) of the amount                    self-dealing (within the meaning of para-
                                                                    which would have been paid by the dis-                     graph (e)(1) of this section) under this sub-
                                                                    qualified person for the use of the prop-                  paragraph on December 31, 1973, B must ter-
                                                                                                                               minate his use of the property. In addition,
                                                                    erty on or after the date of such termi-
                                                                                                                               B must pay R $9,000, $4,000 for his use of the
                                                                    nation, for the period such disqualified                   property for 1972 (the excess of $14,000, the
                                                                    person would have used the property                        fair rental value for 1 year as of Dec. 31, 1973,
                                                                    (without regard to any further exten-                      over $10,000, the amount B paid R for his use
                                                                    sions or renewals of such period) if                       of the property for 1972) and $5,000 for his use
                                                                    such termination had not occurred,                         of the property for 1973 (the excess of $15,000,
                                                                    over the fair market value of such use                     the fair rental value for 12 months as of Jan.
                                                                    for such period.                                           1, 1973, over $10,000, the amount B paid R for
                                                                                                                               his use of the property for 1973).
                                                                    In applying (a) of this subdivision the                      Example 3. B, a substantial contributor to
                                                                    fair market value of the use of prop-                      private foundation T, leases office space in a
                                                                    erty shall be the higher of the rate                       building owned by T for $5,000 for 1 year be-
                                                                    (that is, fair rental value per period in                  ginning on November 10, 1972, in a trans-
                                                                    the case of use of property other than                     action not included in any of the exceptions
                                                                    money or fair interest rate in the case                    to self-dealing. The fair rental value of the
                                                                                                                               building for a 1-year period on November 10,
                                                                    of use of money) at the time of the act                    1972, is $4,000. On May 10, 1973, the fair rental
                                                                    of self-dealing (within the meaning of                     value of the building for the remaining pe-
                                                                    paragraph (e)(1) of this section) or such                  riod of the lease is $2,200. In order to correct
                                                                    rate at the time of correction of such                     the acts of self-dealing under this subpara-
                                                                    act of self-dealing. In applying (b) of                    graph on May 10, 1973, B and T must termi-
                                                                    this subdivision the fair market value                     nate the lease. In addition, B must pay T $300
                                                                    of the use of property shall be the rate                   (the excess of $2,500, the amount which would
                                                                    at the time of correction.                                 have been paid by B for the remaining period
                                                                                                                               of the lease if it had not been terminated,
                                                                      (ii) The provisions of this subpara-                     over $2,200, the fair rental value at the time
                                                                    graph may be illustrated by the fol-                       of correction for the remaining period of the
                                                                    lowing examples:                                           lease).
                                                                      Example 1. On January 1, 1972, private foun-               (5) Use of property by a private founda-
                                                                    dation S rented the third story of its office              tion. (i) In the case of the use by a pri-
                                                                    building to A, a disqualified person, for 1
                                                                                                                               vate foundation of property owned by a
                                                                    year at an annual rent of $10,000, in a trans-
                                                                    action not within any of the exceptions to                 disqualified person, undoing the trans-
                                                                    self-dealing. Both S and A are on the cal-                 action includes, but is not limited to,
                                                                    endar year basis. The fair rental value of                 terminating the use of such property.
                                                                    such office space for a 1-year period on Janu-             In addition to termination, the dis-
                                                                    ary 1, 1972, is $12,000. On June 30, 1972, the             qualified person must pay the founda-
                                                                    fair rental value of such office space for a 1-            tion:
                                                                    year period is $13,000. In order to correct the              (a) The excess (if any) of the amount
                                                                    act of self-dealing under this subparagraph                paid to the disqualified person for such
                                                                    on June 30, 1972, A must terminate his use of
                                                                    the property. In addition, A must pay S
                                                                                                                               use until such termination over the
                                                                    $1,500, the excess of $6,500 (the fair rental              fair market value of the use of the
                                                                    value for 6 months as of June 30, 1972) over               property, and
                                                                    $5,000 (the amount paid to S from Jan. 1,                    (b) The excess (if any) of the fair
                                                                    1972, to June 30, 1972).                                   market value of the use of the prop-
                                                                      Example 2. On January 1, 1972, private foun-             erty, for the period the foundation
                                                                    dation R rented the fourth story of its office             would have used the property (without
                                                                    building to B, a disqualified person, for 1                regard to any further extensions or re-
                                                                    year at an annual rent of $10,000, in a trans-
                                                                    action not included in any of the exceptions
                                                                                                                               newals of such period) if such termi-
                                                                    to self-dealing. Both R and B are on the cal-              nation had not occurred, over the
                                                                    endar year basis. On January 1, 1973, B con-               amount which would have been paid to
                                                                    tinues to rent the office space as a periodic              the disqualified person on or after the
                                                                    tenant paying his rent monthly at an annual                date of such termination for such use
                                                                    rate of $10,000. The fair rental value of such             for such period.
                                                                    office space for a 1-year period on January 1,
                                                                                                                               In applying (a) of this subdivision the
                                                                    1972, is $12,000, and as of January 1, 1973, is
                                                                    $1,250 per month. As of December 31, 1973, the             fair market value of the use of prop-
                                                                    fair rental value of such office space is                  erty shall be the lesser of the rate (that
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                                                                    $14,000 for a 1-year period and $1,200 on a                is, fair rental value per period in the
                                                                    monthly basis. In order to correct his acts of             case of use of property other than

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                                                                    § 53.4941(e)–1                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    money or fair interest rate in the case                    quires that the disqualified person pay
                                                                    of use of money) at the time of the act                    to the foundation any amount which is
                                                                    of self-dealing (within the meaning of                     excessive. However, termination of the
                                                                    paragraph (e)(1) of this section) or such                  employment or independent contractor
                                                                    rate at the time of correction of such                     relationship is not required.
                                                                    act of self-dealing. In applying (b) of                      (7) Special rule for correction of valu-
                                                                    this subdivision the fair market value                     ation errors. (i) In the case of a trans-
                                                                    of the use of property shall be the rate                   action described in paragraph (b)(2)(iii)
                                                                    at the time of correction.                                 of this section, a ‘‘correction’’ of the
                                                                      (ii) The provisions of this subpara-                     act of self-dealing shall ordinarily be
                                                                    graph may be illustrated by the fol-                       deemed to occur if the foundation is
                                                                    lowing examples:                                           paid an amount of money equal to the
                                                                      Example 1. On July 1, 1972, private founda-              amount involved (as defined in para-
                                                                    tion X leases office space in a building owned             graph (b)(2)(iii) of this section) plus
                                                                    by C, a disqualified person, for 1 year at an              such additional amounts as are nec-
                                                                    annual rent of $6,000. Both X and C are on                 essary to compensate it for the loss of
                                                                    the calendar year basis. The fair rental value
                                                                                                                               the use of the money or other property
                                                                    of such office space for a 1-year period as of
                                                                    July 1, 1972, is $4,200. As of January 1, 1973,            during the period commencing on the
                                                                    the fair rental value of such office space for             date of the act of self-dealing and end-
                                                                    a 1-year period is $5,400, and as of June 30,              ing on the date the transaction is cor-
                                                                    1973, the fair rental value of such office space           rected pursuant to this subparagraph.
                                                                    for a 1-year period is $4,800. In order to cor-              (ii) The provisions of this subpara-
                                                                    rect his acts of self-dealing (within the                  graph may be illustrated by the fol-
                                                                    meaning of paragraph (e)(1) of this section)
                                                                    under this subparagraph on June 30, 1973, C
                                                                                                                               lowing example:
                                                                    must terminate X’s use of the property. In                   Example. Assume the same facts as in ex-
                                                                    addition, C must pay X $1,500, $900 (the ex-               ample (5) of paragraph (b)(4) of this section.
                                                                    cess of $3,000, the amount paid to C from                  Such transaction shall be considered as cor-
                                                                    July 1, 1972, through December 31, 1972, over              rected by a payment of $5,000 by M to V, to-
                                                                    $2,100, the fair rental value for 6 months as of           gether with an additional payment to V of
                                                                    July 1, 1972) plus $600 (the excess of $3,000,             an amount equal to the interest which V
                                                                    the amount paid to C from January 1, 1973,                 could have obtained on $5,000 for the period
                                                                    through June 30, 1973, over $2,400, the fair               commencing on the date of the redemption
                                                                    rental value for 6 months as of June 30, 1973).            and ending on the date the act is corrected.
                                                                      Example 2. On April 1, 1973, D, a disqualified
                                                                    person with respect to private foundation Y,                 (d) Cross reference. For rules relating
                                                                    loans $100,000 to Y at 6 percent interest per              to taxable events that are corrected
                                                                    annum. Both principal and interest are to be               within the correction period, defined in
                                                                    paid on April 1, 1978. The fair market value
                                                                    of the use of the money on April 1, 1973, is 9
                                                                                                                               section 4963 (e), see section 4961 (a), and
                                                                    percent per annum. On April 1, 1974, D and Y               the regulations thereunder.
                                                                    terminate the loan. On such date, the fair                   (e) Act of self-dealing—(1) Number of
                                                                    market value of the use of $100,000 is 10 per-             acts; use of money or property—(i) In gen-
                                                                    cent per annum. In order to correct the act                eral. If a transaction between a private
                                                                    of self-dealing on April 1, 1974, in addition to           foundation and a disqualified person is
                                                                    the termination of the loan from D to Y, D                 determined to be self-dealing (as de-
                                                                    must pay Y $16,000, the excess of $40,000
                                                                    ($100,000×10 percent, the fair market value of             fined in section 4941(d)), for purposes of
                                                                    the use determined at the time of correction,              section 4941 there is generally one act
                                                                    from April 1, 1974, to April 1, 1978) over                 of self-dealing. For the date on which
                                                                    $24,000 (the amount of interest Y would have               such act is treated as occurring, see
                                                                    paid to D from April 1, 1974, to April 1, 1978,            paragraph (a)(2) of this section. If, how-
                                                                    if the loan from D to Y had not been termi-                ever, such transaction relates to the
                                                                    nated).                                                    leasing of property, the lending of
                                                                      (6) Payment of compensation to a dis-                    money or other extension of credit,
                                                                    qualified person. In the case of the pay-                  other use of money or property, or pay-
                                                                    ment of compensation by a private                          ment of compensation, the transaction
                                                                    foundation to a disqualified person for                    will generally be treated (for purposes
                                                                    the performance of personal services                       of section 4941 but not section 507 or
                                                                    which are reasonable and necessary to                      section 6684) as giving rise to an act of
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                                                                    carry out the exempt purpose of such                       self-dealing on the day the transaction
                                                                    foundation, undoing the transaction re-                    occurs plus an act of self-dealing on the

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4941(e)–1

                                                                    first day of each taxable year or por-                     treated as a separate act of self-dealing
                                                                    tion of a taxable year which is within                     with respect to each disqualified person
                                                                    the taxable period and which begins                        for purposes of section 4941. For pur-
                                                                    after the taxable year in which the                        poses of section 507 and, in the case of
                                                                    transaction occurs.                                        a foundation manager, section 6684,
                                                                      (ii) Examples. The provisions of this                    however, such transaction shall be
                                                                    subparagraph may be illustrated by the                     treated as only one act of self-dealing.
                                                                    following examples:                                        For purposes of this subparagraph, an
                                                                      Example 1. On August 31, 1970, X, a private              individual and one or more members of
                                                                    foundation, sells a building to A, a disquali-             his family (within the meaning of sec-
                                                                    fied person with respect to X. A is on the cal-            tion 4946(d)) shall be treated as one per-
                                                                    endar year basis. Under these circumstances,               son, regardless of whether a member of
                                                                    the transaction between A and X is one act                 the family is a disqualified person not
                                                                    of self-dealing which is treated for purposes              only by reason of section 4946(a)(1)(D)
                                                                    of section 4941 as occurring on August 31,
                                                                                                                               but also by reason of another subpara-
                                                                    1970.
                                                                      Example 2. Assume the facts as stated in                 graph of section 4946(a)(1). However,
                                                                    example (1), except that, instead of selling               the liability imposed on a disqualified
                                                                    the building to A, X leases the building to A              person and one or more members of his
                                                                    for a term of 4 years beginning July 31, 1970,             family for joint participation in an act
                                                                    at an annual rental of $12,000. The fair rental            of self-dealing shall be joint and sev-
                                                                    value of the building is also $12,000 per                  eral in accordance with section
                                                                    annum as of July 31, 1970, and throughout                  4941(c)(1) and § 53.4941(c)–1(a).
                                                                    the next 4 years. This transaction is cor-
                                                                    rected on September 30, 1973, in accordance
                                                                                                                                 (ii) Examples. The provisions of this
                                                                    with paragraph (c)(4) of this section. Under               subparagraph may be illustrated by the
                                                                    these circumstances, the transaction be-                   following examples:
                                                                    tween A and X constitutes four separate acts
                                                                                                                                 Example 1. Private foundation X permits A,
                                                                    of self-dealing, which are treated for pur-
                                                                                                                               a substantial contributor to X, and her
                                                                    poses of section 4941 as occurring on July 31,
                                                                                                                               spouse, H, to use an automobile owned by X
                                                                    1970, January 1, 1971, January 1, 1972, and
                                                                                                                               and normally used in its foundation activi-
                                                                    January 1, 1973. Consequently, there are four
                                                                                                                               ties to travel from State Z to State Y for a
                                                                    taxable periods. The first taxable period is
                                                                                                                               vacation on December 1, 1971. The auto-
                                                                    from July 31, 1970, to September 30, 1973; the
                                                                                                                               mobile is then returned to X until December
                                                                    second is from January 1, 1971, to September
                                                                                                                               21, 1971, when X again permits them to use
                                                                    30, 1973; the third is from January 1, 1972, to
                                                                                                                               the automobile to return to their home in
                                                                    September 30, 1973; and the fourth is from
                                                                    January 1, 1973, to September 30, 1973. For                State Z. Under these circumstances, there is
                                                                    purposes of the initial taxes in section                   one act of self-dealing on December 1, 1971,
                                                                    4941(a), the amount involved is $5,000 for the             and a second act of self-dealing on December
                                                                    first taxable period, $12,000 for the second,              21, 1971.
                                                                    $12,000 for the third, and $9,000 for the fourth.            Example 2. Assume the facts as stated in
                                                                    The initial taxes to be paid by A are thus                 example (1), except that B joined A and H on
                                                                    $1,000 ($5,000×5%×4 taxable years or partial               their vacation and traveled with them both
                                                                    taxable years in the taxable period) for the               to and from State Y. B is a disqualified per-
                                                                    first act; $1,800 ($12,000×5%×3) for the second            son with respect to X, but he is not related
                                                                    act; $1,200 ($12,000×5%×2) for the third act;              by blood or marriage to A or H. Assume also
                                                                    and $450 ($9,000×5%×1) for the fourth act.                 that X is not paid for the use of its auto-
                                                                      Example 3. Assume the facts as stated in                 mobile, but that the fair rental value during
                                                                    example (1) of § 53.4941(d)–4(c)(4)(ii). If the de-        the taxable period is $300 (or $100 per person)
                                                                    bentures are held by Y after December 31,                  for a one-way trip between State Y and State
                                                                    1979, the extension of credit will not be ex-              Z. Under these circumstances, there are four
                                                                    cepted from the definition of an act of self-              acts of self-dealing, two with respect to A
                                                                    dealing, because an act of self-dealing will be            and H and two with respect to B. The
                                                                    treated (for purposes of section 4941) as oc-              amount involved with respect to A and H is
                                                                    curring on January 1, 1980.                                $200 for each act, and the amount involved
                                                                                                                               with respect to B is $100 for each act.
                                                                      (2) Number of acts; joint participation
                                                                    by disqualified persons—(i) In general. If                    (f) Fair market value. For purposes of
                                                                    joint participation in a transaction by                    §§ 53.4941(a)–1 through 53.4941 (f)–1, fair
                                                                    two or more disqualified persons con-                      market value shall be determined pur-
                                                                    stitutes self-dealing (such as a joint                     suant to the provisions of § 53.4942(a)–2
                                                                    sale of property to a private foundation                   (c)(4).
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                                                                    or joint use of its money or property),                    [T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amend-
                                                                    such transaction shall generally be                        ed by T.D. 8084, 51 FR 16301, May 2, 1986]

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                                                                    § 53.4941(f)–1                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    § 53.4941(f)–1      Effective dates.                         Subpart C—Taxes on Failure To
                                                                       (a) In general. Except as provided in                          Distribute Income
                                                                    paragraph        (b)   of    this    section,
                                                                    §§ 53.4941(a)–1 through 53.4941(e)–1 shall                  SOURCE: T.D. 7249, 38 FR 768, Jan. 4, 1973,
                                                                    apply to all acts of self-dealing engaged                  unless otherwise noted.
                                                                    in after December 31, 1969.
                                                                                                                               § 53.4942(a)–1 Taxes for failure to dis-
                                                                       (b) Transitional rules—(1) Commitments                       tribute income.
                                                                    made prior to January 1, 1970, between
                                                                                                                                  (a) Imposition of tax—(1) Initial tax.
                                                                    private foundations and government offi-
                                                                                                                               Except as provided in paragraph (b) of
                                                                    cials. Section 4941 shall not apply to a                   this section, section 4942(a) imposes an
                                                                    payment for one or more purposes de-                       excise tax of 15 percent on the undis-
                                                                    scribed in section 170(c) (1) or (2)(B)                    tributed income (as defined in para-
                                                                    made on or after January 1, 1970, by a                     graph (a) of § 53.4942(a)–2) of a private
                                                                    private foundation to a government of-                     foundation for any taxable year which
                                                                    ficial, if such payment is made pursu-                     has not been distributed before the
                                                                    ant to a commitment entered into                           first day of the second (or any suc-
                                                                    prior to such date, but only if such                       ceeding) taxable year following such
                                                                    commitment was made in accordance                          taxable year (if such first day falls
                                                                    with the foundation’s usual practices                      within the taxable period as defined in
                                                                    and is reasonable in amount in light of                    paragraph (c)(1) of this section). For
                                                                    the purposes of the payment. For pur-                      purposes of section 4942 and this sec-
                                                                    poses of this subparagraph, a commit-                      tion, the term distributed means dis-
                                                                    ment will be considered entered into                       tributed as qualifying distributions
                                                                    prior to January 1, 1970, if prior to such                 under section 4942(g). See paragraph
                                                                    date, the amount and nature of the                         (d)(2) of § 53.4942(a)–3 with respect to
                                                                    payments to be made and the name of                        correction of deficient distributions for
                                                                    the payee were entered on the records                      prior taxable years.
                                                                    of the payor, or were otherwise ade-                          (2) Additional tax. In any case in
                                                                    quately evidenced, or the notice of the                    which an initial excise tax is imposed
                                                                                                                               by section 4942(a) on the undistributed
                                                                    payment to be received was commu-
                                                                                                                               income of a private foundation for any
                                                                    nicated to the payee in writing.
                                                                                                                               taxable year, section 4942(b) imposes an
                                                                       (2) Special transitional rule. In the case              additional excise tax on any portion of
                                                                    of an act of self-dealing engaged in                       such income remaining undistributed
                                                                    prior to July 5, 1971, section 4941(a) (1)                 at the close of the correction period (as
                                                                    shall not apply if:                                        defined in paragraph (c)(1) of this sec-
                                                                       (i) The participation (as defined in                    tion). The tax imposed by section
                                                                    § 53.4941(a)–1(a)(3)) by the disqualified                  4942(b) is equal to 100 percent of the
                                                                    person in such act is not willful and is                   amount remaining undistributed at the
                                                                    due to reasonable cause (as defined in                     close of the taxable period.
                                                                    § 53.4941(a)–1(b) (4) and (5)),                               (3) Payment of tax. Payment of the ex-
                                                                       (ii) The transaction would not be a                     cise taxes imposed by section 4942 (a)
                                                                    prohibited transaction if section 503(b)                   or (b) is in addition to, and not in lieu
                                                                    applied, and                                               of, making the distribution of such un-
                                                                       (iii) The act is corrected (within the                  distributed income as required by sec-
                                                                    meaning of § 53.4941(e)–1(c)) within a pe-                 tion 4942. See section 507(a)(2) and the
                                                                    riod ending [insert 90 days after date                     regulations thereunder.
                                                                    on which final regulations under sec-                         (4) Examples. The provisions of this
                                                                                                                               paragraph may be illustrated by the
                                                                    tion 4941 are filed by the Federal Reg-
                                                                                                                               following examples:
                                                                    ister], extended (prior to the expiration
                                                                    of the original period) by any period                         Example 1. M, a private foundation which
                                                                    which the Commissioner determines is                       uses the calendar year as its taxable year,
                                                                                                                               has at the end of 1981, $50,000 of undistributed
                                                                    reasonable and necessary (within the
                                                                                                                               income (as defined in paragraph (a) of
                                                                    meaning of § 53.4941(e)–1(d)) to bring                     § 53.4942 (a)–2) for 1981. As of January 1, 1983,
                                                                    about correction of the act of self-deal-                  $40,000 is still undistributed. On August 15,
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                                                                    ing.                                                       1983, a notice of deficiency with respect to
                                                                                                                               the excise taxes imposed by section 4942 (a)

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–1
                                                                    and (b) is mailed to M under section 6212 (a)                 (2) Improper valuation. For purposes of
                                                                    and the taxable period ends. Thus, under                   subparagraph (1)(ii) of this paragraph,
                                                                    these facts, an initial excise tax of $6,000 (15
                                                                                                                               failure to value an asset properly shall
                                                                    percent of $40,000) is imposed upon M. An ad-
                                                                    ditional excise tax of $40,000 (100 percent of             be regarded as ‘‘not willful’’ and ‘‘due
                                                                    $40,000) is imposed by section 4942(b). Under              to reasonable cause’’ whenever, under
                                                                    section 4961(a), however, if the undistributed             all the facts and circumstances, the
                                                                    income is reduced to zero during the correc-               foundation can show that it has made
                                                                    tion period, this latter tax will not be as-               all reasonable efforts in good faith to
                                                                    sessed, and if assessed, it will be abated, and            value such an asset in accordance with
                                                                    if collected, it will be credited or refunded as
                                                                    an overpayment.
                                                                                                                               the provisions of paragraph (c)(4) of
                                                                       Example 2. Assume the facts as stated in                § 53.4942(a)–2. If a foundation, after full
                                                                    example (1), except that the notice of defi-               disclosure of the factual situation, ob-
                                                                    ciency is mailed to M on September 7, 1984,                tains a bona fide appraisal of the fair
                                                                    and as of January 1, 1984, only $10,000 of the             market value of an asset by a person
                                                                    $50,000 of undistributed income with respect               qualified to make such an appraisal
                                                                    to 1981 is undistributed. Therefore, initial ex-           (whether or not such a person is a dis-
                                                                    cise taxes of $6,000 (15 percent of $40,000, M’s
                                                                    undistributed income from 1981, as of Janu-
                                                                                                                               qualified person with respect to the
                                                                    ary 1, 1983) and $1,500 (15 percent of $10,000,            foundation), and such foundation relies
                                                                    M’s undistributed income from 1981 as of                   upon such appraisal, then failure to
                                                                    January 1, 1984) are imposed by section                    value the asset properly shall ordi-
                                                                    4942(a). If the $10,000 remains undistributed              narily be regarded as ‘‘not willful’’ and
                                                                    as of September 7, 1984, the end of the tax-               ‘‘due to reasonable cause’’. Notwith-
                                                                    able period, an additional excise tax of                   standing the preceding sentence, the
                                                                    $10,000 (100 percent of $10,000, M’s undistrib-
                                                                                                                               failure to obtain such a bona fide ap-
                                                                    uted income from 1981, as of September 7,
                                                                    1984) is imposed by section 4942(b).                       praisal shall not, by itself, give rise to
                                                                                                                               any inference that a foundation’s fail-
                                                                       (b) Exceptions—(1) In general. The ini-                 ure to value an asset properly was will-
                                                                    tial excise tax imposed by section                         ful or not due to reasonable cause.
                                                                    4942(a) shall not apply to the undistrib-                     (3) Example. The provisions of this
                                                                    uted income of a private foundation:                       paragraph may be illustrated by the
                                                                       (i) For any taxable year for which it                   following example:
                                                                    is an operating foundation (as defined
                                                                    in section 4942(j)(3) and the regulations                     Example. In 1976 M, a private foundation
                                                                    thereunder), or                                            which was established in 1975 and which uses
                                                                       (ii) To the extent that the foundation                  the calendar year as the taxable year, incor-
                                                                    failed to distribute any amount solely                     rectly values its assets under paragraph
                                                                                                                               (c)(4) of § 53.4942(a)–2 in a manner which is
                                                                    because of incorrect valuation of assets
                                                                                                                               not willful and is due to reasonable cause. As
                                                                    under paragraph (c)(4) of § 53.4942(a)–2,                  a result of the incorrect valuation of assets,
                                                                    if:                                                        $20,000 which should be distributed with re-
                                                                       (a) The failure to value the assets                     spect to 1976 is not distributed, and as of
                                                                    properly was not willful and was due to                    January 1, 1978, such amount is still undis-
                                                                    reasonable cause,                                          tributed. On March 29, 1978, a notice of defi-
                                                                       (b) Such amount is distributed as                       ciency with respect to the excise taxes im-
                                                                    qualifying distributions (within the                       posed by section 4942 (a) and (b) is mailed to
                                                                    meaning of paragraph (a) of § 53.4942                      M under section 6212(a). On May 5, 1978 (with-
                                                                                                                               in the allowable distribution period), M
                                                                    (a)–3) by the foundation during the al-
                                                                                                                               makes a qualifying distribution of $20,000
                                                                    lowable distribution period (as defined                    which is treated under paragraph (d)(2) of
                                                                    in paragraph (c)(2) of this section),                      § 53.4942(a)–3 as made out of M’s undistrib-
                                                                       (c) The foundation notifies the Com-                    uted income for 1976. M notifies the Commis-
                                                                    missioner that such amount has been                        sioner of its action. Under the stated facts,
                                                                    distributed (within the meaning of sub-                    an initial excise tax of $3,000 (15 percent of
                                                                    division (ii)(b) of this subparagraph) to                  $20,000) would (except for the exception con-
                                                                    correct such failure, and                                  tained in subparagraph (1)(ii) of this para-
                                                                       (d) Such distribution is treated under                  graph) have been imposed by section 4942(a),
                                                                    paragraph (d)(2) of § 53.4942(a)–3 as made                 but since all of the requirements of such sub-
                                                                                                                               paragraph are satisfied no tax is imposed by
                                                                    out of the undistributed income for the
                                                                                                                               section 4942(a).
                                                                    taxable year for which a tax would (ex-
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                                                                    cept for this subdivision) have been im-                     (c) Certain periods. For purposes of
                                                                    posed by section 4942(a).                                  this section—

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                                                                    § 53.4942(a)–2                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                      (1) Taxable period. (i) The term ‘‘tax-                  treated as the end of the allowable dis-
                                                                    able period’’ means, with respect to the                   tribution period.
                                                                    undistributed income of a private foun-                      (3) Cross reference. For rules relating
                                                                    dation for any taxable year, the period                    to taxable events that are corrected
                                                                    beginning with the first day of the tax-                   within the correction period, defined in
                                                                    able year and ending on the earlier of:                    section 4963(e), see section 4961 (a) and
                                                                      (A) The date of mailing of a notice of                   the regulations thereunder.
                                                                    deficiency under section 6212(a) with                        (4) Examples. The provisions of this
                                                                    respect to the initial excise tax im-                      paragraph may be illustrated by the
                                                                    posed under section 4942(a), or                            following examples:
                                                                      (B) The date on which the initial ex-                      Example 1. In 1975 M, a private foundation
                                                                    cise tax imposed under section 4942(a)                     which uses the calendar year as the taxable
                                                                    is assessed.                                               year, made an error in valuing its assets
                                                                    For example, assume M, a private foun-                     which was not willful and was due to reason-
                                                                    dation which uses the calendar year as                     able cause. The error caused M not to dis-
                                                                    the taxable year, has $15,000 of undis-                    tribute $25,000 that should have been distrib-
                                                                                                                               uted with respect to 1975. On March 1, 1978, a
                                                                    tributed income for 1981. A notice of                      notice of deficiency with respect to the ex-
                                                                    deficiency is mailed to M under section                    cise taxes imposed by section 4942 (a) and (b)
                                                                    6212(a) on June 1, 1983. With respect to                   was mailed to M under section 6212(a). With
                                                                    the undistributed income of M for 1981,                    respect to the undistributed income for 1975,
                                                                    the taxable period began on January 1,                     the taxable period is the period from January
                                                                    1981, and ended on June 1, 1983.                           1, 1975, through March 1, 1978, and the allow-
                                                                      (ii) Where a notice of deficiency re-                    able distribution period is the period from Jan-
                                                                                                                               uary 1, 1976, through May 30, 1978 (90 days
                                                                    ferred to in subdivision (i) of this sub-                  after the mailing of the notice of deficiency).
                                                                    paragraph is not mailed because there                        Example 2. Assume the facts as stated in
                                                                    is a waiver of the restrictions on as-                     example (1), except that the Commissioner
                                                                    sessment and collection of a deficiency,                   determines that it is reasonable and nec-
                                                                    or because the deficiency is paid, the                     essary to extend the period for distribution
                                                                    date of filing of the waiver or the date                   through June 15, 1978. Thus, the allowable dis-
                                                                    of such payment, respectively, shall be                    tribution period is from January 1, 1976,
                                                                                                                               through June 15, 1978.
                                                                    treated as the end of the taxable pe-
                                                                    riod.                                                        (d) Effective date. Except as otherwise
                                                                      (2) Allowable distribution period. (i)                   specifically provided, section 4942 and
                                                                    The term ‘‘allowable distribution pe-                      the regulations thereunder shall only
                                                                    riod’’ means the period beginning with                     apply with respect to taxable years be-
                                                                    the first day of the first taxable year                    ginning after December 31, 1969.
                                                                    following the taxable year in which the                    [T.D. 7256, 38 FR 3317, Feb. 7, 1973, as amend-
                                                                    incorrect valuation of foundation as-                      ed by T.D. 8084, 51 FR 16302, May 2, 1986]
                                                                    sets (described in paragraph (b)(1)(ii) of
                                                                    this section) occurred and ending 90                       § 53.4942(a)–2 Computation of undis-
                                                                    days after the date of mailing of a no-                          tributed income.
                                                                    tice of deficiency under section 6212(a)                      (a) Undistributed income. For purposes
                                                                    with respect to the initial excise tax                     of section 4942, the term ‘‘undistributed
                                                                    imposed by section 4942(a). This period                    income’’ means, with respect to any
                                                                    shall be extended by any period in                         private foundation for any taxable year
                                                                    which a deficiency cannot be assessed                      as of any time, the amount by which:
                                                                    under section 6213(a), and any other pe-                      (1) The distributable amount (as de-
                                                                    riod which the Commissioner deter-                         fined in paragraph (b) of this section)
                                                                    mines is reasonable and necessary to                       for such taxable year, exceeds
                                                                    permit a distribution of undistributed                        (2) The qualifying distributions (as
                                                                    income under section 4942.                                 defined in § 53.4942(a)–3) made before
                                                                      (ii) Where a notice of deficiency re-                    such time out of such distributable
                                                                    ferred to in subdivision (i) of this sub-                  amount.
                                                                    paragraph is not mailed because there                         (b) Distributable amount—(1) In gen-
                                                                    is a waiver of the restrictions on as-                     eral. For purposes of paragraph (a) of
                                                                    sessment and collection of a deficiency,                   this section, the term ‘‘distributable
                                                                    or because the deficiency is paid, the                     amount’’ means:
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                                                                    date of filing of the waiver or the date                      (i) For taxable years beginning before
                                                                    of such payment, respectively, shall be                    January 1, 1982, an amount equal to the

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–2

                                                                    greater of the minimum investment re-                        (iii) Limitation. Notwithstanding sub-
                                                                    turn (as defined in paragraph (c) of this                  divisions (i) and (ii) of this subpara-
                                                                    section) or the adjusted net income (as                    graph, a private foundation shall not
                                                                    defined in paragraph (d) of this sec-                      be required to distribute a greater
                                                                    tion); and                                                 amount for any taxable year than
                                                                       (ii) For taxable years beginning after                  would have been required (without re-
                                                                    December 31, 1981, an amount equal to                      gard to this subparagraph) for such
                                                                    the minimum investment return (as de-                      year had the corpus of the section
                                                                    fined in paragraph (c) of this section),                   4947(a) (2) trust to which the distribu-
                                                                    reduced by the sum of the taxes im-                        tion described in subdivision (ii) of this
                                                                    posed on such private foundation for                       subparagraph is attributable been
                                                                    such taxable year under subtitle A of                      taken into account by such foundation
                                                                    the Code and section 4940, and in-                         as an asset described in paragraph (c)
                                                                    creased by the amounts received from                       (1) (i) of this section.
                                                                    trusts described in subparagraph (2) of                      (c) Minimum investment return—(1) In
                                                                    this paragraph.                                            general. For purposes of paragraph (b)
                                                                       (2) Certain trust amounts—(i) In gen-                   of this section, the ‘‘minimum invest-
                                                                    eral. The distributable amount shall be                    ment return’’ for any private founda-
                                                                    increased by the income portion (as de-                    tion for any taxable year is the amount
                                                                    fined in subdivision (ii) of this subpara-                 determined by multiplying:
                                                                    graph) of distributions from trusts de-                      (i) The excess of the aggregate fair
                                                                    scribed in section 4947(a)(2) with re-                     market value of all assets of the foun-
                                                                    spect to amounts placed in trust after                     dation, other than those described in
                                                                    May 26, 1969. If such distributions are                    subparagraph (2) or (3) of this para-
                                                                    made with respect to amounts placed                        graph, over the amount of the acquisi-
                                                                    in trust both on or before and after                       tion indebtedness with respect to such
                                                                    May 26, 1969, such distributions shall be                  assets     (determined    under   section
                                                                    allocated between such amounts to de-                      514(c)(1), but without regard to the tax-
                                                                    termine the extent to which such dis-                      able year in which the indebtedness
                                                                    tributions shall be included in the                        was incurred), by
                                                                    foundation’s distributable amount. For                       (ii) The applicable percentage (as de-
                                                                    rules relating to the segregation of                       fined in subparagraph (5) of this para-
                                                                    amounts placed in trust on or before                       graph) for such year.
                                                                    May 26, 1969, from amounts placed in                       For purposes of subdivision (i) of this
                                                                    trust after such date and to the alloca-                   subparagraph, the aggregate fair mar-
                                                                    tion of income derived from such                           ket value of all assets of the founda-
                                                                    amounts, see paragraph (c) (5) of                          tion shall include the average of the
                                                                    § 53.4947–1.                                               fair market values on a monthly basis
                                                                       (ii) Income portion of distributions to                 of    securities     for which    market
                                                                    private foundations. For purposes of                       quotations are readily available (with-
                                                                    subdivision (i) of this subparagraph,                      in the meaning of subparagraph
                                                                    the income portion of a distribution                       (4)(i)(a) of this paragraph), the average
                                                                    from a section 4947(a)(2) trust to a pri-                  of the foundation’s cash balances on a
                                                                    vate foundation in a particular taxable                    monthly basis (less the cash balances
                                                                    year of such foundation shall be the                       excluded from the computation of the
                                                                    greater of:                                                minimum investment return by oper-
                                                                       (a) The amount of such distribution                     ation of subparagraph (3)(iv) of this
                                                                    which is treated as income (within the                     paragraph), and the fair market value
                                                                    meaning of section 643(b)) of the trust,                   of all other assets (except those assets
                                                                    or                                                         described in subparagraph (2) or (3) of
                                                                       (b) The guaranteed annuity, or fixed                    this paragraph) for the period of time
                                                                    percentage of the fair market value of                     during the taxable year for which such
                                                                    the trust property (determined annu-                       assets are held by the foundation. Any
                                                                    ally), which the private foundation is                     determination of the fair market value
                                                                    entitled to receive for such year, re-                     of an asset required pursuant to the
                                                                    gardless of whether such amount is ac-                     provisions of this subparagraph shall
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                                                                    tually received in such year or in any                     be made in accordance with the rules of
                                                                    prior or subsequent year.                                  subparagraph (4) of this paragraph.

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                                                                    § 53.4942(a)–2                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                       (2) Certain assets excluded. For pur-                   for such exempt purpose is not prac-
                                                                    poses of this paragraph, the assets                        tical (based on the facts and cir-
                                                                    taken into account in determining                          cumstances of the particular case) and
                                                                    minimum investment return shall not                        that definite plans exist to commence
                                                                    include the following:                                     such use within a reasonable period of
                                                                       (i) Any future interest (such as a                      time. Consequently, assets which are
                                                                    vested or contingent remainder, wheth-                     held for the production of income or for
                                                                    er legal or equitable) of a foundation in                  investment (for example, stocks, bonds,
                                                                    the income or corpus of any real or per-                   interest-bearing    notes,   endowment
                                                                    sonal property, other than a future in-                    funds, or, generally, leased real estate)
                                                                    terest created by the private founda-                      are not being used (or held for use) di-
                                                                    tion after December 31, 1969, until all                    rectly in carrying out the foundation’s
                                                                    intervening interests in, and rights to                    exempt purpose, even though the in-
                                                                    the actual possession or enjoyment of,                     come from such assets is used to carry
                                                                    such property have expired, or, al-                        out such exempt purpose. Whether an
                                                                    though not actually reduced to the                         asset is held for the production of in-
                                                                    foundation’s possession, until such fu-                    come or for investment rather than
                                                                    ture interest has been constructively                      used (or held for use) directly by the
                                                                    received by the foundation, as where it                    foundation to carry out its exempt pur-
                                                                    has been credited to the foundation’s                      pose is a question of fact. For example,
                                                                    account, set apart for the foundation,                     an office building used for the purpose
                                                                    or otherwise made available so that the                    of providing offices for employees en-
                                                                    foundation may acquire it at any time                      gaged in the management of endow-
                                                                    or could have acquired it if notice of                     ment funds of the foundation is not
                                                                    intention to acquire had been given;                       being used (or held for use) directly by
                                                                       (ii) The assets of an estate until such                 the foundation to carry out its chari-
                                                                    time as such assets are distributed to                     table, educational, or other similar ex-
                                                                    the foundation or, due to a prolonged                      empt purpose. However, where property
                                                                    period of administration, such estate is                   is used both for charitable, edu-
                                                                    considered terminated for Federal in-                      cational, or other similar exempt pur-
                                                                    come tax purposes by operation of                          poses and for other purposes, if such
                                                                    paragraph (a) of § 1.641(b)–3 of this                      exempt use represents 95 percent or
                                                                    chapter (Income Tax Regulations);                          more of the total use, such property
                                                                       (iii) Any present interest of a founda-                 shall be considered to be used exclu-
                                                                    tion in any trust created and funded by                    sively for a charitable, educational, or
                                                                    another person (see, however, para-                        other similar exempt purpose. If such
                                                                    graph (b) (2) of this section with re-                     exempt use of such property represents
                                                                    spect to amounts received from certain                     less than 95 percent of the total use,
                                                                    trusts described in section 4947(a) (2));                  reasonable allocation between such ex-
                                                                       (iv) Any pledge to the foundation of                    empt and nonexempt use must be made
                                                                    money or property (whether or not the                      for purposes of this paragraph. Prop-
                                                                    pledge may be legally enforced); and                       erty acquired by the foundation to be
                                                                       (v) Any assets used (or held for use)                   used in carrying out its charitable,
                                                                    directly in carrying out the founda-                       educational, or other similar exempt
                                                                    tion’s exempt purpose.                                     purpose may be considered as used (or
                                                                       (3) Assets used (or held for use) in car-               held for use) directly to carry out such
                                                                    rying out the exempt purpose—(i) In gen-                   exempt purpose even though the prop-
                                                                    eral. For purposes of subparagraph                         erty, in whole or in part, is leased for
                                                                    (2)(v) of this paragraph, an asset is                      a limited period of time during which
                                                                    ‘‘used (or held for use) directly in car-                  arrangements are made for its conver-
                                                                    rying out the foundation’s exempt pur-                     sion to the use for which it was ac-
                                                                    pose’’ only if the asset is actually used                  quired, provided such income-pro-
                                                                    by the foundation in the carrying out                      ducing use of the property does not ex-
                                                                    of the charitable, educational, or other                   ceed a reasonable period of time. Gen-
                                                                    similar purpose which gives rise to the                    erally, 1 year shall be deemed to be a
                                                                    exempt status of the foundation, or if                     reasonable period of time for purposes
                                                                    the foundation owns the asset and es-                      of the immediately preceding sentence.
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                                                                    tablishes to the satisfaction of the                       For treatment of the income derived
                                                                    Commissioner that its immediate use                        from such income-producing use, see

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–2

                                                                    paragraph (d)(2)(viii) of this section.                      (e) The reasonable cash balances (as
                                                                    Where the income-producing use con-                        described in subdivision (iv) of this
                                                                    tinues beyond a reasonable period of                       subparagraph) necessary to cover cur-
                                                                    time, the property shall not be deemed                     rent administrative expenses and other
                                                                    to be used by the foundation to carry                      normal and current disbursements di-
                                                                    out its charitable, educational, or                        rectly connected with the foundation’s
                                                                    other similar exempt purpose, but, in-                     charitable, educational, or other simi-
                                                                    stead, as of the time the income-pro-                      lar exempt activities; and
                                                                    ducing use becomes unreasonable, such                        (f) Any property leased by a founda-
                                                                    property shall be treated as disposed of                   tion in carrying out its charitable, edu-
                                                                    within the meaning of paragraph                            cational, or other similar exempt pur-
                                                                    (d)(2)(iii)(b) of this section to the ex-                  pose at no cost (or at a nominal rent)
                                                                    tent that the acquisition of the prop-                     to the lessee or for a program-related
                                                                    erty was taken into account as a quali-                    purpose (within the meaning of section
                                                                    fying distribution (within the meaning                     4944(c)), such as the leasing of ren-
                                                                    of paragraph (a)(2) of § 53.4942(a–3) for                  ovated apartments to low-income ten-
                                                                    any taxable year. If, subsequently, the                    ants at a low rental as part of the les-
                                                                    property is used by the foundation di-                     sor foundation’s program for rehabili-
                                                                    rectly in carrying out its charitable,                     tating a blighted portion of a commu-
                                                                    educational, or other similar exempt                       nity. For treatment of the income de-
                                                                    purpose, a qualifying distribution in                      rived from such use, see paragraph (d)
                                                                    the amount of its then fair market                         (2) (viii) of this section.
                                                                    value, determined in accordance with                         (iii) Functionally related business—(a)
                                                                    the rules contained in subparagraph (4)                    In general. The term ‘‘functionally re-
                                                                    of this paragraph, shall be deemed to                      lated business’’ means:
                                                                    have been made as of the time such ex-                       (1) A trade or business which is not
                                                                    empt use begins.                                           an unrelated trade or business (as de-
                                                                                                                               fined in section 513), or
                                                                      (ii) Illustrations. Examples of assets
                                                                                                                                 (2) An activity which is carried on
                                                                    which are ‘‘used (or held for use) di-
                                                                                                                               within a larger aggregate of similar ac-
                                                                    rectly in carrying out the foundation’s
                                                                                                                               tivities or within a larger complex of
                                                                    exempt purpose’’ include, but are not                      other endeavors which is related (aside
                                                                    limited to, the following:                                 from the need of the organization for
                                                                      (a) Administrative assets, such as of-                   income or funds or the use it makes of
                                                                    fice equipment and supplies which are                      the profits derived) to the charitable,
                                                                    used by employees or consultants of                        educational, or other similar exempt
                                                                    the foundation, to the extent such as-                     purpose of the organization.
                                                                    sets are devoted to and used directly in                     (b) Examples. The provisions of this
                                                                    the administration of the foundation’s                     subdivision may be illustrated by the
                                                                    charitable, educational or other simi-                     following examples:
                                                                    lar exempt activities;
                                                                                                                                 Example 1. X, a private foundation, main-
                                                                      (b) Real estate or the portion of a
                                                                                                                               tains a community of historic value which is
                                                                    building used by the foundation di-                        open to the general public. For the conven-
                                                                    rectly in its charitable, educational, or                  ience of the public, X, through a wholly
                                                                    other similar exempt activities;                           owned, separately incorporated, taxable en-
                                                                      (c) Physical facilities used in such ac-                 tity, maintains a restaurant and hotel in
                                                                    tivities, such as paintings or other                       such community. Such facilities are within
                                                                    works of art owned by the foundation                       the larger aggregate of activities which
                                                                                                                               makes available for public enjoyment the
                                                                    which are on public display, fixtures                      various buildings of historic interest and
                                                                    and equipment in classrooms, research                      which is related to X’s exempt purpose.
                                                                    facilities and related equipment which                     Thus, the operation of the restaurant and
                                                                    under the facts and circumstances                          hotel under such circumstances constitutes a
                                                                    serve a useful purpose in the conduct of                   functionally related business.
                                                                    such activities;                                             Example 2. Y, a private foundation, as part
                                                                                                                               of its medical research program under sec-
                                                                      (d) Any interest in a functionally re-
                                                                                                                               tion 501(c) (3), publishes a medical journal in
                                                                    lated business (as defined in subdivi-                     carrying out its exempt purpose. Space in
                                                                    sion (iii) of this subparagraph) or in a                   the journal is sold for commercial adver-
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                                                                    program-related investment (as defined                     tising. Notwithstanding the fact that the ad-
                                                                    in section 4944(c));                                       vertising activity may be subject to the tax

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                                                                    § 53.4942(a)–2                                                          26 CFR Ch. I (4–1–09 Edition)
                                                                    imposed by section 511, such activity is with-                (3)   Locally    traded,   for   which
                                                                    in a larger complex of endeavors which                     quotations can readily be obtained
                                                                    makes available to the scientific community                from established brokerage firms.
                                                                    and the general public developments with re-                  (b) For purposes of this subdivision,
                                                                    spect to medical research and is therefore a               commonly accepted methods of valu-
                                                                    functionally related business.                             ation must be used in making an ap-
                                                                       (iv) Cash held for charitable, etc. activi-             praisal. Valuations made in accordance
                                                                    ties. For purposes of subdivision (ii)(e)                  with the principles stated in the regu-
                                                                    of this subparagraph, the reasonable                       lations under section 2031 constitute
                                                                    cash balances which a private founda-                      acceptable methods of valuation. This
                                                                    tion needs to have on hand to cover ex-                    paragraph (c)(4)(i)(b) applies only for
                                                                    penses and disbursements described in                      taxable years beginning before January
                                                                                                                               1, 1976. See section 4942(e)(2)(B) and
                                                                    such subdivision will generally be
                                                                                                                               paragraph (c)(4)(i)(c) of this section for
                                                                    deemed to be an amount, computed on
                                                                                                                               special valuation rules that apply for
                                                                    an annual basis, equal to one and one-
                                                                                                                               subsequent taxable years.
                                                                    half percent of the fair market value of                      (c) For purposes of this subdivision (i)
                                                                    all assets described in subparagraph                       and with respect to taxable years be-
                                                                    (1)(i) of this paragraph, without regard                   ginning after December 31, 1975, if the
                                                                    to subdivision (ii)(e) of this subpara-                    private foundation can show that the
                                                                    graph. However, if the Commissioner is                     value of securities determined on the
                                                                    satisfied that under the facts and cir-                    basis of market quotations as provided
                                                                    cumstances an amount in addition to                        by subdivision (i)(a) does not reflect
                                                                    such one and one-half percent is nec-                      the fair market value thereof because:
                                                                    essary for payment of such expenses                           (1) The securities constitute a block
                                                                    and disbursements, then such addi-                         of securities so large in relation to the
                                                                    tional amount may also be excluded                         volume of actual sales on the existing
                                                                    from the amount of assets described in                     market that it could not be liquidated
                                                                    subparagraph (1)(i) of this paragraph.                     in a reasonable time without depress-
                                                                    All remaining cash balances, including                     ing the market.
                                                                    amounts necessary to pay any tax im-                          (2) The securities are securities in a
                                                                    posed by section 511 or any section of                     closely held corporation and sales are
                                                                    chapter 42 of the Code except section                      few or of a sporadic nature, and, or
                                                                    4940, are to be included in the assets de-                    (3) The sale of the securities would
                                                                    scribed in subparagraph (1)(i) of this                     result in a forced or distress sale be-
                                                                    paragraph.                                                 cause the securities could not be of-
                                                                       (4) Valuation of assets—(i) Certain se-                 fered to the public for sale without
                                                                    curities. (a) For purposes of subpara-                     first being registered under the Securi-
                                                                                                                               ties Act of 1933 or because of other fac-
                                                                    graph (1)(i) of this paragraph, a private
                                                                                                                               tors,
                                                                    foundation may use any reasonable
                                                                    method to determine the fair market                        then the price at which the securities
                                                                    value on a monthly basis of securities                     could be sold as such outside the usual
                                                                    for which market quotations are read-                      market, as through an underwriter,
                                                                    ily available, as long as such method is                   may be a more accurate indication of
                                                                                                                               value than market quotations. On the
                                                                    consistently used. For purposes of this
                                                                                                                               other hand, if the securities to be val-
                                                                    subparagraph, market quotations are
                                                                                                                               ued represents a controlling interest,
                                                                    readily available if a security is:
                                                                                                                               either actual or effective, in a going
                                                                       (1) Listed on the New York Stock Ex-                    business, the price at which other lots
                                                                    change, the American Stock Exchange,                       change hands may have little relation
                                                                    or any city or regional exchange in                        to the true value of the securities. No
                                                                    which quotations appear on a daily                         decrease in the fair market value of
                                                                    basis, including foreign securities list-                  any given class of securities deter-
                                                                    ed on a recognized foreign national or                     mined on the basis of market
                                                                    regional exchange;                                         quotations as provided by subdivision
                                                                       (2) Regularly traded in the national                    (i)(a) shall be allowed except as author-
                                                                    or regional over-the-counter market,                       ized by this subdivision, and no such
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                                                                    for which published quotations are                         decrease shall in the aggregate exceed
                                                                    available; or                                              10 percent of the fair market value of

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–2

                                                                    such class of securities so determined                     readily be obtained from established broker-
                                                                    on the basis of market quotations and                      age firms. W consistently follows a practice
                                                                    without regard to this subdivision.                        of valuing its O stock on the 15th day of each
                                                                                                                               month by obtaining a bona fide quotation of
                                                                      (d) In the case of securities described
                                                                                                                               bid and asked prices for the stock from an
                                                                    in subdivision (i)(a) of this subpara-                     established brokerage firm and taking the
                                                                    graph, which are held in trust for, or on                  mean of such prices on that day. If a
                                                                    behalf of, a foundation by a bank or                       quotation is unavailable on the regular valu-
                                                                    other financial institution which val-                     ation date, W values its O stock based upon
                                                                    ues such securities periodically by use                    a bona fide quotation on the first day there-
                                                                    of a computer, a foundation may deter-                     after on which such a quotation is available.
                                                                    mine the correct value of such securi-                     W’s method of valuing its O Corporation
                                                                    ties by use of such computer pricing                       stock is permissible under the rules con-
                                                                                                                               tained in subdivision (i)(a) of this subpara-
                                                                    system, provided the Commissioner has
                                                                                                                               graph.
                                                                    accepted such computer pricing system
                                                                    as a valid method for valuing securities                     (ii) Cash. In order to determine the
                                                                    for Federal estate tax purposes.                           amount of a foundation’s cash bal-
                                                                      (e) This subdivision may be illus-                       ances, the foundation shall value its
                                                                    trated by the following examples:                          cash on a monthly basis by averaging
                                                                       Example 1. U, a private foundation, owns                the amount of cash on hand as of the
                                                                    1,000 shares of the stock of M Corporation. M              first day of each month and as of the
                                                                    stock is regularly traded on the New York                  last day of each month.
                                                                    Stock Exchange. U consistently follows a                     (iii) Common trust funds. If a private
                                                                    practice of valuing its 1,000 shares of M stock            foundation owns a participating inter-
                                                                    on the last trading day of each month based                est in a common trust fund (as defined
                                                                    upon the quoted closing price for M stock.
                                                                    U’s method of valuing its M Corporation
                                                                                                                               in section 584) established and adminis-
                                                                    stock is permissible under the rules con-                  tered under a plan providing for the
                                                                    tained in subdivision (i)(a) of this subpara-              periodic valuation of participating in-
                                                                    graph.                                                     terests during the fund’s taxable year
                                                                       Example 2. Assume the facts as stated in                and the reporting of such valuations to
                                                                    example (1), except that U consistently fol-               participants, the value of the founda-
                                                                    lows a practice of valuing its 1,000 shares of             tion’s interest in the common trust
                                                                    M stock by taking the mean of the closing
                                                                                                                               fund based upon the average of the
                                                                    prices for M stock on the first and last trad-
                                                                    ing days of each month and the trading day                 valuations reported to the foundation
                                                                    nearest the 15th day of each month. U’s                    during its taxable year will ordinarily
                                                                    method of valuing its M stock is permissible               constitute an acceptable method of
                                                                    under the rules contained in subdivision                   valuation.
                                                                    (i)(a) of this subparagraph.                                 (iv) Other assets. (a) Except as other-
                                                                       Example 3. Assume the facts as stated in                wise provided in subdivision (iv)(b) of
                                                                    example (1), except that U consistently fol-
                                                                                                                               this subparagraph, the fair market
                                                                    lows a practice of valuing its M stock by
                                                                    taking the mean of the highest and lowest                  value of assets other than those de-
                                                                    quoted prices for the stock on the last trad-              scribed in subdivisions (i) through (iii)
                                                                    ing day of each month. U’s method of val-                  of this subparagraph shall be deter-
                                                                    uing its M stock is permissible under the                  mined annually. Thus, the fair market
                                                                    rules contained in subdivision (1)(a) of this              value of securities other than those de-
                                                                    subparagraph.                                              scribed in subdivision (i) of this sub-
                                                                       Example 4. V, a private foundation, owns                paragraph shall be determined in ac-
                                                                    1,000 shares of the stock of N Corporation. N
                                                                                                                               cordance with this subdivision (a). If,
                                                                    stock is regularly traded in the national
                                                                    over-the-counter market and published                      however, a private foundation owns
                                                                    quotations of the bid and asked prices for the             voting stock of an issuer of unlisted se-
                                                                    stock are available. V consistently follows a              curities and has, or together with dis-
                                                                    practice of valuing its 1,000 shares of N stock            qualified persons or another private
                                                                    on the first trading day of each month by                  foundation has, effective control of the
                                                                    taking the mean of the bid and asked prices                issuer (within the meaning of § 53.4943–
                                                                    on that day. V’s method of valuing its N Cor-              3(b)(3)(ii), then to the extent that the
                                                                    poration stock is permissible under the rules
                                                                                                                               issuer’s assets consist of shares of list-
                                                                    contained in subdivision (i)(a) of this sub-
                                                                    paragraph.                                                 ed securities issues, such assets shall
                                                                       Example 5. W, a private foundation, owns                be valued monthly on the basis of mar-
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                                                                    1,000 shares of the stock of O Corporation. O              ket quotations or in accordance with
                                                                    stock is locally traded and quotations can                 section 4942(e)(2)(B), if applicable.

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                                                                    § 53.4942(a)–2                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    Thus, for example, if a private founda-                    with an annual valuation made in ac-
                                                                    tion and a disqualified person together                    cordance with subdivision (iv)(a) of
                                                                    own all of the unlisted voting stock of                    this subparagraph, and the most recent
                                                                    a holding company which in turn holds                      such valuation of such assets shall be
                                                                    a portfolio of securities of issues which                  used in computing the foundation’s
                                                                    are listed on the New York Stock Ex-                       minimum investment return. In the
                                                                    change, in determining the net worth                       case of a foundation organized before
                                                                    of the holding company, the underlying                     May 27, 1969, a valuation made in ac-
                                                                    portfolio securities are to be valued                      cordance with this subdivision applica-
                                                                    monthly by reference to market                             ble to the foundation’s first taxable
                                                                    quotations for their issues unless a de-                   year beginning after December 31, 1972,
                                                                    crease in such value is authorized in                      and the 4 succeeding taxable years
                                                                    accordance with section 4942(e)(2)(b).                     must be made no later than the last
                                                                    Such determination may be made by                          day of such first taxable year. In the
                                                                    employees of the private foundation or                     case of a foundation organized after
                                                                    by any other person, without regard to                     May 26, 1969, a valuation made in ac-
                                                                    whether such person is a disqualified                      cordance with this subdivision applica-
                                                                    person with respect to the foundation.                     ble to the foundation’s first taxable
                                                                    A valuation made pursuant to the pro-                      year beginning after February 5, 1973
                                                                    visions of this subdivision, if accepted                   and the succeeding 4 taxable years
                                                                    by the Commissioner, shall be valid                        must be made no later than the last
                                                                    only for the taxable year for which it is                  day of such first taxable year. Any sub-
                                                                    made. A new valuation made in accord-                      sequent valuation made in accordance
                                                                    ance with these provisions is required                     with this subdivision must be made no
                                                                    for the succeeding taxable year.                           later than the last day of the first tax-
                                                                      (b) If the requirements of this sub-                     able year for which such new valuation
                                                                    division are met, the fair market value                    is applicable. A valuation, if properly
                                                                    of any interest in real property, includ-                  made in accordance with the rules set
                                                                    ing any improvements thereon, may be                       forth in this subdivision, will not be
                                                                    determined on a 5-year basis. Such                         disturbed by the Commissioner during
                                                                    value must be determined by means of                       the 5-year period for which it applies
                                                                    a certified, independent appraisal made                    even if the actual fair market value of
                                                                    in writing by a qualified person who is                    such property changes during such pe-
                                                                    neither a disqualified person with re-                     riod.
                                                                    spect to, nor an employee of, the pri-                        (c) For purposes of this subdivision,
                                                                    vate foundation. The appraisal is cer-                     commonly accepted methods of valu-
                                                                    tified only if it contains a statement at                  ation must be used in making an ap-
                                                                    the end thereof to the effect that, in                     praisal. Valuations made in accordance
                                                                    the opinion of the appraiser, the values                   with the principles stated in the regu-
                                                                    placed on the assets appraised were de-                    lations under section 2031 constitute
                                                                    termined in accordance with valuation                      acceptable methods of valuation. The
                                                                    principles regularly employed in mak-                      term appraisal, as used in this subdivi-
                                                                    ing appraisals of such property using                      sion, means a determination of fair
                                                                    all reasonable valuation methods. The                      market value and is not to be con-
                                                                    foundation shall retain a copy of the                      strued in a technical sense peculiar to
                                                                    independent appraisal for its records. If                  particular property or interests there-
                                                                    a valuation made pursuant to the pro-                      in, such as, for example, mineral inter-
                                                                    visions of this subdivision in fact falls                  ests in real property.
                                                                    within the range of reasonable values                         (v) Definition of ‘‘securities’’. For pur-
                                                                    for the appraised property, such valu-                     poses of this subparagraph, the term
                                                                    ation may be used by the foundation                        ‘‘securities’’ includes, but is not lim-
                                                                    for the taxable year for which the valu-                   ited to, common and preferred stocks,
                                                                    ation is made and for each of the suc-                     bonds, and mutual fund shares.
                                                                    ceeding 4 taxable years. Any valuation                        (vi) Valuation date. (a) In the case of
                                                                    made pursuant to the provisions of this                    an asset which is required to be valued
                                                                    subdivision may be replaced during the                     on an annual basis as provided in sub-
                                                                    5-year period by a subsequent 5-year                       division (iv)(a) of this subparagraph,
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                                                                    valuation made in accordance with the                      such asset may be valued as of any day
                                                                    rules set forth in this subdivision, or                    in the private foundation’s taxable

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–2

                                                                    year to which such valuation applies,                        (d) Beginning in 1974, apply with an
                                                                    provided the foundation follows a con-                     applicable percentage of 51⁄2 percent.
                                                                    sistent practice of valuing such asset                       (iii) Short taxable periods. In any case
                                                                    as of such date in all taxable years.                      in which a taxable year referred to in
                                                                      (b) A valuation described in subdivi-                    this subparagraph is a period less than
                                                                    sion (iv)(b) of this subparagraph may be                   12 months, the applicable percentage to
                                                                    made as of any day in the first taxable                    be applied to the amount determined
                                                                    year of the private foundation to which                    under the provisions of subparagraph
                                                                    such valuation is to be applied.                           (1) of this paragraph shall be equal to
                                                                      (vii) Assets held for less than a taxable                the applicable percentage for the cal-
                                                                    year. For purposes of this paragraph,                      endar year in which the short taxable
                                                                    any asset described in subparagraph                        period began multiplied by a fraction,
                                                                    (1)(i) of this paragraph which is held by                  the numerator of which is the number
                                                                    a foundation for only part of a taxable                    of days in such short taxable period
                                                                    year shall be taken into account for                       and the denominator of which is 365.
                                                                    purposes of determining the founda-                          (d) Adjusted net income—(1) Definition.
                                                                    tion’s minimum investment return for                       For purposes of paragraph (b) of this
                                                                    such taxable year by multiplying the                       section, the term ‘‘adjusted net in-
                                                                    fair market value of such asset (as de-                    come’’ means the excess (if any) of:
                                                                    termined pursuant to this subpara-                           (i) The gross income for the taxable
                                                                    graph) by a fraction, the numerator of                     year (including gross income from any
                                                                    which is the number of days in such                        unrelated trade or business) deter-
                                                                    taxable year that the foundation held                      mined with the income modifications
                                                                    such asset and the denominator of                          provided by subparagraph (2) of this
                                                                    which is the number of days in such                        paragraph, over
                                                                    taxable year.                                                (ii) The sum of the deductions (in-
                                                                                                                               cluding deductions directly connected
                                                                      (5) Applicable percentage—(i) In gen-
                                                                                                                               with the carrying on of any unrelated
                                                                    eral. For purposes of paragraph (c)(1)(ii)
                                                                                                                               trade or business), determined with the
                                                                    of this section, except as provided in
                                                                                                                               deduction modifications provided by
                                                                    paragraph (c)(5)(ii) or (iii) of this sec-
                                                                                                                               subparagraph (4) of this paragraph,
                                                                    tion, the applicable percentage is:
                                                                                                                               which would be allowed to a corpora-
                                                                      (a) Six percent for a taxable year be-
                                                                                                                               tion subject to the tax imposed by sec-
                                                                    ginning in 1970 or 1971;
                                                                                                                               tion 11 for the taxable year.
                                                                      (b) Five and a half percent for a tax-
                                                                    able year beginning in 1972;                               In computing the income includible
                                                                                                                               under this paragraph as gross income
                                                                      (c) Five and one-quarter percent for a
                                                                                                                               and the deductions allowable under
                                                                    taxable year beginning in 1973;
                                                                                                                               this paragraph from such income, the
                                                                      (d) Six percent for a taxable year be-                   principles of subtitle A of the Code
                                                                    ginning in 1974 or 1975; and                               shall apply except to the extent such
                                                                      (e) Five percent for taxable years be-                   principles conflict with section 4942
                                                                    ginning after Dec. 31, 1975.                               and the regulations thereunder (with-
                                                                      (ii) Transitional rule. In the case of or-               out regard to this sentence). Except as
                                                                    ganizations organized before May 27,                       otherwise provided in this paragraph,
                                                                    1969 (including organizations deemed to                    no exclusions or deductions from gross
                                                                    be so organized by virtue of the provi-                    income or credits against tax are al-
                                                                    sions of paragraph (e)(2) of this sec-                     lowable under this paragraph. For pur-
                                                                    tion), section 4942 shall, for all pur-                    poses of subdivision (i) of this subpara-
                                                                    poses other than the determination of                      graph, the term ‘‘gross income’’ does
                                                                    the minimum investment return under                        not include gifts, grants, or contribu-
                                                                    section 4942(j)(3)(B)(ii), for taxable                     tions received by the private founda-
                                                                    years:                                                     tion but does include income from a
                                                                      (a) Beginning before January 1, 1972,                    functionally related business (as de-
                                                                    apply without regard to section 4942(e).                   fined in paragraph (c)(3)(iii) of this sec-
                                                                      (b) Beginning in 1972, apply with an                     tion).
                                                                    applicable percentage of 41⁄8 percent,                       (2) Income modifications. The income
                                                                      (c) Beginning in 1973, apply with an                     modifications referred to in subpara-
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                                                                    applicable percentage of 43⁄8 percent                      graph (1)(i) of this paragraph are as fol-
                                                                    and                                                        lows:

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                                                                    § 53.4942(a)–2                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                      (i) Section 103 (relating to interest on                 under section 302(b)(1) if all of the fol-
                                                                    certain     governmental      obligations)                 lowing conditions are satisfied:
                                                                    shall not apply. Hence, interest which                       (a) Such redemption is of stock which
                                                                    would have been excluded from gross                        was owned by a private foundation on
                                                                    income by section 103 shall be included                    May 26, 1969 (or which is acquired by a
                                                                    in gross income.                                           private foundation under the terms of a
                                                                      (ii) Capital gains and losses from the                   trust which was irrevocable on May 26,
                                                                    sale or other disposition of property                      1969, or under the terms of a will exe-
                                                                    shall be taken into account only in an                     cuted on or before such date which are
                                                                    amount equal to any net short-term                         in effect on such date and at all times
                                                                    capital gain (as defined in section                        thereafter);
                                                                    1222(5)) for the taxable year. Long-term                     (b) Such foundation is required to
                                                                    capital gain or loss is not included in                    dispose of such property in order not to
                                                                    the computation of adjusted net in-                        be liable for tax under section 4943 (re-
                                                                    come. Similarly, net section 1231 gains                    lating to taxes on excess business hold-
                                                                    shall be excluded from the computa-                        ings) applied, in the case of a disposi-
                                                                    tion of adjusted net income. However,                      tion before January 1, 1975, without
                                                                    net section 1231 losses shall be included                  taking section 4943(c)(4) into account;
                                                                    in the computation of adjusted net in-                     and
                                                                    come, if such losses are otherwise de-                       (c) Such foundation receives in re-
                                                                    scribed in subparagraph (1)(ii) of this                    turn an amount which equals or ex-
                                                                    paragraph. Any net short-term capital                      ceeds the fair market value of such
                                                                    loss for a given taxable year shall not                    property at the time of such disposi-
                                                                    be taken into account in computing ad-                     tion or at the time a contract for such
                                                                    justed net income for such year or in                      disposition was previously executed in
                                                                    computing net short-term capital gain                      a transaction which would not con-
                                                                    for purposes of determining adjusted                       stitute a prohibited transaction (with-
                                                                    net income for prior or future taxable                     in the meaning of section 503(b) or the
                                                                    years regardless of whether the founda-                    corresponding provisions of prior law).
                                                                    tion is a corporation or a trust.                            (v) If, as of the date of distribution of
                                                                      (iii) The following amounts shall be                     property for purposes described in sec-
                                                                    included in gross income for the tax-                      tion 170(c) (1) or (2)(B), the fair market
                                                                    able year:                                                 value of such property exceeds its ad-
                                                                      (a) Amounts received or accrued as                       justed basis, such excess shall not be
                                                                    repayments of amounts which were                           deemed an amount includible in gross
                                                                    taken into account as a qualifying dis-                    income.
                                                                    tribution within the meaning of para-                        (vi) The income received by a private
                                                                    graph (a)(2)(i) of § 53.4942(a)–3 for any                  foundation from an estate during the
                                                                    taxable year;                                              period of administration of such estate
                                                                      (b) Notwithstanding subdivision (ii)                     shall not be included in such founda-
                                                                    of this subparagraph, gross amounts re-                    tion’s gross income, unless, due to a
                                                                    ceived or accrued from the sale or                         prolonged period of administration,
                                                                    other disposition of property to the ex-                   such estate is considered terminated
                                                                    tent that the acquisition of such prop-                    for Federal income tax purposes by op-
                                                                    erty was taken into account as a quali-                    eration of paragraph (a) of § 1.641(b)–3 of
                                                                    fying distribution (within the meaning                     this chapter (Income Tax Regulations).
                                                                    of paragraph (a)(2)(ii) of § 53.4942(a)–3)                   (vii) Distributions received by a pri-
                                                                    for any taxable year; and                                  vate foundation from a trust created
                                                                      (c) Any amount set aside under para-                     and funded by another person shall not
                                                                    graph (b) of § 53.4942(a)–3 to the extent                  be included in the foundation’s gross
                                                                    it is determined that such amount is                       income. However, with respect to dis-
                                                                    not necessary for the purposes for                         tributions from certain trusts de-
                                                                    which it was set aside.                                    scribed in section 4947(a)(2), see para-
                                                                      (iv) Any distribution received by a                      graph (b)(2) of this section.
                                                                    private foundation from a disqualified                       (viii) Gross income shall include all
                                                                    person in redemption of stock held by                      amounts derived from, or in connection
                                                                    such private foundation in a business                      with, property held by the foundation,
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                                                                    enterprise shall be treated as not es-                     even though the fair market value of
                                                                    sentially equivalent to a dividend                         such property may not be included in

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–2

                                                                    such foundation’s assets for purposes of                   be determined in accordance with the
                                                                    determining minimum investment re-                         rules set forth in subdivision (ii) of this
                                                                    turn by operation of paragraph (c)(3) of                   subparagraph and the adjusted basis
                                                                    this section.                                              for purposes of determining loss from
                                                                       (ix) Gross income shall include                         such disposition shall be determined in
                                                                    amounts treated in a preceding taxable                     accordance with the rules set forth in
                                                                    year as a ‘‘qualifying distribution’’ by                   subdivision (iii) of this subparagraph.
                                                                    operation      of    paragraph     (c)   of                Further, the provisions of this subpara-
                                                                    § 53.4942(a)–3 where such amounts are                      graph do not apply for any purpose
                                                                    not redistributed by the close of the                      other than for purposes of subpara-
                                                                    donee organization’s succeeding tax-                       graph (2)(ii) of this paragraph. For ex-
                                                                    able year in accordance with the rules                     ample, the determination of gain pur-
                                                                    prescribed in such paragraph (c). In                       suant to the provisions of section 341 is
                                                                    such cases, such amounts shall be in-                      determined without regard to this sub-
                                                                    cluded in the donor foundation’s gross                     paragraph.
                                                                    income for such foundation’s first tax-                      (ii) Gain from sale or other disposition.
                                                                    able year beginning after the close of                     The adjusted basis for purposes of de-
                                                                    the donee organization’s first taxable                     termining gain from the sale or other
                                                                    year following the donee organization’s                    disposition of property shall be the
                                                                    taxable year of receipt.                                   greater of:
                                                                       (x) For taxable years ending after Oc-                    (a) The fair market value of such
                                                                    tober 4, 1976, section 4942(f)(2)(D) states                property on December 31, 1969, plus or
                                                                    that section 483 (relating to imputed                      minus all adjustments after December
                                                                    interest on deferred payments) does                        31, 1969, and before the date of sale or
                                                                    not apply to payments made pursuant                        other disposition under the rules of
                                                                    to a binding contract entered into in a                    Part II, Subchapter O, Chapter 1 of the
                                                                    taxable year beginning before January                      Code, provided that the property was
                                                                    1, 1970. Amounts that are not treated as                   held by the private foundation on De-
                                                                    imputed interest because of section                        cember 31, 1969, and continuously
                                                                    4942(f)(2)(D) and this subdivision will                    thereafter to such date of sale or other
                                                                    represent gain or loss from the sale of                    disposition; or
                                                                    property. If the gain or loss is long                        (b) The adjusted basis as determined
                                                                    term capital gain or loss, section                         under the rules of Part II, Subchapter
                                                                    4942(f)(2)(B) excludes the gain or loss                    O, Chapter 1 of the Code, subject to the
                                                                    from the computation of the founda-                        provisions of section 4940(c)(3)(B) and
                                                                    tion’s gross income. If, in a taxable                      the regulations thereunder (and with-
                                                                    year beginning after December 31, 1969,                    out regard to section 362(c)). With re-
                                                                    there is a substantial change in the                       spect to assets acquired prior to De-
                                                                    terms of a contract entered into in a                      cember 31, 1969, which were subject to
                                                                    taxable year beginning before January                      depreciation or depletion, for purposes
                                                                    1, 1970, then any payment made pursu-                      of determining the adjustments to be
                                                                    ant to the changed contract is not con-                    made to basis between the date of ac-
                                                                    sidered a payment made pursuant to a                       quisition and December 31, 1969, and
                                                                    contract entered into in a taxable year                    amount equal to straight-line deprecia-
                                                                    beginning before January 1, 1970.                          tion or cost depletion shall be taken
                                                                    Whether or not a change in the terms                       into account. In addition, in deter-
                                                                    of a contract (for example, a change re-                   mining such adjustments to basis, if
                                                                    lating to time of payment, sales price,                    any other adjustments would have been
                                                                    or obligations under the contract) is a                    made during such period (such as a
                                                                    substantial change is determined by                        change in useful life based upon addi-
                                                                    applying the rules under section 483                       tional data or a change in facts), such
                                                                    and § 1.483–1(b)(4). As used in this sub-                  adjustments shall also be taken into
                                                                    division, a binding contract includes an                   account.
                                                                    irrevocable written option.                                  (iii) Loss from sale or other disposition.
                                                                       (3) Adjusted basis—(i) In general. For                  For purposes of determining loss from
                                                                    purposes of subparagraph (2)(ii) of this                   the sale or other disposition of prop-
                                                                    paragraph, the adjusted basis for pur-                     erty, adjusted basis as determined in
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                                                                    poses of determining gain from the sale                    subdivision (ii)(b) of this subparagraph
                                                                    or other disposition of property shall                     shall apply.

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                                                                    § 53.4942(a)–2                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                      (iv) Examples. The provisions of this                    which is paid or incurred for the pro-
                                                                    subparagraph may be illustrated by the                     duction or collection of gross income.
                                                                    following examples:                                        Operating expenses include compensa-
                                                                                                                               tion of officers, other salaries and
                                                                       Example 1. A private foundation, which
                                                                    uses the cash receipts and disbursements                   wages of employees, interest, rent, and
                                                                    method of accounting, purchased certain de-                taxes. Where only a portion of the
                                                                    preciable real property on December 1, 1969.               property produces (or is held for the
                                                                    On December 31, 1969, the fair market value                production of) income subject to the
                                                                    of such property was $100,000 and its adjusted             provisions of section 4942, and the re-
                                                                    basis (determined under the provisions of                  mainder of the property is used for
                                                                    this subparagraph) was $102,000. The property              charitable, educational, or other simi-
                                                                    was sold on January 2, 1970, for $105,000. Be-
                                                                                                                               lar exempt purposes, the deductions al-
                                                                    cause fair market value on December 31,
                                                                    1969, $100,000, is less than the adjusted basis            lowed by this subparagraph shall be ap-
                                                                    as determined by Part II, Subchapter O,                    portioned between the exempt and non-
                                                                    Chapter 1 of the Code, $102,000, a short-term              exempt uses. Similarly, where the de-
                                                                    gain of $3,000 is recognized (i.e., sale price of          ductions with respect to property used
                                                                    $105,000 less the greater of the two possible              for a charitable, educational, or other
                                                                    bases) for purposes of subparagraph (2)(ii) of             similar exempt purpose exceed the in-
                                                                    this paragraph.                                            come derived from such property, such
                                                                       Example 2. Assume the facts as stated in                excess shall not be allowed as a deduc-
                                                                    example (1), except that the sale price was
                                                                    $95,000. Because the sale price was $7,000 less
                                                                                                                               tion, but may be treated as a quali-
                                                                    than the adjusted basis for loss ($102,000 as              fying distribution described in para-
                                                                    determined by the application of subdivision               graph (a)(2)(ii) of § 53.4942(a)–3. Further-
                                                                    (iii) of this subparagraph), there is a capital            more, this subdivision does not allow
                                                                    loss of $7,000 which may be deducted against               deductions which are not paid or in-
                                                                    short-term capital gains for 1970 (if any) in              curred for the purposes herein pre-
                                                                    determining net short-term capital gain.                   scribed. Thus, for example, the deduc-
                                                                       Example 3. A private foundation, which                  tions prescribed by the following sec-
                                                                    uses the cash receipts and disbursements
                                                                    method of accounting, purchased unim-
                                                                                                                               tions are not allowable: (a) The chari-
                                                                    proved land on December 1, 1969. On Decem-                 table contributions deduction pre-
                                                                    ber 31, 1969, the fair market value of such                scribed under sections 170 and 642(c); (b)
                                                                    property was $110,000 and its adjusted basis               the net operating loss deduction pre-
                                                                    (determined under the provisions of this sub-              scribed under section 172; and (c) the
                                                                    paragraph) was $102,000. The property was                  special deductions prescribed under
                                                                    sold on January 2, 1970, for $105,000. Since the           Part VIII, Subchapter B, Chapter 1 of
                                                                    fair market value on December 31, 1969,                    the Code.
                                                                    $110,000, exceeds the adjusted basis as deter-
                                                                    mined by Part II, Subchapter O, Chapter 1 of
                                                                                                                                 (ii) Special rules. For purposes of com-
                                                                    the Code, $102,000, such fair market value                 puting adjusted net income under sub-
                                                                    will be used for purposes of determining                   paragraph (1) of this paragraph: (a) The
                                                                    gain. However, because the adjusted basis for              allowances for depreciation and deple-
                                                                    purposes of determining gain exceeds the                   tion as determined under section
                                                                    sale price, there is no gain. Furthermore, be-             4940(c)(3)(B) and the regulations there-
                                                                    cause the adjusted basis for purposes of de-               under shall be taken into account, and
                                                                    termining loss, $102,000, is less than sale                (b) section 265 (relating to expenses and
                                                                    price, there is no loss.
                                                                                                                               interest relating to tax-exempt inter-
                                                                      (4) Deduction modifications—(i) In gen-                  est) shall not apply.
                                                                    eral. For purposes of computing ad-                          (e) Certain transitional rules—(1) In
                                                                    justed net income under subparagraph                       general. In the case of organizations or-
                                                                    (1) of this paragraph, no deduction                        ganized before May 27, 1969, section 4942
                                                                    shall be allowed other than all the or-                    shall:
                                                                    dinary and necessary expenses paid or                        (i) Not apply to an organization to
                                                                    incurred for the production or collec-                     the extent its income is required to be
                                                                    tion of gross income or for the manage-                    accumulated pursuant to the manda-
                                                                    ment, conservation, or maintenance of                      tory terms (as in effect on May 26, 1969,
                                                                    property held for the production of                        and at all times thereafter) of an in-
                                                                    such income, except as provided in sub-                    strument executed before May 27, 1969,
                                                                    division (ii) of this subparagraph. Such                   with respect to the transfer of income
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                                                                    expenses include that portion of a pri-                    producing property to such organiza-
                                                                    vate foundation’s operating expenses                       tion, except that section 4942 shall

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–2

                                                                    apply to such organization if the orga-                    foundation which is necessary to re-
                                                                    nization would have been denied ex-                        form, or to excuse such foundation
                                                                    emption had section 504(a) not been re-                    from compliance with, its governing
                                                                    pealed, or would have had its deduc-                       instrument or any other instrument
                                                                    tions under section 642(c) limited had                     (as in effect on May 26, 1969) in order to
                                                                    section 681(c) not been repealed. In ap-                   comply with the provisions of section
                                                                    plying the preceding sentence, in addi-                    4942, and in the case of subparagraph
                                                                    tion to the limitations contained in                       (1)(i) of this paragraph for all taxable
                                                                    section 504(a) or 681(c) before its repeal,                years following the taxable year in
                                                                    section 504(a)(1) or 681(c)(1) shall be                    which such judicial proceeding is ter-
                                                                    treated as not applying to an organiza-                    minated during which the governing
                                                                    tion to the extent its income is re-                       instrument or any other instrument
                                                                    quired to be accumulated pursuant to                       does not permit compliance with such
                                                                    the mandatory terms (as in effect on                       provisions. Thus, the exception de-
                                                                    January 1, 1951, and at all times there-                   scribed in subparagraph (1)(ii) of this
                                                                    after) of an instrument executed before                    paragraph applies after 1971 only for
                                                                    January 1, 1951, with respect to the                       taxable years during which such judi-
                                                                    transfer of income producing property                      cial proceeding is pending. Accord-
                                                                    to such organization before such date,                     ingly, beginning with the first taxable
                                                                    if such transfer was irrevocable on such                   year following the taxable year in
                                                                    date; and                                                  which such judicial proceeding is ter-
                                                                       (ii) Not apply to an organization                       minated, such foundation will be re-
                                                                    which is prohibited by its governing in-                   quired to meet the requirements of sec-
                                                                    strument or other instrument from dis-                     tion 4942 and the regulations there-
                                                                    tributing capital or corpus to the ex-                     under (and be subject to the taxes pro-
                                                                    tent the requirements of section 4942                      vided upon failure to do so) except to
                                                                    are inconsistent with such prohibi-                        the extent such foundation is required
                                                                    tions.                                                     to accumulate income as described in
                                                                       (2) Certain existing organizations. For                 subparagraph (1)(i) of this paragraph,
                                                                    purposes of this section, an organiza-                     even if the governing instrument con-
                                                                    tion will be deemed to be organized                        tinues to prohibit invasion of capital or
                                                                    prior to May 26, 1969, if it is either a                   corpus. In any case where a founda-
                                                                    testamentary trust created under the                       tion’s governing instrument or any
                                                                    will of an individual who died prior to                    other instrument requires accumula-
                                                                    such date or an inter visos trust which                    tion of income as described in subpara-
                                                                    was in existence and irrevocable prior                     graph (1)(i) of this paragraph beginning
                                                                    to such date, even though it is not                        with the first taxable year following
                                                                    funded until after May 26, 1969. Simi-                     the taxable year in which such judicial
                                                                    larly, a split-interest trust, as de-                      proceeding is terminated, the distribut-
                                                                    scribed in section 4947(a)(2) (without re-                 able amount (as defined in paragraph
                                                                    gard to section 4947(a)(2)(C)), which be-                  (b) of this section) for such foundation
                                                                    came irrevocable prior to May 27, 1969,                    shall be reduced by the amount of the
                                                                    and which is treated as a private foun-                    income required to be accumulated.
                                                                    dation under section 4947(a)(1) subse-                     Therefore, if the foundation’s adjusted
                                                                    quent to such date, likewise shall be                      net income for any taxable year equals
                                                                    treated as an organization organized                       or exceeds its minimum investment re-
                                                                    prior to such date. See section 507(b)(2)                  turn for such year, the accumulation
                                                                    and the regulations thereunder with re-                    provisions will be given full effect.
                                                                    spect to the applicability of transi-                      However, if the minimum investment
                                                                    tional rules where there has been a                        return exceeds the adjusted net income
                                                                    merger of two or more private founda-                      for any taxable year, the foundation
                                                                    tions or a reorganization of a private                     will be required to distribute such ex-
                                                                    foundation.                                                cess for such year. For purposes of this
                                                                       (3) Limitation. With respect to taxable                 paragraph, a judicial proceeding will be
                                                                    years beginning after December 31,                         treated as pending only if the founda-
                                                                    1971, subparagraph (1) (i) and (ii) of this                tion is diligently pursuing its judicial
                                                                    paragraph shall apply only for taxable                     remedies and there is no unreasonable
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                                                                    years during which there is pending                        delay in such proceeding for which the
                                                                    any judicial proceeding by the private                     private foundation is responsible.

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                                                                    § 53.4942(a)–3                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                      (4) Examples. The provisions of this                     taxable year would also have been $72,000, be-
                                                                    paragraph may be illustrated by the                        fore other adjustments.
                                                                    following examples:                                        [T.D. 7256, 38 FR 3317, Feb. 5, 1973; 38 FR 4577,
                                                                                                                               Feb. 16, 1973, as amended by T.D. 7486, 42 FR
                                                                      Example 1. X, a private foundation orga-                 24265, May 13, 1977; TD 7594, 44 FR 7138, Feb.
                                                                    nized in 1930, is required by the mandatory                6, 1979; T.D. 7610, 44 FR 21644, Apr. 11, 1979;
                                                                    terms of its governing instrument to accu-                 T.D. 7715, 45 FR 56803, Aug. 26, 1980; T.D. 7849,
                                                                    mulated 25 percent of its adjusted net in-                 47 FR 50857, Nov. 10, 1982; T.D. 7878, 48 FR
                                                                    come and to add such accumulations to cor-                 11943, Mar. 22, 1983]
                                                                    pus. The instrument also prohibits distribu-
                                                                    tion of corpus for any purpose. On July 13,                § 53.4942(a)–3     Qualifying distributions
                                                                    1971, X instituted an action in the appro-                      defined.
                                                                    priate State court to reform the instrument
                                                                    by deleting the accumulation and corpus
                                                                                                                                 (a) In general—(1) Distributions gen-
                                                                    provisions described above. If the court’s                 erally. For purposes of section 4942 and
                                                                    final order reforms the accumulation provi-                the     regulations     thereunder,    the
                                                                    sions to allow distributions of income suffi-              amount of a qualifying distribution of
                                                                    cient to avoid the imposition of a tax under               property (as defined in subparagraph
                                                                    section 4942, then section 4942 applies to X,              (2) of this paragraph) is the fair market
                                                                    regardless of the court’s action with respect              value of such property as of the date
                                                                    to the corpus provisions. However, if the                  such qualifying distribution is made.
                                                                    court rules that the accumulation provision                The amount of an organization’s quali-
                                                                    may not be reformed, section 4942 applies to               fying distributions will be determined
                                                                    X only to the extent provided for in subpara-              solely on the cash receipts and dis-
                                                                    graph (3) of this paragraph, regardless of the             bursements method of accounting de-
                                                                    court’s action with respect to the corpus pro-             scribed in section 446(c)(1).
                                                                    vision.
                                                                                                                                 (2) Definition. The term qualifying dis-
                                                                      Example 2. Private foundation Y was cre-
                                                                    ated by the will of A who died in 1940. Y’s
                                                                                                                               tribution means:
                                                                    governing instrument requires that 40 per-                   (i) Any amount (including program-
                                                                    cent of Y’s adjusted net income be added to                related investments, as defined in sec-
                                                                    corpus each year. In an action commenced                   tion 4944(c), and reasonable and nec-
                                                                    prior to December 31, 1971, a court of com-                essary administrative expenses) paid to
                                                                    petent jurisdiction rules that this accumula-              accomplish one or more purposes de-
                                                                    tion provisions must be complied with. In                  scribed in section 170(c) (1) or (2)(B),
                                                                    Y’s succeeding taxable year its adjusted net               other than any contribution to:
                                                                    income is $120,000, and its minimum invest-                  (a) A private foundation which is not
                                                                    ment return is $140,000. Thus, Y is required               an operating foundation (as defined in
                                                                    to accumulated $48,000 (40 percent of $120,000)            section 4942(j)(3)), except as provided in
                                                                    and shall be allowed to do so. Therefore, Y’s
                                                                                                                               paragraph (c) of this section, or
                                                                    distributable amount for such taxable year
                                                                    shall be the greater of its adjusted net in-                 (b) An organization controlled (di-
                                                                    come ($120,000) or its minimum investment                  rectly or indirectly) by the contrib-
                                                                    return ($140,000), reduced by the amount of                uting private foundation or one or
                                                                    the income required to be accumulated                      more disqualified persons with respect
                                                                    ($48,000) and the taxes imposed by Subtitle A              to such foundation, except as provided
                                                                    of the Code and section 4940 and increased by              in paragraph (c) of this section;
                                                                    any trust distributions described in para-                   (ii) Any amount paid to acquire an
                                                                    graph (b)(2) of this section. Accordingly, Y’s             asset used (or held for use) directly in
                                                                    distributable amount for such taxable year is              carrying out one or more purposes de-
                                                                    $92,000 ($140,000 reduced by $48,000), before              scribed in section 170(c) (1) or (2)(B).
                                                                    other adjustments. If Y’s minimum invest-                  See paragraph (c)(3) of § 53.4942(a)–2 for
                                                                    ment return had been $120,000 instead of
                                                                                                                               the definition of used (or held for use);
                                                                    $140,000, its distributable amount for such
                                                                    taxable year would have been $72,000 ($120,000
                                                                                                                               or
                                                                    reduced by $48,000), before other adjust-                    (iii) Any amount set aside within the
                                                                    ments. Similarly, if Y’s minimum invest-                   meaning of paragraph (b) of this sec-
                                                                    ment return had been $100,000 instead of                   tion.
                                                                    $140,000, its distributable amount for such                  (3) Control. For purposes of subpara-
                                                                                                                               graph (2)(i)(b) of this paragraph, an or-
                                                                                                                               ganization is ‘‘controlled’’ by a founda-
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                                                                                                                               tion or one or more disqualified per-
                                                                                                                               sons with respect to the foundation if

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–3

                                                                    any of such persons may, by aggre-                         make expenditures for a specific chari-
                                                                    gating their votes or positions of au-                     table, educational, or other similar ex-
                                                                    thority, require the donee organization                    empt purpose, if such borrowed funds
                                                                    to make an expenditure, or prevent the                     are in fact expended for such purpose in
                                                                    donee organization from making an ex-                      any taxable year, and if such loan is
                                                                    penditure, regardless of the method by                     thereafter repaid, in whole or in part,
                                                                    which the control is exercised or exer-                    in a taxable year beginning after De-
                                                                    cisable. ‘‘Control’’ of a donee organiza-                  cember 31, 1969, then, at the election of
                                                                    tion is determined without regard to                       the foundation as provided in subdivi-
                                                                    any conditions imposed upon the donee                      sion (ii)(b) of this subparagraph, a
                                                                    as part of the distribution or any other                   qualifying distribution will be deemed
                                                                    restrictions accompanying the dis-                         to have been made at such time or
                                                                    tribution as to the manner in which                        times that such loan principal is so re-
                                                                    the distribution is to be used, unless                     paid rather than at the earlier time
                                                                    such conditions or restrictions are de-                    that the borrowed funds were actually
                                                                    scribed in paragraph (a)(8) of § 1.507–2 of                distributed for such exempt purpose.
                                                                    this chapter (Income Tax Regulations).                       (b) The election described in subdivi-
                                                                    In general, it is the donee, not the dis-                  sion (ii)(a) of this subparagraph is to be
                                                                    tribution, which must be ‘‘controlled’’                    made by attaching a statement to the
                                                                    by the distributing private foundation                     form the private foundation is required
                                                                    for the provisions of subparagraph                         to file under section 6033 for the first
                                                                    (2)(i)(b) of this paragraph to apply.                      taxable year beginning after December
                                                                    Thus, the furnishing of support to an
                                                                                                                               31, 1969, in which a repayment of loan
                                                                    organization and the consequent impo-
                                                                                                                               principal is made. Such statement
                                                                    sition of budgetary procedures upon
                                                                                                                               shall be made a part of such form and
                                                                    that organization with respect to such
                                                                                                                               shall be attached to such form in each
                                                                    support shall not in itself be treated as
                                                                                                                               succeeding taxable year in which any
                                                                    subjecting that organization to the dis-
                                                                                                                               repayment of loan principal is made.
                                                                    tributing foundation’s control within
                                                                                                                               The statement shall set forth the name
                                                                    the meaning of this subparagraph.
                                                                                                                               and address of the lender, the amount
                                                                    Such ‘‘budgetary procedures’’ include
                                                                                                                               borrowed, the specific use made of such
                                                                    expenditure      responsibility   require-
                                                                    ments under section 4945(d)(4). The                        borrowed funds, and the private foun-
                                                                    ‘‘controlled’’ organization need not be                    dation’s election to treat repayments
                                                                    a private foundation; it may be any                        of loan principal as qualifying distribu-
                                                                    type of exempt or nonexempt organiza-                      tions.
                                                                    tion including a school, hospital, oper-                     (iii) Interest. Any payment of interest
                                                                    ating foundation, or social welfare or-                    with respect to a loan described in sub-
                                                                    ganization.                                                division (i) or (ii) of this subparagraph
                                                                       (4) Borrowed funds—(i) In general. For                  shall be treated as a deduction under
                                                                    purposes of this paragraph, if a private                   paragraph (d)(1)(ii) of § 53.4942(a)–2 in
                                                                    foundation borrows money in a par-                         the taxable year in which it is made.
                                                                    ticular taxable year to make expendi-                        (5) Changes in use of an asset. If an
                                                                    tures for a specific charitable edu-                       asset not used (or held for use) directly
                                                                    cational, or other similar purpose, a                      in carrying out one or more purposes
                                                                    qualifying distribution out of such bor-                   described in section 170(c) (1) or (2)(B)
                                                                    rowed funds will, except as otherwise                      is subsequently converted to such a
                                                                    provided in subdivision (ii) of this sub-                  use, the foundation may treat such
                                                                    paragraph, be deemed to have been                          conversion as a qualifying distribution.
                                                                    made only at the time that such bor-                       The amount of such qualifying dis-
                                                                    rowed funds are actually distributed                       tribution shall be the fair market value
                                                                    for such exempt purpose.                                   of the converted asset as of the date of
                                                                       (ii) Funds borrowed before 1970. (a) If a               its conversion. For purposes of the pre-
                                                                    private     foundation    has    borrowed                  ceding sentence, fair market value
                                                                    money in a taxable year beginning be-                      shall be determined by making a valu-
                                                                    fore January 1, 1970, or subsequently                      ation of the converted asset as of the
                                                                    borrows money pursuant to a written                        date of its conversion in accordance
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                                                                    commitment which was binding as of                         with the rules set forth in paragraph
                                                                    the last day of such taxable year, to                      (c)(4) of § 53.4942(a)-2.

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                                                                    § 53.4942(a)–3                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                      (6) Certain foreign organizations—(i) In                 $46,000 ($44,000 of salaries and 10 percent of
                                                                    general. Distributions for purposes de-                    the overhead, both of which are reasonable
                                                                    scribed in section 170(c)(2)(B) to a for-                  administrative expenses paid to accomplish
                                                                                                                               section 170(c) (1) or (2)(B) purposes). Pay-
                                                                    eign organization, which has not re-                       ment (iii) of this example is also a qualifying
                                                                    ceived a ruling or determination letter                    distribution, since it is a contribution for
                                                                    that it is an organization described in                    section 170(c)(2)(B) purposes to an organiza-
                                                                    section 509(a) (1), (2), or (3) or 4942(j)(3),             tion which is not described in subparagraph
                                                                    will be treated as a distribution made                     (2)(i) (a) or (b) of this paragraph. The other 90
                                                                    to an organization described in section                    percent of payment (ii) of this example may
                                                                    509(a) (1), (2), or (3) or 4942(j)(3) if the               constitute items of deduction under para-
                                                                    distributing foundation has made a                         graph (d)(1)(ii) of § 53.4942(a)–2 if such items
                                                                                                                               otherwise qualify under such paragraph.
                                                                    good faith determination that the                            Example 2. On February 21, 1972, N, a pri-
                                                                    donee organization is an organization                      vate foundation which uses the calendar year
                                                                    described in section 509(a) (1), (2), or (3)               as the taxable year, pays $500,000 for real
                                                                    or 4942(j)(3). Such a ‘‘good faith deter-                  property on which it plans to build hospital
                                                                    mination’’ ordinarily will be consid-                      facilities to be used for medical care and
                                                                    ered as made where the determination                       education. The real property produces no in-
                                                                    is based on an affidavit of the donee or-                  come and the hospital facilities will not be
                                                                    ganization or an opinion of counsel (of                    constructed until 1974 according to the set-
                                                                                                                               aside plan submitted to and approved by the
                                                                    the distributing foundation or the                         Commissioner pursuant to paragraph (b) of
                                                                    donee organization) that the donee is                      this section. The purchase of the land is a
                                                                    an organization described in section                       qualifying distribution under subparagraph
                                                                    509(a) (1), (2), or (3) or 4942(j)(3). Such                (2)(ii) of this paragraph. If, however, the
                                                                    an affidavit or opinion must set forth                     property used were to produce rental income
                                                                    sufficient facts concerning the oper-                      for more than a reasonable period of time be-
                                                                    ations and support of the donee organi-                    fore construction of the hospital is begun,
                                                                    zation for the Internal Revenue Service                    then as of the time such rental use becomes
                                                                                                                               unreasonable (i) such purchase would no
                                                                    to determine that the donee organiza-                      longer constitute a qualifying distribution
                                                                    tion would be likely to qualify as an                      under subparagraph (2)(ii) of this paragraph,
                                                                    organization described in section 509(a)                   and (ii) the amount of the qualifying dis-
                                                                    (1), (2), or (3) or 4942(j)(3).                            tribution would be included in N’s gross in-
                                                                      (ii) Definition. For purposes of this                    come.       See      paragraphs    (c)(3)(i) and
                                                                    subparagraph, the term foreign organi-                     (d)(2)(iii)(b) of § 53.4942(a)–2.
                                                                    zation means any organization which is                       Example 3. In 1971, X, a private foundation
                                                                                                                               engaged in holding paintings and exhibiting
                                                                    not described in section 170(c)(2)(A).
                                                                                                                               them to the public, purchases an additional
                                                                      (7) Payment of tax. The payment of                       building to be used to exhibit the paintings.
                                                                    any tax imposed under chapter 42 of                        Such expenditure is a qualifying distribution
                                                                    the Code shall not be treated as a                         under subparagraph (2)(ii) of this paragraph.
                                                                    qualifying distribution.                                   In 1975, X sells the building. Under paragraph
                                                                      (8) Examples. The provisions of this                     (d)(2)(iii)(b) of § 53.4942(a)–2, all of the pro-
                                                                    paragraph may be illustrated by the                        ceeds of the sale (less direct costs of the sale)
                                                                    following examples:                                        are included in X’s adjusted net income for
                                                                                                                               1975.
                                                                      Example 1. M, a private foundation which                   Example 4. In January 1969, M, a private
                                                                    uses the calendar year as the taxable year,                foundation which uses the calendar year as
                                                                    makes the following payments in 1970: (i) a                the taxable year, borrows $10 million to give
                                                                    payment of $44,000 to five employees for con-              to N, a private college, for the construction
                                                                    ducting a foundation program of educational                of a science center. M borrowed the money
                                                                    grants for research and study; (ii) $20,000 for            from X, a commercial bank. M is to repay X
                                                                    various items of overhead, 10 percent of                   at the rate of $1.1 million per year ($1 million
                                                                    which is attributable to the activities of the             principal and $0.1 million interest) for 10
                                                                    employees mentioned in payment (i) of this                 years, beginning in January, 1973. M distrib-
                                                                    example and the other 90 percent of which is               uted $5 million of the borrowed funds to N in
                                                                    attributable to administrative expenses                    February 1969 and the other $5 million in
                                                                    which were not paid to accomplish any sec-                 March 1970. M files a statement with the
                                                                    tion 170(c) (1) or (2)(B) purpose; and (iii) a             form it is required to file under section 6033
                                                                    $100,000 general purpose grant paid to an edu-             for 1973 which contains the information re-
                                                                    cational institution described in section                  quired by subparagraph (4)(ii)(b) of this para-
                                                                    170(b)(1)(A)(ii) which is not controlled by M              graph. Pursuant to M’s election, each repay-
                                                                    or any disqualified persons with respect to                ment of loan principal constitutes a quali-
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                                                                    M. Payments (i) and (ii) of this example are               fying distribution in the year of repayment.
                                                                    qualifying distributions to the extent of                  Accordingly, the distribution of $5 million to

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–3
                                                                    N in March 1970 will not be treated as a                   ited to, projects in which relatively
                                                                    qualifying distribution. Each payment of in-               long-term grants or expenditures must
                                                                    terest ($0.1 million annually) with respect to             be made in order to assure the con-
                                                                    M’s loan from X is treated as a deduction
                                                                    under paragraph (d)(1)(ii) of § 53.4942(a)–2 in
                                                                                                                               tinuity      of    particular   charitable
                                                                    the taxable year in which it is made.                      projects or program-related invest-
                                                                      Example 5. Private foundation Y engages in               ments (as defined in section 4944(c)) or
                                                                    providing care for the aged. Y makes a dis-                where grants are made as part of a
                                                                    tribution of cash to H, a hospital described               matching-grant program. Such projects
                                                                    in section 170(b)(1)(A)(iii) which is not con-             include, for example, a plan to erect a
                                                                    trolled by Y or any disqualified person with               building to house the direct charitable,
                                                                    respect to Y. The distribution is made sub-                educational, or other similar exempt
                                                                    ject to the conditions that H will invest the
                                                                    money as a separate fund which will bear a                 activity of the private foundation (such
                                                                    name commemorating the creator of Y and                    as a museum building in which paint-
                                                                    will use the income from such fund only for                ings are to be hung), even though the
                                                                    H’s exempt hospital purposes which relate to               exact location and architectural plans
                                                                    care for the aged. Under these cir-                        have not been finalized; a plan to pur-
                                                                    cumstances, the distribution from Y to H is                chase an additional group of paintings
                                                                    a qualifying distribution pursuant to sub-                 offered for sale only as a unit that re-
                                                                    paragraph (2)(i) of this paragraph.
                                                                                                                               quires an expenditure of more than one
                                                                      (b) Certain set-asides—(1) In general.                   year’s income; or a plan to fund a spe-
                                                                    An amount set aside for a specific                         cific research program that is of such
                                                                    project that is for one or more of the                     magnitude as to require an accumula-
                                                                    purposes described in section 170(c) (1)                   tion of funds before beginning the re-
                                                                    or (2)(B) may be treated as a qualifying                   search, even though not all of the de-
                                                                    distribution in the year in which set                      tails of the program have been final-
                                                                    aside (but not in the year in which ac-                    ized.
                                                                    tually paid), if the requirements of sec-                     (3) Cash distribution test; in general.
                                                                    tion 4942(g)(2) and this paragraph (b)                     The cash distribution test is satisfied
                                                                    are satisfied. The requirements of this                    if:
                                                                    paragraph (b) are satisfied if the pri-                       (i) The specific project for which the
                                                                    vate foundation establishes to the sat-                    amount is set aside will not be com-
                                                                    isfaction of the Commissioner that the                     pleted before the end of the taxable
                                                                    amount set aside will be paid for the                      year in which the set-aside is made,
                                                                    specific project within 60 months after                       (ii) The private foundation actually
                                                                    it is set aside, and                                       distributes, in cash or its equivalent
                                                                      (i) The set-aside satisfies the suit-                    and for one or more of the purposes de-
                                                                    ability test described in subparagraph                     scribed in section 170(c) (1) or (2)(B),
                                                                    (2) of this paragraph, or                                  the      ‘‘start-up    period   minimum
                                                                      (ii) With respect to a set-aside made                    amount’’ described in subparagraph (4)
                                                                    in a taxable year beginning after De-                      of this paragraph during the private
                                                                    cember 31, 1974, the private foundation                    foundation’s start-up period, and
                                                                    satisfies the cash distribution test de-                      (iii) The private foundation actually
                                                                    scribed in subparagraph (3) of this                        distributes, in cash or its equivalent
                                                                    paragraph.                                                 and for one or more of the purposes de-
                                                                    If the suitability test or cash distribu-                  scribed in section 170(c) (1) or (2)(B),
                                                                    tion test is otherwise satisfied, the 60                   the ‘‘full-payment period minimum
                                                                    month period for paying the amount                         amount’’ described in subparagraph (5)
                                                                    set aside may, for good cause shown, be                    of this paragraph in each taxable year
                                                                    extended by the Commissioner.                              of the private foundation’s full-pay-
                                                                      (2) Suitability test. The suitability test               ment period.
                                                                    is satisfied if the private foundation es-                 For purposes of the cash distribution
                                                                    tablishes to the satisfaction of the                       test, an amount set aside will be treat-
                                                                    Commissioner that the specific project                     ed as distributed in the year in which
                                                                    for which the amount is set aside is one                   actually paid and not in the year in
                                                                    that can be better accomplished by the                     which set aside.
                                                                    set-aside than by the immediate pay-                          (4) Minimum distribution required dur-
                                                                    ment of funds. Specific projects that                      ing start-up period—(i) Start-up period.
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                                                                    can be better accomplished by the use                      For private foundations created before
                                                                    of a set-aside include, but are not lim-                   January 1, 1972, the start-up period is

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                                                                    § 53.4942(a)–3                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    the four taxable years immediately                         dation after that date), a distribution
                                                                    preceding the taxable year beginning in                    actually made during the taxable year
                                                                    calendar year 1976. For private founda-                    in which the foundation was created
                                                                    tions created after December 31, 1971                      (the year immediately preceding the
                                                                    (or for organizations that first become                    first taxable year of the private foun-
                                                                    private foundations after that date),                      dation’s start-up period) may be treat-
                                                                    the start-up period is the four taxable                    ed as a distribution actually made dur-
                                                                    years following the taxable year in                        ing the start-up period. In addition, a
                                                                    which the private foundation was cre-                      distribution actually made by a private
                                                                    ated (or otherwise became a private                        foundation within 51⁄2 months after the
                                                                    foundation). For purposes of this sub-                     end of the start-up period will be treat-
                                                                    paragraph (4), a private foundation will                   ed as a distribution actually made dur-
                                                                    be considered ‘‘created’’ in the taxable                   ing the start-up period if:
                                                                    year in which the private foundation’s                       (a) The private foundation was un-
                                                                    distributable amount (as determined                        able to determine the distributable
                                                                    under section 4942(d)) first exceeds $500.                 amount for the fourth taxable year of
                                                                      (ii) Start-up period minimum amount.                     the start-up period until after the end
                                                                    The amount that a private foundation                       of such period, and
                                                                    must actually distribute in cash or its                      (b) The private foundation actually
                                                                    equivalent during the private founda-                      made distributions prior to the end of
                                                                    tion’s start-up period is not less than                    the start-up period based upon a rea-
                                                                    the sum of:                                                sonable estimate of the private founda-
                                                                      (a) Twenty percent of the private                        tion’s distributable amount for the
                                                                    foundation’s distributable amount (as                      fourth taxable year of the start-up pe-
                                                                    determined under section 4942(d)) for                      riod.
                                                                    the first taxable year of the start-up                       (v) Examples. The provisions of this
                                                                    period,                                                    subparagraph (4) may be illustrated by
                                                                      (b) Forty percent of the private foun-                   the following examples:
                                                                    dation’s distributable amount for the                        Example 1. F, a private foundation created
                                                                    second taxable year of the start-up pe-                    on January 1, 1975, uses the calendar year as
                                                                    riod,                                                      its taxable year. The start-up period for F is
                                                                      (c) Sixty percent of the private foun-                   January 1, 1976 through December 31, 1979. F
                                                                                                                               has distributable amounts under section
                                                                    dation’s distributable amount for the
                                                                                                                               4942(d) for taxable years 1976 through 1979 in
                                                                    third taxable year of the start-up pe-                     the following amounts: 1976, $100,000; 1977,
                                                                    riod, and                                                  $120,000; 1978, $150,000; 1979, $200,000. F’s start-
                                                                      (d) Eighty percent of the private                        up period minimum amount is the sum of the
                                                                    foundation’s distributable amount for                      following amounts: 20% of $100,000 ($20,000);
                                                                    the fourth taxable year of the start-up                    40% of $120,000 ($48,000); 60% of $150,000
                                                                    period.                                                    ($90,000); and 80% of $200,000 ($160,000); which
                                                                      (iii) Timing of distributions. The re-                   equals $318,000. Thus F is required to actu-
                                                                                                                               ally distribute at least $318,000 in cash or its
                                                                    quirement that a private foundation                        equivalent during the start-up period.
                                                                    distribute the start-up period min-                          Example 2. F, a private foundation created
                                                                    imum amount during the start-up pe-                        in 1969, uses the calendar year as its taxable
                                                                    riod is a requirement that such amount                     year. F’s start-up period is the calendar
                                                                    be distributed before the end of the                       years 1972 through 1975. F makes two cash
                                                                    start-up period, and is not a require-                     distributions in 1972. The first distribution is
                                                                    ment that any portion of such amount                       made on account of a set-aside made in 1969.
                                                                                                                               Under section 4942(g), that distribution is
                                                                    be distributed in any one taxable year                     treated as a qualifying distribution made in
                                                                    of the start-up period.                                    1969. The second distribution is treated under
                                                                      (iv) Distribution actually made during                   section 4942(h) has made out of F’s undistrib-
                                                                    start-up period. In general, only a dis-                   uted income for 1971. In addition, F makes a
                                                                    tribution actually made during the                         cash distribution in 1976 that is treated
                                                                    start-up period is taken into account in                   under section 4942(h) as made out of F’s un-
                                                                    determining whether a private founda-                      distributed income for 1975. In determining
                                                                                                                               whether F has distributed its start-up period
                                                                    tion has distributed the start-up period
                                                                                                                               minimum amount within the start-up period,
                                                                    minimum amount. However, in the                            the 1972 distributions are both taken into ac-
                                                                    case of a private foundation created                       count because they were actually made dur-
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                                                                    after December 31, 1971 (or an organiza-                   ing F’s start-up period. The 1976 distribution
                                                                    tion that first became a private foun-                     is not taken into account, however, because

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                                                                    Internal Revenue Service, Treasury                                                          § 53.4942(a)–3
                                                                    that distribution was not actually made dur-               has distributed the full-payment period
                                                                    ing F’s start-up period.                                   minimum amount for such year.
                                                                      (5) Minimum distribution required dur-                     (v) Examples. The provisions of this
                                                                    ing full-payment period—(i) Full-payment                   subparagraph (5) may be illustrated by
                                                                    period. A private foundation’s full-pay-                   the following examples:
                                                                    ment period includes each taxable year                       Example 1. F, a private foundation created
                                                                    that begins after the end of the private                   on January 1, 1973, uses the calendar year as
                                                                    foundation’s start-up period.                              its taxable year. F has a start-up period of
                                                                      (ii) Full-payment period minimum                         January 1, 1974, through December 31, 1977,
                                                                    amount. The amount that a private                          and a full-payment period that includes
                                                                                                                               every taxable year beginning after December
                                                                    foundation must actually distribute in                     31, 1977. F’s distributable amount (as deter-
                                                                    cash or its equivalent in a taxable year                   mined under section 4942(d)) for 1978 is
                                                                    of the private foundation’s full-pay-                      $500,000. Thus, F’s full-payment period min-
                                                                    ment period is not less than 100 percent                   imum amount for 1978 is $500,000. During 1978
                                                                    of the private foundation’s distribut-                     F distributes $100,000 in cash to Charity X
                                                                    able amount determined under section                       and $400,000 in cash to Charity Y on account
                                                                    4942(d) (without regard to section                         of a set-aside made in 1973. F has distributed
                                                                                                                               its full-payment period minimum amount for
                                                                    4942(i)) with respect to the taxable                       1978 because it has made actual cash dis-
                                                                    year.                                                      tributions during that year which total
                                                                      (iii) Carryover of distributions in excess               $500,000. However, F has made qualifying dis-
                                                                    of full-payment period minimum amount.                     tributions (as determined under section
                                                                    If, in a taxable year beginning after De-                  4942(g)) with respect to 1978 of only $100,000.
                                                                    cember 31, 1975, a private foundation                      In order to avoid liability for the tax on un-
                                                                    distributes an amount in excess of the                     distributed income under section 4942(a), F
                                                                                                                               must distribute or set aside an additional
                                                                    full-payment period minimum amount                         $400,000 before January 1, 1980.
                                                                    for the taxable year, the excess shall be                    Example 2. Assume the facts as stated in
                                                                    used to reduce the full-payment period                     Example (1) except that in 1978 F makes cash
                                                                    minimum amount in the taxable years                        distributions totaling $600,000. Since the
                                                                    in the adjustment period. The amount                       total cash distributions made in 1978
                                                                    of the excess distribution used to re-                     ($600,000) exceed the full-payment period
                                                                    duce the full-payment period minimum                       minimum amount for 1978 ($500,000), there
                                                                                                                               exists a $100,000 excess which must be used
                                                                    amount in each successive taxable year
                                                                                                                               by F to reduce its full-payment period min-
                                                                    of the adjustment period shall be equal                    imum amounts for the years 1979–1983 (the
                                                                    to the amount of such excess less the                      taxable years in the adjustment period with
                                                                    sum of the full-payment period min-                        respect to the 1978 excess). Therefore, if F’s
                                                                    imum amounts for all prior taxable                         distributable amount (as determined under
                                                                    years in the adjustment period to                          section 4942(d)) for 1979 is $500,000, F’s full-
                                                                    which the excess was previously ap-                        payment period minimum amount for 1979 is
                                                                    plied. The taxable years in the adjust-                    $400,000 ($500,000–$100,000).
                                                                    ment period are the five taxable years                       (6) Failure to distribute minimum
                                                                    immediately following the taxable year                     amounts—(i) In general. If a private
                                                                    in which the excess distribution is                        foundation fails to actually distribute
                                                                    made. Any distribution in excess of the                    the start-up period minimum amount
                                                                    full-payment period minimum amount                         during the start-up period or, except as
                                                                    made during a taxable year of the ad-                      described in subdivision (ii) of this sub-
                                                                    justment period shall not be taken into                    paragraph (6), if a private foundation
                                                                    account under this subparagraph (iii)                      fails to actually distribute the full-
                                                                    until any earlier excess has been com-                     payment period minimum amount dur-
                                                                    pletely applied against full-payment                       ing a taxable year of the full-payment
                                                                    period minimum amounts during its                          period, then any set-aside made by the
                                                                    adjustment period.                                         private foundation during the start-up
                                                                      (iv) Distributions actually made during                  period (if the failure relates to the
                                                                    a taxable year. Except as described in                     start-up period) or during the taxable
                                                                    subdivision (ii) of subparagraph (6),                      year (if the failure relates to the full-
                                                                    only a distribution actually made dur-                     payment period) that was not approved
                                                                    ing a taxable year of the full-payment                     by the Commissioner under the suit-
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                                                                    period is taken into account in deter-                     ability test described in subparagraph
                                                                    mining whether a private foundation                        (2) of this paragraph will not be treated

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                                                                    § 53.4942(a)–3                                                          26 CFR Ch. I (4–1–09 Edition)

                                                                    as a qualifying distribution. Further,                     foundation must apply for the Commis-
                                                                    any set-aside made after the year of                       sioner’s approval of the set-aside before
                                                                    such a failure to so distribute a min-                     the end of the taxable year in which
                                                                    imum amount will be treated as a                           the amount is set aside. The Commis-
                                                                    qualifying distribution only if the                        sioner will either approve or disapprove
                                                                    Commissioner approves the set-aside                        the set-aside in writing. An otherwise
                                                                    under the suitability test. In any case                    proper set-aside will not be treated as a
                                                                    in which a set-aside ceases to be treat-                   qualifying distribution under this para-
                                                                    ed as a qualifying distribution as a re-                   graph (b) with respect to a taxable year
                                                                    sult of a failure to distribute the full-                  if the Commissioner’s approval is not
                                                                    payment period minimum amount, a                           sought before the end of the taxable
                                                                    private foundation may be assessed a                       year in which the amount is actually
                                                                    deficiency under section 4942(a) within                    set aside. To obtain approval by the
                                                                    the     period    described    in   section                Commissioner for a set-aside under the
                                                                    6501(n)(3).                                                suitability test, the private foundation
                                                                      (ii) Correction of certain failures to dis-              must write to Commissioner of Inter-
                                                                    tribute. If a private foundation’s failure                 nal Revenue, Attention: OP:E:EO:T,
                                                                    to distribute the full-payment period                      1111 Constitution Avenue, NW., Wash-
                                                                    minimum amount during a taxable                            ington, DC 20224, and include:
                                                                    year of the full-payment period was not                      (a) A statement describing the nature
                                                                    willful and was due to reasonable                          and purposes of the specific project and
                                                                    cause, the private foundation may cor-                     the amount of the set-aside for which
                                                                    rect the failure to so distribute. Cor-                    approval is requested;
                                                                    rection will be achieved if the private                      (b) A statement describing the
                                                                    foundation distributes within the cor-                     amounts and approximate dates of any
                                                                    rection period cash or its equivalent in                   planned additions to the set-aside after
                                                                    an amount not less than the difference                     its initial establishment;
                                                                    between the full-payment period min-                         (c) A statement of the reasons why
                                                                    imum amount for the taxable year and                       the project can be better accomplished
                                                                    the amount actually distributed during                     by a set-aside than by the immediate
                                                                    the taxable year. The correction period                    payment of funds;
                                                                    is the correction period as defined in                       (d) A detailed description of the
                                                                    section 4962(e), determined with respect                   project, including estimated costs,
                                                                    to the earliest occurring taxable event                    sources of any future funds expected to
                                                                    (as defined in section 4962(e)(2)(A)) that                 be used for completion of the project,
                                                                    would result if the failure to distribute                  and the location or locations (general
                                                                    a    full-payment      period     minimum                  or specific) of any physical facilities to
                                                                    amount were not corrected. The addi-                       be acquired or constructed as part of
                                                                    tional distribution will be treated for                    the project; and
                                                                    purposes of subparagraph (5) of this                         (e) A statement by an appropriate
                                                                    paragraph as made during the taxable                       foundation manager (as defined in sec-
                                                                    year with respect to which the failure                     tion 4946(b)) that the amounts to be set
                                                                    occurred. If a private foundation fails                    aside will actually be paid for the spe-
                                                                    to distribute the full-payment period                      cific project within a specified period
                                                                    minimum amount during a taxable                            of time that ends not more than 60
                                                                    year of the full-payment period be-                        months after the date of the first set-
                                                                    cause such amount can be determined                        aside, or a statement showing good
                                                                    only after the end of the taxable year,                    cause why the period for paying the
                                                                    no ‘‘willful failure to distribute’’ the                   amount set aside should be extended
                                                                    full-payment period minimum amount                         (including a showing that the proposed
                                                                    will occur if the private foundation                       project could not be divided into two or
                                                                    makes an addition