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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,
cprice-sewell on PRODPC61 with CFR
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
11
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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
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
(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
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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
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§ 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
cprice-sewell on PRODPC61 with CFR
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,
20
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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
cprice-sewell on PRODPC61 with CFR
and use—(i) In general. An importer may
(B) Is listed in the current Table. elect to treat the entry of products
21
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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-
cprice-sewell on PRODPC61 with CFR
corporated in such article, but only if porated into the receivers. Thus, in the case
the importer— of television receivers that were assembled
22
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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
cprice-sewell on PRODPC61 with CFR
them for shipping in a protective packing as a material in the product’s manufac-
material manufactured with ODCs. Under ture.
23
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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
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
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.
cprice-sewell on PRODPC61 with CFR
—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.
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
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 .........................
cprice-sewell on PRODPC61 with CFR
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—
cprice-sewell on PRODPC61 with CFR
[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
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
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
35
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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.
cprice-sewell on PRODPC61 with CFR
mined under paragraph (c)(1) of this (iii) The aggregate tax that would
section. (but for section 4682(d), section 4682(g),
36
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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
cprice-sewell on PRODPC61 with CFR
(2) Relies on the certificate in good registration has been revoked or sus-
faith. pended.
37
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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
cprice-sewell on PRODPC61 with CFR
(Taxpayer identifying number of seller) llllllllllllllllllllllll
are purchased for export by Purchaser. llllllllllllllllllllllll
38
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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
cprice-sewell on PRODPC61 with CFR
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-
cprice-sewell on PRODPC61 with CFR
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
40
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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.
41
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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.
cprice-sewell on PRODPC61 with CFR
53.6091–1 Place for filing chapter 42 tax re-
turns.
42
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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
cprice-sewell on PRODPC61 with CFR
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
43
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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
cprice-sewell on PRODPC61 with CFR
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
44
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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-
cprice-sewell on PRODPC61 with CFR
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
45
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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)).
cprice-sewell on PRODPC61 with CFR
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
46
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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
cprice-sewell on PRODPC61 with CFR
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
47
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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.
48
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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
cprice-sewell on PRODPC61 with CFR
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
49
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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
cprice-sewell on PRODPC61 with CFR
the transaction with someone other an estate or trustee of a revocable
than a disqualified person only at a se- trust either:
50
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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
cprice-sewell on PRODPC61 with CFR
(5) Control. For purposes of this para- of subparagraph (5) of this paragraph)
graph, an organization is controlled by or between two disqualified persons
51
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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
cprice-sewell on PRODPC61 with CFR
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
52
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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
cprice-sewell on PRODPC61 with CFR
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
53
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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-
cprice-sewell on PRODPC61 with CFR
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,
54
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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
cprice-sewell on PRODPC61 with CFR
(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
cprice-sewell on PRODPC61 with CFR
fully and without reasonable cause provide its managers both the non-
with respect to the act or failure to act compensatory and the compensatory
56
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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-
cprice-sewell on PRODPC61 with CFR
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
57
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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
cprice-sewell on PRODPC61 with CFR
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
58
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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
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
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
60
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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
cprice-sewell on PRODPC61 with CFR
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-
cprice-sewell on PRODPC61 with CFR
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-
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
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.
cprice-sewell on PRODPC61 with CFR
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
65
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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
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
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-
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
$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
cprice-sewell on PRODPC61 with CFR
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).
cprice-sewell on PRODPC61 with CFR
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,
cprice-sewell on PRODPC61 with CFR
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
74
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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.
cprice-sewell on PRODPC61 with CFR
tablishes to the satisfaction of the For treatment of the income derived
Commissioner that its immediate use from such income-producing use, see
76
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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
77
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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
cprice-sewell on PRODPC61 with CFR
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-
cprice-sewell on PRODPC61 with CFR
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,
cprice-sewell on PRODPC61 with CFR
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
80
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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-
cprice-sewell on PRODPC61 with CFR
applicable percentage of 43⁄8 percent graph (1)(i) of this paragraph are as fol-
and lows:
81
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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,
cprice-sewell on PRODPC61 with CFR
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
82
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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
cprice-sewell on PRODPC61 with CFR
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
cprice-sewell on PRODPC61 with CFR
expenses include that portion of a pri- producing property to such organiza-
vate foundation’s operating expenses tion, except that section 4942 shall
84
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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
cprice-sewell on PRODPC61 with CFR
years during which there is pending delay in such proceeding for which the
any judicial proceeding by the private private foundation is responsible.
85
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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.
cprice-sewell on PRODPC61 with CFR
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