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Instructions for Form 4720 2003 Tax Year

Instructions for Form 4720 - Notices

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Table of Contents

Specific Instructions for
Page 1

Question B.   To avoid additional taxes and penalties under sections 4941 through 4945, 4955, and 4958, and in some cases further initial taxes on the foundation, organization, and related persons, a foundation, organization, disqualified person, or manager must correct the taxable event within the correction period. The taxable event is the act, failure to act, or transaction that resulted in the liability for initial taxes under these provisions.

  Generally, the correction period begins on the date the event occurs and ends 90 days after the mailing date of a notice of deficiency, under section 6212, in connection with the second tier tax imposed on that taxable event. That time is extended by:
  1. Any period in which a deficiency cannot be assessed under section 6213(a) because a petition to the Tax Court for redetermination of the deficiency is pending, not extended by any supplemental proceeding by the Tax Court under section 4961(b), regarding whether correction was made and
  2. Any other period the IRS determines is reasonable and necessary to correct the taxable event.

  The taxable event will be treated as occurring:
  1. For the tax on failure to distribute income, on the first day of the tax year for which there was a failure to distribute income,
  2. For the tax on excess business holdings, on the first day on which there were excess business holdings, or
  3. In any other case, on the date the event occurred.

  Generally, the term “correction” has the following meanings:
  • Section 4941 (Schedule A)—Undoing the transaction to the extent possible, but in any case placing the private foundation in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.
  • Section 4942 (Schedule B)—Making sufficient qualifying distributions to compensate for deficient qualifying distributions for a prior tax year.
  • Section 4943 (Schedule C)—Action that results in the foundation no longer having excess business holdings in a business enterprise.
  • Section 4944 (Schedule D)—An investment is considered to be removed from jeopardy when the investment is sold or otherwise disposed of, and the proceeds of such sale or other disposition are not investments that jeopardize the carrying out of the foundation's exempt purposes.
  • Section 4945 (Schedule E)—

    1. Recovering part or all of the expenditure to the extent recovery is possible, and where full recovery is not possible, such additional corrective action as is prescribed by regulations or
    2. Obtaining or making the report in question for a case that fails to comply with section 4945(h)(2) or (3) (expenditure responsibility).
  • Section 4955 (Schedule F)—Recovering part or all of the expenditure to the extent recovery is possible, establishment of safeguards to prevent future political expenditures, and where full recovery is not possible, such additional corrective action as is prescribed by the regulations.
  • Section 4958 (Schedule I)—Undoing the excess benefit to the extent possible and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person had been dealing under the highest fiduciary standards.

  If, when the return is filed, the foundation, organization, managers, disqualified persons, or self-dealers have corrected any acts or transactions resulting in liability for tax under Chapter 42, answer “Yes” to question B and give the following information separately for each correction:
  1. Schedule and item number of the act or transaction that has been corrected,
  2. A description of the act or transaction that resulted in the tax,
  3. A detailed description of the correction made,
  4. The amount of any political expenditure recovered,
  5. Description of safeguards to prevent future political expenditures, and
  6. The date of correction.

  For any acts or transactions the foundation, organization, managers, disqualified persons, or self-dealers have not corrected, give the following information separately for each act:
  1. Schedule and item number of the act or transaction that has not been corrected,
  2. A description of the act or transaction, and
  3. A detailed explanation of why correction has not been made and what steps are being taken to make the correction.

  If you are correcting deficient distributions under section 4942 where an election under section 4942(h)(2) was filed with the IRS, provide a copy of the election. See the instructions for Form 990-PF, Part XIII, lines 4b and 4c for more information.

Part I

Line 8   
Tip

  If the organization has an entry on this line, it must also file Form 8870.

  Enter the total of all premiums paid by the organization on any personal benefit contract if the payment of premiums is in connection with a transfer for which a deduction is not allowed under section 170(f)(10)(A). Also, if there is an understanding or expectation that any person will directly or indirectly pay any premium on a personal benefit contract for the transferor, include those premium payments in the amount entered on this line.

  A personal benefit contract is (to the transferor) any life insurance, annuity, or endowment contract that benefits directly or indirectly the transferor, a member of the transferor's family, or any other person designated by the transferor (other than an organization described in section 170(c)).

  For more information, see Notice 2000-24, I.R.B. 2000-17, 952.

Part II-A

Columns (a) and (b).   List the names, addresses, and taxpayer identification number of all persons who owe tax in connection with the foundation or organization, whether as managers, self-dealers, or disqualified persons, as shown in Schedules A, D, E, F, H, and I.

Column (c).   For each person listed in column (a), enter the sum of:
  1. Taxes that person owes as a self-dealer, from Schedule A, Part II, column (d), and
  2. Tax for acts of self-dealing in which the individual participated as a foundation manager, from Schedule A, Part III, column (d).

Column (d).   Enter for each person listed in column (a) the tax on jeopardy investments from Schedule D, Part II, column (d), that the individual took part in as a foundation manager.

Column (e).   Enter for each person listed in column (a) the tax on taxable expenditures from Schedule E, Part II, column (d), that the individual took part in as a foundation manager.

Column (f).   Enter for each person listed in column (a) the tax on political expenditures from Schedule F, Part II, column (d), that the individual took part in as an organization or foundation manager.

Column (g).   Enter for each person listed in column (a) the tax on disqualifying lobbying expenditures from Schedule H, Part II, column (d), that the individual took part in as an organization manager.

Column (h).   For each person listed in column (a), enter the sum of:
  1. Taxes that person owes as a disqualified person, from Schedule I, Part II, column (d), and
  2. Tax on excess benefit transactions in which the organization manager participated knowing that the transaction was improper, from Schedule I, Part III, column (d).

  A person's liability for tax as a self-dealer, manager, or disqualified person under sections 4912, 4941, 4944, 4945, 4955, and 4958 is joint and several. Therefore, if more than one person owes tax on an act as a manager, self-dealer, or disqualified person, they may apportion the tax among themselves. However, when all managers, self-dealers, or disqualified persons who are liable for tax on a particular transaction under sections 4912, 4941, 4944, 4945, 4955, or 4958 pay less than the total tax due on that transaction, then the IRS may charge the amount owed to one or more of them regardless of the tax apportionment shown on this return.

Schedule A—Initial Taxes on Self-Dealing

General Instructions

Requirement.   All organizations that answered “Yes” to question 1b or 1c in Part VII-B of Form 990-PF, or “Yes” to question 1b or 1c in Part VI-B of Form 5227, must complete Schedule A. Complete Parts I, II, and III of Schedule A only in connection with acts that are subject to the tax on self-dealing.

  Paying the tax and filing a Form 4720 is required for each year or part of a year in the taxable period that applies to the act of self-dealing. Generally, the taxable period begins with the date on which the self-dealing occurs and ends on the earliest of:
  1. The date a notice of deficiency is mailed under section 6212, in connection with the initial tax imposed on the self-dealer,
  2. The date the initial tax on the self-dealer is assessed, or
  3. The date correction of the act of self-dealing is completed.

Self-dealing   means any direct or indirect:
  1. Sale, exchange, or leasing of property between a private foundation and a disqualified person (see definitions in Form 990-PF instructions),
  2. Lending of money or other extension of credit between a private foundation and a disqualified person,
  3. Furnishing of goods, services, or facilities between a private foundation and a disqualified person,
  4. Payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person,
  5. Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation, and
  6. Agreement by a private foundation to make any payment of money or other property to a government official (see Pub. 578, Chapter V), other than an agreement to employ or make a grant to that individual for any period after the end of government service if that individual will be ending government service within a 90-day period.

Exceptions to Self-Dealing.   See Pub. 578 for a description of acts that are not considered self-dealing.

Initial Taxes on Self-Dealer.   An initial tax of 5% of the amount involved is charged for each act of self-dealing between a disqualified person and a private foundation for each year or part of a year in the taxable period. Any disqualified person (other than a foundation manager acting only as such) who takes part in the act of self-dealing must pay the tax.

Initial Taxes on Foundation Managers.   When a tax is imposed on a foundation manager for an act of self-dealing, the tax will be 2½% of the amount involved in the act of self-dealing for each year or part of a year in the taxable period. However, the total tax imposed for all years in the taxable period is limited to $10,000 for each act of self-dealing. The tax is imposed on any foundation manager who took part in the act knowing that it was self-dealing except those foundation managers whose participation was not willful and was due to reasonable cause. Any foundation manager who took part in the act of self-dealing must pay the tax.

Specific Instructions

Part I.   List each act of self-dealing in Part I. Enter in column (d) the number designation from Form 990-PF, Part VII-B, question 1a, or Form 5227, Part VI-B, question 1a, that applies to the act. For example, “1a(1)” or “1a(4).”

Part II.   Enter in column (a) the names of all disqualified persons who took part in the acts of self-dealing listed in Part I. If more than one disqualified person took part in an act of self-dealing, each is individually liable for the entire tax in connection with the act. But the disqualified persons who are liable for the tax may prorate the payment among themselves. Enter in column (c) the tax to be paid by each disqualified person.

  Carry the total amount in column (d) for each self-dealer to page 1, Part II-A,
column (c).

Part III.   Enter in column (a) the names of all foundation managers who took part in the acts of self-dealing listed in Part I, and who knew that they were acts of self-dealing (except for foundation managers whose participation was not willful and was due to reasonable cause).

  If more than one foundation manager took part in the act of self-dealing, knowing that it was such an act, and participation was willful and not due to reasonable cause, each is individually liable for the entire tax in connection with the act. But the foundation managers liable for the tax may prorate the payment among themselves. Enter in column (c) the tax to be paid by each foundation manager.

  Carry the total amount in column (d) for each foundation manager to page 1, Part II-A, column (c).

Schedule B—Initial Tax on Undistributed Income

Complete Schedule B if you answered “Yes” to Form 990-PF, Part VII-B, question 2b.

An initial excise tax of 15% is imposed on a private foundation's undistributed income on the first day of the second or any succeeding tax year after the tax year in connection with which income remains undistributed.

Use the 2003 Form 4720 to report the initial tax on undistributed income for tax years beginning in 2002 or earlier that remains undistributed at the end of the foundation's current tax year beginning in 2003. The initial tax will not apply to a private foundation's undistributed income:

  1. For any tax year it is an operating foundation (as defined in section 4942(j)(3) and related regulations or in section 4942(j)(5)), or
  2. To the extent it did not distribute an amount solely because of an incorrect valuation of assets, provided the foundation satisfies the requirements of section 4942(a)(2), or
  3. For any year for which the initial tax was previously assessed or a notice of deficiency was issued.

Do not complete Schedule B for any year for which any of the above provisions apply to the undistributed income.

Schedule C—Initial Tax on Excess Business Holdings

General Instructions

Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. They may be subject to an excise tax on the amount of any excess holdings.

Requirement.   If you answered “Yes” to Form 990-PF, Part VII-B, question 3b, or Form 5227, Part VI-B, question 3b, complete a Schedule C for each business enterprise in which the foundation had excess business holdings for its tax year beginning in 2003.

Taxes.   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. The initial tax is 5% of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. The excess holdings are determined on the day during the tax year when they were the largest.

  If the foundation keeps the excess business holdings after the initial tax has been imposed, it becomes liable for an additional tax of 200% of the remaining excess business holdings unless it disposes of them within the taxable period. However, if the foundation disposes of its excess business holdings during the correction period, the additional tax will not be assessed or, if assessed, will be abated and if collected, will be credited or refunded. See Pub. 578 for information on the correction period.

Business Enterprise.   In general, this means the active conduct of a trade or business, including any activity regularly conducted to produce income from selling goods or performing services, that is an unrelated trade or business described in section 513.

  The term “business enterprise” does not include a functionally related business as defined in section 4942(j)(4). In addition, business holdings do not include program-related investments (such as investments in small businesses in economically depressed areas or in corporations to assist in neighborhood renovations) as defined in section 4944(c) and related regulations. Also, business enterprise does not include a trade or business at least 95% of the gross income of which comes from passive sources. See Pub. 578.

Excess Business Holdings.   Excess business holdings is the amount of stock or other interest in a business enterprise that the foundation would have to dispose of to a person other than a disqualified person in order for the foundation's remaining holdings in the enterprise to be permitted holdings (section 4943(c)(1)). See Pub. 578.

Sole Proprietorships.   In general, a private foundation may not have any permitted holdings in a business enterprise that is a sole proprietorship. For exceptions, see Pub. 578, Chapter X. For a definition of sole proprietorship, see Regulations section 53.4943-10(e).

Corporate Voting Stock.   This stock entitles a person to vote for the election of directors. Treasury stock and stock that is authorized but unissued is not voting stock for these purposes. See Regulations sections 53.4943-3(b)(1)(ii) and 53.4943-3(b)(2)(ii).

  For a partnership (including a limited partnership) or joint venture, the term “profits interest” should be substituted for “voting stock.” For any unincorporated business enterprise that is not a partnership, joint venture, or sole proprietorship, the term “beneficial interest” should be substituted for “voting stock.” See Regulations section 53.4943-3(c).

Nonvoting Stock.   Corporate equity interests that do not have voting power should be classified as nonvoting stock. Evidences of indebtedness (including convertible indebtedness), warrants, and other options or rights to acquire stock should not be considered equity interests. See Regulations section 53.4943-3(b)(2).

  For a partnership (including a limited partnership) or joint venture, the term “capital interest” should be substituted for “nonvoting stock.” For any unincorporated business that is not a partnership, joint venture, or sole proprietorship, references to nonvoting stock do not apply for computation of permitted holdings. See Regulations section 53.4943-3(c)(4).

Attribution of Business Holdings.   In determining the holdings in a business enterprise of either a private foundation or a disqualified person, any stock or other interest owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. In general, this rule does not apply to certain income interests or remainder interests of a private foundation in a split-interest trust described in section 4947(a)(2). See Regulations section 53.4943-8.

Taxable Period.   The taxable period begins on the first day the foundation has excess business holdings and ends on the earliest of:
  1. The mailing date of a notice of deficiency, under section 6212, in connection with the initial tax on excess business holdings related to those holdings,
  2. The date the excess is eliminated, or
  3. The date the initial tax on excess business holdings related to those holdings is assessed.

  When a notice of deficiency is not mailed because the restrictions on assessment and collection are waived or because the deficiency is paid, the date of filing the waiver or the date of paying the tax, respectively, will be treated as the end of the taxable period. See Regulations section 53.4943-9.

Exceptions to Tax on Excess Business Holdings

  1. 2% De Minimis Rule. A private foundation will not be treated as having excess business holdings in any enterprise in which it, together with related foundations as described in the instructions for Form 990-PF (under the definition for “disqualified person” in the General Instructions) owns not more than 2% of the voting stock and not more than 2% in value of all outstanding shares of all classes of stock.
  2. Disposition of Excess Business Holdings Within 90 Days. Generally, when a private foundation acquires excess business holdings other than as a result of purchase by the foundation (such as an acquisition by a disqualified person), the foundation will not be taxed on those excess holdings if it disposes of enough of them so that it no longer has an excess. To avoid the tax, the disposition must take place within 90 days from the date the foundation knew, or had reason to know, of the event that caused it to have excess business holdings. That 90-day period will be extended to include the period during which Federal or state securities laws prevent the foundation from disposing of those excess business holdings. See Regulations section 53.4943-2(a).
  3. General Rules on the Permitted Holdings of a Private Foundation in a Business Enterprise. No excess business holdings tax is imposed (a) if a private foundation and all disqualified persons together hold no more than 20% of the voting stock of a business enterprise or (b) on nonvoting stock, if all disqualified persons together do not own more than 20% of the voting stock of the business enterprise.

    If the private foundation and all disqualified persons together do not own more than 35% of the enterprise's voting stock, and effective control is in one or more persons who are not disqualified persons in connection with the foundation, then 35% may be substituted for 20% wherever it appears in the preceding paragraph. See sections 4943(c)(2) and 4943(c)(3).

    If a private foundation and all disqualified persons together had holdings in a business enterprise of more than 20% of the voting stock on May 26, 1969, substitute that percentage for 20% and for 35% (if the holding is greater than 35%), using the principles of section 4943(c)(4) that apply. However, the percentage substituted may not be more than 50%.

    The percentage substituted under the preceding paragraph is (a) subject to reductions and limitations (see sections 4943(c)(4)(A)(ii) and 4943(c)(4)(D)) and (b) applicable, both in connection with the voting stock and, separately, in connection with the value of all outstanding shares of all classes of stock (see section 4943(c)(4)(A)(iii)).

  4. Interests Held by a Private Foundation on May 26, 1969. For private foundations that had business holdings on May 26, 1969 (or holdings acquired by trust or will as described in exception 5 below), that were more than the current limits permit, there are transitional rules that permit the foundation to dispose of the excess over time without being subject to the tax on excess business holdings.

    During the first phase, no excess business holdings tax was imposed on a private foundation for interests held since May 26, 1969, if the foundation had excess holdings on that date. The first phase is:

    1. A 20-year period beginning on May 26, 1969, if on that date the foundation and all disqualified persons held more than a 95% voting interest in the enterprise (the 20-year first phase expired on May 25, 1989);
    2. A 15-year period beginning on May 26, 1969, if on that date the foundation and all disqualified persons together had more than a 75% voting stock interest (or more than a 75% profits or beneficial interest of any unincorporated business), or more than a 75% interest in the value of all outstanding shares of all classes of stock (or more than a 75% capital interest of a partnership or joint venture) in the enterprise (the 15-year first phase expired on May 25, 1984); and
    3. A 10-year period beginning on May 26, 1969, in all other cases in which the foundation had excess business holdings on May 26, 1969. The 10-year first phase expired on May 25, 1979.

    During the second phase (the 15-year period after the first phase), if the foundation's disqualified persons hold more than 2% of the enterprise's voting stock, the foundation will be liable for tax if the foundation holds more than 25% of the voting stock or if the foundation and its disqualified persons together hold more than 50% of the voting stock.

    However, during the second phase, if a foundation's disqualified persons purchase voting stock in a business enterprise after July 18, 1984, causing the combined holdings of the disqualified persons to exceed 2% of the enterprise's voting stock, the foundation has 5 years to reduce its holdings in the enterprise to below its second phase limit before the increase will be treated as held by the foundation. See sections 4943(c)(4)(D) and 4943(c)(6).

    The first-phase periods may be suspended pending the outcome of any judicial proceeding the private foundation brings regarding reform or other procedure to excuse it from compliance with its governing instrument or similar instrument in effect on May 26, 1969. See section 4943(c)(4)(C) and Regulations section 53.4943-4.

  5. Holdings Acquired by Trust or Will. Holdings acquired under the terms of a trust that was irrevocable on May 26, 1969, or under the terms of a will executed by that date, are treated as held by the foundation on May 26, 1969, except that the 15- and 10-year periods of the first phase for the holdings start on the date of distribution under the trust or will instead of on May 26, 1969. See section 4943(c)(5) and Regulations section 53.4943-5. See section 4943(d)(1) and Regulations section 53.4943-8 for rules relating to constructive holdings held in a corporation, partnership, estate, or trust for the benefit of the foundation.
  6. Gifts or Bequests of Business Holdings. Except as provided in exception 5, there is a special rule for private foundations that have excess business holdings as a result of a change in holdings after May 26, 1969. This rule applies if the change is other than by purchase by the foundation or by disqualified persons (such as through gift or bequest) and the additional holdings result in the foundation having excess business holdings. In that case, the foundation has 5 years to reduce these holdings or those of its disqualified persons to permissible levels to avoid the tax. See section 4943(c)(6) and Regulations section 53.4943-6.

    A private foundation that received an unusually large gift or bequest of business holdings after 1969, and that has made a diligent effort to dispose of excess business holdings, may apply for an additional 5-year period to reduce its holdings to permissible levels if certain conditions are met. See section 4943(c)(7).

  7. Readjustments, Distributions, or Changes in Relative Value of Different Classes of Stock. See Regulations section 53.4943-4(d)(10) for special rules whereby increases in the percentage of value of holdings in a corporation that result solely from changes in the relative values of different classes of stock will not result in excess business holdings.

See Regulations section 53.4943-6(d) for rules on treatment of increases in holdings due to readjustments, distributions, or redemptions.

See Regulations section 53.4943-7 for special rules for readjustments involving grandfathered holdings.

Exceptions From Self-Dealing Taxes on Certain Dispositions of Excess Business Holdings.   Section 101(I)(2)(B) of the Tax Reform Act of 1969 provides for a limited exception from self-dealing taxes for private foundations that dispose of certain excess business holdings to disqualified persons, as long as the sales price equals or is more than fair market value.

  The excess business holdings involved are interests that are subject to the section 4941 transitional rules for May 26, 1969, holdings. These interests would also be subject to the excess business holdings tax if they were not reduced by the required amount.

Specific Instructions

Complete columns (a) and (b) of Schedule C if sections 4943(c)(4), 4943(c)(3) (using the principles of 4943(c)(4)), or 4943(c)(5) apply.

Complete column (a) and column (c) (if applicable) if sections 4943(c)(2) or 4943(c)(3) (using the principles of 4943(c)(2)) apply.

Complete Schedule C for that day during the tax year when the foundation's excess holdings in the enterprise were largest.

Line 1.   Enter in column (a) the percentage of voting stock the foundation holds in the business enterprise.

  If the foundation is using the rules or principles for determining present holdings under section 4943(c)(4)(A) or (D), enter in column (b) the percentage of value the foundation holds in all outstanding shares of all classes of stock.

  Do not include in either column (a) or (b) stock treated as held by disqualified persons:
  1. Under section 4943(c)(6) or Regulations sections 53.4943-6 and 53.4943-10(d) or
  2. During the first phase if the first phase is still in effect (see Regulations sections 53.4943-4(a), (b), and (c)).

Line 2.   If the foundation is using the rules or principles for determining present holdings under section 4943(c)(4), refer to that section and Regulations section 53.4943-4(d) to determine which entries to record in columns (a) and (b). Enter in column (a) the excess of the substituted combined voting level over the disqualified person voting level. Enter in column (b) the excess of the substituted combined value level over the disqualified person value level.

  If the foundation is using the rules or principles for determining permitted holdings under section 4943(c)(2), refer to that section to determine which entries to record in column (a). Enter in column (a) the percentage, using the general rule (section 4943(c)(2)(A)) or the 35% rule (see section 4943(c)(2)(B)), if applicable, of permitted holdings the foundation may have in the enterprise's voting stock. If the foundation determines the permitted holdings under section 4943(c)(2)(B), attach a statement showing effective control by a third party.

Line 3.   Enter the value of any stock, interest, etc., in the business enterprise that the foundation is required to dispose of so the foundation's holdings in the enterprise are permitted. See section 4943 and related regulations.

  A private foundation using the section 4943(c)(4) rules has excess holdings if line 1 is more than line 2 in either column (a) or column (b). Do not include in column (b) the value of any voting stock included in column (a).

  A private foundation using the section 4943(c)(2) rules has excess holdings if line 1 is more than line 2 in column (a) or if the private foundation holds nonvoting stock and all disqualified persons together own more than 20% (or 35%, if applicable) of the enterprise's voting stock, interest, etc. In the latter case, enter in column (c) the value of all nonvoting stock the foundation holds.

Line 4.   Enter the value of excess holdings disposed of under the 90-day rule in Regulations section 53.4943-2(a)(1)(ii). If other conditions preclude imposition of tax on excess business holdings, include the value of the nontaxable amount on this line and attach an explanation.

Schedule D—Initial Taxes on Investments That Jeopardize Charitable Purpose

General Instructions

Requirement.   Complete Schedule D if you answered “Yes” to Form 990-PF, Part VII-B, question 4a or b, or Form 5227, Part VI-B, question 4a or b. Report each investment separately. Paying tax and filing a Form 4720 are required for each year or part of a year in the taxable period that applies to the investments that jeopardize the foundation's charitable purpose. Generally, the taxable period begins with the date of the investment and ends with the date corrective action is completed, a notice of deficiency is mailed, or the initial tax is assessed, whichever comes first. Therefore, in addition to investments made in 2003, include all investments subject to tax that were made before 2003 if those investments were not removed from jeopardy before 2003 and the initial tax was not assessed before 2003.

Taxable Investments.   An investment to be taxed on this schedule is an investment by a private foundation that jeopardizes the carrying out of its exempt purposes (i.e., if it is determined that the foundation managers, in making the investment, did not exercise ordinary business care and prudence, under prevailing facts and circumstances, in providing for the long- and short-term financial needs of the foundation to carry out its exempt purposes). See Regulations section 53.4944-1(a)(2). An investment is not taxed on this schedule if it is a program-related investment; that is, one whose primary purpose is one or more of those described in section 170(c)(2)(B) (religious, charitable, educational, etc.). A significant purpose of such an investment cannot be the production of income or the appreciation of property. See section 4944(c) and Regulations section 53.4944-3.

Initial Taxes on Foundation.   The initial tax is 5% of the amount invested for each year or part of a year in the taxable period.

Initial Taxes on Foundation Managers.   When a tax is imposed on a jeopardy investment of the foundation, the tax will be 5% of the investment for each year or part of a year in the taxable period, up to $5,000 for any one investment. It is imposed on all foundation managers who took part in the act, knowing that it was such an act, except for foundation managers whose participation was not willful and was due to reasonable cause. Any foundation manager who took part in making the investment must pay the tax.

Specific Instructions

Part I.   Complete this part for all taxable investments.

Part II.   Enter in column (a) the names of all foundation managers who took part in making the investments listed in Part I. See Initial Taxes on Foundation Managers above.

  If more than one foundation manager is listed in column (a), each is individually liable for the entire amount of tax in connection with the investment. However, the foundation managers who are liable for the tax may prorate payment among themselves. Enter in column (c) the tax each foundation manager will pay.

  Carry the total amount in column (d) for each foundation manager to page 1, Part II-A, column (d).

Schedule E—Initial Taxes on Taxable Expenditures

General Instructions

Requirement.   Complete Schedule E if you answered “Yes” to Form 990-PF, Part VII-B, question 5b, or Form 5227, Part VI-B, question 5b. Complete Parts I and II of Schedule E only for expenditures that are subject to tax.


Note:

Also, see Schedule F, Initial Taxes on Political Expenditures.

Taxable Expenditures.   With certain exceptions, this means any amount a private foundation pays or incurs:
  1. To carry on propaganda or otherwise influence any legislation through—

    1. An attempt to influence general public opinion or any segment of it and
    2. Communication with any member or employee of a legislative body, or with any other government official or employee who may take part in formulating legislation;
  2. To influence the outcome of any specific public election, or to conduct, directly or indirectly, any voter registration drive;
  3. As a grant to an individual for travel, study, or other purposes;
  4. As a grant to an organization not described in section 509(a)(1), (2), or (3) or that is not an exempt operating foundation (as defined in section 4940(d)(2)); or
  5. For any purpose other than religious, charitable, scientific, literary, educational, or public purposes, or the prevention of cruelty to children or animals.

Exceptions.   Section 4945(d)(4)(B) provides an exception to taxable expenditures that applies to certain grants to organizations when the granting foundation exercises expenditure responsibility described in section 4945(h). Pub. 578 has additional information on special rules and exceptions to the definition of taxable expenditures given above.

Initial Tax on Foundation.   An initial tax of 10% of each taxable expenditure is imposed on the foundation.

Initial Tax on Foundation Managers.   When a tax is imposed on a taxable expenditure of the foundation, a tax of 2½% of the expenditure will be imposed on any foundation manager who agreed to the expenditure and who knew that it was a taxable expenditure. Foundation managers whose participation was not willful and was due to reasonable cause are not liable for the tax. Any foundation manager who took part in the expenditure and is liable for the tax must pay the tax. The maximum total amount of tax on all foundation managers for any one taxable expenditure is $5,000. If more than one foundation manager is liable for tax on a taxable expenditure, all those foundation managers are jointly and severally liable for the tax.

Specific Instructions

Part I.   Complete this part for all taxable expenditures. Enter in column (f) the number designation from Form 990-PF, Part VII-B, question 5a, or Form 5227, Part VI-B, question 5a, that applies to the act; for example, “5a(1).”

Part II.   Enter in column (a) the names of all foundation managers who agreed to make the taxable expenditure. See Initial Tax on Foundation Managers on page 6. If more than one foundation manager is listed in column (a), each is individually liable for the entire tax in connection with the expenditure. However, the foundation managers who are liable for the tax may prorate the payment among themselves. Enter in column (c) the tax each foundation manager will pay.

  Carry the total amount in column (d) for each foundation manager to page 1, Part II-A, column (e).

Schedule F—Initial Taxes on Political Expenditures

General Instructions

Requirement.   Complete Schedule F if you answered “Yes” to question 5a(2) and 5b of Form 990-PF, Part VII-B. Complete Schedule F if you entered an amount of political expenditure in question 81a, Part VI of Form 990, or in question 37a, Part V, of
Form 990-EZ.

Political Expenditures.   These include any amount paid or incurred by a section 501(c)(3) organization that participates or intervenes in (including the publication or distribution of statements) any political campaign on behalf of, or in opposition to, any candidate for public office. The tax is imposed even if the political expenditure gives rise to a revocation of the organization's section 501(c)(3) status.

  These taxes apply in the case of both public charities and private foundations. When tax is imposed under this provision in the case of a private foundation, however, the expenditure in question will not be treated as a taxable expenditure under section 4945.

  For an organization formed primarily to promote the candidacy or prospective candidacy of an individual for public office (or that is effectively controlled by a candidate or prospective candidate and is used primarily for such purposes), amounts paid or incurred for any of the following purposes are deemed political expenditures:
  1. Remuneration to the candidate or prospective candidate for speeches or other services;
  2. Travel expenses of the individual;
  3. Expenses of conducting polls, surveys, or other studies, or preparing papers or other material for use by the individual;
  4. Expenses of advertising, publicity, and fundraising for such individual; and
  5. Any other expense which has the primary effect of promoting public recognition or otherwise primarily accruing to the benefit of the individual.

Initial Tax on Organization or Foundation.   The initial tax on the organization or foundation is 10% of the amount involved.

Initial Tax on Organization Managers or Foundation Managers.   An initial tax of 2½% of the amount involved (up to $5,000 of tax on any one expenditure) is imposed on any manager who agrees to an expenditure, knowing that it is a political expenditure, unless the agreement is not willful and is due to reasonable cause.

  Any manager who agreed to the expenditure must pay the tax.

Specific Instructions

Part I.   Complete this part for all political expenditures.

Part II.   Enter in column (a) the names of all managers who took part in making the political expenditures listed in Part I. See Initial Tax on Organization Managers or Foundation Managers above.

  If more than one manager is listed in column (a), each is individually liable for the entire amount of tax on the expenditure. However, the managers who are liable for the tax may prorate payment among themselves. Enter in column (c) the tax each manager will pay.

  Carry the total amount in column (d) for each manager to page 1, Part II-A, column (f).

Schedule G—Tax on Excess Lobbying Expenditures

Requirement.   Schedule G must be completed by eligible section 501(c)(3) organizations that elected to be subject to the limitations on lobbying expenditures under section 501(h) and that made excess lobbying expenditures as defined in section 4911(b).

  Except as noted below, follow the line instructions on Schedule G.

Affiliated Groups.   If you are a nonelecting member of an affiliated group, you are not required to file Form 4720.

  If you are an electing member of an affiliated group and are filing a separate return, enter on line 1 the amount from Schedule A (Form 990 or 990-EZ), Part VI-A, column (b), line 43. Enter on line 2 the amount from Schedule A (Form 990 or 990-EZ), Part VI-A, column (b), line 44.

  If you are an electing member of an affiliated group and are included in a group return, enter on line 1 your share of the excess grassroots lobbying expenditures of the affiliated group, and on line 2 your share of the excess lobbying expenditures of the affiliated group. Take these amounts from the schedule of excess lobbying expenditures that must be attached to Schedule A (Form 990 or 990-EZ). See the instructions for Schedule A (Form 990 or 990-EZ), Part VI-A, for a discussion of the lobbying provisions, including how to figure the taxable amount.

Schedule H—Taxes on Disqualifying Lobbying Expenditures

General Instructions

Requirement.   Schedule H must be completed by certain organizations whose section 501(c)(3) status is revoked because of excess lobbying activities.

Exceptions.   These taxes are not imposed on a private foundation (whose lobbying expenditures may be subject to the tax on taxable expenditures). These taxes also are not imposed on any organization for which a section 501(h) election was in effect at the time of the lobbying expenditures or that was not eligible to make a section 501(h) election.

Tax on Organization.   A tax of 5% of the lobbying expenditures is imposed on the organization whose section 501(c)(3) status is revoked because of excess lobbying activities.

Tax on Organization Managers.   A tax of 5% of the lobbying expenditures is also imposed on any manager who willfully and without reasonable cause consented to the lobbying expenditures, knowing that they would likely result in the organization no longer qualifying under section 501(c)(3).

  There is no limit on the amount of this tax that may be imposed against either the organization or its managers. Any organization manager who agreed to the expenditure must pay the tax.

Specific Instructions

Part I.   Complete this part for all disqualifying lobbying expenditures.

Part II.   Enter in column (a) the names of all organization managers who took part in making disqualifying lobbying expenditures listed in Part I. See Tax on Organization Managers above.

  If more than one organization manager is listed in column (a), each is individually liable for the entire amount of tax in connection with the expenditure. However, the managers who are liable for the tax may prorate payment among themselves. Enter in column (c) the tax each manager will pay.

  Carry the total amount in column (d) for each organization manager to page 1, Part II-A, column (g).

Schedule I—Initial Taxes on Excess Benefit Transactions

General Instructions

Requirement.   Complete Schedule I for any Excess benefit transaction in which an Applicable organization provides an Excess benefit to a Disqualified person. These terms are discussed below.

Applicable organization.   In general, an applicable organization is any section 501(c)(3) (except a private foundation) or any 501(c)(4) organization.

  Also, an applicable organization includes any organization that was a 501(c)(3) (except a private foundation) or 501(c)(4) organization at any time during a five-year period ending on the date of an excess benefit transaction (the lookback period).

Initial taxes.   Excise taxes are imposed under section 4958 on each excess benefit transaction. If an organization manager receives an excess benefit from an excess benefit transaction, the manager may be liable for the tax on disqualified persons and the tax on the organization manager. See Abatement on page 3 for information on abatement, refund, or relief from this tax.

Tax on disqualified persons.   The tax is 25% of the excess benefit and is paid by any disqualified person who improperly benefited from the excess benefit transaction.

Tax on organization managers.   If tax is imposed on a disqualified person for any excess benefit transaction, then tax is also imposed on any organization manager who knowingly participated in the excess benefit transaction. The tax is 10% of the excess, not to exceed $10,000 for each transaction.

Additional tax on the disqualified person.   If the initial tax is imposed on an excess benefit transaction and the transaction is not corrected within the taxable period, then any disqualified person involved shall be liable for an additional tax equal to 200% of the excess benefit.

  This additional tax is abated (refunded if collected) if the excess benefit transaction is corrected within the correction period (defined in Question B under Specific Instructions for Page 1 on page 3).

Taxable period.   Taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of:
  1. The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction or
  2. The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed.

Excess benefit transaction.   An excess benefit transaction is any transaction in which:
  1. An excess benefit is provided by the organization, directly or indirectly to, or for the use of, any disqualified person or
  2. The amount of any economic benefit provided to, or for the use of, a disqualified person is determined in whole or in part by the revenues of the organization and violates the private inurement prohibition rules (to the extent provided in regulations).

Caution:   Until final regulations are issued regarding the special rules for revenue sharing transactions described in 2 above, these transactions will only be subject to section 4958 liability under the general rule described in 1 above.

Excess benefit.   Excess benefit means the excess of the economic benefit received from the applicable organization over the consideration given (including services) by a disqualified person.

  However, an economic benefit will not be treated as compensation for services unless the applicable organization clearly indicates its intent to treat the economic benefit (when paid) as compensation for a disqualified person's services. See Regulations section 53.4958-4(c) for more information.

Exception.   Generally, section 4958 does not apply to any fixed payment made to a person under an initial contract. See Regulations section 53.4958-4(a)(3) for details.

Special rule.   The initial and additional taxes of this section do not apply if the transaction described in 1 under Excess benefit transaction was pursuant to a written contract in effect on September 13, 1995, and at all times after that date until the time that the transaction occurs.

  However, if a written contract is materially modified, it is treated as a new contract entered into as of the date of the material modification. A material modification includes amending the contract to extend its term or to increase the compensation payable to a disqualified person.

Disqualified person.   For purposes of this section, a disqualified person means:
  1. Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization,
  2. A family member of an individual described in 1, or
  3. A 35% controlled entity.

Family members.   Family members of an individual (described in 1 above) include a disqualified person's spouse, ancestors, children, grandchildren, great grandchildren, and brothers and sisters (whether by whole or half-blood). It also includes the spouse of the children, grandchildren, great grandchildren, brothers or sisters (whether by whole or half-blood).

35% controlled entity.   The term 35% controlled entity means:
  1. A corporation in which a person described in 1 or 2 under Disqualified person owns more than 35% of the total combined voting power,
  2. A partnership in which such persons own more than 35% of the profits interest, or
  3. A trust or estate in which such persons own more than 35% of the beneficial interest.

  In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply.


Specific Instructions

Part I.   List each excess benefit transaction in Part I, column (c). Enter the date of the transaction in column (b) and the amount of the excess benefit in column (d). Compute the tax on the excess benefit for disqualified persons and enter it in column (e). Compute any tax on the excess benefit for organization managers and enter the amount in column (f).

   For organization managers, the tax is the lesser of 10% of the excess benefit or $10,000. This tax is computed on each transaction.

Part II.   Enter in column (a) the names of all disqualified persons who took part in the excess benefit transactions. If more than one disqualified person took part in an excess benefit transaction, each is individually liable for the entire tax on the transaction. But the disqualified persons who are liable for the tax may prorate the payment among themselves. Enter in column (c) the tax to be paid by each disqualified person.

  Carry the total amount in column (d) for each disqualified person to page 1, Part II-A,
column (h).

Part III.   Enter in column (a) the names of all organization managers who knowingly took part in the excess benefit transactions listed in Part I. If more than one organization manager knowingly took part in an excess benefit transaction, each is individually liable for the entire tax in connection with the transaction. But the organization managers liable for the tax may prorate the payment among themselves. Enter in column (c) the tax to be paid by each organization manager.

  Carry the total amount in column (d) for each organization manager to page 1, Part II-A, column (h).


Privacy Act and Paperwork Reduction Act Notice


We ask for the information on this form to carry out the Internal Revenue laws of the United States. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax. Certain individuals who owe tax under Chapter 41 or 42 of the Internal Revenue Code, and who do not sign the Form 4720 of the foundation or organization, must file a separate Form 4720 showing the tax owed and the name of the foundation or organization for which they owe tax. Sections 6001 and 6011 of the Internal Revenue Code require you to provide the requested information if the tax applies to you. Section 6109 requires you to provide your social security or other identifying number. Routine uses of this information include disclosing it to the Department of Justice for civil and criminal litigation and to other federal agencies, as provided by law. We may disclose the information to cities, states, the District of Columbia, and U.S. Commonwealths or possessions to administer their laws. We may disclose the information to foreign governments pursuant to tax treaties. If you do not file this information, you may be subject to interest, penalties, and/or criminal prosecution.

We may also disclose this information to Federal and state agencies to enforce Federal nontax criminal laws and to combat terrorism.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping 39 hr., 55 min.
Learning about the law or the form 16 hr., 30 min.
Preparing the form 23 hr., 22 min.
Copying, assembling, and sending the form to the IRS 1 hr., 36 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Products Coordinating Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this address. Instead, see Where To File on page 2.

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