Private Foundations: Tax Law and Compliance, 4th Edition

Chapter TenTax on Investment Income

1. § 10.1 Rate of Tax
2. § 10.2 Reducing the Excise Tax
   1. (a) Qualification for 1 Percent Rate
   2. (b) Distributing, Rather than Selling, Property
   3. (c) Another Tax Reduction Possibility
3. § 10.3 Formula for Taxable Income
   1. (a) Gross Investment Income
   2. (b) Capital Gains and Losses
   3. (c) Interest
   4. (d) Dividends
   5. (e) Rentals
   6. (f) Royalties
   7. (g) Estate or Trust Distributions
   8. (h) Partnerships
   9. (i) Questionable Taxable Gains before 2007
4. § 10.4 Reductions to Gross Investment Income
   1. (a) Deductions Allowed
   2. (b) Deductions Not Allowed
   3. (c) Changing Accounting Method or Tax Year
5. § 10.5 Foreign Foundations
6. § 10.6 Exemption from Tax on Investment Income
7. § 10.7 Legislative Proposal

The private foundation is one of the few types of tax-exempt organizations that are required to pay a tax on investment income.¹ The revenue derived from this tax is intended to offset the cost of enforcing the sanctions imposed on private foundations and other exempt organizations. As one analysis stated, private foundations are to “share some of the burden of paying the cost of government, especially for more extensive and vigorous enforcement of the tax laws relating to exempt organizations.”² To preserve the concept that private foundations are exempt entities, this tax is cast as an excise tax rather than an income tax.³

Indeed, the tax was intended to be in the nature of an audit fee.⁴ These taxes are not actually earmarked for auditing and supervising foundations but are mingled with the ...