SECTION 2. BACKGROUND

.01 Prior to amendment by the Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107–134 (the Act), section 692(c)(1) provided that, in the case of any

of the Internal Revenue Code of 1986, as amended, in light of the courts’ decisions in Ann Jackson Family Foundation v. Com- missioner, 97 T.C. 534 (1991), aff’d, 15 F.3d 917 (9 ^th Cir. 1994).

BACKGROUND

Section 4942(a) imposes a tax on the amount of undistributed income of a private foundation for any taxable year that is not distributed by the first day of the second taxable year following such taxable year. Section 4942(c) defines undistributed income as the amount by which the distributable amount for the taxable year exceeds the qualifying distributions made out of the distributable amount. Section 4942(d) defines distributable amount as the minimum investment return (plus certain refunds of amounts previously taken into account as qualifying distributions), reduced by the taxes imposed on the private foundation under subtitle A and section 4940. Treas. Reg. § 53.4942(a)–2(b)(2), provides that the distributable amount of a private foundation shall be increased by the income portion of distributions from trusts described in section 4947(a)(2) with respect to amounts placed into trust after March 26, 1969. In Ann Jackson Family Founda- tion, the Tax Court held that Treas. Reg. § 53.4942(a)–2(b)(2) was invalid to the extent the regulation requires including in the private foundation’s distributable amount for the year the full amount of the income portion of distributions from split-interest trusts. The court determined that the language of section 4942 did not support this interpretative regulation.

PROPOSED ACTION

The Treasury Department and the Internal Revenue Service intend to propose regulations modifying the regulations under section 4942 in a manner consistent with the holdings of the Tax Court and the Ninth Circuit in Ann Jackson Family Foundation . Until further guidance is promulgated, private foundations should compute the distributable amount under section 4942(d) without regard to Treas. Reg. § 53.4942(a)–2(b)(2).

CURRENT RETURN PROCESSING

For current tax returns, any private foundation to which this notice applies should mark “Filed pursuant to Notice 2004–36” on the front page of its Form 990–PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation . If a Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code, is filed, Schedule B (Initial Tax on Undistributed Income) should be computed disregarding distributions received from section 4947(a)(2) trusts. Returns should be completed in accordance with this notice pending corresponding changes to Form 990–PF and Form 4720 and the accompanying instructions.

Form 990–PF requires information with respect to not only the current tax year, but also prior tax years, particularly Parts XI and XIII. Private foundations may wish to complete these Parts as if prior year returns had been completed in accordance with this Notice rather than the Form instructions. Private foundations may include a schedule to show how the information provided on such return varies from prior year returns as filed. It is not necessary for a private foundation to file amended returns for prior years, but it will be expected to retain the supporting information and computations for the changes that would have been reflected had amended returns been filed.

REFUND PROCESSING

For years in which the statute of limitations has not expired and for which a refund of section 4942 taxes paid is sought, the private foundation must file an amended Form 990–PF and an amended Form 4720 for that year with a schedule showing the corrected amount of section 4942 liability pursuant to this Notice. The private foundation should mark the front page of the amended return (or returns) “Filed pursuant to Notice 2004–36.”

COMMENTS

The Service welcomes comments and suggestions relating to the amendment of the regulations on distributions from split-interest trusts to private foundations. Written comments should be submitted by August 9, 2004, to CC:PA:LPD:RU

May 10, 2004 890 2004-19 I.R.B.

the Secretary will ascertain, allowing a reasonable time under the circumstances for response, from the Department of State and the Department of Justice whether those Departments believe that a preponderance of the evidence indicates that the event resulted from terrorist activity directed against the United States or its allies. The Secretary will follow the same procedures if an event that occurred within the United States has an international dimension, or if the perpetrators or cause of the event are unknown. An event within the United States has an “international dimension” if a preponderance of the evidence indicates that it involves: (a) an attack by a foreign perpetrator, or by a domestic perpetrator with links to a foreign principal ( e.g., a foreign terrorist group, sponsor or financier); (b) an attack on a foreign national, family members in the United States of a foreign national, or a United States entity held by foreign owners; (c) an attack on a foreign diplomatic mission or on an international organization (including attacks on foreign diplomats and other internationally-protected persons in the United States); or (d) an attack on, or with its impact in, the United States, launched from across the border of the United States. See, generally, 22 U.S.C. § 2656f(d); 18 U.S.C. § 2331(1).

(2) Prior to publishing a determination that an event that occurred within the United States that does not have an international dimension constituted a terrorist action within the meaning of section 692(c)(2), the Secretary will ascertain, allowing a reasonable time under the circumstances for response, from the Department of Justice whether that Department believes that a preponderance of the evidence indicates that the event resulted from terrorist activity directed against the United States.

(3) Prior to publishing a determination that an event constituted a military action within the meaning of section 692(c)(2), the Secretary will consult the Department of Defense with respect to whether the event was a military action involving the Armed Forces of the United States resulting from violence or aggression against the United States or its allies.

(4) After determining that a terrorist or military action has occurred, the Secretary may exercise the authority under section 7508A to disregard a period of up to one

individual military or civilian employee of the United States who died as a result of wounds or injury incurred in a terrorist or military action outside the United States while the individual was a military or civilian employee of the United States, any tax imposed by subtitle A of the Code (income tax) did not apply with respect to the taxable year in which fell the date of death and with respect to any prior taxable year in the period beginning with the last taxable year ending before the taxable year in which the wounds or injury were incurred.

.02 Section 113(b) of the Act amended section 692(c) to remove the requirement that the employee must have incurred the wounds or injuries outside the United States. This amendment applies to tax years ending on or after September 11, 2001. Section 692(c)(1), as amended, provides that, in the case of any individual military or civilian employee of the United States who dies as a result of wounds or injury incurred in a terrorist or military action while the individual was a military or civilian employee of the United States, any tax imposed by subtitle A of the Code (income tax) shall not apply with respect to the taxable year in which falls the date of death and with respect to any prior taxable year in the period beginning with the last taxable year ending before the taxable year in which the wounds or injury were incurred.

.03 Section 692(c)(2) defines “terroristic or military action” as any terrorist activity which a preponderance of the evidence indicates was directed against the United States or any of its allies and any military action involving the Armed Forces of the United States and resulting from violence or aggression against the United States or any of its allies (or threat thereof). Terrorist activity includes criminal offenses intended to coerce, intimidate, or retaliate against the government or civilian population. See, e.g., Homeland Security Act of 2002, Pub. L. No. 107–296, sec. 2(15), 116 Stat. 2135, 2141, 6 U.S.C. § 101(15). .04 Section 111 of the Act added section 139 to the Code. Section 139 provides that gross income shall not include any amount received by an individual as a qualified disaster relief payment. A qualified disaster includes a disaster which results from a terrorist or military action, as defined in section 692(c)(2). I.R.C. § 139(c)(1).

.05 Section 112(a) of the Act grants the Secretary authority under section 7508A to disregard a period of time (up to one year) for determining: (a) the timeliness of acts under section 7508(a)(1), (b) the amount of any addition to tax, and (c) the amount of any credit or refund, in the event of a terrorist or military action, as defined in section 692(c)(2). Section 112(c) of the Act amends the Employee Retirement Income Security Act, 29 U.S.C. § 1148 and 29 U.S.C. § 1302(i) (ERISA), to authorize the Secretary of Labor to disregard a period of up to one year for determining the timeliness of actions required under ERISA, in the event of a terrorist or military action, as defined by section 692(c)(2).

.06 Section 113 of the Act amends section 104(a)(5) of the Code to include compensation received for injuries or sickness as a result of a terrorist or military action, as defined by section 692(c)(2).