A. Background / History

(1) Before the Tax Reform Act of 1969, the investment income of private foundations,

similar to public charities, wasn’t subject to tax. According to the legislative history of Section 4940, the purpose of a tax on the investment income of private foundations was to:

a. Ensure private foundations would bear part of the cost of government, and

b. Function as a user fee that would help pay the cost of administering the

private foundation provisions.

(2) The tax imposed under Section 4940(a) is an excise tax and not an income tax.

Unless an income tax treaty provides that a tax other than an income tax is covered for purposes of the tax treaty, excise taxes, and the Section 4940 excise tax in particular, will not be treated as a covered tax under that United States income tax treaty. See Revenue Ruling (Rev. Rul.) 84-169, 1984-2 C.B. 216.

(3) The Pension Protection Act of 2006, Public Law 109-280 (“PPA 2006”), redefined

gross investment income and capital gain net income for purposes of Section 4940(c). The Act also amended the Code for Chapter 42 excise taxes. Most of the first tier excise tax rates, as well as the limits on foundation manager taxes were doubled.

(4) Regarding the filing requirements for private foundations, for tax years beginning

on or after July 2, 2019, Section 3101 of Public Law 116-25 requires that returns by exempt organizations be filed electronically. If an organization is filing Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, for a tax year beginning on or after July 2, 2019, the organization must file the return electronically. Limited exceptions apply.

(5) Electronic filing requirements have not changed for Form 990-PF filers with tax

years beginning before July 2, 2019 (which includes calendar year 2019 Forms 990-PF). Required electronic filing for calendar year filers will apply for tax years beginning in 2020 and later.

(6) There are new reporting standards for net assets, and Part II of Form 990-PF was

updated to reflect the Financial Accounting Standard Board’s (FASB’s)

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reclassification of net assets into two classes, net assets without donor restrictions and net assets with donor restrictions.

(7) The Taxpayer Certainty and Disaster Tax Relief Act passed on December 20,

2019, included legislation that reduced the 2% excise tax on net investment income of private foundations to 1.39%. At the same time, the legislation repealed the 1% special rate that applied if the private foundation met certain distribution requirements. The changes are effective for taxable years beginning after December 20, 2019.

(8) For tax years beginning in 2020, an individual liable for a Chapter 42 excise tax

won’t have the option to file jointly with the organization with respect to which the excise tax relates. Beginning with tax year 2020, Form 4720 has been revised to identify whether the filer is the organization or an individual. Accordingly, for tax years after 2019, an agent preparing Form 4720 to report individual excise tax liability during an examination will no longer convert Form 4720 to “Form 4720-A.” The revenue agent will, instead, complete Form 4720 identifying the filer as an individual as described in the instructions for Form 4720. Please see the Form 4720 instructions for further information.