A. Exhibit 1: Section 4940 Example — 0824 Publ 5580 (PDF)

(1) During the examination of Private Foundation Alpha, Agent Williams review Part I

of the Form 990-PF for the year under examination and the prior years. Agent Williams obtains the books and records for the five previous years.

Note: The amounts reported on Part V of the return under examination come from the prior years’ Forms 990-PF. Because prior year amounts are reported on the return for the year under examination, agents may request books and records from those years to verify the reported amounts.

(2) On Form 990-PF, the taxpayer paid a Section 4940 tax of $13,192, claiming to be

entitled to the Section 4940(e) 1% tax rate. The net investment income reported on Part I Line 27(b) was $1,319,200. Private Foundation Alpha reported the following amounts for 201112 on Form 990-PF Part V.

Base Period Years	Adjusted Qualifying Distributions	Net Value of Noncharitable Use Assets	Distribution Ratio
2010	$207,577	$22,902,232	0.009063614
2009	$1,708,660	$30,524,083	0.055977439
2008	$1,586,932	$20,563,743	0.077171359
2007	$1,854,083	$20,386,458	0.090946794
2006	$840,244	$39,168,308	0.021452139
The sum of the distribution ratios	The sum of the distribution ratios	The sum of the distribution ratios	0.254611346
Average distribution ratio for the 5-year base period	Average distribution ratio for the 5-year base period	Average distribution ratio for the 5-year base period	0.050922269
The net value of non-charitable use assets for 2011	The net value of non-charitable use assets for 2011	The net value of non-charitable use assets for 2011	$24,303,581
The average distribution ratio multiplied by the assets net value	The average distribution ratio multiplied by the assets net value	The average distribution ratio multiplied by the assets net value	$1,237,593
1% of net investment income	1% of net investment income	1% of net investment income	$13,192
The sum of the two above amounts	The sum of the two above amounts	The sum of the two above amounts	$1,250,786
Qualifying distributions from Part XII	Qualifying distributions from Part XII	Qualifying distributions from Part XII	$1,261,332

(3) In reviewing the records, Agent Williams finds that in lieu of taking the average of

12 end-of-month balances for each year as required by Section 4940(e)(5), Section 4942(e)(2) and Treas. Reg. 53.4942(a)-2(c)(ii), the foundation used the January and December ending values divided by two to arrive at the net value of non-charitable use assets each year. Agent Williams compiles the following table of ending balances (cash and securities combined).

Month	2011	2010	2009	2008	2007	2006
Jan.	$31,467,378	$22,909,633	$7,790,548	$24,772,425	$22,498,813	$2,600,472
Feb.	$36,106,867	$38,109,497	$7,812,389	$28,594,378	$21,152,025	$20,145,814
Mar.	$47,136,598	$26,182,305	$10,788,337	$28,817,860	$16,681,252	$2,370,000
Apr.	$32,926,971	$29,863,039	$19,031,437	$21,156,140	$20,279,695	$25,270,619
May	$31,875,373	$27,058,917	$33,118,231	$39,092,678	$39,887,291	$26,965,403
Jun.	$31,583,880	$38,884,273	$39,294,219	$36,296,967	$30,376,780	$27,435,181
Jul.	$30,528,076	$36,832,683	$53,680,220	$10,716,462	$29,931,354	$29,136,744
Aug.	$21,076,814	$36,796,071	$29,049,515	$14,748,143	$27,100,917	$44,368,653
Sept.	$19,892,556	$42,501,813	$57,976,763	$15,576,231	$19,211,371	$50,075,854
Oct.	$16,916,854	$44,633,691	$48,008,689	$14,969,542	$31,419,935	$61,041,198
Nov.	$16,298,983	$19,057,261	$33,245,104	$14,814,622	$23,810,364	$74,151,584
Dec.	$17,139,784	$22,894,831	$53,257,618	$16,355,061	$18,274,103	$75,736,144
12 Month Avg.	$27,745,845	$32,143,668	$32,754,423	$22,159,209	$25,051,992	$36,608,139

(4) Using the 12-month averages, Agent Williams revises Part V. The schedule now

reads:

Base Period Years	Adjusted Qualifying Distributions	Net Value of Noncharitable Use Assets	Distribution Ratio
2010	$207,577	$32,143,668	0.006457788
2009	$1,708,660	$32,754,423	0.052165779
2008	$1,586,932	$22,159,209	0.071615011
2007	$1,854,083	$25,051,992	0.074009405
2006	$840,244	$36,608,139	0.022952382
The sum of the distribution ratios	The sum of the distribution ratios	The sum of the distribution ratios	0.227200367
Average distribution ratio for the 5-year base period	Average distribution ratio for the 5-year base period	Average distribution ratio for the 5-year base period	0.045440073
The net value of non-charitable use assets for 2011	The net value of non-charitable use assets for 2011	The net value of non-charitable use assets for 2011	$27,745,845
The average distribution ratio multiplied by the assets net value	The average distribution ratio multiplied by the assets net value	The average distribution ratio multiplied by the assets net value	$1,260,773
1% of net investment income	1% of net investment income	1% of net investment income	$13,192
The sum of the two above amounts	The sum of the two above amounts	The sum of the two above amounts	$1,273,965
Qualifying distributions from Part XII	Qualifying distributions from Part XII	Qualifying distributions from Part XII	$1,261,332

(5) For PF Alpha to qualify for the 1% Section 4940 rate, the last line in the table

(Qualifying distributions from Part XII) must be equal to or greater than the second to last line. As the foundation failed the computational test, Agent Williams prepares Forms 4883 and 4621 to assert the additional $13,192 in tax.

Exempt Organizations Excise Tax Audit Changes

(Chapter 41, Chapter 42, and Section 170(f)(10)(F) Excise Taxes)

Name of Taxpayer Employer ID No. Private Foundation Alpha [Insert EIN] 1

Employer ID No.

[Insert EIN]

Schedule or Exhibit 1

Name of Exempt Organization (if different from Taxpayer)			Taxable Years Ended
			Taxable Years Ended	Taxable Years Ended	Taxable Years Ended
			12/31/2011
Internal Revenue Code Section for Proposed Adjustment	Internal Revenue Code Section for Proposed Adjustment	Internal Revenue Code Section for Proposed Adjustment	4940(a)
1. Adjustments	1. Adjustments	Tax rate change 1% to 2% - failed to qualify for reduced rate
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
2.	Total Adjustments	Total Adjustments	0.00
3.	Amount reported on return or as Previously adjusted	Amount reported on return or as Previously adjusted	1,319,200.00
4.	Total amount as corrected	Total amount as corrected	1,319,200.00
5.	Applicable tax rate %	Applicable tax rate %	2%
6.	Initial tax liability as corrected (line 4 x Line 5)	Initial tax liability as corrected (line 4 x Line 5)	26,384.00
7.	Initial tax liability reported	Initial tax liability reported	13,192.00
8.	Increase (or decrease) in tax	Increase (or decrease) in tax	13,192.00
9.	Additional tax (minimum)	Additional tax (minimum)
10.	Penalties (Code section)	Penalties (Code section)

See attached Explanation of Items

Form 4883 (Rev. 1-2004) Catalog Number 42083F

Department of the Treasury Internal Revenue Service www.irs.gov

Exempt Organizations – Report of Examination

1. Form No. 4720		2. Area Office [Insert name of your area]						3. Date of Report [Insert date]
4. Name and Address of Taxpayer Private Foundation Alpha [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Alpha [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Alpha [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Alpha [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Alpha [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Alpha [Insert street address] [Insert city, state, and zip code]	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)
6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	7. Tax Period(s) Ended	7. Tax Period(s) Ended	7. Tax Period(s) Ended	8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6)	8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6)	8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6)	9. Tax Period(s) Ended	9. Tax Period(s) Ended	9. Tax Period(s) Ended
6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	12/31/2011	12/31/2011
6. Social Security Number or Employer Identification Number [Insert EIN]
6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]
10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]
14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14b. Penalty	14b. Penalty	14b. Penalty	14b. Penalty	14b. Penalty
Internal Revenue Code Section (1)	Period Covered by Examination (2)	Period Covered by Examination (2)	Period Covered by Examination (2)	Amount of Tax (3)	Amount of Tax (3)	Additional Tax (4)	Internal Revenue Code Section (1)	Internal Revenue Code Section (1)	Internal Revenue Code Section (1)	Amount (2)	Amount (2)
4940(a)	12/31/2011	12/31/2011	12/31/2011	13,192.00	13,192.00

See attached Explanation of Items

16. Attachments

Form 4621 Rev (1-2004) Catalog Number 41830Q

Deparatment of the Treasury Internal Revenue Service www.irs.gov