B. Chapter 42 First Tier Excise — 0824 Publ 5580 (PDF)

(1) The table below identifies the parties subject to the Chapter 42 excise taxes,

(initial/first tier taxes generally applicable to private foundations under subchapter A), the applicable tax rates before and after the implementation of PPA 2006, and what limit, if any, applies to the tax, and if so, how much.

(2) The Taxpayer Certainty and Disaster Tax Relief Act (TCA) 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 At the same time, the legislation repealed the 1% special rate that applied if the private foundation met certain distribution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.

Code Section	Liable party	Tax Rate (PPA 2006*)		Limit (PPA 2006*)		TCA
Code Section	Liable party	Before	After	Before	After	After
4940(a)	PF	up to 2%	up to 2%	None	None	1.39%**
4941(a)(1)	Self-dealer	5%	10%	None	None	No change
4941(a)(2)	FM	2.5%	5%	$10,000 per act	$20,000 per act	No change
4942(a)	PF	15%	30%	None	None	No change
4943(a)(1)	PF	5%	10%	None	None	No change
4944(a)(1)	PF	5%	10%	None	None	No change
4944(a)(2)	FM	5%	10%	$5,000 per act	$10,000 per act	No change
4945(a)(1)	PF	10%	20%	None	None	No change
4945(a)(2)	FM	2.5%	5%	$5,000 per act	$10,000 per act	No change
The tax rate changes are effective for full tax years that begin after August 17, 2006. *The tax rate changes are effective for full tax years after December 20, 2019.

(3) If an organization or individual incurs an excise tax under Section 4941, 4942,

4943, or 4944 in a given year, then the first tier tax is imposed that year and each subsequent tax year or partial year in the taxable period (but under Section 4943, only for tax years that end within the taxable period). For Sections 4941, 4943, and 4944, the taxable period doesn’t end until the earliest of:

a. Full correction (in the case of Section 4943 when the excess business holding

is eliminated, or in the case of Section 4944, when the amount invested is removed from jeopardy),

b. Assessment, or

c. Issuance of a notice of deficiency.

Note: The notice of deficiency should reflect taxes owed for all years and partial years up to the date of notice, as a second notice of deficiency might not be allowed for taxes on the same act or failure to act. See Section 6212(c).

(4) For Sections 4942 and 4945, the taxable period ends on the earliest of:

a. Issuance of a notice of deficiency, or

b. Assessment.

(5) Under Section 4945, there is only one first tier tax in the taxable period (unlike

Sections 4941 - 4944).

(6) Use the tax year of the disqualified person for Section 4941 (Rev. Rul. 75-391,

1975-2 C.B. 446). Similarly, use the tax year of the private foundation for tax paid by the private foundation under Section 4940 or Sections 4942-4945, and the tax year of the foundation manager for foundation manager taxes under Sections 4941, 4944 and 4945.

(7) Except for Section 4940, excise taxes are reported on Form 4720, Return of

Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. For tax years beginning in 2020, an individual liable for a Chapter 42 excise tax will not 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, and each taxpayer must file a separate Form 4720. Accordingly, for tax years after 2019, an agent preparing the Form 4720 under substitute for return (SFR) procedures to report an individual’s 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. Please see the instructions for Form 4720 and Notice 2021-01, 2021-2 IRB 315, for further information.

Note: Electronic filing of the Form 4720 is required for private foundations for Form 4720 returns due on or after July 15, 2021. A limited exception applies for 2020 Form 4720 returns with a due date on or after July 15, 2021, that are submitted on paper and bear a postmark date on or before June 16, 2021. Organizations other than private foundations are encouraged, but not required, to file Form 4720 electronically.

(8) To calculate Section 4940 and Section 4942 taxes, complete the Form 990-PF,

Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation. Reclassify expenditures as necessary to determine the qualifying distributions.

(9) The applicable report forms are:

a. Form 4621, Exempt Organizations - Report of Examination

b. Form 4883, Exempt Organizations Excise Tax Audit Changes

c. Form 886-A, Explanation of Items

d. Form 870-E, Waiver of Restrictions on Assessment and Collection of

Deficiency and Acceptance of Overassessment