B. Net Investment Income

(1) The net investment income of a private foundation is defined as the amount by

which its gross investment income plus capital gain net income exceeds allowable deductions. In computing net investment income, no exclusions or deductions from gross investment income or credits against the Section 4940 tax are allowable except those provided in Section 4940 and the applicable regulations. Net investment income must be determined under the principles of Subtitle A, except to the extent inconsistent with the provisions of Section 4940.

(2) Tax-exempt income and the expenses and interest related to such income are

excluded in computing the base of the excise tax. In computing net investment income, the IRS has held that a private foundation:

a. Must include in the year received any capital gain dividend from a regulated

investment company described in Section 851. See Rev. Rul. 73-320, 1973-2 C.B. 385.

b. Must apportion the audit fees it paid between its investment and exempt

activities to deduct the former expense in computing net investment income. See Rev. Rul. 75-410, 1975-2 C.B. 446.

c. May deduct its amortizable bond premium to the extent that it would be

deductible under Section 171 in computing its net investment income. See Rev. Rul. 76-248, 1976-1 C.B. 353.