B. Relevant Terms

(1) Disqualified Individual: Section 4940(d)(3)(B) provides that the term

“disqualified individual” means, with respect to any private foundation, an individual who is:

a. A substantial contributor to the foundation,

b. An owner of more than 20% of (i) the total combined voting power of a

corporation, (ii) the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation, or

c. A member of the family of any individual described in (a) or (b) above.

For purposes of this provision, the term "family " includes only an individual’s spouse, ancestors, children, grandchildren, great grandchildren, and spouses of children, grandchildren, great grandchildren. The constructive ownership rules (Section 4946(a)(3) and (4)) apply in determining ownership in a corporation, partnership and trust for the purpose of defining "disqualified individual."

(2) Exempt Operating Foundation: Section 4940(d)(2) provides that the term

“exempt operating foundation” means, with respect to any taxable year, any private foundation if:

a. Such foundation is an operating foundation, as defined in Section 4942(j)(3),

b. Such foundation has been publicly supported for at least 10 taxable years,

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c. At all times during the taxable year, the governing body of such foundation (i)

consists of individuals at least 75% of whom are not disqualified individuals, and (ii) is broadly representative of the general public, and

d. At no time during the taxable year does such foundation have an officer who

is a disqualified individual.

Note: Section 4940 does not impose tax on exempt operating foundations. See Section 4940(d). An organization must obtain a determination letter from the IRS recognizing its status as an exempt operating foundation to be exempt from the Section 4940 excise tax. See Revenue Procedure (Rev. Proc.) 2024-5, 2024-1 I.R.B. 262 (updated annually).

(3) Gross Investment Income: Section 4940(c)(2) states that the term “gross

investment income” means the gross amount of income from interest, dividends, rents, payments with respect to securities loans (as defined in Section 512(a)(5)), and royalties, but not including any such income to the extent included in computing the tax imposed by Section 511. Such term shall also include income from sources similar to those in the preceding sentence.

(4) Net Investment Income: Section 4940(c)(1) states the net investment income is

the amount by which (A) the sum of the gross investment income and the capital gain net income exceeds (B) the deductions allowed. Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A.