A. Background / History

(1) Under Chapter 42, excise taxes are imposed pursuant to Section 4945 with

respect to taxable expenditures made by private foundations and certain trusts subject to Chapter 42.

(2) Congress enacted Section 4945, part of the Tax Reform Act of 1969 (P.L. 91 172), to curb perceived abuses of private foundations. The perceived abuses included the following:

a. Attempting to influence legislation;

b. Engaging in political activities;

c. Distributing funds to individuals for use in vacations and interludes between

jobs;

d. Subsidizing the preparation of materials furthering specific political

viewpoints;

e. Failing to have adequate controls to ensure that the funds be used

exclusively for exempt purposes.

(3) Section 4945 curbs abuse not covered by the other remedial provisions of

Chapter 42. See background and general explanation of Section 4945 in General Explanation of the Tax Reform Act of 1969 (Blue Book), prepared by the Staff of the Joint Committee on Internal Revenue Taxation, December 3, 1970. Some transactions, however, may result in Section 4941 tax in addition to Section 4945 tax. See Rev. Rul. 77-161, 1977-1 C.B. 358.

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

1212, 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. The amendments apply to excise taxes imposed by Section 4945.

(5) 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.

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(6) 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 applies for tax years beginning in 2020 and later.

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

(8) 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.

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

does 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, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the IRC, 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.