A. Introduction

(1) Section 4945(d) lists five categories of taxable expenditures. These include

amounts:

a. Spent to carry on propaganda or attempt to influence legislation. See Section

4945(d)(1).

b. Expended to influence any specific public election outcome, or to carry on a

partisan voter registration drive (directly or indirectly). See Section 4945(d)(2).

c. Paid as a grant to an individual for travel, study, or other similar purposes,

unless the grant satisfies Section 4945(g). See Section 4945(d)(3).

d. Disbursed as a grant to an organization, unless the organization is a public

charity (other than certain supporting organizations) or the PF exercises expenditure responsibility per Section 4945(h). See Section 4945(d)(4)(A)(ii)) or exempt operating foundation. See Section 4945(d)(4).

e. Paid or incurred for any purpose other than one in Section 170(c)(2)(B). See

Section 4945(d)(5).

(2) An expenditure may fall into several categories of taxable expenditures.

Regardless of the number of categories violated, the tax is assessed only once.

Example: A foundation manager issues a series of payments to two individuals to travel throughout several counties in a state during an election year. The recipients act as paid signature gatherers for a number of ballot initiatives to modify current laws. They also go door to door to sign up eligible voters, based on a list of potential voters provided by a state political party. They provide pamphlets to the voters promoting specific party candidates. The individuals submit travel vouchers for reimbursement to the foundation, along with the signature pages, lists of voter registrations, and paid invoices for the printing of the pamphlets.

Note: In the above example, the foundation has violated Sections 4945(d)(1), (d)(2), and (d)(5). The foundation is liable only once for the tax on the reimbursements to the individuals, and the tax is imposed only once in the taxable period.

(3) When examining the foundation, review all the expenditures. Determine which

expenditures constitute grants. For grants to individuals for travel, studies, or similar purposes, verify that the organization has obtained a Section 4945(g) advance ruling letter. The organization may request the letter during the initial application process or in a subsequent ruling request. If the foundation doesn’t

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have a ruling letter, determine whether it meets an exception under Section 4945(d)(3) or Section 4945(g). Assert the tax if the foundation doesn’t meet the exceptions.

Note: The foundation may submit Form 8940, Request for Miscellaneous Determination, and pay a user fee to request a Section 4945(g) advance ruling letter. The ruling is prospective from the date of the letter and is not retroactive, though it may be required as part of correction.

(4) Unless a grant was made to a public charity (other than certain supporting

organizations - see Section 4945(d)(4)(A)(ii)) or an exempt operating foundation, determine whether the foundation exercised expenditure responsibility.

(5) For those grants that failed the expenditure responsibility requirement, propose

the first tier tax and request correction. Refer to the Correction section for a discussion of acceptable correction.

(6) Be aware that there are permitted expenditures, such as:

a. Expenditures to acquire investments that generate income to be used to

further the purposes of the organization.

b. Reasonable expenses related to acquiring these investments.

c. Payment of taxes.

d. Expenses that qualify as allowable deductions in figuring unrelated business

income tax (UBIT).

e. Any payment that is a Section 4942 qualifying distribution.

f. Any deduction allowed in arriving at taxable net investment income (Section 4940).

g. Reasonable expenditures to evaluate, acquire, modify, and dispose of

program-related investments.

h. Business expenses of the recipient of a program-related investment.

(7) Payment of unreasonable administrative expenses, including wages, consultant

fees, and other fees for services performed, are taxable expenditures unless they were:

a. Made in the good faith belief that the amounts were reasonable.

b. Consistent with ordinary business care and prudence.

(8) Request documentation that supports the reasonableness determination for any

expenditure that appears unreasonable. Expenditures may be taxable if the trustees, officers, or foundation managers didn’t try to determine whether the expenditures were reasonable. If needed, submit a Specialist Referral System request for an LB&I engineer to evaluate the expenditure. Determine the excess expenditure and propose the tax for the excess amount.

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(9) Compute the tax using the expenditure amount, or excess amount if deemed

unreasonable. Propose the tax for the year in which the expenditure was made.

(10) In addition to the Section 4945(a)(1) tax imposed on foundations, Section

4945(a)(2) imposes a tax on a foundation manager who knowingly and willfully agrees to the expenditure.

(11) Refer to the Correction section for a discussion of acceptable correction.

(12) Complete Form 4883, Exempt Organizations Excise Tax Audit Changes, Form

4621, Report of Examination - Exempt Organization, Form 886-A, Explanation of Items, and Form 870-E, Waiver of Restriction on Assessments and Collection of Deficiency and Acceptance of Overassessment. See Section VI of this Technical Guide for examples of how to determine and compute the tax.

Note: Form 870-E is used with respect to taxes that a taxpayer agrees to pay in full, suspends interest from continuing to accrue, and facilitates closure. See IRM 8.6.4, Reaching Settlement and Securing an Appeals Agreement Form and IRM 4.70.14, Resolving the Examination. List separately the tax for each taxable event (and for each year within the taxable period), and when applicable, prepare a separate Form 870-E for each taxpayer.

(13) The Section 4945(a)(1) tax is reported on Form 4720 and assessed against the

private foundation. See IRM 4.70.13, Executing the Examination, to set up a substitute for return if no return was filed or to secure a delinquent return.

(14) The foundation manager tax is reported on Form 4720 and assessed against the

responsible individual(s). See also IRM 4.70.14, Resolving the Examination, for the situations described above.

Note: A manager, self-dealer, disqualified person, donor, donor adviser or related person who owes tax under Chapter 41 or 42 (including an organization manager under Section 4965), may no longer report the tax on the Form 4720 filed by the organization. Each taxpayer must file a separate Form 4720. See Notice 2021-01, 2021-2 I.R.B. 315.