A. Section 4945 — Publication 5590

(1) Be aware that some transactions may trigger multiple excise taxes. It’s common

for a transaction to be both a self-dealing transaction and a taxable expenditure transaction.

(2) The following facts below are taken from Part VII, Item A in TG 58 Excise Taxes

on Self-Dealing – IRC Section 4941. The expenditure doesn’t meet any exception listed in Section 4945. The transaction is a taxable expenditure. The table below shows how the tax is computed for the foundation and the foundation manager.

(3) Disqualified Person Charlie establishes Private Foundation Bravo on June 1,

2005, depositing $500,000 into PF Bravo’s savings account. PF Bravo’s fiscal year ends June 30. DP Charlie is the sole foundation manager of PF Bravo. DP Charlie applies for and receives exemption for PF Bravo under Section 501(c)(3) as a private foundation. The determination letter is dated August 22, 2007. PF Bravo’s Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, states that the foundation will make grants only to public charities. The determination letter states, “We have not considered whether grants made under your procedures are excludable from the gross income of recipients under Section 117(a) of the Code.” DP Charlie is a CPA, and partner of a small accounting firm. DP Charlie has 20 years of experience, with 10 years spent as the controller of a large public charity.

(4) On October 10, 2009, PF Bravo issues a check to Mike, DP Charlie’s child. DP

Mike is 10 years old. The check is for $25,000. The memo field on the check states “Happy Birthday”. DP Mike has not rendered any services to the foundation.

(5) During an examination of the Form 990-PF for 201006, Agent Davis notifies PF

Bravo that the transaction constitutes a taxable expenditure subject to tax under Section 4945. For the report of examination, Agent Davis proposes the foundation manager excise tax under Section 4945(a)(2) on DP Charlie. The amount of the taxable expenditure, $25,000, is the amount that is subject to tax. The amount of correction is also $25,000.

(6) DP Charlie filed the 201006 Form 990-PF on November 15, 2010. The statute of

limitations on the taxable expenditure transaction is November 15, 2013, if the return provided adequate notice of the transaction. Because DP Charlie made

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correction in 2011, no second tier taxes are proposed. Note that when there is a taxable expenditure, tax is imposed only once in the taxable period.

Description	Amount
10/10/2009 Transaction	25,000.00
Foundation Tax at 20%	5,000.00
Foundation Manager Tax at 5% (Cap at $10K)	1,250.00

(7) Expanding upon the example, assume that Private Foundation Bravo

subsequently files a late Form 4720. The Form 4720 is filed 10 days after Agent Davis issued the initial examination appointment letter on July 2, 2012. The foundation reports only $5,000 as a taxable expenditure. Upon further inquiry, Agent Davis finds that the $20,000 not reported was placed into a Section 529 tuition plan. No foundation manager taxes were reported. Agent Davis’ resulting adjustment is computed below.

Description	Amount
10/10/2009 Transaction	25,000.00
Amount Reported	5,000.00
Adjusted Transaction Amount	20,000.00
Foundation Tax at 20%	4,000.00
Foundation Manager Tax at 5% (Cap at $10K)	1,250.00

(8) Due to PF Bravo’s filing of the late Form 4720, the failure to file or failure to pay

penalties are not proposed. (See IRM 4.8.9, Statutory Notices of Deficiency, for information on failure to file and failure to pay penalties). For Foundation Manager (FM) Charlie, Agent Davis establishes the substitute for return on IDRS and proposes the failure to file and failure to pay penalties. For FM Charlie (a calendar year taxpayer), the Form 4720 return for the taxable expenditure transaction occurring in 2009, was due May 15, 2010. Agent Davis determines that abatement under Section 4962 does not apply in this case. Agent Davis issues the report on December 3, 2012, and solicits correction. See below for penalty computations:

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Taxpayer	Tax	Penalty Rate	Months Late	Penalty
FM Charlie	$1,250.00	4.5%	5	$281.25
FM Charlie	$1,250.00	0.5%	31	$193.75

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Exempt Organizations Excise Tax Audit Changes

(Chapter 41, Chapter 42, and Section 170(f)(10)(F) Excise Taxes)

Taxpayer)

See attached Explanation of Items

Form 4883 (Rev. 1-2004) Catalog Number 42083F

111

Department of the Treasury Internal Revenue Service www.irs.gov

Exempt Organizations Excise Tax Audit Changes

(Chapter 41, Chapter 42, and Section 170(f)(10)(F) Excise Taxes)

Name of Exempt Organization (if different from Taxpayer) Private Foundation Bravo

			Taxable Years Ended
			12/31/2009
Internal Revenue Code Section for Proposed Adjustment	Internal Revenue Code Section for Proposed Adjustment	Internal Revenue Code Section for Proposed Adjustment	4945(a)(2)
1. Adjustments	1. Adjustments	Taxable expenditure (birthday gift)	25,000.00
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
1. Adjustments	1. Adjustments
2.	Total Adjustments	Total Adjustments	25,000.00
3.	Amount reported on return or as Previously adjusted	Amount reported on return or as Previously adjusted	0.00
4.	Total amount as corrected	Total amount as corrected	25,000.00
5.	Applicable tax rate %	Applicable tax rate %	5%
6.	Initial tax liability as corrected (line 4 x Line 5)*	Initial tax liability as corrected (line 4 x Line 5)*	1,250.00
7.	Initial tax liability reported	Initial tax liability reported	0.00
8.	Increase (or decrease) in tax	Increase (or decrease) in tax	1,250.00
9.	Additional tax (minimum)	Additional tax (minimum)
10.	Penalties (Code section 6651(a)(1), 6651(a)(2))	Penalties (Code section 6651(a)(1), 6651(a)(2))	475.00

Explanation of Adjustments See attached Explanation of Items

Tax on foundation managers is capped at $10,000. The failure to pay penalty per 6651(a)(2)

will continue to accrue until the tax deficiency is fully paid, up to a maximum rate of 25%.

Department of the Treasury

Form 4883 (Rev. 1-2004) Catalog Number 42083F Internal Revenue Service

Catalog Number 42083F

Department of the Treasury Internal Revenue Service www.irs.gov

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Exempt Organizations – Report of Examination

1. Form No. 4720		2. Area Office [Insert name of your area]						3. Date of Report [Insert date]
4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code]	4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code]	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)	5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4)
6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	7. Tax Period(s) Ended	7. Tax Period(s) Ended	7. Tax Period(s) Ended	8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6)	8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6)	8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6)	9. Tax Period(s) Ended	9. Tax Period(s) Ended	9. Tax Period(s) Ended
6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	6/30/2010	6/30/2010
6. Social Security Number or Employer Identification Number [Insert EIN]
6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]	6. Social Security Number or Employer Identification Number [Insert EIN]
10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	10. Reporter Preparer’s Name [Insert your name]	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No	11. Agreement Secured (Check one.) Yes No
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]	13. Agreement Date [Leave blank]
14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14a. Summary of Proposed Adjustments	14b. Penalty	14b. Penalty	14b. Penalty	14b. Penalty	14b. Penalty
Internal Revenue Code Section (1)	Period Covered by Examination (2)	Period Covered by Examination (2)	Period Covered by Examination (2)	Amount of Tax (3)	Amount of Tax (3)	Additional Tax (4)	Internal Revenue Code Section (1)	Internal Revenue Code Section (1)	Internal Revenue Code Section (1)	Amount (2)	Amount (2)
4945(a)(1)	6/30/2010	6/30/2010	6/30/2010	4,000.00	4,000.00

See attached Explanation of Items

16. Attachments

Form 4621 Rev (1-2004) Catalog Number 41830Q

113

Deparatment of the Treasury Internal Revenue Service www.irs.gov

Exempt Organizations – Report of Examination

See attached Explanation of Items

16. Attachments

Form 4621 Rev (1-2004) Catalog Number 41830Q

114

Deparatment of the Treasury Internal Revenue Service www.irs.gov