B.4. Definition and Method of Correction

(1) Section 4945(b)(1), as stated above, provides that if a private foundation corrects

a taxable expenditure during the taxable period, it and its managers will not be liable for the second tier tax. However, the private foundation is not required to attempt to recover the taxable expenditure by legal action if in all probability a judgment would not be satisfied. See Treas. Reg. 53.4945-1(d)(1).

(2) Under Section 4945(i) and Treas. Reg. 53.4945-1(d)(1), correcting a taxable

expenditure is accomplished by recovering the amount of the expenditure to the

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extent recovery is possible. If all the funds constituting the taxable expenditure are recovered, the foundation will have corrected the transaction and need not take any further steps to avoid liability for the additional tax.

(3) If recovery of the full amount of the expenditure is not possible, the IRS may

require the private foundation, under the facts and circumstances, to take some or all the following corrective actions:

a. Withholding any unpaid funds due to the grantee;

b. Making no further grants to the particular grantee;

c. Submitting, in addition to other reports that are required, periodic reports (for

example, quarterly) with respect to all its expenditures (such reports shall be equivalent in detail to the reports required by Section 4945(h)(3) and Treas. Reg. 53.4945-5(d));

d. Improving methods of exercising expenditure responsibility;

e. Improving methods of selecting recipients of individual grants; and

f. Implementing other measures as the IRS may prescribe in a particular case.

(4) If the expenditure is taxable only because of inadequate reporting (in violation of

Section 4945(h)(2) or Section 4945(h)(3)), correction may be accomplished by obtaining the required report. In addition, if the expenditure is taxable only because of a failure to obtain a full and complete report from the grantee on how the funds were spent (Section 4945(h)(2)) and an investigation indicates that no grant funds have been diverted to any use not in furtherance of a purpose specified in the grant, correction may be accomplished by exerting all reasonable efforts to obtain the report in question and reporting the failure to the IRS, even though the report is not finally obtained. See Treas. Reg. 53.4945-1(d)(2).

(5) Where a grant is a taxable expenditure under Section 4945(d)(3) only because of

a failure to obtain advance approval of procedures under Section 4945(g), correction may be accomplished by obtaining approval of the grant making procedures and establishing to the satisfaction of the IRS that:

a. No grant funds have been diverted for use not in furtherance of a purpose not

specified in the grant;

b. The grant making procedures instituted would have been approved if

advance approval of such procedures had been properly requested; and

c. Where advance approval of grant making procedures is subsequently

required, such approval will be properly requested. See Treas. Reg. 53.49451(d)(3).