C. Law / Authority — Publication 5590

(1) Section 4945 was enacted to deter private foundations from making inappropriate

expenditures. Excise taxes are imposed on private foundations and their managers for expenditures that fall within the definition of "taxable expenditures." Nonexempt charitable trusts treated as private foundations under Section 4947(a)(1) and split-interest trusts described in Section 4947(a)(2) are also subject to Section 4945, except as provided under Section 4947.

(2) There are five categories of taxable expenditures. Taxable expenditures are

amounts paid or incurred by private foundations:

a. To carry on propaganda, or otherwise attempt to influence legislation (Section

4945(d)(1));

b. To influence the outcome of any specific public election, or to carry on a

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

c. As a grant to an individual for travel, study, or other similar purposes, unless

the grant meets certain requirements (Section 4945(d)(3));

d. As a grant to an organization unless such organization is a public charity or

unless the grantor private foundation exercises "expenditure responsibility" over the grant (Section 4945(d)(4)); and

e. For any purpose other than one specified in Section 170(c)(2)(B) (specifically

religious, charitable, scientific, literary, or educational purposes, to foster certain amateur sports competition, or for the prevention of cruelty to children or animals) (Section 4945(d)(5)).

(3) If a private foundation makes an expenditure that falls within the definition of any

of these categories of taxable expenditures, Section 4945(a)(1) imposes an excise tax that is to be paid by the private foundation. When the private foundation is subject to the Section 4945(a)(1) tax, its managers may also be subject to initial excise taxes under Section 4945(a)(2) if they know that an expenditure is a taxable expenditure and agree to make such taxable expenditure. However, this initial tax is not applicable if the agreement to make such taxable expenditure is not willful and is due to reasonable cause. The taxes described in Sections 4945(a)(1) and (a)(2) are known as "first tier" taxes.

(4) An additional excise tax of much greater severity is imposed under Section

4945(b)(1) on the private foundation if it fails to correct the taxable expenditure within the taxable period. Section 4945(b)(2) taxes are imposed on the foundation managers if they refuse to agree to part or all of the correction. The taxes described in Section 4945(b)(1) and (b)(2) are known as "second tier" taxes. This two tier tax structure is parallel to the tax sanctions imposed under Sections 4941 through 4944, although taxes on managers are only imposed under Sections 4941, 4944, and 4945. If the private foundation repeatedly or flagrantly violates Section 4945, the IRS may terminate its status. Such action may make the private foundation liable for termination tax under Section 507(c).

(5) A private foundation exempt from federal income tax under Section 501(c)(3)

cannot, as a substantial part of its activities, carry on propaganda or otherwise attempt to influence legislation. The definition of substantiality is irrelevant for purposes of Section 4945. Any amount spent or incurred by a private foundation in an attempt to influence legislation is a taxable expenditure under Section 4945. A private foundation may also lose its exempt status if the legislative activity is substantial, resulting in status as a taxable private foundation (still subject to Section 4945).

(6) Private foundations are not permitted to make the Section 501(h) election and be

covered by the lobbying expenditures tests under Section 4911, although regulations under Sections 4911 and 4945 share some rules for determining lobbying expenditures.