D. Information — Publication 5590

(1) Each Chapter 42 excise tax, except for Section 4940, requires correction of the

taxable event that triggers the excise tax. (Sections 4942, 4943, and 4944 generally don’t refer to “correction” but effectively require correcting the violation to avoid multiple taxes and second tier taxes.) Failure to make correction can result in the imposition of second tier taxes. When one transaction triggers multiple excise taxes, the correction for one tax may possibly also satisfy correction for the other taxes. Refer to the specific Technical Guides and Regulations for directions on the appropriate correction methods for each Code subsection.

(2) The immediately following table identifies the Code subsection requiring

correction and the actions required to make it. There is no correction for Section 4940, as it has no second tier excise tax. Section 4940 is an excise tax that is computed like an income tax, except that certain deductions aren’t allowed, such as the net operating loss deduction under Section 172. See Treas. Reg. 53.49401(e).

Code Section	Correction
4941(e)(3)	Undo the transaction to the extent possible. Restore the foundation to the same or better financial position than it would have been had the transaction not occurred. See Treas. Reg. 53.4941(e)-1(c)

4942(h)(2) and 4963(d)(2)	Reduce the amount of undistributed income to zero. Can elect to treat qualifying distributions as made from a prior year’s undistributed income. Treas. Reg. 53.4942(a)- 3(b)(6), relating to failure to distribute minimum amounts under the cash distribution test for set-asides, allows for correction (by distribution of cash or cash equivalent only) within the correction period if the failure to distribute was not willful and was due to reasonable cause.
4943(c)	Depending on when and how the business holding was received, the organization may have a transition period in which to dispose of the excess holding. Correction is made when no excess holdings remain. Treas. Reg. 53.4943-9(c)
4944(e)(2)	Remove the investment from jeopardy by either selling it or disposing of it (other than exchanging it for another jeopardizing investment). Treas. Reg. 53.4944-5(b)
4945(i)(1)	Recover as much of the expenditure as possible, and any other correction the IRS may prescribe if unable to recover the whole expenditure. In certain situations, obtain or make a report on the use of a grant, or obtain approval of grant-making procedures. Treas. Reg. 53.4945-1(d)

(3) The correction amount isn’t necessarily the same as the amount involved in a

particular transaction. Compute the correction amount and the taxable amount involved separately. Refer to the specific technical guides and regulations for directions on the appropriate correction methods.

Note: When two or more excise taxes are involved, verify that correction has been made for each tax code section under which liability arises. What may constitute correction for one section may not be sufficient correction under another code section.

Example: A foundation issues a below-market "loan" to a disqualified person, who in turn uses the money to purchase a vacation property for personal use. The transaction is both self-dealing and a taxable expenditure. To correct the taxable expenditure, the disqualified person needs to repay the loan. To correct the self-dealing transaction, the disqualified person needs to not only repay the loan, but also pay interest.

(4) When correction is made, obtain verification. See the following list (not all inclusive) for acceptable proof of correction. Discuss with the manager and Area Counsel as to appropriate methods of correction and proof, if desired:

a. Copies of cancelled check(s) to the foundation and bank statement(s)

showing the deposit(s).

b. New title documents for returned real property.

c. Copies of cancelled check(s) and bank statement(s) showing appropriate

distributions.

d. Brokerage/financial institution statement(s) showing that a foundation no

longer owns an asset or stock.

e. Copies of reports secured concerning the uses of grants made.

(5) Be alert for attempts to circumvent the correction requirement. At a minimum,

ensure that the parties don’t:

a. Deposit the correction amount and then issue a new check back to the party

making correction.

b. Obtain new title documents for returned property and then change title back

to the party that returned the property.

c. Redeposit amounts distributed to satisfy Section 4942 (such as voided

checks, circular transactions).

d. Transfer assets or stocks to other financial institutions or to disqualified

parties for which statements aren’t provided.

e. Engage in an act of self-dealing when attempting to make correction.

(6) If revoking or involuntarily terminating the foundation, request and verify that

correction is made to a governmental agency or other Section 501(c)(3) organization that isn’t itself at risk of revocation.

(7) In the event that requests to extend the correction period (Section 4963(e)(1)(B))

are received, under Delegation Order 7-4 (IRM 1.2.2.8.4), Area Managers may authorize extensions of the correction period, or delegate the authority to the group manager. Consult the group manager if considering granting an extension of time to make correction. It is recommended that the appropriate TE/GE Division Counsel also be consulted per the group manager’s authorization.

(8) Extensions of the correction period aren’t ordinarily granted unless these factors

are present:

a. The taxpayer is actively seeking in good faith to correct the taxable event.

b. Adequate correction is unavailable or can’t reasonably be expected to occur

during the original correction period.

c. The taxable event appears to be an isolated occurrence, and it appears

unlikely that similar taxable events will occur in the future. See Treas. Reg. 53.4963-1(e)(3).

Note: An extension of the correction period also extends the period in which the taxpayer may petition the Tax Court for the deficiency. Treas. Reg. 301.62131(e).

(9) A taxpayer paying the full amount of the first tier tax during the original correction

period extends the correction period to the later of:

a. 90 days after paying the first tier tax, or

b. The last day of the original correction period.

Note: If the taxpayer pays the first tier tax after the IRS mails a statutory notice of deficiency and before the 90-day period of the notice has expired, the taxpayer has 90 days from the payment date to make correction. See Treas. Reg. 53.4963-1(e)(4). If the taxpayer petitions the Tax Court regarding the second tier taxes, before the correction period (including extensions) expires, the correction period runs until the decision is final. See Treas. Reg. 53.4963-1(e)(2).

(10) See Treas. Reg. 53.4963-1(e)(5) for extensions of the correction period where a

claim for refund is filed with respect to payment of the full amount of the first tier tax imposed with respect to the taxable event or when a suit or proceeding with respect to the claim is filed.

(11) If there has been a waiver of the restrictions on assessment and collection of the

deficiency or if the deficiency is paid, and therefore no notice of deficiency is mailed, the correction period will end with the end of the collection prohibition period described in Treas. Reg. 53.4961-2(e)(5). See Treas. Reg. 53.49631(e)(6).