E.1. Prohibited Expenditures

(1) Expenditures that are subject to Section 4945(d)(5) include all payments made to

either individuals or organizations for noncharitable purposes. These improper purposes include wrongful distributions, excessive compensation arrangements, and unreasonable payments for goods and services.

(2) For example, an unrestricted grant by a private foundation to a cemetery not

described in Section 170(c)(2)(B) is a taxable expenditure under Section 4945(d)(5). See Rev. Rul. 80-97, 1980-1 C.B. 257.

(3) Underwood v. United States, 461 F. Supp. 1382 (N.D. Tex. 1978), held that a

private foundation’s refund of a contribution conditioned upon deductibility was not a taxable expenditure after it had been determined by the IRS that the contribution was not deductible, as the Foundation was no longer entitled to it, and thus the refund was not an "amount paid or incurred” by the foundation.

(4) Larchmont Foundation, Inc. v. Commissioner, 72 T.C. 131 (1979), vacated and

remanded, 659 F.2d 1085 (7th Cir. 1981), held that a foundation’s failure to substantiate the nature and purpose of certain expenditures listed on its return resulted in taxable expenditures.

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(5) Gladney v. Commissioner, 745 F.2d 955 (5th Cir. 1984), held that a charitable

trust that made noncharitable liquidating distributions pursuant to a state court order prior to terminating its private foundation status under Section 507 made taxable expenditures under Section 4945(d)(5).

(6) Thorne v. Commissioner, 99 T.C. 67 (1992), held grants to an individual to write a

book where the foundation had not sought advance approval from the IRS, and to family members of foundation managers, were taxable expenditures under Section 4945(d)(5).

(7) Notice 99-36, 1999-1 C.B. 1284, alerted Section 501(c)(3) organizations about

certain charitable split-dollar insurance transactions that purport to give rise to charitable contribution deductions under Section 170 or 2522 and noted that private foundations and foundation managers participating in them may be subject to tax under Section 4945.

(8) Parks v. Commissioner, 145 T.C. 278 (2015), aff'd sub nom., Parks Foundation v.

Commissioner, 717 F. App’x 712 (9th Cir. 2017), held that payments for several radio messages that did not constitute lobbying communications but were not educational resulted in taxable expenditures under Section 4945(d)(5).