Exempt Organizations Technical Guide›TG 62: Excise Taxes on Taxable Expenditures – IRC Section 4945›Table of Contents
G. All Chapter 42 Second Tier Excise Taxes
Publication 5590 — Exempt Organizations Technical Guide TG 62: Excise Taxes on Taxable Expenditures under IRC 4945 · 2026-10-03 edition · updated 2026-10-04 · United States
(1) See the following table for the additional/second tier taxes generally applicable to
private foundations under subchapter A for each Code section.
| Code Section | Liable party | Tax Rate | Limit? (PPA 2006*) | |
|---|---|---|---|---|
| Code Section | Liable party | Tax Rate | Before | After |
| 4941(b)(1) | Self-dealer | 200% | None | None |
| 4941(b)(2) | FM | 50% | $10,000 per act | $20,000 per act |
| 4942(b) | PF | 100% | None | None |
| 4943(b) | PF | 200% | None | None |
| 4944(b)(1) | PF | 25% | None | None |
| 4944(b)(2) | FM | 5% | $10,000 per act | $20,000 per act |
| 4945(b)(1) | PF | 100% | None | None |
| 4945(b)(2) | FM | 50% | $10,000 per act | $20,000 per act |
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*The limit changes are effective for the first full tax years that begin after August 17, 2006.
(2) Second tier taxes are:
a. Triggered by the failure to make correction,
b. Imposed at the same time as first tier taxes for assessment or when a notice
of deficiency is issued, and
c. Abated if correction is made within the correction period.
(3) Indicate in the report of examination (Forms 4883, 4621, 886-A) the amount of
potential second tier taxes if the taxpayer doesn’t make correction. With Area Manager approval, the closing of an agreed first tier tax case can be delayed for a reasonable period to permit correction, depending on the facts and circumstances.
(4) Before granting the above extension, ensure that the taxpayer has:
a. Signed the Form 870-E.
b. Paid the first tier tax.
c. Granted a statute extension, if necessary.
Note: Obtain the Area Manager’s approval due to the additional case cycle time.
(5) All second tier taxes are imposed once per act/failure to act or taxable event.
Refer to the specific Code section and the regulations for how to determine the amount of the second tier tax calculation. Under Sections 4942 and 4943, if the taxpayer partially corrects (reduces but does not eliminate undistributed income or excess business holdings), the second tier tax is on the uncorrected remaining amount.
(6) Under Section 4945(b)(1), the second tier tax is imposed on the foundation and is
at the rate of 100% of the amount of each taxable expenditure. For foundation managers, who have refused to agree to part or all of the correction of the taxable expenditure, the tax under Section 4945(b)(2) is at the rate of 50% of the amount of the taxable expenditure (subject to the limitations in Section 4945(c)(2)).
(7) See IRM 4.70.14, Resolving the Examination, for additional information for the
necessary letters and forms to complete. For a proposed second tier tax liability, show the second tier tax on the last year which shows an adjustment for the first tier tax, noting in the examination report that the additional tax will be imposed at the end of the taxable period if the act/failure to act or taxable event is not corrected. Before issuing a 30-day letter to a foundation manager asserting second tier excise taxes, the examiner must issue a Thorne letter requesting that the foundation manager agree to correction. See Thorne v. Commissioner, 99 T.C. 67 (1992). For help drafting a Thorne letter, contact Area Counsel. See
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Example Worksheets/Exhibits for sample language used in a Thorne letter for a theoretical Section 4945 scenario.
(8) If the taxpayer doesn’t agree to the tax or fails to make correction, the case is
unagreed. See IRM 4.70.14, Resolving the Examination, for case closing procedures.
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