Imposition of Section 507(c) Tax

(1) Section 507(c) imposes on a private foundation whose status as such has been

terminated either voluntarily or involuntarily under Section 507(a) a tax equal to the lower of the:

a. Aggregate tax benefit defined in Section 507(d) resulting from the Section

501(c)(3) status of the organization, or

b. Value of its net assets. See Treas. Reg. 1.507-4(a).

(2) Section 507(c) tax does not apply to Sections 507(b)(1)(A) or 507(b)(2)

transfers unless Section 507(a) becomes applicable. See Treas. Reg. 1.5074(b).

Note: As a practical matter, termination tax assessments are more likely to occur during a subsequent examination. Once Chapter 42 taxes have been assessed, any new violations identified in a later examination will provide proof of willfulness.

(3) Computing the termination tax requires multiple smaller computations normally

provided by the foundation:

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(4) Aggregate tax benefit is used as the amount of the termination tax only if the

foundation substantiates the amount by adequate records or other corroborating evidence. Section 507(c)(1). As the IRS retains records for a limited period, it may not be feasible to compute the tax from the date of inception. Obtain any available information via IDRS, return requests, and Online Statistics of Income EO Image Net (SEIN). Establish Audit Information Management System (AIMS) controls via the Reporting Compliance and Case Management System (RCCMS) using source code 45 to retrieve the returns of the substantial contributors.

(5) See IRM 4.70.14, Resolving the Examination, for guidance on converting the

Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation, to Forms 1120, U.S. Corporation Income Tax Return, or 1041, U.S. Income Tax Return for Estates and Trusts. Use RGS NT to determine the increase in income tax from the disallowance of charitable contributions deductions.

(6) Propose the tax using Forms 4883, Exempt Organizations Excise Tax Audit

Change, and 4621, Report of Examination – Exempt Organizations. Use Form 990-PF to assess the tax in lieu of Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the IRC.

(7) Imposition of the termination tax doesn’t eliminate liability for the underlying

Chapter 42 taxes that initiated the termination process. See Treas. Reg. 1.5071(b)(2).

(8) When you close the case as a termination, prepare Form 2363-A, Request for

IDRS Input for BMF/EO Entity Change, to update the status code, indicating the effective date in YYYYMM format:

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a. Status 23: 507(a)

b. Status 24: 507(b)(1)(A) (no termination tax applies)

c. Status 25: 507(b)(1)(B) (no termination tax applies)

(9) Termination of private foundation status under Section 507 results in the

foundation being treated as an organization created on the day after termination. See Section 509(c).