Exempt Organizations Technical Guide›TG 3-22: Termination of Private Foundation Status - IRC Section 507›Table of Contents
Section 507 Termination Tax Example
0324 Publ 5614 (PDF) · 2026-10-03 edition · updated 2026-10-04 · United States
(1) Because of a Form 5666 filed during a previous examination, Agent Smith is
inspecting the records of Private Foundation Echo. The trustees, Sierra, Tango, and Uniform were previously assessed Section 4941 taxes for transactions in 200512, 200612, and 200712.
(2) According to the Form 5666, on the day after inception in 2005, PF Echo
loaned 75% of its cash to Victor, a corporation wholly owned by Sierra, Tango, and Uniform. There was no loan instrument on file. The corporation later corrected the transaction, paying the money back on December 1, 2008, with additional interest computed at prime rate. The previous agent pro-rated the tax assessments on the trustees based on their shares of ownership. The agent also assessed Section 4945 taxes on the foundation for taxable expenditures not serving a Section 170(c)(2)(B) purpose.
(3) During the examination of 201012 through 201112, Agent Smith finds that PF
Echo has since paid 80% of its cash to the trustees reported as notes receivable on Forms 990-PF. Each trustee took turns signing the notes receivable, as shown below:
| Date | Amount | Signed for PF Echo | Signed as Recipient |
|---|---|---|---|
| 12/2/2008 | $575,000 | DP Tango | DP Sierra |
| 12/2/2008 | $498,000 | DP Uniform | DP Tango |
| 12/2/2008 | $452,000 | DP Sierra | DP Uniform |
(4) All the notes have 30-year terms, with payment in full upon maturity. The
notes fail to specify any amount of interest or any interim payments.
(5) After consulting with Area Counsel, Agent Smith proposes revocation and
involuntary termination. Using Online SEIN, Agent Smith retrieves the Forms 990-PF from 2005 to present. Agent Smith also pulls the IMFOLR prints for each trustee’s Forms 1040 from 2005 to present. The following tables show the amounts donated by each trustee (Form 990-PF Schedule B), adjusted gross income, contribution amount deducted, and individual income marginal tax bracket for each year from 2005 through 2011. None of the trustees made any contributions in 2011.
Note: The tables below don’t include computations of alternative minimum tax (AMT), which would be included in an actual computation of the aggregate tax benefit.
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DP Sierra - Income Tax Benefit
| Year | Donation | AGI | Deduction | Tax Bracket | Tax | Interest |
|---|---|---|---|---|---|---|
| 2005 | $360,000 | $1,310,860 | $360,000 | 35% | $126,000 | $50,103 |
| 2006 | $270,000 | $885,491 | $265,647 | 35% | $92,976 | $27,232 |
| 2007 | $290,000 | $978,140 | $293,442 | 35% | $102,705 | $20,260 |
| 2008 | $160,000 | $543,394 | $160,911 | 35% | $56,319 | $7,560 |
| 2009 | $75,000 | $381,309 | $75,000 | 35% | $26,250 | $2,356 |
| 2010 | $190,000 | $641,164 | $190,000 | 35% | $66,500 | $3,300 |
| Total | Total | Total | Total | Total | $470,750 | $110,811 |
DP Tango - Income Tax Benefit
| Year | Donation | AGI | Deduction | Tax Bracket | Tax | Interest |
|---|---|---|---|---|---|---|
| 2005 | $250,000 | $830,138 | $249,041 | 35% | $87,164 | $34,660 |
| 2006 | $260,000 | $891,221 | $260,959 | 35% | $91,336 | $26,751 |
| 2007 | $230,000 | $794,359 | $230,000 | 35% | $80,500 | $15,880 |
| 2008 | $195,000 | $662,571 | $195,000 | 35% | $68,250 | $9,162 |
| 2009 | $300,000 | $949,045 | $248,714 | 35% | $87,050 | $7,814 |
| 2010 | $190,000 | $642,991 | $192,897 | 35% | $67,154 | $3,332 |
| Total | Total | Total | Total | Total | $481,454 | $97,599 |
DP Uniform - Income Tax Benefit
| Year | Donation | AGI | Deduction | Tax Bracket | Tax | Interest |
|---|---|---|---|---|---|---|
| 2005 | $110,000 | $443,763 | $110,000 | 35% | $38,500 | $15,309 |
| 2006 | $190,000 | $623,977 | $187,193 | 35% | $65,518 | $19,189 |
| 2007 | $240,000 | $806,943 | $242,082 | 35% | $84,729 | $16,714 |
| 2008 | $310,000 | $1,047,661 | $310,724 | 35% | $108,753 | $14,599 |
| 2009 | $370,000 | $1,217,879 | $365,364 | 35% | $127,877 | $11,479 |
| 2010 | $440,000 | $1,492,553 | $444,636 | 35% | $155,623 | $7,722 |
| Total | Total | Total | Total | Total | $581,000 | $85,012 |
(6) The tables below show the calculation of the gift taxes on DP Sierra, DP
Tango, and DP Uniform, that would be assessed if PF Echo were a taxable entity. The tables assume that each DP had a $1 million “applicable exclusion
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amount” available to apply to lifetime gifts in 2005, and made no other taxable gifts between 2005 and 2010. The tables list the year, donation, exclusion, the gift tax on the net taxable amount, and interest.
DP Sierra - Gift Tax Benefit
| Year | Donation | Exclusion Amount Used | Gift Tax | Interest |
|---|---|---|---|---|
| 2005 | $360,000 | $360,000 | $0 | $0 |
| 2006 | $270,000 | $270,000 | $0 | $0 |
| 2007 | $290,000 | $290,000 | $0 | $0 |
| 2008 | $160,000 | $80,000 | $18,200 | $2,443 |
| 2009 | $75,000 | $0 | $16,900 | $1,517 |
| 2010 | $190,000 | $0 | $51,600 | $2,560 |
| Total | Total | $1,000,000 | $86,700 | $6,520 |
DP Tango - Gift Tax Benefit
| Year | Donation | Exclusion Amount Used | Gift Tax | Interest |
|---|---|---|---|---|
| 2005 | $250,000 | $250,000 | $0 | $0 |
| 2006 | $260,000 | $260,000 | $0 | $0 |
| 2007 | $230,000 | $230,000 | $0 | $0 |
| 2008 | $195,000 | $195,000 | $0 | $0 |
| 2009 | $300,000 | $65,000 | $66,000 | $5,924 |
| 2010 | $190,000 | $0 | $51,600 | $2,560 |
| Total | Total | $1,000,000 | $117,600 | $8,484 |
DP Uniform - Gift Tax Benefit
| Year | Donation | Exclusion Amount Used | Gift Tax | Interest |
|---|---|---|---|---|
| 2005 | $110,000 | $110,000 | $0 | $0 |
| 2006 | $190,000 | $190,000 | $0 | $0 |
| 2007 | $240,000 | $240,000 | $0 | $0 |
| 2008 | $310,000 | $310,000 | $0 | $0 |
| 2009 | $370,000 | $150,000 | $61,200 | $5,494 |
| 2010 | $440,000 | $0 | $135,400 | $6,719 |
| Total | Total | $1,000,000 | $196,600 | $12,213 |
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(7) Had PF Echo been a taxable entity, all contributions by the trustees would be
regarded as capital contributions. Based on amounts reported on Forms 990PF, PF Echo would have incurred the following income tax liabilities since inception had it been a taxable entity:
PF Echo - Income Tax Benefit
| Tax Year | Taxable Income | Tax (at Trust Tax Rates) | Interest |
|---|---|---|---|
| 2005 | $11,600 | $3,167 | $1,259 |
| 2006 | $107,000 | $36,529 | $10,699 |
| 2007 | $218,000 | $75,343 | $14,862 |
| 2008 | $283,000 | $98,069 | $13,164 |
| 2009 | $269,000 | $93,137 | $8,360 |
| 2010 | $363,000 | $126,036 | $6,254 |
| Total | Total | $432,281 | $54,598 |
(8) There are no estate taxes to compute, and no amounts were received from
other foundations in Section 507(b)(2) transfers. The net assets per PF Echo’s financial records on November 30, 2008 (closest available date using bank records and brokerage statements) were $2,932,270. The net assets as of September 30, 2012, were $4,640,806. Interest on the tax liabilities, using RGSNT, computed to September 30, 2012, is shown below:
Aggregate Tax Benefit
| Taxpayer | Year | Tax Increase | Interest | Aggregate Tax Benefit |
|---|---|---|---|---|
| DP Sierra Income Tax | 2005 - 2010 | $470,750 | $110,811 | $581,561 |
| DP Tango Income Tax | 2005 - 2010 | $481,454 | $97,599 | $579,053 |
| DP Uniform Income Tax | 2005 - 2010 | $581,000 | $85,012 | $666,012 |
| DP Sierra Gift Tax | 2005 - 2010 | $86,700 | $6,520 | $93,220 |
| DP Tango Gift Tax | 2005 - 2010 | $117,600 | $8,484 | $126,084 |
| DP Uniform Gift Tax | 2005 - 2010 | $196,600 | $12,213 | $208,813 |
| PF Echo Income Tax | 2005 - 2010 | $432,281 | $54,598 | $486,879 |
| Aggregate Tax Benefit | Aggregate Tax Benefit | $2,366,385 | $375,237 | $2,741,622 |
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(9) The termination tax is the lesser of either the aggregate tax benefit of
$2,741,622 or the net value of the assets (greater of $2,932,270 or $4,640,806). The tax is $2,741,622.
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Exempt Organizations Excise Tax Audit Changes
(Chapter 41, Chapter 42, and Section 170(f)(10)(F) Excise Taxes)
Taxpayer)
See attached Explanation of Items for computation of tax liability
Form 4883 (Rev. 1-2004) Catalog Number 42083F
Catalog Number 42083F
Department of the Treasury Internal Revenue Service www.irs.gov
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Exempt Organizations – Report of Examination
See attached Explanation of Items
16. Attachments
Form 4621 Rev (1-2004) Catalog Number 41830Q
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Deparatment of the Treasury Internal Revenue Service www.irs.gov
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