Volunteer Legal Handbook Section II(D)(1)-(2)  Legal Short Course - Tax Laws and Government Regulation - Part 2

D. Tax Laws and Other Government Regulation, Cont'd

3. Restrictions on uses of funds

A major way in which the government regulates nonprofit corporations is by restricting the uses they can make of their funds. There are a lot of restrictions; we'll examine three of the more important ones.

a) Charitable purposes

Every charitable corporation exists for specific purposes as a part of its §501(c)(3) status. It's a short list of allowable purposes, and changing them means amending your §501(c)(3) application.

Every charitable corporation must be "organized and operated exclusively" for an exempt purpose. Some of those exempt purposes include:

(1) Religious

Because of the requirements of the First Amendment of the U.S. Constitution, this purpose is very broadly defined. "Religious purposes" have been found for charitable corporations ranging from construction of a church building, to inspection of food products for compliance with religious dietary requirements, to genealogical research. The IRS has issued a "Tax Guide for Churches and Other Religious Institutions," Publication 1828, which describes its position on these issues in more detail.

Available on-line at

http://www.irs.ustreas.gov/prod/forms_pubs/index.html.

If a charitable corporation with a §501(c)(3) exemption for religious purposes expends monies for something other than its exempt purpose it is less likely to encounter problems with the IRS than other charitable corporations, again because of deference under the First Amendment. It's probably accurate to say that religious organizations are less rigorously scrutinized by the IRS for proof that the activities of the organization fit to its religious purpose. However, the prohibitions on political and legislative activities are pretty rigorously enforced.

(2) Charitable

This is probably the broadest category. Originally, "charitable" may have meant "relief of the poor," but case law and, reluctantly perhaps, the IRS have acknowledged that it is much broader than that. There is no longer any requirement of a nexus between the charitable corporation and "relief of the poor."

(3) Scientific

Scientific purposes include both sponsorship of research and facilities for research and the dissemination of the results of that research.

(4) Educational

Advancement of education includes creation of nonprofit educational institutions, financing of scholarships, dissemination of knowledge by publication, support of libraries and similar uses.

b) Political and legislative activities

One of the most famous and most important limitations on the activities of §501(c)(3) nonprofit corporations is the very serious limitation placed on their political and legislative activities. §501(c)(3) provides, in part, that with regard to a charitable corporation "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

This is an extremely complex, politically volatile and legally dangerous area of law. The easiest rule to follow is to not engage in political activities. If your §501(c)(3) nonprofit corporation decides it must, exercise great care. What follows is only an introduction; you will need specific legal and accounting advice to find your way through this maze.

Basically, there are two sorts of regulated activities, which are explained below. The kinds of activities, the limits imposed, and the sanctions for violating the limits, are quite different.

How About an Example?

(1) Political Campaign Activities Prohibition

"It should be noted that exemption is lost . . . by participation in any political campaign on behalf of any candidate for public office. It need not form a substantial part of the organization's activities." United States v. Dykema, 666 F.2d 1096, 1101 (7th Cir. 1981) (cert. den., 456 U.S. 983 (1982) (emphasis in original).

(a) IRS: This is an absolute prohibition

The IRS position is simple: your §501(c)(3) organization can't engage in political campaign activities. If you do, you are ineligible for §501(c)(3) status. Period.

i) No requirement that political campaigning be "substantial"

As we will see below, in the case of "legislative activities," there is a test of substantiality. In the case of political campaigning activities, there is no requirement of substantiality. The IRS position is that any amount at all is fatal.

ii) Might still be a de minimis exception

A few cases have held that there is a certain minimum threshold before the political activities are noticeable, as it were. But the IRS has not agreed with that position. Don't rely on it.

(b) Elements

There are four requirements, all of which must be present, for action to be a prohibited "political campaign activity." None of the elements is particularly well-defined.

i) A 501(c)(3) organization may not "participate" or "intervene" in a political campaign

ii) The political activity must be a "political campaign"

iii) The campaign must be with respect to an individual who is a "candidate"

iv) The individual must be a candidate for a "public office"

(c) Definitions

i) Candidate

An individual who offers himself, or who is proposed by others, as a contestant for an elective public office, whether such office be national, state or local. IRS Reg. §1.501(c)(3)-1(c)(3)(iii)

ii) Political Campaign

A campaign for public office in a public election merely and simply means running for office, or candidacy for office, as the word is used in common parlance, and as it is understood by the man on the street. Norris v. United States, 86 F.2d 379, 381-382, (8th Cir. 1936, rev'd on other grounds, 300 U.S. 564 (1937)

iii) Participate or intervene

The most obvious way for a charitable organization to participate or intervene in a political campaign is to make a contribution to the political campaign of a candidate. However, this is clearly forbidden as a condition of tax exemption. New Faith, Inc. v. Commissioner, 64 T.C.M. 1050 (1992).

iv) Public Office

"Elective public office in the executive or legislative branch of the Government of the United States" as well as other elective or appointed offices.

(2) Legislative Activities

The second limit on general political activity by §501(c)(3) nonprofit corporations involves limits on what the IRS calls "legislative activities."

(a) There is no exception for legislative activity related to the §501(c)(3) nonprofit corporation's purpose

There is a pervasive myth that legislative activities are "okay" if they relate to your organization's purpose. The myth is false. The same rules apply whether the legislative activities are closely or only remotely related to your §501(c)(3) purpose or the purposes set out in your other organizational or planning documents.

(b) Concepts

There are key concepts here. You need to understand what constitutes "legislation," what amounts to "legislative activities," "grass roots" versus "direct" lobbying, and the "substantial part" versus the "expenditure" test. We'll try them in that order.

i) What constitutes "legislation"

Generally, this is action by an elected body. The legislative body could be Congress or a local school board. It could be voters themselves, if the issue involves an initiative or referendum. The subject could be Constitutional amendments to simple, non-binding resolutions.

ii) What constitutes "legislative activities"

It can take two forms: "direct" lobbying and "grass roots" lobbying. The rules are a little different for each type, and the spending limits depending on whether your §501(c)(3) nonprofit corporation has elected the "substantial part" test or the "expenditure" test.

(1) "Direct" lobbying

In direct lobbying, your organization, through its agents, is expending resources &endash; staff time, volunteer time, money &endash; to contact and directly influence one or more of the people who vote on legislation. Generally, this is an elected official, although it can be voters in the case of initiatives and referenda.

(2) "Grass roots" lobbying

Grass roots lobbying is attempting to influence legislation by urging people to contact their elected officials. You are approaching voters, asking them to influence elected officials, instead of directly influencing the elected officials yourself.

(3) Five exceptions for the "Expenditure Test" - IRC §4911(d)(2)

If your §501(c)(3) nonprofit corporation has elected the "expenditure" test, described below, then there are five kinds of "expenditures" which do not constitute "legislative activities." Note these exceptions are available only if your §501(c)(3) nonprofit corporation has elected the "expenditure" rule described below.

(a) Making available results of nonpartisan research

What constitutes "nonpartisan" is pretty constrained. If the IRS thinks it advocates one side of an issue, it will not qualify for the exception.

(b) Providing technical assistance in response to a written request

If the elected officials ask you to testify, to address technical issues, then it is not an "expenditure." Testifying before a legislative committee explaining why child abuse is bad, in response to a written request from the committee, would likely qualify.

(c) Self-defense exception

Your §501(c)(3) nonprofit corporation may engage in legislative activities without being subject to the expenditure test limits if the legislative activities are "self-defense;" your §501(c)(3) nonprofit corporation is lobbying to preserve its existence or the reason for its existence, as defined in its corporate purpose and §501(c)(3) application.

(d) Communications between the §501(c)(3) nonprofit corporation and its bona fide members

It's not legislative activity if you are only lobbying your bona fide members.

(e) Routine communications with government officials

If your §501(c)(3) nonprofit corporation is required by the terms of its grant agreement, for example, to make reports to elected officials, it's not lobbying under this exception.

(c) The General Rules &emdash; The "Substantial Part Test"

There don't seem to be any hard and fast rules. There are a few cases which show just how vague this standard is.

"The legislative activities of an organization must be balanced in the context of the objectives and circumstances of the organization to determine whether a substantial part of its activities was to influence or attempt to influence legislation." Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849, 855 (10th Cir. 1972), cert. den., 414 U.S. 864 (1973).

In a different context, "Whether an activity is substantial is a facts-and-circumstances inquiry not always dependent upon time and percentage expenditures." The Nationalist Movement v. Commissioner, 102 T.C. 558, 589 (1994), aff'd 37 F.3d 216 (5th Cir. 1994).

i) A distressingly vague standard

Note that this test can only be applied "after the fact" &endash; it's a post hoc test to use the legal phrase.

ii) Possible selective enforcement

Extremely vague tests like this sometimes invite selective enforcement. The expenditure test, defined below, was adopted in part because of perceived selective enforcement.

(d) The Elective Rules &emdash; The "Expenditure Test"

If your §501(c)(3) nonprofit corporation elects the "expenditure" test, then the following rules apply. Note the exceptions to the "expenditure" test described above, and note the catches described below.

i) The concept - a sliding scale percentage of total exempt expenditures

The basic concept is that you are permitted without imposition of penalty or jeopardy of your tax-exempt status to spend a sliding percentage of the total of certain categories of expenses on legislative activities. Not all expenses your §501(c)(3) nonprofit corporation incurs are eligible for the sliding scale percentage.

ii) Exempt purpose expenditures

The term ``exempt purpose expenditures'' means, with respect to any organization for any taxable year, the total of the amounts paid or incurred by such organization to accomplish purposes described in IRC §170(c)(2)(B) (relating to religious, charitable, educational, etc., purposes). See IRC §4911(e)(1)

(1) Essentially an itemized list

The IRS Regulations set out what is essentially an itemized list of what it deems are expenses sufficiently related to your charitable purposes to qualify as "exempt purpose expenditures" under this test. Not all expenses will qualify. The detailed list can be found at 26 CFR §4911(e).

(2) Limits and constraints

This is an extremely complicated and dangerous area. The structure of the statutes resembles a kind of "mini-income tax," with deductions much like regular income tax. Expenses you might expect to qualify as "exempt purpose expenditures" - fund raising expenses, for example, may not qualify under the regulations. Please obtain legal and tax advice before venturing into this area.

iii) The sliding scale

If your §501(c)(3) nonprofit corporation has elected the "expenditure" test described above, and subject to the qualifications and limits set out below, then your §501(c)(3) nonprofit corporation may expend up to the following amounts on "legislative activities" without incurring tax penalties or jeopardy to your tax exempt status:

20% of the first $500,000 in exempt expenditures

15% of the next $500,000 in exempt expenditures

10% of the next $500,000 in exempt expenditures

5% of any remaining exempt expenditures

(1) Absolute cap of $1 million

It doesn't matter what the sliding scale permits; under no circumstances may your §501(c)(3) nonprofit corporation expend more than $1 million on legislative activities in any taxable year. That's not going to be a problem for most organizations.

(2) Only 25% of the foregoing amounts may be expended on "grass roots" lobbying

Remember the distinction between "direct" and "grass roots" lobbying; only 25% of the total authorized sliding scale percentage may be expended on "grass roots" lobbying.

iv) The Catches

As always, some restrictions, catches and limitations apply. Here are a few of them.

(1) Excise tax of 25% of excess expenditures

If you exceed the maximum permitted percentage of allowed expenditures, the excess expenditures are subject to a special excise tax of 25% of those expenditures.

(2) Loss of exempt status if average 150% of limitation over four years

If on a four year moving average you exceed 150% of the limitation, your §501(c)(3) nonprofit corporation will lose its tax-exempt status.

(3) Not available to churches, church organizations or private foundations

These and some other types of §501(c)(3) nonprofit corporations are not permitted to elect the "expenditure" test.

(4) Strict record keeping requirements

There are detailed record-keeping requirements, as you would expect if the IRS is to be able to verify compliance with these requirements.

c) Excess benefits transactions

A third major constraint on charitable corporations is imposed by §501(c)(3): "No part of the net earnings of which inures to the benefit of any private shareholder or individual."

Congress recently re-worked these requirements and adopted something called the "excess benefits rule" to accomplish the prohibition on benefits to any private shareholder or individual. The idea was to create a class of "intermediate sanctions" so that in the event of improper distributions the IRS would have some lesser sanction than revoking a charitable corporation's exemption. The "intermediate sanctions" are pretty serious, however, and apply to both §501(c)(3) and 501(c)(4) entities. I will refer to charitable corporations in discussing these sanctions, but note they apply to nonprofit corporations that are §501(c)(4) organizations as well. These laws were adopted in 1996. Proposed regulations have been issued but at November 11, 1998 are not yet final.

Some commentators predict that the new "excess benefits transactions" rules are the most dramatic and important package of rules concerning charitable corporations since Congress established the basic nonprofit tax structure in 1969. If the new laws are targeted at nonprofit corporations who simply pay too much to employees or to the children of their principal donors, then the impact may be much less.

(1) The basic rule

Tax sanctions in the form of a penalty excise tax are imposed upon "disqualified persons" who receive an improper benefit from a transaction with a charitable corporation. A penalty excise tax is also imposed upon the "organization managers" who authorized the transaction knowing that it was improper. And the excess benefit transaction must be "undone" or an additional round of penalties will be imposed and, ultimately, the exempt status may be lost.

There are a lot of concepts buried in this general rule that need to be examined with care.

(a) Legislative history

When courts and, for that matter, lawyers, try to interpret and understand legislation they turn to the legislative history. In the case of the new excess benefits laws, the legislative history is scant, except for a House of Representatives committee report. The glosses put on the statute by that committee report pretty dramatically change the meaning of the law. For example, the committee report directs the IRS to write a series of "safe harbors" &emdash; tests charitable corporations can use to make certain they aren't violating the new rules &emdash; into the regulations the IRS issues, but the statute is completely silent as to any such rules.

(b) Regulations

At this point, there aren't any that I can find, either proposed or final regulations, other than one set directing the use of IRS Form 4270 to report excess benefits transactions and applicable excise taxes.

(2) Disqualified persons

The first special phrase is the idea of a "disqualified person," the person who will pay one part of the penalty excise tax. There are a lot of ways one can be classed as a "disqualified person" for the purposes of this rule. They include:

(a) Persons in a position to exercise influence

Any person who during the five year period ending at the date of the scrutinized transaction was in a position to "exercise substantial influence over the affairs" of the nonprofit corporation, whether by reason of being a manager, director or officer or otherwise, is a disqualified person.

i) Family members

This category also includes anyone who was a member of the family of a disqualified person. "Family member" is very broadly defined, and is broader that the definitions applied to private foundations under similar tests, and includes ancestors, heirs and siblings.

ii) 35% control

This category also includes persons who own 35% of an entity that engages in such a transaction.

(b) Officers, directors or trustees

The IRS says that officers, directors and trustees of nonprofit corporations are not automatically "disqualified persons" by reason of their status, but it's hard to see how an officer, director or trustee could claim otherwise. It's not clear that even the rigorous abstention and conflict of interest procedures discussed below at nonprofit corporate law would protect an officer, director or trustee in these circumstances. Perhaps this will be the subject of the "safe harbor" regulations from the IRS.

(c) Comment

The definition of "disqualified person" is intended by Congress to test by status and not by technical definition; that is, it looks like the IRS will determine on a case-by-case basis whether or not a person has or had at the time of the scrutinized transaction the ability to exercise substantial influence over the affairs of the nonprofit corporation. For example, a major donor to a organization, while not an officer, director or member, may nonetheless be characterized as a person in a position to exercise substantial influence and thereby be a disqualified person.

(3) Organization managers

The second special phrase is the idea of "organization managers," the person who will pay another part of the penalty excise tax. It includes trustees, directors or officers of the charitable corporation, however denominated. The proposed regulations would extend the definition to persons with indirect control.

(4) Excess benefits

An excess benefit transaction is any transaction in which an economic benefit is provided by a charitable corporation directly or indirectly to or for the benefit of a disqualified person and the economic benefits received by that disqualified person exceeds the value received by the charitable corporation.

For example, suppose a charitable corporation owns a recreational camp that is only used in the summer, and lets its executive director use that camp in the fall and winter as a "perk" at no charge. Suppose the rental value of the camp is $250/day. If the executive director uses it for two months, that might be 60 days x $250/day = $15,000 in "excess benefits" paid to the executive director. Presumably, the executive director's salary is the base benefit, the executive director is certainly a "disqualified person," and hence the use of the recreational facility might be an "excess benefit."

As another example, suppose your charitable corporation has a volunteer and member of the board of directors who has given 20 years of selfless volunteering to your charitable corporation. The charitable corporation decides to give the volunteer and his wife a two week, all expenses paid trip to Hawaii. That vacation might be an "excess benefit." The volunteer, as a member of the board of directors, is a "disqualified person," and a volunteer, by definition, serves without expectation of compensation. Any payment from the charitable corporation to the volunteer might be "excess benefits."

Obviously, we need some guidance from the IRS in these areas. There's some, but perhaps not at much in the proposed regulations. They are discussed in the Supplement.

(5) Taxes imposed

There are three penalty excise taxes imposed upon the parties to the payment of an "excess benefit."

(a) On the "disqualified person"

There is an initial penalty excise tax of 25% of the "excess benefit" imposed upon the "disqualified person." If in one year the "disqualified person" hasn't returned or reimbursed the charitable corporation for the "excess benefit," then the "disqualified person" is subject to a further penalty excise tax of 200% of the "excess benefit."

(b) On the "organization managers"

Every "organization manager" who participates in a decision to give a "disqualified person" an "excess benefit" is jointly and severally liable for a penalty excise tax of the lesser of 10% of the "excess benefit" or $10,000. This is a one time excise tax, unlike the excise tax imposed upon the "disqualified person."

(6) The proposed regulations

The IRS has issued proposed regulations, which are discussed in more detail in a Supplement.

d) State restrictions on charitable gaming proceeds

Alaska law imposes some restrictions on the uses that may be made of the net proceeds from charitable gaming activities. See the discussion at charitable gaming.

4. Reporting requirements and tax returns

There is a myth that nonprofit corporations do not have to file Federal income tax returns. Don't confuse taxability of income with tax reporting. All nonprofit corporations must file income tax returns. They are information returns. The failure to file such a return exposes the nonprofit corporation, and its officers, directors and management to penalties, and can jeopardize a nonprofit corporation's Section 501(c)(3) status.

There are a discouraging number of tax returns that can be required of nonprofit corporations in general and charitable corporations in particular. The list is too long to set out in full, but here are a few of the more common requirements.

a) Annual information return - Form 990

This is the basic information return for nonprofit corporations (except private foundations). If your nonprofit corporation's gross receipts in a year were less than $25,000, you need not file a return, unless you received one in the mail. The IRS publishes a list of exempt organizations which are not required to file an annual information return. The list includes certain church-affiliated organizations. See IRS Regs. §§1.508-1 and 1.6033-2.

Note that the laws of some states (not Alaska) require all nonprofit corporations to file information returns.

If your nonprofit corporation is required to file a Form 990, then it is also required to make a copy of that form available for inspection and copying by interested persons. The IRS, to my knowledge, has not yet issued regulations setting out what the rules will be for third party inspection of Form 990's.

(1) Short Form 990-EZ

This is a simplified Form 990. It's available for exempt organizations except private foundations whose total assets are less than $250,000 at year end and whose gross receipts are less than $100,000 for the tax year.

(2) Public inspection

Copies of your most recent Form 990's and your Form 1023 (Application for Exempt Status) must be available for inspection by the public. Copies of the forms must be furnished to interested persons upon request, at cost. IRC §6104.

b) Special returns

(1) Exempt organization business income tax return &endash; Form 990-T

This form is used to report unrelated business income and to calculate unrelated business income tax.

(2) Reporting excess benefits transactions - Form 4720

If your charitable corporation engaged in "excess benefits transactions," then it must file a Form 4720.

(3) Election of "expenditure test" on lobbying - Form 5768

A charitable corporation may elect to engage in certain kind of legislative activities, "lobbying," as described in section II(D)(3) at pages 52-57 above. If it does, then it will probably want to elect the "expenditure test" for its certainty. If it makes that election, it does so using Form 5768.

(4) Reporting political activities - Form 1120-POL

If your nonprofit corporation spent any amount on political activities (see § II(D)(3) above), your nonprofit corporation may also have to file Form 1120-POL.

5. Private foundations

To thoroughly discuss private foundations would require doubling the size of these materials. Please see the Supplemental Materials section for additional resources of private foundations.

The main advantage of a private foundation is to the donor and can be summarized in one word: control. Simplifying things a great deal, there is a tradeoff for the donor. As the donor surrenders control, he or she gains tax advantages and reduces administrative costs; as he or she exercises control over the use the private foundation makes of the monies, tax advantages may be reduced or disappear altogether and the administrative costs &emdash; the portion of the endowment lost to overhead &emdash; will increase.

The cost of creating and obtaining exempt status for a private foundation is significant. The operating costs, and in particular complying with all of the rules and restrictions that surround private foundations, is another very significant issue. But for the right kind of donor, those prices may be reasonable for the greater control a donor can have over the use made of his, her or its donated funds.

Because private foundations are largely creations of the tax code, discussion of them tends to focus overwhelmingly on fairly obscure income tax concepts. You really need the help of a qualified certified public accountant to work your way through these issues. This is only a much simplified introduction.

a) Advantages

First and foremost, control. A donor who gives money to a private foundation they control has the ability to direct the use of monies. The private foundation is not answerable to any broader group of donors and, subject to the requirements of the Internal Revenue Code, can manage the monies as they see fit.

b) Disadvantages

Federal tax law subjects private foundations to an annual excise tax of 2% on annual investment income. In addition, there are more limits on the amount of deductible contributions that may be made to foundations than there are for charitable corporations. These and other limits are intended to prevent private foundations from abusing their greater control and flexibility.

(1) The extent of the tax deduction

Very generally, a donor to a charitable corporation may deduct the full fair market value of in-kind donations. Also very generally, a donor may deduct only his or her basis in in-kind donations to a private foundation. If the in-kind property were fully depreciated the donor to the private foundation would not get any deduction. However, Congress has on an annual basis been allowing a fair market value deduction to donors to private foundations under 26 U.S.C. §170(e)(5). The present renewal expires on May 31, 1998.

In addition, there are other constraints on the deductibility of donations to private foundations.

(a) Limits on cash donations

Generally, a donor may not deduct cash donations in any given year that amount to more than 50% of the donor's adjusted gross income. It's 30% in the case of certain sub-types of private foundations.

(b) Limits on appreciated property donations

Generally, a donor may not deduct gifts of appreciated property in any given year that amount to more than 30% of the donor's adjusted gross income. It's 20% in the case of certain sub-types of private foundations. Excess donations of appreciated property may be carried forward for the next five years.

(c) Limits on stock donations

Were talking corporate shares here, not livestock. The rules here are hopelessly complex, and in transition. Be aware that there are complex limits on stock donations, with serious tax implications for the donor, and talk to a certified public accountant.

c) Defining a foundation

Any charitable corporation can call itself a "foundation," but for purposes of these materials it is the tax definition that matters. Under the tax laws, and especially 26 U.S.C. §509(a), a "foundation" is characterized by three things, which operate as a kind of negative definition. In application, however, these tests can be terrifically difficult to administer or apply.

(1) Single major source of funding

A private foundation typically has a single primary source of funds; a corporation or a family contributes essentially all of the money to it, as opposed to having a broad base of contributors.

(2) Grant-making program

A private foundation usually makes grants to charitable corporations who administer programs, as opposed to operating programs itself. Generally, all distributions must be to charitable corporations. The specific rules are at 26 U.S.C. §4942(g).

(3) Absence of fund-raising

Monies disbursed from the private foundation come from the endowment or investment income of the endowment, as opposed to a fund-raising program.

d) Special restrictions on operation

Congress has perceived private foundations as carrying a high risk of abuse, and has closely regulated them. In addition to the 2% excise tax on investment income, there are other excise taxes imposed on private foundations that are penal and intended to regulate their behavior as opposed to generating revenue. They are avoidable if you operate the private foundation in the way Congress wants.

(1) Excise tax on self-dealing

There is an excise tax imposed on transactions tainted with self-dealing that is similar, but not identical, to the excise tax on excess benefits transactions described above.

(2) Excise tax on failure to distribute income

If the private foundation fails to make qualifying distributions at a high enough level under a complex definition, then an excise tax must be imposed. Generally, the private foundation must distribute at least five percent of the aggregate fair market value of its assets that are not used directly to carry out the private foundation's exempt purposes.

(3) Excise tax on excess business holdings

Generally, a private foundation may not own more than 20% of the voting stock of a business. Any voting stock owned by the persons who control the private foundation are subtracted from that total.

(4) Excise tax on jeopardy investments

A private foundation cannot invest its funds in ways that jeopardize its ability to perform its mission.

(5) Excise tax on taxable expenditures

An extremely difficult area, generally a private foundation can't make distributions which would be forbidden to a charitable corporation; i.e., political contributions or lobbying expenses.

(6) Other resources

The IRS's view of private foundations' duties and risks is set out in IRS Publication 578, "Tax Information for Private Foundations and Foundation Managers," available on the Internet at:

http://www.irs.ustreas.gov/prod/forms_pubs/index.html

or at 1-800-TAX-FORM.

(7) Required returns

All private foundations are required to file annual Form 990-PF returns.