Louis E. Michelson, A Professional Corporation

Providing Legal and Tax Advisory Services to Nonprofit Organizations

Termination of Private Foundation Status

December 6th, 2011 · No Comments · Federal Income Taxes, Private foundations

If you are a private foundation that is considering stopping your activities, there are right ways and wrong ways to do this most important step.   Depending on how it is done, the foundation there may need to notify the IRS of intent to terminate and pay a termination tax.   This way is viewed by some as being the “wrong” way of terminating.

Other more desirable alternatives exist.  If, for example, a private foundation distributes all of its assets to public charities that meet certain requirements, the private foundation is not required to notify the IRS of its intent to terminate and does not owe a termination tax. A foundation may also transfer its assets to another private foundation, commence voluntary termination, and pay no termination tax because it has no assets. In this case, the transferee acquires all of the aggregate tax benefits of the transferor associated with the transferred assets.   Either of these ways may viewed by some as being the “right way” of terminating.

What if the foundation decides to terminate its private foundation status and to operate as a public charity?  The foundation is required to notify the IRS (quite detailed per the IRS rules), operate for a continuous 60 month period and then establish immediately at the end of the 60 month period that it meets the detailed requirements for a public charity.

The IRS has information that can guide foundations, including the following links:

Termination of Private Foundation Status

Life Cycle of a Private Foundation

Life Cycle of a Public Charity

Facts about Terminating or Merging Your Exempt Organization:  Publication 4779 (May 2009)

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