§4948 Application of taxes and denial of exemption with respect to certain foreign organizations

Summary

A 4% tax must be paid each year on the U.S.-source gross investment income of any foreign organization that is treated as a private foundation. “Gross investment income” and “sources within the United States” are defined by other tax rules (see sections 4940(c)(2) and 861). If a foreign organization gets most of its support from outside the United States, most special private-foundation rules (including sections 507 and 508 and the rest of this chapter except the 4% rule) do not apply. But if such an organization engaged in a “prohibited transaction” after December 31, 1969, it is not exempt under section 501(a). A “prohibited transaction” means the kinds of acts that would trigger penalties under sections 6684 or 507 for a domestic foundation (and involves “disqualified persons” as defined in section 4946). The Secretary will notify the organization and publish that notice in the Federal Register the same day. Under rules the Secretary makes, the organization can apply for exemption starting with the second taxable year after notice; if the Secretary is satisfied it won’t repeat the act, exemption can be restored from the year the claim is filed. Donors cannot claim deductions under sections 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for gifts or bequests made after the Secretary’s published notice for any taxable year in which the organization is not exempt.