Title 26, Internal Revenue CodeRelease 119-110
§507 Termination of Private Foundation Status
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter F — Exempt Organizations › PART II — PRIVATE FOUNDATIONS › § 507
Summary
A private foundation stops being a private foundation only in two main ways: the organization tells the IRS it plans to stop, or the IRS finds willful, repeated, or flagrant wrongdoing that makes the group liable for tax under chapter 42, tells the group, and the tax is paid or fully forgiven. There are special rules for becoming a public charity instead of a private foundation. A foundation can end its private status by giving all its net assets to one or more public charities that have been public charities for at least 60 calendar months, or by meeting the public-charity tests in section 509(a) either within a 12-month period that starts with its first taxable year after December 31, 1969, or during a continuous 60-calendar-month period starting with the first day of any taxable year after December 31, 1969. To use the 12- or 60-month route, the foundation must tell the IRS before the period starts (or within 90 days after final rules are issued) and must prove afterward that it met the tests. When the IRS can tax a foundation that stops being private, the tax equals the smaller of (a) the total tax benefit the foundation got from its tax-exempt 501(c)(3) status (measured by added taxes to contributors and to the foundation’s income, plus interest, with special trust rules), or (b) the value of the foundation’s net assets. A “substantial contributor” is anyone who gave more than $5,000 and more than 2% of all gifts (special rules apply for valuation, spouses, trusts, and when someone stops being “substantial”). Asset value is measured at the higher of the first day action began that led to stopping private status or the date it actually stops. If assets are moved, the tax is treated as imposed from that first day of action. The IRS may cancel unpaid tax if the foundation gives all assets to qualifying public charities that have existed 60 months, or if a state officer notifies the IRS within one year that court-ordered corrective action to preserve the assets has begun and later certifies it is complete.
Full Legal Text
Title 26, §507
Internal Revenue Code, Source: USLM XML via OLRC
(a)General rule
Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if—
(1)such organization notifies the Secretary (at such time and in such manner as the Secretary may by regulations prescribe) of its intent to accomplish such termination, or
(2)(A)with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax under chapter 42, and
(B)the Secretary notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c),
and either such organization pays the tax imposed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g).
(b)Special rules
(1)Transfer to, or operation as, public charity
The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if—
(A)such organization distributes all of its net assets to one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution, or
(B)(i)such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969,
(ii)such organization notifies the Secretary (in such manner as the Secretary may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is terminating its private foundation status, and
(iii)such organization establishes to the satisfaction of the Secretary (in such manner as the Secretary may by regulations prescribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i).
If an organization gives notice under subparagraph (B)(ii) of the commencement of a 60-month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month period, this part and chapter 42 shall not apply to such organization for any taxable year within such 60-month period for which it does meet such requirements.
(2)Transferee foundations
For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization.
(c)Imposition of tax
There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of— (1)
(2)the value of the net assets of such foundation.
(d)Aggregate tax benefit
(1)In general
For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of— (A)
(B)the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912, if (i) it had not been exempt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deductions under section 642(c) (or the corresponding provisions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of section 170(b)(1)(A)), and
(C)interest on the increases in tax determined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a private foundation.
(2)Substantial contributor (3) Regulations
(A)Definition
For purposes of paragraph (1), the term “substantial contributor” means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term “substantial contributor” also means the creator of the trust.
(B)Special rules
For purposes of subparagraph (A)—
(i)each contribution or bequest shall be valued at fair market value on the date it was received,
(ii)in the case of a foundation which is in existence on October 9, 1969, all contributions and bequests received on or before such date shall be treated (except for purposes of clause (i)) as if received on such date,
(iii)an individual shall be treated as making all contributions and bequests made by his spouse, and
(iv)any person who is a substantial contributor on any date shall remain a substantial contributor for all subsequent periods.
(C)Person ceases to be substantial contributor in certain cases
(i)In general
A person shall cease to be treated as a substantial contributor with respect to any private foundation as of the close of any taxable year of such foundation if—
(I)during the 10-year period ending at the close of such taxable year such person (and all related persons) have not made any contribution to such private foundation,
(II)at no time during such 10-year period was such person (or any related person) a foundation manager of such private foundation, and
(III)the aggregate contributions made by such person (and related persons) are determined by the Secretary to be insignificant when compared to the aggregate amount of contributions to such foundation by one other person.
For purposes of subclause (III), appreciation on contributions while held by the foundation shall be taken into account.
(ii)Related person
For purposes of clause (i), the term “related person” means, with respect to any person, any other person who would be a disqualified person (within the meaning of section 4946) by reason of his relationship to such person. In the case of a contributor which is a corporation, the term also includes any officer or director of such corporation.
(e)Value of assets
For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation.
(f)Liability in case of transfers of assets from private foundation
For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation.
(g)Abatement of taxes
The Secretary may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if—
(1)the private foundation distributes all of its net assets to one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or
(2)following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary, in such manner as the Secretary may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary receives certification from the appropriate State officer that such action has resulted in such preservation of assets.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
1984—Subsec. (d)(2)(C). Pub. L. 98–369 added subpar. (C). 1976—Pub. L. 94–455 struck out “or his delegate” after “Secretary” wherever appearing.
Statutory Notes and Related Subsidiaries
Effective Date
of 1984 Amendment Pub. L. 98–369, div. A, title III, § 313(b),
July 18, 1984, 98 Stat. 787, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after
December 31, 1984.”
Effective Date
Section effective Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91–172, set out as a note under section 4940 of this title. Applicability to Determination of Status as Substantial Contributor for Purposes of Taxes on Self-Dealing of Contributions Made Prior to
October 9, 1969 Pub. L. 95–170, § 3, Nov. 12, 1977, 91 Stat. 1352, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “In determining whether a person is a substantial contributor within the meaning of section 507(d)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for purposes of applying section 4941 of such Code (relating to taxes on self-dealing), contributions made before
October 9, 1969, which—“(1) were made on account of or in lieu of payments required under a lease in effect before such date, and “(2) were coincident with or by reason of the reduction in the required payments under such lease, shall not be taken into account. For purposes of applying section 507(d)(2)(B)(iv) of such Code, the preceding sentence shall be treated as having taken effect on
January 1, 1970.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 507
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110