Exempt Organizations Technical Guide: Excise Taxes on Investments Which Jeopardize Charitable Purposes - IRC Section 4944
22 May 2024
SUMMARY:The technical guide on excise taxes under IRC Section 4944 addresses regulations for private foundations, which are tax-exempt under Section 501(c)(3) but not classified as public charities under Section 509(a). These organizations are subject to Chapter 42 rules, which include excise taxes on investments that jeopardize their charitable purposes. Section 4944 mandates these taxes if a foundation makes such risky investments, with additional liability for managers aware of the investments' jeopardizing nature. This framework was significantly shaped by the Tax Reform Act of 1969, aimed at curtailing abuses in private foundations' investment activities, with subsequent amendments such as the Pension Protection Act of 2006 and the Taxpayer Certainty and Disaster Tax Relief Act of 2019 updating excise tax rates and filing requirements.
Key regulatory details include the distinction between jeopardizing investments and program-related investments (PRIs), which are exempt if they primarily accomplish charitable purposes without aiming to produce income or appreciate in value. Excise taxes are structured in two tiers: the first tier tax applies annually as long as the jeopardizing investment persists, and if not corrected within a specified period, a second tier tax is imposed, which is harsher and also applies to managers who refuse to make corrections. These provisions ensure that private foundations manage their resources prudently, focusing on advancing their exempt charitable objectives.
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Desireé M. Bennett, EA - Principal
