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Private Foundations with Expiring Carryovers

Generally, a private foundation is subject to a 30 percent tax on its income that is not distributed by the following year end. Where the foundation distributes more than its income in a given year, the excess can be carried over for five years thereby reducing the required distribution in those future years. The issue raised by a recent IRS announcement was whether a private foundation can elect to treat its distributions in that fifth year as coming from corpus rather than income. If available, doing so would utilize some or all of the carryover before it expires to offset that year’s income and the amount covered by the distribution out of corpus would “freshen up” the carryover. 

For example: Can a private foundation with a $100 carryover that will expire at the end of this year “elect” to distribute $100 of its current year income out of corpus? If that were appropriate, the $100 carryover would offset all the income and the $100 distribution out of corpus would create a “fresh” $100 carryover.   


The IRS announcement says the carryover cannot be refreshed by an “election” to treat distributions out of corpus. The announcement cites Code Section 4942 and Regulation Section 53.4942(a)-3(e)(2), which it interprets to limit the ability of the foundation that has income to elect that a distribution is out of corpus unless the distributions for the year exceed the foundation’s income. In effect, the IRS takes the position that, for purposes of utilizing a carryover, a distribution is deemed to be first applied against income and only if distribution exceeds the income can it be considered a distribution of corpus.



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