In a recently filed case in the United States Tax Court, the Estes Family Educational and Charitable Foundation, a private foundation, is challenging IRC § 4942 excise tax deficiencies stemming from an alleged failure to satisfy its minimum distribution requirements. The Estes Foundation was assessed nearly $9 million in excise taxes, including $4.1 million relating to the 30 percent excise tax for failing to make sufficient distributions for tax years 2010-2013, and $4.8 million relating to the 100 percent excise tax for failing to correct the alleged failures by the end of 2015.
Under IRC § 4942, a private non-operating foundation generally must pay out each year an amount equal to 5 percent of its net investment assets in qualifying distributions. Qualifying distributions generally include grants to qualified donees, reasonable and necessary administrative costs to make the grants, and certain other costs relating to its charitable activities.
Failure to meet the minimum distribution requirement will result in an excise tax assessed on the undistributed amount equal to 30 percent of the undistributed amount. The foundation can also be subject to an additional excise tax of 100 percent of the undistributed amount if the foundation does not pay out the undistributed income to correct the failures within 90 days of receiving notice from the IRS.
In its petition, the foundation challenges the IRS computations regarding the undistributed amounts, and asserts that the deficiencies are related to its refusal to execute an extension of the limitations period for assessment of excise taxes, as well as to the fact that prior determinations made by the IRS against individuals of the Estes family were resolved completely in the family’s favor. The foundation also alleges that it had reasonable cause for failing to make any required distributions, because of the illiquidity of its investment assets that was beyond its control. Private foundations and their advisors should stay tuned to see whether this case ultimately results in a Tax Court opinion that addresses these interesting issues.
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