An introduction to the requirements a non-operating private foundation must satisfy as to the timing and treatment of charitable distributions in order to attain the benefits of pass-through distribution pursuant to IRC 170(b)(1)(F)(ii). IRC Section and Treasury Regulations IRC 170(b)(1)(A)(vii) Charitable contributions and gifts, Percentage limitations. IRC 170(b)(1)(F)(ii) Certain private foundations IRC 4942(g) Qualifying distributions defined IRC 4945(d)(4) Taxable expenditure, grant to an organization IRC 4945(h) Expenditure responsibility Treas. Reg. 1.170A-9(h)(1) Private nonoperating foundation distributing amount equal to all contributions received, in general Treas. Reg. 1.170A-9(h)(2) Special rules Treas. Reg. 1.170A-9(h)(4) Adequate records required Resources (court cases, Chief Counsel Advice, Revenue Rulings, internal resources) Issue Snapshot: IRC Section 4942 Taxes on Failure to Distribute Income—Carryover of Excess Distributions or Undistributed Income Issue Snapshot: IRC Section 4945(h) Expenditure Responsibility Analysis Introduction A "conduit foundation" (also referred to as a "pass-through foundation" or "distributing foundation") is any private nonoperating foundation that meets the distribution requirements specified in IRC 170(b)(1)(F)(ii) for a taxable year.1 Conduit foundations must make qualifying distributions (treated as distributions out of corpus) in an amount equal to 100 percent of contributions received in a taxable year no later than the 15th day of the third month following the close of the taxable year in question. "Conduit" is simply a description of a private nonoperating foundation that satisfies the distribution requirements of IRC 170(b)(1)(F)(ii) for a particular taxable year. By virtue of the foundation satisfying the "conduit" distribution requirements in a taxable year, individual contributors to the conduit foundation in that taxable year are eligible for a higher charitable deduction limit. Pursuant to IRC 170(b)(1)(A)(vii), the amount of the charitable deduction allowed for an individual taxpayer's contributions to a qualifying foundation is capped at 50 percent of the taxpayer's contribution base for the taxable year. (For cash contributions before January 1, 2026, the cap is increased to 60 percent under IRC 170(b)(1)(G).) This differs from the general rule under IRC 170(b)(1)(B), which normally limits the charitable deduction for contributions from an individual taxpayer to a private nonoperating foundation to 30 percent of the taxpayer's contribution base for the year. In addition, a contribution from a private nonoperating foundation to a foundation described in IRC 170(b)(1)(F)(ii) is not a qualifying distribution unless IRC 4942(g)(3) is met (requiring the distributee foundation to make a timely re-distribution out of corpus). The determination of whether a private nonoperating foundation is described in IRC 170(b)(1)(F)(ii) is made on a year-by-year basis. It does not require prior approval by the IRS. A private nonoperating foundation may satisfy IRC 170(b)(1)(F)(ii) by making an election to treat a current-year distribution as made out of corpus as set forth in Treas. Reg. 53.4942(a)-3(d)(2) or an election to treat a prior-year distribution as a current year distribution out of corpus as set forth in in Treas. Reg. 53.4942(a)-3(c)(2)(iv). No election is required by a private nonoperating foundation if sufficient qualifying distributions are treated as being made out of corpus under 53.4942(a)-3(d)(1). See, for example, Treas. Reg. 53.4942(a)-3(c)(3), Example 1. Relationship between IRC 4942 and IRC 170(b)(1)(f)(ii) IRC 4942 requires a private nonoperating foundation to distribute income equal to its distributable amount for a taxable year under IRC 4942(d) via qualifying distributions under IRC 4942(g) within 12 months of the close of the taxable year in question. This differs from the requirement imposed on conduit foundations by IRC 170(b)(1)(F)(ii) to distribute an amount equal to all contributions received in a taxable year within 2 months and 15 days of the close of taxable year in question. A conduit foundation thus must satisfy the distribution requirements of both IRC 4942 and 170(b)(1)(F)(ii) for the taxable year. Conduit foundation treatment means the foundation claiming to be described in IRC 170(b)(1)(F)(ii) must meet this accelerated deadline for qualifying distributions for a taxable year. If the foundation successfully meets this deadline, donations to the conduit foundation receive the favorable tax treatment conferred by IRC 170(b)(1)(A)(vii). If the foundation fails to meet the conduit foundation requirements of IRC 170(b)(1)(F)(ii), it still must meet the mandatory distribution requirements of IRC 4942. 1Treas. Reg. 1.170A-9(h) refers in some places to IRC 170(b)(1)(E)(ii) and in others to 170(b)(1)(D)(ii), both of which are references to what is now 170(b)(1)(F)(ii). Section 170(b)(1)(E) was redesignated as 170(b)(1)(D) in 1976 and redesignated as 170(b)(1)(F) in 1986. Treas. Reg. 1.170A-9(h) was amended in 1980 when the section referenced was 170(b)(1)(D), leaving references to both 170(b)(1)(D)(ii) and 170(b)(1)(E)(ii) in the regulation. Requirements for distributions: Treas. Reg. 1.170a-9(h)(1)(i) For a private nonoperating foundation to be treated as a conduit in IRC 170(b)(1)(F)(ii), all distributions made by the foundation counting toward its 100 percent distribution requirement must be qualifying distributions under IRC 4942(g). Such distributions cannot be made to the following recipients (whether or not the re-distribution requirements of IRC 4942(g)(3) are met by the distributee): An organization controlled directly or indirectly by the conduit foundation or by one or more disqualified persons (within the meaning of IRC 4946) with respect to the conduit foundation, or A private foundation which is not an operating foundation (within the meaning of IRC 4942(j)(3)). All distributions counting toward the 100 percent distribution requirement of IRC 170(b)(1)(F)(ii) must also be treated as distributions out of corpus for the taxable year in question in accordance with IRC 4942(h). Timing of distributions: Treas. Reg. 1.170A-9(h)(1)(ii) In order for an organization to meet the distribution requirements described above, it must distribute in the manner described above an amount equal in value to 100 percent of all contributions received in the taxable year and have no remaining undistributed income for the taxable year. It must make all such distributions not later than the 15th day of the third month after the close of the taxable year in which the contributions were received. Example: X is a private foundation on a calendar year basis. As of January 1, 1971, X had no undistributed income for 1970. X's distributable amount for 1971 was $600,000. In July 1971, A, an individual, contributed $500,000 (fair market value determined at the time of the contribution) of appreciated property to X (which, if sold, would give rise to long-term capital gain). X did not receive any other contribution in either 1970 or 1971. During 1971, X made qualifying distributions of $700,000 which were treated as made out of the undistributed income for 1971 and $100,000 out of corpus. X will meet the requirements for 1971 if it makes additional qualifying distributions of $400,000 out of corpus by March 15, 1972. Special rules: Treas. Reg. 1.170a-9(h)(2)(i)-(v) For purposes of IRC 170(b)(1)(A)(vii), an organization described in IRC 170(b)(1)(F)(ii) must distribute all contributions received in any year, whether of cash or property. However, solely for purposes of IRC 170(e)(1)(B)(ii), an organization described in IRC 170(b)(1)(F)(ii) is required to distribute all contributions of property only received in any year. "Contributions" in this context do not include bequests, legacies, devises, or transfers under IRC 2055 or 2106(a)(2) with respect to which a deduction was not allowed under IRC 170. Treas. Reg. 1.170A-9(h)(2)(i). A private foundation seeking to be described in IRC 170(b)(1)(F)(ii) for a taxable year might receive in that year a distribution from another private foundation that wants the distribution to be treated as a qualifying distribution under IRC 4942(g)(3). In such case, the distributee private foundation must make a re-distribution as described in IRC 4942(g)(3)(A)) not later than the 15th day of the third month after the close of such taxable year2 in order for any other distribution by the distributee foundation to be counted toward the 100% requirement in IRC 170(b)(1)(F)(ii). Treas. Reg. 1.170A-9(h)(1)(i).3 The re-distribution does not count toward the distributee foundation’s 100% requirement. Any distributions made by a conduit foundation with respect to a particular taxable year shall be treated as made first out of contributions of property and then out of contributions of cash received by such foundation in such year. Treas. Reg. 1.170A-9(h)(2)(ii). A private foundation is not required to trace specific contributions of property, or amounts into which such contributions are converted, to specific distributions. Treas. Reg. 1.170A-9(h)(2)(iii). Generally, for purposes of IRC 170(b)(1)(F)(ii), the fair market value of contributed property, determined on the date of contribution, is required to be used for purposes of determining whether an amount equal in value to 100 percent of the contributions received has been distributed. However, reasonable selling expenses, if any, incurred by the foundation in the sale of the contributed property may be deducted from the fair market value of the contributed property on the date of contribution, and distribution of the balance of the fair market value will satisfy the 100 percent distribution requirement. Treas. Reg. 1.170A-9(h)(2)(iv). If a private foundation receives a contribution of property and, within 30 days thereafter, either sells the property or makes an in kind distribution of the property to a public charity, then at the choice of the private foundation the gross amount received on the sale (less reasonable selling expenses incurred) or the fair market value of the contributed property at the date of its distribution to the public charity, and not the fair market value of the contributed property on the date of contribution (less reasonable selling expenses, if any), is considered to be the amount of the fair market value of the contributed property for purposes of the requirements of IRC 170(b)(1)(F)(ii). Treas. Reg. 1.170A-9(h)(2)(iv). A private foundation may satisfy the requirements for conduit foundation status for a particular taxable year by electing (pursuant to IRC 4942(h)(2) and the regulations thereunder) to treat a portion or all of one or more distributions, made not later than the 15th day of the third month after the close of such year, as made out of corpus. Treas. Reg. 1.170A-9(h)(2)(v). An election to treat current-year distributions as made out of corpus is set forth in Treas. Reg. 53.4942(a)-3(d)(2), and an election for prior-year distributions in Treas. Reg. 53.4942(a)-3(c)(2)(iv). 2By contrast, a distributee private foundation ordinarily has until the end its taxable year following the year of receipt of contribution to make the re-distribution under IRC 4942(g)(3). 3As discussed below, the distributee private foundation may make a corpus election that meets its re-distribution requirement under IRC 4942(g)(3). Adequate records required: Treas. Reg. 1.170A-9(h)(4) A taxpayer claiming a deduction under IRC 170 for a charitable contribution to a conduit foundation must obtain adequate records or other sufficient evidence from such foundation showing that the foundation made the required qualifying distributions within the time prescribed. Such records or other evidence must be attached to the taxpayer's return for the taxable year for which the charitable contribution deduction is claimed. If necessary, an amended income tax return or claim for refund may be filed. Issue indicators or audit tips Issue indicators A foundation described in IRC 170(b)(1)(F)(ii) remains subject to all Chapter 42 excise taxes. The nature of such foundations makes IRC 4942 and IRC 4945 especially relevant. Consider these indicators for the following Chapter 42 excise taxes: IRC 4941: Self-Dealing Evidence of distributions made to organizations controlled by one or more disqualified persons with respect to the foundation. Evidence of loans of foundation property to disqualified persons. Use of foundation property by disqualified persons. IRC 4942: Mandatory Distributions Failure to make distributions equal to or greater than the foundation's distributable amount for a taxable year before the first day of the second succeeding taxable year pursuant to IRC 4942(a). For private foundations claiming a contribution to a foundation described in IRC 170(b)(1)(F)(ii) as a qualifying distribution under IRC 4942(g)(3), look for failure by the distributee foundation to make a re-distribution equal to the amount of the contribution received from the contributor private foundation before the first day of the distributee foundation’s second succeeding taxable year pursuant to IRC 4942(g)(3)(A) (to be described in IRC 170(b)(1)(F)(ii) in the year it receives the contribution, the distributee foundation must, among other things, make the re-distribution by the 15th day of the third month after the close of its first succeeding taxable year). IRC 4944: Jeopardizing Investments Ensure that any distributions made by the foundation described in IRC 170(b)(1)(F)(ii) that are designated as program-related investments are made primarily for accomplishing one or more of the purposes described in IRC 170(c)(2)(B). Verify that any such program-related investments do not have as a significant purpose the production of income or the appreciation of property. IRC 4945: Taxable Expenditures Investigate whether any distributions made by the foundation described in IRC 170(b)(1)(F)(ii) are taxable expenditures under IRC 4945(d). Verify whether the foundation has exercised expenditure responsibility over all grants for which it is required to do so under IRC 4945(h). When examining a foundation that made a contribution to a foundation described in IRC 170(b)(1)(F)(ii), verify whether the contributor foundation has exercised expenditure responsibility over the grant to the foundation to the extent it is required to do so under IRC 4945(h). Audit tips Lead Sheets and Lead Sheet Attachments are recommended for use in developing this issue. Review pre-grant inquiry requirements under IRC 4945(h) to determine if requirements were met. Review all expenditures and determine which expenditures constitute grants to organizations. If any of the grantee organizations are not organizations listed in IRC 4945(d)(4)(A), then the grants are subject to expenditure responsibility in accordance with IRC 4945(h). These grants must be reviewed in further detail to determine if all the conditions of expenditure responsibility are met. Examine the Form 990-PF to determine if the foundation properly made an election, if applicable, under Treas. Reg. 53.4942(a)-3(c)(2)(iv) or Treas. Reg. 53.4942(a)-3(d)(2). Review to ensure that no other Chapter 42 violation occurred, such as self-dealing under IRC 4941, failure to make required distributions under IRC 4942, excess business holdings under IRC 4943, and jeopardizing investments under IRC 4944.
