Substantial Contributor Definition: Private Foundation

A substantial contributor includes any per­son who contributed or bequeathed a total amount of more than $5,000 to the private foun­dation if the amount is more than two percent of the total contributions and bequests received by the foundation from its creation up through the close of the tax year of the foundation in which the contribution or bequest is received from that person. For a trust, a substantial contributor includes the creator of the trust. However, in no case does the term include a governmental unit.

In determining whether the total contribu­tions and bequests from a person are more than two percent of the total contributions and bequests re­ceived by a private foundation, both the total of the amounts received by the foundation and the total of the amounts contributed and be­queathed by the person, are determined as of the last day of each tax year. Although the deter­mination is made on the last day of the foundation’s tax year, a donor is a substantial contributor as of the first day the foundation receives a gift large enough to make the donor a substantial contributor. Each contribution or be­quest is valued at its fair market value on the date it is received by the foundation. Gifts by an individual include all contributions and bequests made by that individual and his or her spouse.

A determination is to be made as to whether a person is a substantial contributor as of the end of each of the foundation’s tax years, based on the respective totals of all contributions re­ceived and the total amount received from a particular person by that date. Status as a sub­stantial contributor will date from the time the donor first met the $5,000–two percent test. Once a person is a substantial contributor to a private foundation, generally that person remains a sub­stantial contributor even though the individual might not be so classified if a determination were first made at some later date. For instance, even though the total contributions and bequests of a person become less than two percent of the total re­ceived by a private foundation, generally the person remains a substantial contributor to the foundation.

However, a person ceases to be a substan­tial contributor as of the end of a private foundation’s tax year if:

1. That person (and all related persons) have not made any contributions to the founda­tion during the ten-year period ending with that tax year, and
2. That person (or any related person) was not a foundation manager of the founda­tion at any time during that ten-year period, and
3. The total contributions made by that per­son (and related persons) are determined by the IRS to be insignificant compared to the total contributions to the foundation by one other person.  For the purpose of this comparison, appreciation on contributions while held by the foundation is taken into account.

A person is related to a substantial contribu­tor, for this rule, if that person’s relationship to the contributor would make that other person a disqualified person with respect to the contribu­tor.  If the contribu­tor is a corporation, the term related person also includes any officer or director of the corpo­ration.

Special rules.  A substantial contributor does not include an entity that is described in section 509(a)(1), (2), or (3) or any organization wholly owned by such an entity.  In addition, only for purposes of section 4941 excise taxes on self-dealing, a substantial contributor does not in­clude any other organization described in sec­tion 501(c)(3) (other than an organization with section 509(a)(4) status).

The term contribution includes gifts, and grants to the foundation, as well as bequests, devises, legacies, or transfers as outlined in the rules relating to estate and gift tax.

With respect to a private foundation, entities excluded from the definition of sub­stantial contributor are also excluded from the definition of disqualified per­son.

Return to Life Cycle of a Private Foundation