Specific Instructions for Page 1

Question B.   To avoid additional taxes and penalties under sections 4941 through 4945, 4955, and 4958, and in some cases further initial taxes on the foundation, organization, and related persons, a foundation, organization, disqualified person, or manager must correct the taxable event within the correction period. The taxable event is the act, failure to act, or transaction that resulted in the liability for initial taxes under these provisions.

Generally, the correction period begins on the date the event occurs and ends 90 days after the mailing date of a notice of deficiency, under section 6212, in connection with the second tier tax imposed on that taxable event. That time is extended by:

1. Any period in which a deficiency cannot be assessed under section 6213(a) because a petition to the Tax Court for redetermination of the deficiency is pending, not extended by any supplemental proceeding by the Tax Court under section 4961(b), regarding whether correction was made and
2. Any other period the IRS determines is reasonable and necessary to correct the taxable event.

The taxable event will be treated as occurring:

1. For the tax on failure to distribute income, on the first day of the tax year for which there was a failure to distribute income,
2. For the tax on excess business holdings, on the first day on which there were excess business holdings, or
3. In any other case, on the date the event occurred.

Generally, the term correction has the following meanings:

• Section 4941 (Schedule A) - Undoing the transaction to the extent possible, but in any case placing the private foundation in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.
• Section 4942 (Schedule B) - Making sufficient qualifying distributions to compensate for deficient qualifying distributions for a prior tax year.
• Section 4943 (Schedule C) - Action that results in the foundation no longer having excess business holdings in a business enterprise.
• Section 4944 (Schedule D) - An investment is considered to be removed from jeopardy when the investment is sold or otherwise disposed of, and the proceeds of such sale or other disposition are not investments that jeopardize the carrying out of the foundation's exempt purposes.
• Section 4945 (Schedule E) -
  1. Recovering part or all of the expenditure to the extent recovery is possible, and where full recovery is not possible, such additional corrective action as is prescribed by regulations or
  2. Obtaining or making the report in question for a case that fails to comply with section 4945(h)(2) or (3) (expenditure responsibility).
• Section 4955 (Schedule F) - Recovering part or all of the expenditure to the extent recovery is possible, establishment of safeguards to prevent future political expenditures, and where full recovery is not possible, such additional corrective action as is prescribed by the regulations.
  
• Section 4958 (Schedule I) - Undoing the excess benefit to the extent possible and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person had been dealing under the highest fiduciary standards.

If, when the return is filed, the foundation, organization, managers, disqualified persons, or self-dealers have corrected any acts or transactions resulting in liability for tax under Chapter 42, answer Yes to question B and give the following information separately for each correction:

1. Schedule and item number of the act or transaction that has been corrected,
2. A description of the act or transaction that resulted in the tax,
3. A detailed description of the correction made,
4. The amount of any political expenditure recovered,
5. Description of safeguards to prevent future political expenditures, and
6. The date of correction.

For any acts or transactions the foundation, organization, managers, disqualified persons, or self-dealers have not corrected, give the following information separately for each act:

1. Schedule and item number of the act or transaction that has not been corrected,
2. A description of the act or transaction, and
3. A detailed explanation of why correction has not been made and what steps are being taken to make the correction.

If you are correcting deficient distributions under section 4942 where an election under section 4942(h)(2) was filed with the IRS, provide a copy of the election. See the instructions for Form 990-PF, Part XIII, lines 4b and 4c for more information.

Part I

Line 8  

If the organization has an entry on this line, it must also file Form 8870.

Enter the total of all premiums paid by the organization on any personal benefit contract if the payment of premiums is in connection with a transfer for which a deduction is not allowed under section 170(f)(10)(A). Also, if there is an understanding or expectation that any person will directly or indirectly pay any premium on a personal benefit contract for the transferor, include those premium payments in the amount entered on this line.

A personal benefit contract is (to the transferor) any life insurance, annuity, or endowment contract that benefits directly or indirectly the transferor, a member of the transferor's family, or any other person designated by the transferor (other than an organization described in section 170(c)).

For more information, see Notice 2000-24, I.R.B. 2000-17, 952.

Part II-A

Columns (a) and (b).   List the names, addresses, and taxpayer identification number of all persons who owe tax in connection with the foundation or organization, whether as managers, self-dealers, or disqualified persons, as shown in Schedules A, D, E, F, H, and I.

Column (c).   For each person listed in column (a), enter the sum of:

1. Taxes that person owes as a self-dealer, from Schedule A, Part II, column (d), and
2. Tax for acts of self-dealing in which the individual participated as a foundation manager, from Schedule A, Part III, column (d).

Column (d).   Enter for each person listed in column (a) the tax on jeopardy investments from Schedule D, Part II, column (d), that the individual took part in as a foundation manager.

Column (e).   Enter for each person listed in column (a) the tax on taxable expenditures from Schedule E, Part II, column (d), that the individual took part in as a foundation manager.

Column (f).   Enter for each person listed in column (a) the tax on political expenditures from Schedule F, Part II, column (d), that the individual took part in as an organization or foundation manager.

Column (g).   Enter for each person listed in column (a) the tax on disqualifying lobbying expenditures from Schedule H, Part II, column (d), that the individual took part in as an organization manager.

Column (h).   For each person listed in column (a), enter the sum of:

1. Taxes that person owes as a disqualified person, from Schedule I, Part II, column (d), and
2. Tax on excess benefit transactions in which the organization manager participated knowing that the transaction was improper, from Schedule I, Part III, column (d).

A person's liability for tax as a self-dealer, manager, or disqualified person under sections 4912, 4941, 4944, 4945, 4955, and 4958 is joint and several. Therefore, if more than one person owes tax on an act as a manager, self-dealer, or disqualified person, they may apportion the tax among themselves. However, when all managers, self-dealers, or disqualified persons who are liable for tax on a particular transaction under sections 4912, 4941, 4944, 4945, 4955, or 4958 pay less than the total tax due on that transaction, then the IRS may charge the amount owed to one or more of them regardless of the tax apportionment shown on this return.

Schedule A - Initial Taxes on Self-Dealing

General Instructions

Requirement.   All organizations that answered Yes to question 1b or 1c in Part VII-B of Form 990-PF, or Yes to question 1b or 1c in Part VI-B of Form 5227, must complete Schedule A. Complete Parts I, II, and III of Schedule A only in connection with acts that are subject to the tax on self-dealing.

Paying the tax and filing a Form 4720 is required for each year or part of a year in the taxable period that applies to the act of self-dealing. Generally, the taxable period begins with the date on which the self-dealing occurs and ends on the earliest of:

1. The date a notice of deficiency is mailed under section 6212, in connection with the initial tax imposed on the self-dealer,
2. The date the initial tax on the self-dealer is assessed, or
3. The date correction of the act of self-dealing is completed.

Self-dealing   means any direct or indirect:

1. Sale, exchange, or leasing of property between a private foundation and a disqualified person (see definitions in Form 990-PF instructions),
2. Lending of money or other extension of credit between a private foundation and a disqualified person,
3. Furnishing of goods, services, or facilities between a private foundation and a disqualified person,
4. Payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person,
5. Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation, and
6. Agreement by a private foundation to make any payment of money or other property to a government official (see Pub. 578, Chapter V), other than an agreement to employ or make a grant to that individual for any period after the end of government service if that individual will be ending government service within a 90-day period.

Exceptions to Self-Dealing.   See Pub. 578 for a description of acts that are not considered self-dealing.

Initial Taxes on Self-Dealer.   An initial tax of 5% of the amount involved is charged for each act of self-dealing between a disqualified person and a private foundation for each year or part of a year in the taxable period. Any disqualified person (other than a foundation manager acting only as such) who takes part in the act of self-dealing must pay the tax.

Initial Taxes on Foundation Managers.   When a tax is imposed on a foundation manager for an act of self-dealing, the tax will be 2½% of the amount involved in the act of self-dealing for each year or part of a year in the taxable period. However, the total tax imposed for all years in the taxable period is limited to $10,000 for each act of self-dealing. The tax is imposed on any foundation manager who took part in the act knowing that it was self-dealing except those foundation managers whose participation was not willful and was due to reasonable cause. Any foundation manager who took part in the act of self-dealing must pay the tax.

Specific Instructions

Part I.   List each act of self-dealing in Part I. Enter in column (d) the number designation from Form 990-PF, Part VII-B, question 1a, or Form 5227, Part VI-B, question 1a, that applies to the act. For example, 1a(1) or 1a(4).

Part II.   Enter in column (a) the names of all disqualified persons who took part in the acts of self-dealing listed in Part I. If more than one disqualified person took part in an act of self-dealing, each is individually liable for the entire tax in connection with the act. But the disqualified persons who are liable for the tax may prorate the payment among themselves. Enter in column (c) the tax to be paid by each disqualified person.

Carry the total amount in column (d) for each self-dealer to page 1, Part II-A, column (c).

Part III.   Enter in column (a) the names of all foundation managers who took part in the acts of self-dealing listed in Part I, and who knew that they were acts of self-dealing (except for foundation managers whose participation was not willful and was due to reasonable cause).

If more than one foundation manager took part in the act of self-dealing, knowing that it was such an act, and participation was willful and not due to reasonable cause, each is individually liable for the entire tax in connection with the act. But the foundation managers liable for the tax may prorate the payment among themselves. Enter in column (c) the tax to be paid by each foundation manager.

Carry the total amount in column (d) for each foundation manager to page 1, Part II-A, column (c).

Schedule B - Initial Tax on Undistributed Income

Complete Schedule B if you answered Yes to Form 990-PF, Part VII-B, question 2b.

An initial excise tax of 15% is imposed on a private foundation's undistributed income on the first day of the second or any succeeding tax year after the tax year in connection with which income remains undistributed.

Use the 2002 Form 4720 to report the initial tax on undistributed income for tax years beginning in 2001 or earlier that remains undistributed at the end of the foundation's current tax year beginning in 2002. The initial tax will not apply to a private foundation's undistributed income:

1. For any tax year it is an operating foundation (as defined in section 4942(j)(3) and related regulations or in section 4942(j)(5)), or
2. To the extent it did not distribute an amount solely because of an incorrect valuation of assets, provided the foundation satisfies the requirements of section 4942(a)(2), or
3. For any year for which the initial tax was previously assessed or a notice of deficiency was issued.

Do not complete Schedule B for any year for which any of the above provisions apply to the undistributed income.

Schedule C - Initial Tax on Excess Business Holdings

General Instructions

Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. They may be subject to an excise tax on the amount of any excess holdings.

Requirement.   If you answered Yes to Form 990-PF, Part VII-B, question 3b, or Form 5227, Part VI-B, question 3b, complete a Schedule C for each business enterprise in which the foundation had excess business holdings for its tax year beginning in 2002.

Taxes.   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. The initial tax is 5% of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. The excess holdings are determined on the day during the tax year when they were the largest.

If the foundation keeps the excess business holdings after the initial tax has been imposed, it becomes liable for an additional tax of 200% of the remaining excess business holdings unless it disposes of them within the taxable period. However, if the foundation disposes of its excess business holdings during the correction period, the additional tax will not be assessed or, if assessed, will be abated and if collected, will be credited or refunded. See Pub. 578 for information on the correction period.

Business Enterprise.   In general, this means the active conduct of a trade or business, including any activity regularly conducted to produce income from selling goods or performing services, that is an unrelated trade or business described in section 513.

The term business enterprise does not include a functionally related business as defined in section 4942(j)(4). In addition, business holdings do not include program-related investments (such as investments in small businesses in economically depressed areas or in corporations to assist in neighborhood renovations) as defined in section 4944(c) and related regulations. Also, business enterprise does not include a trade or business at least 95% of the gross income of which comes from passive sources. See Pub. 578.

Excess Business Holdings.   Excess business holdings is the amount of stock or other interest in a business enterprise that the foundation would have to dispose of to a person other than a disqualified person in order for the foundation's remaining holdings in the enterprise to be permitted holdings (section 4943(c)(1)). See Pub. 578.

Sole Proprietorships.   In general, a private foundation may not have any permitted holdings in a business enterprise that is a sole proprietorship. For exceptions, see Pub. 578, Chapter X. For a definition of sole proprietorship, see Regulations section 53.4943-10(e).

Corporate Voting Stock.   This stock entitles a person to vote for the election of directors. Treasury stock and stock that is authorized but unissued is not voting stock for these purposes. See Regulations sections 53.4943-3(b)(1)(ii) and 53.4943-3(b)(2)(ii).

For a partnership (including a limited partnership) or joint venture, the term profits interest should be substituted for voting stock. For any unincorporated business enterprise that is not a partnership, joint venture, or sole proprietorship, the term beneficial interest should be substituted for voting stock. See Regulations section 53.4943-3(c).

Nonvoting Stock.   Corporate equity interests that do not have voting power should be classified as nonvoting stock. Evidences of indebtedness (including convertible indebtedness), warrants, and other options or rights to acquire stock should not be considered equity interests. See Regulations section 53.4943-3(b)(2).

For a partnership (including a limited partnership) or joint venture, the term capital interest should be substituted for nonvoting stock. For any unincorporated business that is not a partnership, joint venture, or sole proprietorship, references to nonvoting stock do not apply for computation of permitted holdings. See Regulations section 53.4943-3(c)(4).

Attribution of Business Holdings.   In determining the holdings in a business enterprise of either a private foundation or a disqualified person, any stock or other interest owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. In general, this rule does not apply to certain income interests or remainder interests of a private foundation in a split-interest trust described in section 4947(a)(2). See Regulations section 53.4943-8.

Taxable Period.   The taxable period begins on the first day the foundation has excess business holdings and ends on the earliest of:

1. The mailing date of a notice of deficiency, under section 6212, in connection with the initial tax on excess business holdings related to those holdings,
2. The date the excess is eliminated, or
3. The date the initial tax on excess business holdings related to those holdings is assessed.

When a notice of deficiency is not mailed because the restrictions on assessment and collection are waived or because the deficiency is paid, the date of filing the waiver or the date of paying the tax, respectively, will be treated as the end of the taxable period. See Regulations section 53.4943-9.

Exceptions to Tax on Excess Business Holdings

1. 2% De Minimis Rule. A private foundation will not be treated as having excess business holdings in any enterprise in which it, together with related foundations as described in the instructions for Form 990-PF (under the definition for disqualified person in the General Instructions) owns not more than 2% of the voting stock and not more than 2% in value of all outstanding shares of all classes of stock.
2. Disposition of Excess Business Holdings Within 90 Days. Generally, when a private foundation acquires excess business holdings other than as a result of purchase by the foundation (such as an acquisition by a disqualified person), the foundation will not be taxed on those excess holdings if it disposes of enough of them so that it no longer has an excess. To avoid the tax, the disposition must take place within 90 days from the date the foundation knew, or had reason to know, of the event that caused it to have excess business holdings. That 90-day period will be extended to include the period during which Federal or state securities laws prevent the foundation from disposing of those excess business holdings. See Regulations section 53.4943-2(a).
3. General Rules on the Permitted Holdings of a Private Foundation in a Business Enterprise. No excess business holdings tax is imposed (a) if a private foundation and all disqualified persons together hold no more than 20% of the voting stock of a business enterprise or (b) on nonvoting stock, if all disqualified persons together do not own more than 20% of the voting stock of the business enterprise.

   If the private foundation and all disqualified persons together do not own more than 35% of the enterprise's voting stock, and effective control is in one or more persons who are not disqualified persons in connection with the foundation, then 35% may be substituted for 20% wherever it appears in the preceding paragraph. See sections 4943(c)(2) and 4943(c)(3).

   If a private foundation and all disqualified persons together had holdings in a business enterprise of more than 20% of the voting stock on May 26, 1969, substitute that percentage for 20% and for 35% (if the holding is greater than 35%), using the principles of section 4943(c)(4) that apply. However, the percentage substituted may not be more than 50%.

   The percentage substituted under the preceding paragraph is (a) subject to reductions and limitations (see sections 4943(c)(4)(A)(ii) and 4943(c)(4)(D)) and (b) applicable, both in connection with the voting stock and, separately, in connection with the value of all outstanding shares of all classes of stock (see section 4943(c)(4)(A)(iii)).

4. Interests Held by a Private Foundation on May 26, 1969. For private foundations that had business holdings on May 26, 1969 (or holdings acquired by trust or will as described in exception 5 below), that were more than the current limits permit, there are transitional rules that permit the foundation to dispose of the excess over time without being subject to the tax on excess business holdings.

   During the first phase, no excess business holdings tax was imposed on a private foundation for interests held since May 26, 1969, if the foundation had excess holdings on that date. The first phase is:

   1. A 20-year period beginning on May 26, 1969, if on that date the foundation and all disqualified persons held more than a 95% voting interest in the enterprise (the 20-year first phase expired on May 25, 1989);
   2. A 15-year period beginning on May 26, 1969, if on that date the foundation and all disqualified persons together had more than a 75% voting stock interest (or more than a 75% profits or beneficial interest of any unincorporated business), or more than a 75% interest in the value of all outstanding shares of all classes of stock (or more than a 75% capital interest of a partnership or joint venture) in the enterprise (the 15-year first phase expired on May 25, 1984); and
   3. A 10-year period beginning on May 26, 1969, in all other cases in which the foundation had excess business holdings on May 26, 1969. The 10-year first phase expired on May 25, 1979.

   During the second phase (the 15-year period after the first phase), if the foundation's disqualified persons hold more than 2% of the enterprise's voting stock, the foundation will be liable for tax if the foundation holds more than 25% of the voting stock or if the foundation and its disqualified persons together hold more than 50% of the voting stock.

   However, during the second phase, if a foundation's disqualified persons purchase voting stock in a business enterprise after July 18, 1984, causing the combined holdings of the disqualified persons to exceed 2% of the enterprise's voting stock, the foundation has 5 years to reduce its holdings in the enterprise to below its second phase limit before the increase will be treated as held by the foundation. See sections 4943(c)(4)(D) and 4943(c)(6).

   The first-phase periods may be suspended pending the outcome of any judicial proceeding the private foundation brings regarding reform or other procedure to excuse it from compliance with its governing instrument or similar instrument in effect on May 26, 1969. See section 4943(c)(4)(C) and Regulations section 53.4943-4.

5. Holdings Acquired by Trust or Will. Holdings acquired under the terms of a trust that was irrevocable on May 26, 1969, or under the terms of a will executed by that date, are treated as held by the foundation on May 26, 1969, except that the 15- and 10-year periods of the first phase for the holdings start on the date of distribution under the trust or will instead of on May 26, 1969. See section 4943(c)(5) and Regulations section 53.4943-5. See section 4943(d)(1) and Regulations section 53.4943-8 for rules relating to constructive holdings held in a corporation, partnership, estate, or trust for the benefit of the foundation.
6. Gifts or Bequests of Business Holdings. Except as provided in exception 5, there is a special rule for private foundations that have excess business holdings as a result of a change in holdings after May 26, 1969. This rule applies if the change is other than by purchase by the foundation or by disqualified persons (such as through gift or bequest) and the additional holdings result in the foundation having excess business holdings. In that case, the foundation has 5 years to reduce these holdings or those of its disqualified persons to permissible levels to avoid the tax. See section 4943(c)(6) and Regulations section 53.4943-6.

   A private foundation that received an unusually large gift or bequest of business holdings after 1969, and that has made a diligent effort to dispose of excess business holdings, may apply for an additional 5-year period to reduce its holdings to permissible levels if certain conditions are met. See section 4943(c)(7).

7. Readjustments, Distributions, or Changes in Relative Value of Different Classes of Stock. See Regulations section 53.4943-4(d)(10) for special rules whereby increases in the percentage of value of holdings in a corporation that result solely from changes in the relative values of different classes of stock will not result in excess business holdings.

See Regulations section 53.4943-6(d) for rules on treatment of increases in holdings due to readjustments, distributions, or redemptions.

See Regulations section 53.4943-7 for special rules for readjustments involving grandfathered holdings.

Exceptions From Self-Dealing Taxes on Certain Dispositions of Excess Business Holdings.   Section 101(I)(2)(B) of the Tax Reform Act of 1969 provides for a limited exception from self-dealing taxes for private foundations that dispose of certain excess business holdings to disqualified persons, as long as the sales price equals or is more than fair market value.

The excess business holdings involved are interests that are subject to the section 4941 transitional rules for May 26, 1969, holdings. These interests would also be subject to the excess business holdings tax if they were not reduced by the required amount.

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