Internal Revenue Code §4940 imposes an excise tax of 2% on the net investment income of most domestic tax-exempt private foundations, including private operating foundations. Some exceptions apply. Net investment income is the amount by which the sum of gross investment income and the capital gain net income exceeds the allowable deductions. Tax-exempt interest on governmental obligations and related expenses are excluded.
This tax must be reported on Form 990-PF, Return of Private Foundation. Payment of the tax is subject to estimated tax requirements. For more information concerning payment of estimated tax, see the Instructions for Form 990-PF. Nonexempt private foundations are also subject to this tax, but only to the extent that the sum of the 2% tax plus tax on unrelated business income, applied as if the foundation were tax-exempt, is greater than income tax liability for the year.
Example. A taxable private foundation had an income tax liability for 2002 of $10,000. If the foundation were tax exempt, it would have a $4,000 liability for tax on net investment income and a $7,000 liability for tax on unrelated business income. The foundation is liable under §4940 for $1,000, the amount by which the sum of the tax on net investment income and the tax on unrelated business income ($11,000) exceeds the amount of income tax liability ($10,000).
An exempt operating foundation is not subject to the tax. Further, the tax: is reduced to 1% in certain cases. In general, an exempt operating foundation is a private foundation that has been publicly supported for 10 years; whose governing body consists of individuals less than 25% of whom are disqualified individuals and is broadly representative of the general public; and has no officer who is a disqualified individual during the year.
[Source: Internal Revenue Service, U.S. Dept. Of Treasury (IRS), http://www.irs.gov/]