Form 990-PF instructions adversely affect some grant-making foundations.

• Author: Dingfelder, Karen

Nonoperating private foundations. with income from charitable activities should be aware that the instructions to Form 990-PF reduce the amount of the foundation's qualifying distributions in a way not contemplated by the law or regulations. This result occurs when the foundation derives income from its charitable activities. The proper calculation of qualifying distributions is important, with implications for current and future years, because a private nonoperating foundation must make qualifying distributions at least equal to the required amount for the year or face penalties under Sec. 4949, until the shortfall is corrected.

In general, the required amount of qualifying distributions equals the foundation's minimum investment return--5% of the net fair market value of the foundation's noncharitable assets--reduced by the excise tax on net investment income and any unrelated business income tax (UBIT) (Sec. 4942(d)). Qualifying distributions generally are amounts paid to accomplish charitable purposes, including reasonable and necessary administrative expenses paid to support the foundation's charitable activities; amounts paid to acquire assets used directly in a charitable activity, and certain amounts set aside for specific charitable projects (Sec. 49421(g)).

In calculating its qualifying distributions, a private nonoperating foundation computes the cash expenses paid to support its charitable activities, such as grant-making expenditures. These expenses are added to amounts distributed for charitable activities, and all amounts are entered on Form 990-PF, Page 1, Part 1, Column d as "disbursements for charitable purposes." The total of the expenditures listed in Column d of Part I also is entered on Page 7, Part XII, along with other types of qualifying distributions (program-related investments, amounts paid to acquire assets used directly in a charitable activity and certain amounts set aside for charitable purposes). Total qualifying distributions from Part XII are carried to Part XIII of Form 990-PF to be applied to any prior year deficit in required distributions, and to the current year distribution requirement. In these regards, the form and instructions follow the statutory and regulatory provisions for a private foundation that has no income from a direct charitable activity.

However, there is a gap between the statute and the instructions to the form in the case of a private nonoperating foundation with income from...