Private foundations: down but not out.

• Author: Robbins, Andrew J.

The "qualified appreciated stock" exception for contributions of appreciated securities expired Dec. 31, 1994 (Sec. 170(e)(5)(D)). Beginning in 1995, the deduction must be reduced by the amount that would have been long-term capital gain had the stock been sold.

However, despite this exception's expiration, there is still an opportunity in specified circumstances to make additional contributions of appreciated stock in 1995 and subsequent years.

A private nonoperating foundation is treated like a public charity if it distributes, out of corpus, 100% of the contributions it receives to public charities and private operating foundations by the fifteenth day of the third month following the year in which the contributions are received (Sec. 170(b)(1)(E)(ii)). These distributions are in addition to the income distributions required by Sec. 4942; see the Tax Reform Act of 1969's "Blue Book," at 79.

Therefore, contributions of property to such a "conduit foundation" generally are not reduced by the long-term capital gain that would have resulted if the property had instead been sold (Sec. 170(e)(1)(B)(ii)).

In addition, contributions by individuals to a conduit foundation are eligible for the higher percentage limitations, based on adjusted gross income (AGI), that would apply if these contributions were made to a public charity (Sec. 170(b)(1)(A)(vii)).

Nevertheless, a foundation may not have to make these distributions to be considered a conduit foundation if it has a carryover from prior years of unused excess distributions out of corpus. In that event, it is possible to meet the "100% requirement" by making an election to treat distributions out of corpus made during the five preceding tax years as current distributions (Regs. Sec. 53.4942(a)-3(c)(2)(iv)).

To meet the test for the higher percentage limitations for contributions by individuals (under Sec. 170(b)(1)(A)(vii)), a private nonoperating foundation must distribute all contributions received in any year, whether cash or property, to be considered a conduit foundation. However, solely for purposes of avoiding the reduction of a contribution for unrealized long-term capital gain (under Sec. 170(e)(1)(B)(ii)), a private nonoperating foundation must distribute all contributions of only property received in any year to be considered a conduit foundation (Regs. Sec. 1.170A-9(g)(2)(i)).

Example: PF, a calendar-year foundation, has no 1994 undistributed income. In 1995, PF receives...