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Private Foundation Excise Tax Proposed Change

February 2011

The recently released Federal 2012 Revenue Proposal set forth a provision to change the excise tax private foundations pay on their net investment income to a flat 1.35%.

As you are aware, private foundations that are exempt from federal income tax generally are subject to a two percent excise tax on their net investment income. The excise tax rate is reduced to one percent in any year in which the foundation’s distributions for charitable purposes exceed the average level of the foundation’s charitable distributions over the five preceding taxable years (with certain adjustments).

Because amounts paid by foundations in excise tax generally reduce the funds available for distribution to charitable beneficiaries, the Revenue Proposal would eliminate the “two-tier” structure of this excise tax and theoretically would ensure that a private foundation’s grantees do not suffer adverse consequences if the foundation increases its grant-making in a particular year to respond to charitable needs (thereby increasing their five-year average). Such a change would also simplify both the calculation of the excise tax and charitable distribution planning for private foundations.

The proposal would be effective for taxable years beginning after the date of enactment.

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