[House Report 114-19]
[From the U.S. Government Publishing Office]
114th Congress } { Rept. 114-19
HOUSE OF REPRESENTATIVES
1st Session } { Part 1
======================================================================
PRIVATE FOUNDATION EXCISE TAX SIMPLIFICATION ACT OF 2015
_______
February 9, 2015.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted
the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 640]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 640) to amend the Internal Revenue Code of 1986 to
modify the tax rate for excise tax on investment income of
private foundations, having considered the same, report
favorably thereon with an amendment and recommend that the bill
as amended do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND...........................................2
A. Purpose and Summary................................. 2
B. Background and Need for Legislation................. 2
C. Legislative History................................. 3
II. EXPLANATION OF THE BILL..........................................3
A. Modification of the Tax Rate for the Excise Tax on
Investment Income of Private Foundations (sec. 4940
of the Code)....................................... 3
III. VOTES OF THE COMMITTEE...........................................4
IV. BUDGET EFFECTS OF THE BILL.......................................5
A. Committee Estimate of Budgetary Effects............. 5
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 6
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 6
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.......8
A. Committee Oversight Findings and Recommendations.... 8
B. Statement of General Performance Goals and
Objectives......................................... 8
C. Information Relating to Unfunded Mandates........... 8
D. Applicability of House Rule XXI 5(b)................ 8
E. Tax Complexity Analysis............................. 8
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 9
G. Duplication of Federal Programs..................... 9
H. Disclosure of Directed Rule Makings................. 9
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED............9
VII. DISSENTING VIEWS................................................14
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SEC. 1. SHORT TITLE.
This Act may be cited as the ``Private Foundation Excise Tax
Simplification Act of 2015''.
SECTION 2. MODIFICATION OF THE TAX RATE FOR THE EXCISE TAX ON
INVESTMENT INCOME OF PRIVATE FOUNDATIONS.
(a) In General.--Section 4940(a) of the Internal Revenue Code of 1986
is amended by striking ``2 percent'' and inserting ``1 percent''.
(b) Elimination of Reduced Tax Where Foundation Meets Certain
Distribution Requirements.--Section 4940 of such Code is amended by
striking subsection (e).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 3. BUDGETARY EFFECTS.
The budgetary effects of this Act shall not be entered on either
PAYGO scorecard maintained pursuant to section 4(d) of the Statutory
Pay-As-You-Go Act of 2010.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
H.R. 640, reported by the Committee on Ways and Means,
provides that the excise tax rate on the net investment income
of private foundations is reduced to 1 percent. The bill
repeals the alternative rules that reduce the current-law
excise tax rate from 2 percent to 1 percent for a private
foundation with qualifying distributions that exceed the
average historical level of its charitable distributions.
B. Background and Need for Legislation
While the Committee continues actively to pursue
comprehensive tax reform as a critical means of promoting
economic growth and job creation, the Committee also believes
that it is important to provide permanent, immediate tax relief
to encourage faster economic growth and job creation, while
fostering charitable giving. By simplifying and reducing the
private foundation excise tax on net investment income, H.R.
640 eliminates a source of confusion and frustration,
especially for smaller foundations, which can have endowments
that vary in size significantly from year to year. Private
foundations, both large and small, recommended to the
Committee's 2013 Tax Reform Working Group on Charitable/Exempt
Organizations that the net investment tax be reduced to a flat
1 percent to ease compliance. By adopting this recommendation
to ease the administrative burden on all private foundations,
H.R. 640 will encourage private foundations to provide more
funding of charitable activities to benefit local communities
and the environment across the nation.
C. Legislative History
Background
H.R. 640 was introduced on February 2, 2015, and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 640, the
Private Foundation Excise Tax Simplification Act of 2015, on
February 4, 2015, and ordered the bill, as amended, favorably
reported (with a quorum being present).
Committee hearings
The need for permanent rules simplifying the excise tax on
investment income of private foundations was discussed at a
full Committee hearing on Tax Reform and Charitable
Contributions (February 14, 2013).
II. EXPLANATION OF THE BILL
A. Modification of the Tax Rate for the Excise Tax on Investment Income
of Private Foundations (sec. 4940 of the Code)
PRESENT LAW
Under section 4940(a), a private foundation (other than an
exempt operating foundation) that is exempt from tax under
section 501(a) for a taxable year is subject to a two-percent
excise tax on its net investment income. Net investment income
generally includes interest, dividends, rents, royalties (and
income from similar sources), and capital gain net income, and
is reduced by expenses incurred to earn this income. The two-
percent rate of tax is reduced to one-percent in any year in
which a foundation exceeds the average historical level of its
charitable distributions. Specifically, the excise tax rate is
reduced if the foundation's qualifying distributions
(generally, amounts paid to accomplish exempt purposes)\1\
equal or exceed the sum of (1) the amount of the foundation's
assets for the taxable year multiplied by the average
percentage of the foundation's qualifying distributions over
the five taxable years immediately preceding the taxable year
in question, and (2) one percent of the net investment income
of the foundation for the taxable year.\2\ In addition, the
foundation cannot have been subject to tax in any of the five
preceding years for failure to meet minimum qualifying
distribution requirements in section 4942.
---------------------------------------------------------------------------
\1\Sec 4942(g).
\2\Sec. 4940(e)
---------------------------------------------------------------------------
Private foundations that are not exempt from tax under
section 501(a), such as certain charitable trusts, are subject
to an excise tax under section 4940(b). The tax is equal to the
excess of the sum of the excise tax that would have been
imposed under section 4940(a) if the foundation were tax exempt
and the amount of the tax on unrelated business income that
would have been imposed if the foundation were tax exempt, over
the income tax imposed on the foundation under subtitle A of
the Code.
Private foundations are required to make a minimum amount
of qualifying distributions each year to avoid tax under
section 4942. The minimum amount of qualifying distributions a
foundation has to make to avoid tax under section 4942 is
reduced by the amount of section 4940 excise taxes paid.\3\
---------------------------------------------------------------------------
\3\Sec. 4942(d)(2).
---------------------------------------------------------------------------
REASONS FOR CHANGE
Under the present-law, two-tier private foundation excise
tax rate structure, a foundation must carefully manage the
timing and amount of its grant making to minimize its excise
tax burden. Compliance can be costly and consume resources that
otherwise would have been used for grant making or other
charitable activity.
In addition, to qualify for the lower, one-percent tax rate
in a year, a foundation must ensure that its distributions for
the year exceed a historical, average level of distributions.
This structure creates an incentive for foundations to limit
distributions in any one year, because a significant increase
in distributions will raise the foundation's average level of
distributions, making it more difficult to qualify for the
reduced rate in future years. As a result, a foundation that
might have been inclined to distribute an unusually large
amount in a time of public need, such as during the response to
a natural disaster, has a disincentive to do so.
For these reasons, the Committee believes it is appropriate
to replace the present-law, two-tier private foundation excise
tax rate structure with a simplified structure that uses a
single tax rate of one percent.
EXPLANATION OF PROVISION
The provision replaces the two rates of excise tax on tax-
exempt private foundations with a single rate of tax of one
percent. Thus, under the provision, a tax-exempt private
foundation generally is subject to an excise tax of one percent
on its net investment income. A taxable private foundation is
subject to an excise tax equal to the excess (if any) of the
sum of the one-percent net investment income excise tax and the
amount of the tax on unrelated business income (both calculated
as if the foundation were tax-exempt), over the income tax
imposed on the foundation. The provision repeals the special
reduced excise tax rate for private foundations that exceed
their historical level of qualifying distributions.
The proposal exempts any budgetary effects from the PAYGO
scorecards under the Statutory Pay-As-You-Go Act of 2010.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after the date of enactment.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means in its
consideration of H.R. 640, the Private Foundation Excise Tax
Simplification Act of 2015, on February 4, 2015.
The bill, H.R. 640, was ordered favorably reported as
amended by a rollcall vote of 24 yeas to 14 nays (with a quorum
being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan....................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Rangel....... ........ X .........
Mr. Brady...................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Reichert................... X ........ ......... Mr. Becerra...... ........ X .........
Mr. Boustany................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Price...................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Blumenauer... ........ ........ .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Mr. Schock..................... X ........ ......... Mr. Pascrell..... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Marchant................... X ........ ......... Ms. Sanchez...... ........ X .........
Ms. Black...................... X ........ .........
Mr. Reed....................... X ........ .........
Mr. Young...................... X ........ .........
Mr. Kelly...................... X ........ .........
Mr. Renacci.................... X ........ .........
Mr. Meehan..................... X ........ .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 640, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal budget receipts for fiscal years 2015-2025:
FISCAL YEARS
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-20 2015-25
----------------------------------------------------------------------------------------------------------------
[1] -129 -172 -180 -187 -195 -203 -212 -221 -230 -240 -863 -1,969
----------------------------------------------------------------------------------------------------------------
NOTE: Details do not add to totals due to rounding.
[1] Loss of less than $500,000.
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: the gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue-reducing tax
provision does not provide an increase or decrease in tax
expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 5, 2015.
Hon. Paul Ryan,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 640, the Private
Foundation Excise Tax Simplification Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Nate Frentz.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 640--Private Foundation Excise Tax Simplification Act of 2015
H.R. 640 would amend the Internal Revenue Code to
restructure the excise tax on net investment income of private
foundations from a dual-rate system (tax rates of 1 percent and
2 percent) to a single-rate system with a rate of 1 percent.
Under current law, the calculation of the amount of excise tax
differs depending on whether the foundation is exempt from
income taxes or not, but in both cases a foundation faces a
general excise tax rate of 2 percent on its net investment
income. The rate of tax is reduced to 1 percent when a
foundation has made charitable distributions in a year that
exceed an amount based largely on its historical rate of
distributions relative to its assets.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting H.R. 640 would reduce revenues, thus
increasing federal budget deficits, by about $2.0 billion over
the 2015-2025 period. The estimated budgetary effects of H.R.
640 are shown in the following table.
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
----------------------------------------------------------------------------------------------------------------------
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-2020 2015-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Estimated Revenues............... * -129 -172 -180 -187 -195 -203 -212 -221 -230 -240 -863 -1,969
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: * = less than $500,000.
Although enacting H.R. 640 would affect revenues, the
provisions of the Statutory Pay-As-You-Go Act of 2010 do not
apply to the legislation because it includes a provision that
would direct the Office of Management and Budget to exclude the
estimated changes in revenues from the scorecards used to
enforce the pay-as-you-go rules.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Nathaniel
Frentz. The estimate was approved by David Weiner, Assistant
Director for Tax Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was as a result of the
Committee's review of the provisions of H.R. 640 that the
Committee concluded that it is appropriate to report the bill,
as amended, favorably to the House of Representatives with the
recommendation that the bill do pass.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill, and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code and has widespread applicability to
individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Code and that
have ``widespread applicability'' to individuals or small
businesses, within the meaning of the rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill, and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(g)(2) of H. Res. 5 (114th
Congress), the Committee states that no provision of the bill
establishes or reauthorizes: (1) a program of the Federal
Government known to be duplicative of another Federal program,
(2) a program included in any report from the Government
Accountability Office to Congress pursuant to section 21 of
Public Law 111-139, or (3) a program related to a program
identified in the most recent Catalog of Federal Domestic
Assistance, published pursuant to the Federal Program
Information Act (Public Law 95-220, as amended by Public Law
98-169).
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (114th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 42--PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
Subchapter A--Private Foundations
SEC. 4940. EXCISE TAX BASED ON INVESTMENT INCOME.
(a) Tax-Exempt Foundations.--There is hereby imposed on each
private foundation which is exempt from taxation under section
501(a) for the taxable year, with respect to the carrying on
its activities, a tax equal to [2 percent] 1 percent of the net
investment income of such foundation for the taxable year.
(b) Taxable Foundations.--There is hereby imposed on each
private foundation which is not exempt from taxation under
section 501(a) for the taxable year, with respect to the
carrying on of its activities, a tax equal to--
(1) the amount (if any) by which the sum of (A) the
tax imposed under subsection (a) (computed as if such
subsection applied to such private foundation for the
taxable year), plus (B) the amount of the tax which
would have been imposed under section 511 for the
taxable year if such private foundation had been exempt
from taxation under section 501(a), exceeds
(2) the tax imposed under subtitle A on such private
foundation for the taxable year.
(c) Net Investment Income Defined.--
(1) In general.--For purposes of subsection (a), the
net investment income is the amount by which (A) the
sum of the gross investment income and the capital gain
net income exceeds (B) the deductions allowed by
paragraph (3). Except to the extent inconsistent with
the provisions of this section, net investment income
shall be determined under the principles of subtitle A.
(2) Gross investment income.--For purposes of
paragraph (1), the term ``gross investment income''
means the gross amount of income from interest,
dividends, rents, payments with respect to securities
loans (as defined in section 512(a)(5)), and royalties,
but not including any such income to the extent
included in computing the tax imposed by section 511.
Such term shall also include income from sources
similar to those in the preceding sentence.
(3) Deductions.--
(A) In general.--For purposes of paragraph
(1), there shall be allowed as a deduction all
the ordinary and necessary expenses paid or
incurred for the production or collection of
gross investment income or for the management,
conservation, or maintenance of property held
for the production of such income, determined
with the modifications set forth in
subparagraph (B).
(B) Modifications.--For purposes of
subparagraph (A)--
(i) The deduction provided by section
167 shall be allowed, but only on the
basis of the straight line method of
depreciation.
(ii) The deduction for depletion
provided by section 611 shall be
allowed, but such deduction shall be
determined without regard to section
613 (relating to percentage depletion).
(4) Capital gains and losses.--For purposes of
paragraph (1) in determining capital gain net income--
(A) There shall not be taken into account any
gain or loss from the sale or other disposition
of property to the extent that such gain or
loss is taken into account for purposes of
computing the tax imposed by section 511.
(B) The basis for determining gain in the
case of property held by the private foundation
on December 31, 1969, and continuously
thereafter to the date of its disposition shall
be deemed to be not less than the fair market
value of such property on December 31, 1969.
(C) Losses from sales or other dispositions
of property shall be allowed only to the extent
of gains from such sales or other dispositions,
and there shall be no capital loss carryovers
or carrybacks.
(D) Except to the extent provided by
regulation, under rules similar to the rules of
section 1031 (including the exception under
subsection (a)(2) thereof), no gain or loss
shall be taken into account with respect to any
portion of property used for a period of not
less than 1 year for a purpose or function
constituting the basis of the private
foundation's exemption if the entire property
is exchanged immediately following such period
solely for property of like kind which is to be
used primarily for a purpose or function
constituting the basis for such foundation's
exemption.
(5) Tax-exempt income.--For purposes of this section,
net investment income shall be determined by applying
section 103 (relating to State and local bonds) and
section 265 (relating to expenses and interest relating
to tax-exempt income).
(d) Exemption for Certain Operating Foundations.--
(1) In general.--No tax shall be imposed by this
section on any private foundation which is an exempt
operating foundation for the taxable year.
(2) Exempt operating foundation.--For purposes of
this subsection, the term ``exempt operating
foundation'' means, with respect to any taxable year,
any private foundation if--
(A) such foundation is an operating
foundation (as defined in section 4942(j)(3)),
(B) such foundation has been publicly
supported for at least 10 taxable years,
(C) at all times during the taxable year, the
governing body of such foundation--
(i) consists of individuals at least
75 percent of whom are not disqualified
individuals, and
(ii) is broadly representative of the
general public, and (D) at no time
during the taxable year does such
foundation have an officer who is a
disqualified individual.
(3) Definitions.--For purposes of this subsection--
(A) Publicly supported.--A private foundation
is publicly supported for a taxable year if it
meets the requirements of section
170(b)(1)(A)(vi) or 509(a)(2) for such taxable
year.
(B) Disqualified individual.--The term
``disqualified individual'' means, with respect
to any private foundation, an individual who
is--
(i) a substantial contributor to the
foundation,
(ii) an owner of more than 20 percent
of--
(I) the total combined voting
power of a corporation,
(II) the profits interest of
a partnership, or
(III) the beneficial interest
of a trust or unincorporated
enterprise,
which is a substantial contributor to
the foundation, or
(iii) a member of the family of any
individual described in clause (i) or
(ii).
(C) Substantial contributor.--The term
``substantial contributor'' means a person who
is described in section 507(d)(2).
(D) Family.--The term ``family'' has the
meaning given to such term by section 4946(d).
(E) Constructive ownership.--The rules of
paragraphs (3) and (4) of section 4946(a) shall
apply for purposes of subparagraph (B)(ii).
[(e) Reduction in Tax Where Private Foundation Meets Certain
Distribution Requirements.--
[(1) In general.--In the case of any private
foundation which meets the requirements of paragraph
(2) for any taxable year, subsection (a) shall be
applied with respect to such taxable year by
substituting ``1 percent'' for ``2 percent''.
[(2) Requirements.--A private foundation meets the
requirements of this paragraph for any taxable year
if--
[(A) the amount of the qualifying
distributions made by the private foundation
during such taxable year equals or exceeds the
sum of--
[(i) an amount equal to the assets of
such foundation for such taxable year
multiplied by the average percentage
payout for the base period, plus
[(ii) 1 percent of the net investment
income of such foundation for such
taxable year, and
[(B) such private foundation was not liable
for tax under section 4942 with respect to any
year in the base period.
[(3) Average percentage payout for base period.--For
purposes of this subsection--
[(A) In general.--The average percentage
payout for the base period is the average of
the percentage payouts for taxable years in the
base period.
[(B) Percentage payout.--The term
``percentage payout'' means, with respect to
any taxable year, the percentage determined by
dividing--
[(i) the amount of the qualifying
distributions made by the private
foundation during the taxable year, by
[(ii) the assets of the private
foundation for the taxable year.
[(C) Special rule where tax reduced under
this subsection.--For purposes of this
paragraph, if the amount of the tax imposed by
this section for any taxable year in the base
period is reduced by reason of this subsection,
the amount of the qualifying distributions made
by the private foundation during such year
shall be reduced by the amount of such
reduction in tax.
[(4) Base period.--For purposes of this subsection--
[(A) In general.--The term ``base period''
means, with respect to any taxable year, the 5
taxable years preceding such taxable year.
[(B) New private foundations, etc..--If an
organization has not been a private foundation
throughout the base period referred to in
subparagraph (A), the base period shall consist
of the taxable years during which such
foundation has been in existence.
[(5) Other definitions.--For purposes of this
subsection--
[(A) Qualifying distribution.--The term
``qualifying distribution'' has the meaning
given such term by section 4942(g).
[(B) Assets.--The assets of a private
foundation for any taxable year shall be
treated as equal to the excess determined under
section 4942(e)(1).
[(6) Treatment of successor organizations, etc..--In
the case of--
[(A) a private foundation which is a
successor to another private foundation, this
subsection shall be applied with respect to
such successor by taking into account the
experience of such other foundation, and
[(B) a merger, reorganization, or division of
a private foundation, this subsection shall be
applied under regulations prescribed by the
Secretary.]
* * * * * * *
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