§ 1.7 OPERATING FOR CHARITABLE PURPOSES
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88.1Reg. § 1.501(c)(3)-1(c)(1).
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A private foundation has its tax-exempt status revoked for failing to engage in any exempt activities over a long period of time (Community Education Foundation v. Commissioner, 112 T.C.M. 637 (2016), appeal denied because of lack of representation (__ F.3d __ (D.C. Cir. 2018))).
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In general, Tax-Exempt Organizations § 4.4.
PRIVATE FOUNDATION LAW SANCTIONS
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The federal tax rules pertaining to private foundations136 are often characterized in summaries as if they are typical laws, in the sense of prescriptions governing human behavior. This is not the case; these rules, comprising portions of the Internal Revenue Code, are tax provisions. Thus, this body of law states that, if a certain course of conduct is engaged in (or, perhaps, not engaged in), imposition of one or more excise taxes will be the (or a) result. For example, there is no rule of federal tax law that states that a private foundation may not engage in an act of self-dealing;137 rather, the law is that an act of self-dealing will trigger one or more excise taxes and other sanctions.138
(a) Sanctions (a Reprise)
Because of the nature of this statutory tax law structure, a person subject to an excise tax does not merely pay it and continue with the transaction and its consequences, as is the case with nearly all federal tax regimes. This structure weaves a series of spiraling taxes from which the private foundation, and/or disqualified person(s) with respect to it, can emerge only by paying one or more taxes and correcting (undoing) the transaction involved by paying or distributing assets or having the foundation's income and assets confiscated by the IRS.
The private foundation rules collectively stand as sanctions created by Congress for the purpose of curbing what was perceived as a range of abuses being perpetrated through the use of private foundations by those who control or manipulate them. These provisions comprise Chapter 42 of the Internal Revenue Code. Some of these constraints were placed on supporting organizations and donor-advised funds in 2006.139
(b) Self-Dealing Sanctions as Pigouvian Taxes
In the self-dealing context, two excise taxes are imposed on self-dealers—the initial tax140 and the additional tax.141 The first tax has a rate of 10 percent; the second a rate of 200 percent. There are also taxes on foundation managers where there is knowing participation in the self-dealing transaction (a scienter requirement).142 The foundation self-dealing tax subjects the entire amount involved in a self-dealing transaction to tax. Also, the initial self-dealing tax cannot be abated by the IRS.143 There is the correction feature, by which the self-dealer is required to pay the amount involved to the foundation.144
What has come to be known as the Pigouvian tax is the brainchild of English economist Arthur Cecil Pigou (1879–1959), a contributor to modern welfare economics. He introduced the concept of externality and the belief that externality (social problems) can be corrected by imposition of a tax. A commentator wrote that Pigouvian taxes “aim to regulate behavior by placing a small tax, usually in the form of a uniform excise tax, on the activity to be regulated because of the harm it produces for members of the public.”145
Does the federal self-dealing tax regime constitute one or more Pigouvian taxes? On the face of it, the answer would seem to be yes.146 This commentator nicely observed that the self-dealing taxes “have the Pigouvian impulse to protect the public from harm by imposing an excise tax.”147 Despite this impulse, however, three reasons were posited why the self-dealing taxes are not Pigouvian in nature. One, the additional excise tax rate of 200 percent is not “small.” Two, the initial tax subjects the entire amount involved in a self-dealing transaction to tax, “even if the transaction bene...