The Internal Revenue Code defines a private foundation not by what it is but by what it is not. A private foundation is a section 501(c)(3) organization that does not meet any of the four exceptions to private foundation status enumerated in section 509(a), such as section 509(a)(1), which covers public charities.

More specifically, a private foundation is commonly understood to be a charitable organization that receives funds from one or a few sources, generates ongoing revenue from investments, and makes grants to other charitable organizations instead of operating its own programs.

Private foundations fall into two categories: private operating foundations or private non-operating foundations. Private operating foundations resemble public charities in that they direct most of their assets and resources to accomplishing their exempt programs and activities. Private non-operating foundations are established and funded by a small group of contributors and make grants to public charities instead of carrying out their own programs.

Under section 4940, private foundations are subject to an excise tax on their net investment income, and they also face excise taxes under section 4941 if they engage in activities that constitute self-dealing. There also is a private foundation tax under section 4942 on undistributed income and penalties under section 4944 if a foundation makes investments that jeopardize the fulfillment of its exempt purposes.

Private foundations file Form 990-PF, “Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation,” with the IRS annually.

Tax Analysts covers proposed legislation, IRS guidance, and other news addressing tax issues related to private foundations.