Part III - Analysis of Changes in Net Assets or Fund Balances

Generally, the excess of revenue over expenses accounts for the difference between the net assets at the beginning and end of the year.

On line 2, Part III, re-enter the figure from Part I, line 27(a), column (a).

On lines 3 and 5, list any changes in net assets that were not caused by the receipts or expenses shown in Part I, column (a). For example, if a foundation follows FASB Statement No. 12 and shows an asset in the ending balance sheet at a higher value than in the beginning balance sheet because of an increased market value (after a larger decrease in a prior year), include the increase in Part III, line 3.

If an organization changes its accounting method for tax purposes to conform with the method provided in SFAS 116, it should report any increase required by section 481(a) on line 3 and identify the adjustment as the effect of changing to the methods provided in SFAS 116.

If the organization uses a stepped-up basis to determine gains on sales of assets included in Part I, column (a), then include the amount of step-up in basis in Part III. If you entered a contribution, gift, or grant of property valued at fair market value on line 25 of Part I, column (a), the difference between fair market value and book value should be shown in the books of account and as a net asset adjustment in Part III.

Part IV - Capital Gains and Losses for Tax on Investment Income

Use Part IV to figure the amount of net capital gain to report on lines 7 and 8 of Part I.

• Part IV does not apply to foreign organizations.
• Nonoperating private foundations may not have to figure their short-term capital gain or loss on line 3. See the rules for Nonoperating private foundations on page 11.

Private foundations must report gains and losses from the sale or other disposition of property:

• Held for investment purposes or
• Used to produce unrelated business income; however, only include in net investment income the part of the gain or loss that is not included in the computation of its unrelated business taxable income.

Property held for investment purposes. Property is treated as held for investment purposes if the property is of a type that generally produces interest, dividends, rents, or royalties, even if the foundation disposes of the property as soon as it receives it.

Charitable use property. Do not include any gain or loss from disposing of property used for the foundation's charitable purposes in the computation of tax on net investment income. If the foundation uses property for its charitable purposes, but also incidentally derives income from the property that is subject to the net investment income tax, any gain or loss from the sale or other disposition of the property is not subject to the tax.

However, if the foundation uses property both for charitable purposes and (other than incidentally) for investment purposes, include in the computation of tax on net investment income the part of the gain or loss from the sale or disposition of the property that is allocable to the investment use of the property.

Program-related investments. Do not include gains or losses from the sale or exchange of program-related investments as defined in the instructions for Part IX-B.

Losses. If the disposition of investment property results in a loss, that loss may be subtracted from capital gains realized from the disposition of property during the same tax year but only to the extent of the gains. If losses are more than gains, the excess may not be subtracted from gross investment income, nor may the losses be carried back or forward to other tax years.

Basis. The basis for determining gain from the sale or other disposition of property is the larger of:

1. The fair market value of the property on December 31, 1969, plus or minus all adjustments after December 31, 1969, and before the date of disposition, if the foundation held the property on that date and continuously after that date until disposition or
2. The basis of the property on the date of disposition under normal basis rules (actual basis). See Code sections 1011-1021.

The rules that generally apply to property dispositions reported in this part are:

• Section 1011, Adjusted basis for determining gain or loss.
• Section 1012, Basis of property - cost.
• Section 1014, Basis of property acquired from a decedent.
• Section 1015, Basis of property acquired by gifts and transfers in trust.
• Section 1016, Adjustments to basis.

To figure a loss, basis on the date of disposition is determined under normal basis rules.

See Chapter IV of Pub. 578 for examples on how to determine gain or loss. The completed Form 990-PF in Package 990-PF, Returns for Private Foundations or Section 4947(a)(1) Nonexempt Charitable Trusts Treated as Private Foundations, contains an example of a sale of investment property in which the gain was computed using the donor's basis under the rules of section 1015(a).

Part V - Qualification Under Section 4940(e) for Reduced Tax on Net Investment Income

This part is used by domestic private foundations (exempt and taxable) to determine whether they qualify for the reduced 1% tax under section 4940(e) on net investment income rather than the 2% tax on net investment income under section 4940(a).

Do not complete Part V if this is the organization's first year. A private foundation cannot qualify under section 4940(e) for its first year of existence, nor can a former public charity qualify for the first year it is treated as a private foundation.

A separate computation must be made for each year in which the foundation wants to qualify for the reduced tax.

Line 1, column (b). Enter the amount of adjusted qualifying distributions made for each year shown. The amounts in column (b) are taken from Part XII, line 6 of the Form 990-PF for 1996-2000.

Line 1, column (c). Enter the net value of noncharitable-use assets for each year. The amounts in column (c) are taken from Part X, line 5, for 1996-2000.

Part VI - Excise Tax Based on Investment Income (Section 4940(a), 4940(b), 4940(e), or 4948)

General Rules

Domestic exempt private foundations. These foundations are subject to a 2% tax on net investment income under section 4940(a). However, certain exempt operating foundations described in section 4940(d)(2) may not owe any tax, and certain private foundations that meet the requirements of section 4940(e) may qualify for a reduced tax of 1% (see the Part V instructions).

Exception. The section 4940 tax does not apply to an organization making an election under section 41(e)(6). Enter
N/A in Part VI.

Domestic taxable private foundations and section 4947(a)(1) nonexempt charitable trusts. These organizations are subject to a modified 2% tax on net investment income under section 4940(b). (See Part V and its instructions to find out if they meet the requirements of section 4940(e) that allows them to use a modified 1% tax on net investment income.) However, they must first compute the tax under section 4940(a) as if that tax applied to them.

Foreign organizations. Under section 4948, exempt foreign private foundations are subject to a 4% tax on their gross investment income derived from U.S. sources.

Taxable foreign private foundations that filed Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, enter N/A in Part VI.

Estimated tax. Domestic exempt and taxable private foundations and section 4947(a)(1) nonexempt charitable trusts may have to make estimated tax payments for the excise tax based on investment income. See General Instruction O for more information.

Tax Computation

Line 1a only applies to domestic exempt operating foundations that are described in section 4940(d)(2) and that have a ruling letter from the IRS establishing exempt operating foundation status. If your organization does not have this letter, skip line 1a.

Line 1a. A domestic exempt private foundation that qualifies as an exempt operating foundation under section 4940(d)(2) is not liable for any tax on net investment income on this return.

If your organization qualifies, check the box and enter the date of the ruling letter on line 1a and enter N/A on line 1. Leave the rest of Part Vl blank. For the first year, the organization must attach a copy of the ruling letter establishing exempt operating foundation status. As long as the organization retains this status, write the date of the ruling letter in the space on line 1a. If the organization no longer qualifies under section 4940(d)(2), leave the date line blank and compute the section 4940 tax in the normal manner.

Qualification. To qualify as an exempt operating foundation for a tax year, an organization must meet the following requirements of section 4940(d)(2):

1. It is an operating foundation described in section 4942(j)(3),
2. It has been publicly supported for at least 10 tax years or was a private operating foundation on January 1, 1983, or for its last tax year ending before January 1, 1983,
3. Its governing body, at all times during the tax year, consists of individuals less than 25% of whom are disqualified individuals, and is broadly representative of the general public, and
4. It has no officer who was a disqualified individual at any time during the tax year.

Line 2 - Section 511 tax. Under section 4940(b), a domestic section 4947(a)(1) nonexempt charitable trust or taxable private foundation must add to the tax figured under section 4940(a) (on line 1) the tax which would have been imposed under section 511 for the tax year if it had been exempt from tax under section 501(a). If the domestic section 4947(a)(1) nonexempt charitable trust or taxable private foundation has unrelated business taxable income that would have been subject to the tax imposed by section 511, the computation of tax must be shown in an attachment. Form 990-T may be used as the attachment. All other filers, enter zero.

Line 4 - Subtitle A tax. Domestic section 4947(a)(1) nonexempt charitable trusts and taxable private foundations, enter the amount of subtitle A (income) tax for the year reported on Form 1041 or Form 1120. All other filers, enter zero.

Line 5 - Tax based on investment income. Subtract line 4 from line 3 and enter the difference (but not less than zero) on line 5. Any overpayment entered on line 10 that is the result of a negative amount shown on line 5 will not be refunded. Unless the organization is a domestic section 4947(a)(1) nonexempt charitable trust or taxable private foundation, the amount on line 5 is the same as on line 1.

Line 6 - Credits/Payments

Line 6a applies only to domestic organizations.

Line 6a. Enter the amount of 2001 estimated tax payments, and any 2000 overpayment of taxes that the organization specified on its 2000 return to be credited toward payment of 2001 estimated taxes.

Trust payments treated as beneficiary payments. A trust may treat any part of estimated taxes it paid as taxes paid by the beneficiary. If the filing organization was a beneficiary that received the benefit of such a payment from a trust, include the amount on line 6a of Part VI, and write, Includes section 643(g) payment. See section 643(g) for more information about estimated tax payments treated as paid by a beneficiary.

Line 6b. Exempt foreign foundations must enter the amount of tax withheld at the source.

Line 6d. Enter the amount of any backup withholding erroneously withheld. Recipients of interest or dividend payments must generally certify their correct tax identification number to the bank or other payer on Form W-9, Request for Taxpayer Identification Number and Certification. If the payer does not get this information, it must withhold part of the payments as backup withholding. If the organization files Form 990-PF and was subject to erroneous backup withholding because the payer did not realize the payee was an exempt organization and not subject to this withholding, the organization can claim credit for the amount withheld.

Do not claim erroneous backup withholding on line 6d if you claim it on Form 990-T.

Line 8 - Penalty. Enter any penalty for underpayment of estimated tax shown on Form 2220. Form 2220 is used by both corporations and trusts.

Line 9 - Tax due. Domestic foundations should see General Instruction P.

All foreign organizations should enclose a check or money order (in U.S. funds), made payable to the United States Treasury, with Form 990-PF.

Part VII-A - Statements Regarding Activities

Each question in this section must be answered Yes, No, or N/A (not applicable).

Line 1. Political purposes include, but are not limited to: directly or indirectly accepting contributions or making payments to influence the selection, nomination, election, or appointment of any individual to any Federal, state, or local public office or office in a political organization, or the election of presidential or vice presidential electors, whether or not the individual or electors are actually selected, nominated, elected, or appointed.

Line 3. A conformed copy of an organizational document is one that agrees with the original document and all its amendments. If copies are not signed, attach a written declaration signed by an officer authorized to sign for the organization, certifying that they are complete and accurate copies of the original documents.

Line 6. For a private foundation to be exempt from income tax, its governing instrument must include provisions that require it to act or refrain from acting so as not to engage in an act of self-dealing (section 4941), or subject the foundation to the taxes imposed by sections 4942 (failure to distribute income), 4943 (excess business holdings), 4944 (investments which jeopardize charitable purpose), and 4945 (taxable expenditures). A private foundation may satisfy these section 508(e) requirements either by express language in its governing instrument or by application of state law that imposes the above requirements on the foundation or treats these requirements as being contained in the governing instrument. If an organization claims it satisfies the requirements of section 508(e) by operation of state law, the provisions of state law must effectively impose the section 508(e) requirements on the organization. See Rev. Rul. 75-38, 1975-1 C.B.161, for a list of states with legislation that satisfies the requirements of section 508(e).

However, if the state law does not apply to a governing instrument that contains mandatory directions conflicting with any of its requirements and the organization has such mandatory directions in its governing instrument, then the organization has not satisfied the requirements of section 508(e) by the operation of that legislation.

Line 8a. In the space provided list all states:

1. To which the organization reports in any way about its organization, assets, or activities and
2. With which the organization has registered (or which it has otherwise notified in any manner) that it intends to be, or is, a charitable organization or that it is, or intends to be, a holder of property devoted to a charitable purpose.

Attach a separate list if you need more space.

Line 9. If the organization claims status as a private operating foundation for 2001 and, in fact, meets the private operating foundation requirements for that year (as reflected in Part XIV), any excess distributions carryover from 2000 or prior years may not be carried over to 2001 or any year after 2001 in which it does not meet the private operating foundation requirements. See the instructions for Part XIII.

Line 10 - Substantial contributors. If you answer Yes, attach a schedule listing the names and addresses of all persons who became substantial contributors during the year.

The term substantial contributor means any person whose contributions or bequests during the current tax year and prior tax years total more than $5,000 and are more than 2% of the total contributions and bequests received by the foundation from its creation through the close of its tax year. In the case of a trust, the term substantial contributor also means the creator of the trust (section 507(d)(2)).

The term person includes individuals, trusts, estates, partnerships, associations, corporations, and other exempt organizations.

Each contribution or bequest must be valued at fair market value on the date it was received.

Any person who is a substantial contributor on any date will remain a substantial contributor for all later periods.

However, a person will cease to be a substantial contributor with respect to any private foundation if:

1. The person, and all related persons, made no contributions to the foundation during the 10-year period ending with the close of the taxable year;
2. The person, or any related person, was never the foundation's manager during this 10-year period; and
3. The aggregate contributions made by the person, and related persons, are determined by the IRS to be insignificant compared to the aggregate amount of contributions to the foundation by any other person and the appreciated value of contributions held by the foundation.

The term related person includes any other person who would be a disqualified person because of a relationship with the substantial contributor (section 4946). When the substantial contributor is a corporation, the term also includes any officer or director of a corporation. The term substantial contributor does not include public charities (organizations described in section 509(a)(1), (2), or (3)).

Line 11 - Public inspection requirements and web site address. All domestic private foundations (including section 4947(a)(1) nonexempt charitable trusts treated as private foundations) are subject to the public inspection requirements. See General Instruction Q for information on making the foundation's annual returns and exemption application available for public inspection.

Enter the foundation's web site address if the the foundation has a web site. Otherwise, enter N/A.

Line 13 - Section 4947(a)(1) trusts. Section 4947(a)(1) nonexempt charitable trusts that file Form 990-PF instead of Form 1041 must complete this line. The trust should include exempt-interest dividends received from a mutual fund or other regulated investment company as well as tax-exempt interest received directly.

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