Heard on the Web: Madoff Scandal May Implicate Jeopardizing Investment Tax Rules
Summary
Full Text:
Under IRC section 4944, private
foundations and foundation managers are subject to tax on investments
that jeopardize the foundation's exempt purpose. In general, an initial tax of ten percent of the amount of the
investment applies to the foundation and to foundation managers who
participated in the making of the investment knowing that it
jeopardized the carrying out of the foundation's exempt purposes. If
the investment is not removed from jeopardy (e.g., sold or otherwise
disposed of), an additional tax of 25 percent of the amount of the
investment is imposed on the foundation and five percent of the amount
of the investment on a foundation manager who refused to agree to
remove the investment from jeopardy.
According to an article in The New York Times, organizations that invested with Bernard Madoff might be subject to these taxes based on their failure to vet their investments properly, to heed red flags or to diversify prudently.
Although not
mentioned in the article, section 4944 does not apply only to private
foundations but also to certain charitable trusts. For example,
charitable remainder trusts that name a section 170(c) organization as
an income recipient are also subject to the jeopardy investment rules. The tax also applies
to charitable lead trusts for which the present value of the charitable
interest exceeds 60% of the fair market value of the trust's assets on
the date of its creation.
For further reading, see
For Investing With Madoff, Private Foundations Could Face Tax Fines The New York Times, February 11, 2009 (requires registration)
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