PRIVATE FOUNDATION GETS NO STEP UP BASIS

Private foundation gets no step up basis. Heirs can generally benefit from a step up in basis of inherited assets to their fair market value as of the date of the decedent’s death. A recent program manager technical advice makes clear that, for purposes of an excise tax, a private foundation resulting from a charitable organization’s ceasing to qualify as a public charity cannot claim a step up upon the conversion–at least not one that happened in the last 52 years–despite a prior IRS letter ruling approving a step up in similar circumstances. Private foundation gets no step up basis.

PMTA 2022-01 was issued Nov. 18, 2021, and released Feb. 1, 2022. In it, the IRS Office of Chief Counsel was asked whether, for purposes of determining capital gain net income under Sec. 4940, the basis of property held by a tax-exempt organization under Sec. 501(c)(3) that is also a public charity under Sec. 509(c)(1), (2), or (3) is equal to tits FMV on the date it no longer qualifies as a public charity and becomes a private foundation. The resulting foundation would be liable for the excise tax on investment income under Sec. 4940(a) which is comprised currently at a rate of 1.39% on a foundation’s net investment income for the tax year. One component of net investment income is capital gain net income. Sec. 4940(c)(1) provides that to the extent consistent with Sec. 4940, net investment income is determined under the principles of Subtitle A of the IRS Code.

The only provision appearing to support a step up basis to FMV of an organization’s assets upon becoming a private foundation is Sec. 4940(c)(4)(b), which is a transition rule that applies only to property that was held by a foundation on Dec. 31, 1969 and continuously thereafter until its disposition.

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