IRS lets a private foundation recompute § 4942 distribution carryovers from a below-market charitable lease, reaching a closed year

Plain-English summary

A private foundation bought rural land and leased it to a public charity (X) for a nominal rent, giving X the right to buy the land at a deep discount. That kind of below-market charitable lease should have counted as a qualifying distribution under IRC § 4942 (the rule requiring private foundations to pay out a minimum amount for charity each year), and the leased land should have been treated as an exempt-use asset excluded from the foundation's minimum investment return. The foundation had failed to treat the lease that way on its Form 990-PF returns for Years 1 through 5, and it asked the IRS whether it could fix the error by recomputing its numbers, even though the earliest year (Year 1) is closed under the normal three-year statute of limitations. Relying on a line of authorities (including Rev. Rul. 81-88 and 82-49) that allow prior closed years to be corrected in order to compute the right figures for open years, the IRS ruled the foundation may take the earlier understated qualifying distributions and overstated minimum investment return into account when computing its distribution carryovers for Years 6 and 7. The IRS cautioned that a carryover already used cannot be recycled into a fresh five-year carryforward, and it treated the foundation's later corporate successor and its disregarded-entity LLC as the same foundation for § 4942 purposes.

Ruling snapshot

• Question: May a private foundation recompute its § 4942 minimum investment return and qualifying-distribution carryovers to reflect a previously unreported below-market charitable lease, including a closed prior year, for its open Year 6 and Year 7?
• Outcome: Approved (recomputation of carryovers permitted).
• Key authorities: IRC § 4942; § 6501; Treas. Reg. §§ 53.4942(a)-2, 53.4942(a)-3, 1.507-3(a)(9); Rev. Rul. 78-387, 81-88, 82-49.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202627002 Third Party Communication: None
Release Date: 7/2/2026 Date of Communication: Not Applicable
Index Number: 4942.00-00
Person To Contact:
------------------------------------------------------ ---------------------------, ID No. ---------------
--------------------------------------------- -----------------------------------------------------
------------------------------------------- Telephone Number:
------------------------------------ ---------------------
Refer Reply To:
CC:EEE:EOET:EO1
PLR-116283-25
Date:
April 03, 2026

LEGEND

Foundation = --------------------------------------
X = -------------------------------------------
Y = ---------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Year 7 = -------

Dear -------------:

This is in response to your letter dated September 8, 2025, and additional information
submitted on January 23, 2026, in which Foundation requested a private letter ruling
involving section 4942 of the Internal Revenue Code.1

                                                 FACTS

Foundation is recognized as an exempt organization described in section 501(c)(3) and
is classified as a private foundation under section 509(a). Foundation’s mission is to
advance healthcare, education, and strengthen communities, particularly in rural areas.
For simplicity, the term “Foundation” refers to both the trust and the corporation
described below.

1 The Internal Revenue Code of 1986, as amended, to which all subsequent “section” references are

made unless otherwise indicated.

Foundation was originally formed as a charitable trust, which was recognized as a
section 501(c)(3) private foundation prior to Year 1. In Year 2, the trust reorganized by
forming a corporation in the same state. In Year 3, the corporation sought and received
tax-exempt recognition under section 501(c)(3).2 In Year 4, the trust transferred all
assets to the corporation. Foundation represents that the same person or persons
effectively controlled the trust and the corporation during this transfer.

In Year 1, the trust purchased real property for purposes of leasing the land to X, a
public charity. The trust and X subsequently entered a lease that year (the Lease).
Foundation represents that its support of X is consistent with Foundation’s charitable
purposes and that X is not controlled by Foundation or its disqualified persons. Under
the terms of the Lease, the annual rent is a nominal amount. X must pay real estate
taxes (if any), insurance, and other operating expenses. X also has the right of first
refusal to purchase the land at a significant discount from Foundation’s purchase price,
or upon expiration or early termination of the Lease at the same discounted price.

In Year 3, the trust transferred the land subject to the Lease to Y, a wholly owned single
member LLC. Y assumed the trust’s obligations under the Lease. Foundation
represents that Y has been treated as a disregarded entity of the trust and the
corporation since Year 3.

In Year 5, X and Y amended the Lease to expand the land subject to the Lease. The
Lease as amended remains in effect.

Foundation represents that the Lease, and the additional property added to the Lease in
Year 5, were properly treatable as qualifying distributions and such property from then
on should have been treated as exempt-use property (disregarded in determining
minimum investment return) for purposes of section 4942. Foundation failed to treat the
Lease and added property as qualifying distributions and exempt-use property on its
Form 990-PF returns for Years 1-5 but now wishes to correct the effects of these errors
by re-computing its minimum investment return and qualifying distribution carryforwards
beginning in Year 1 for purposes of its Year 6 and Year 7 taxable years (for which
returns had not yet been filed as of the filing date of the ruling request).

                                   RULING REQUESTED

1) Foundation may take into account understatement of its qualifying distributions
   and overstatement of its minimum investment return in prior years relating to its
   property leased to X in computing its minimum investment return and qualifying
   distribution carryforwards for its Year 6 and Year 7 tax years.

2 In compliance with Rev. Proc. 2018-15, Sec. 7.02, which requires a charitable trust that reorganizes as

a corporation to file a new Form 1023 to be recognized as exempt under section 501(c)(3).

                              LAW AND ANALYSIS

Section 4942(a) generally imposes an excise tax on the undistributed income of a
private foundation that has not been distributed as qualifying distributions by a certain
date.

Section 4942(c) provides that “undistributed income” for a taxable year (or “tax year”) is
the amount by which the distributable amount exceeds the qualifying distributions made
out of such distributable amount.

Section 4942(d) defines “distributable amount” for a taxable year as the sum of the
minimum investment return plus the amounts described in section 4942(f)(2)(C),
reduced by the sum of the taxes imposed on the private foundation for the taxable year
under subtitle A and section 4940.

Section 4942(e)(1) defines the minimum investment return as five percent of the excess
of (A) the aggregate of fair market value of all assets other than those which are used
(or held for use) directly in carrying out the foundation’s exempt purposes, over (B) the
acquisition indebtedness with respect to such assets.

Section 4942(g)(1) defines the term “qualifying distribution” for purposes of section 4942
generally as any amount paid to accomplish one or more purposes described in section
170(c)(2)(B) (hereafter “exempt purposes”), or any amount paid to acquire an asset
used (or held for use) directly in carrying out one or more exempt purposes.

Section 4942(g)(1) further provides that a “qualifying distribution” may not be made to
an organization controlled (directly or indirectly) by the foundation or one or more
disqualified persons (as defined in section 4946) with respect to the foundation, except
as provided in section 4942(g)(3).

Section 4942(h)(1) provides generally that any qualifying distribution made during a
taxable year shall be treated as made—

   (A) first out of the undistributed income of the immediately preceding taxable year
   (if the private foundation was subject to the tax imposed by this section for such
   preceding taxable year) to the extent thereof,
   (B) second out of the undistributed income for the taxable year to the extent
   thereof, and
   (C) then out of corpus.

For purposes of this paragraph, distributions shall be taken into account in the order of
time in which made.

Section 4942(h)(2) provides that a private foundation may elect to treat a portion of a
qualifying distribution that is not treated as made out of the undistributed income of the

immediately preceding taxable year as made out of the undistributed income of a
designated prior taxable year or out of corpus.

Section 4942(i)(1) provides that if, for the taxable years in the adjustment period for
which an organization is a private foundation—

    (A) the aggregate qualifying distributions treated (under section 4942(h)) as
    made out of the undistributed income for such taxable year or as made out of
    corpus (except to the extent section 4942(g)(3)3 with respect to the recipient
    private foundation or section 170(b)(1)(F)(ii) 4 applies) during such taxable years,
    exceed
    (B) the distributable amounts for such taxable years (determined without regard
    to section 4942(i)),

then, for purposes of this section (other than section 4942(h)), the distributable amount
for the taxable year shall be reduced by an amount equal to such excess.

Section 4942(i)(2) generally defines the adjustment period as the five immediately
preceding taxable years.

Section 6501(a) generally provides that the amount of any tax imposed by Title 26 shall
be assessed within 3 years after the return was filed (whether or not such return was
filed on or after the date prescribed), and no proceeding in court without assessment for
the collection of such tax shall be begun after the expiration of such period.

Treas. Reg. § 1.507-3(a)(9)(i) provides that if a private foundation transfers all of its net
assets to a private foundation effectively controlled, directly or indirectly, by the same
person or persons which effectively controlled the transferor private foundation, such a
transferee private foundation shall be treated as if it were the transferor for purposes of
chapter 42 (section 4940 et seq.) and part II of subchapter F of chapter 1 of the Code
(sections 507 through 509).

Treas. Reg. § 53.4942(a)-2(c)(2)(v) excludes from the assets taken into account in
determining the minimum investment return any asset used (or held for use) directly in
carrying out the foundation’s exempt purpose (exempt-use assets).

3 Section 4942(g)(1)(A) and (3) and Treas. Reg. § 53.4942(a)-3(c) allow a private foundation to receive

credit for a qualifying distribution to a section 501(c)(3) (non-operating) private foundation or to a
controlled section 501(c)(3) organization if the distributee makes a timely re-distribution treated as made
out of corpus and the private foundation obtains sufficient evidence from the distributee.
4 Section 170(b)(1)(F)(ii) (formerly 170(b)(1)(E)(ii) and 170(b)(1)(D)(ii)) allows a contributor an enhanced

charitable contribution to a private foundation that makes qualifying distributions of 100% of its
contributions for the foundation’s taxable year as out of corpus (after the application of section 4942(g)(3))
by the 15th day of the third month after the end of the year, and with respect to which the contributor
obtains sufficient evidence from the foundation. A foundation may use carryovers of excess qualifying
distributions from the prior 5 years to satisfy its current-year distribution requirement under section
170(b)(1)(F)(ii)—see Treas. Reg. § 53.4942(a)-3(c)(2)(iv).

Treas. Reg. § 53.4942(a)-2(c)(3)(i) provides that an asset is used (or held for use)
directly in carrying out the foundation’s exempt purpose only if the asset is actually used
by the foundation in carrying out its exempt purpose or the foundation establishes that
its immediate use for such exempt purpose is not practical and that definite plans exist
to commence such use within a reasonable period of time. Assets held for the
production of income or for investment are not used (or held for use) directly in carrying
out the foundation’s exempt purpose.

Treas. Reg. § 53.4942(a)-2(c)(3)(ii)(f) provides as an example of an exempt-use asset
any property leased by a foundation in carrying out its exempt purpose at no cost (or at
a nominal rent) to the lessee or for a program-related purpose

Treas. Reg. § 53.4942(a)-3(a)(1) provides that the amount of a qualifying distribution of
property is the fair market value of such property as of the date such qualifying
distribution is made.

Treas. Reg. § 53.4942(a)-3(a)(2)(ii) provides that the term “qualifying distribution”
includes any amount paid to acquire an asset used (or held for use) directly in carrying
out exempt purposes.

Treas. Reg. § 53.4942(a)-3(a)(5) provides that if an asset not used (or held for use)
directly in carrying out exempt purposes is subsequently converted to such a use, the
foundation may treat such conversion as a qualifying distribution, valued as of the date
of conversion.

Treas. Reg. § 53.4942(a)-3(c)(2)(iv) provides that in order to satisfy distribution
requirements under section [170(b)(1)(F)(ii)] or paragraph (c) (relating to section
4942(g)(3)), a donee organization may elect to treat as a current distribution out of
corpus any amount distributed in a prior taxable year which was treated as a distribution
out of corpus under paragraph (d)(1)(iii) of this section provided that (a) such amount
has not been availed of for any other purpose, such as a carryover under paragraph (e)
of this section or a redistribution under paragraph (c) for a prior year, (b) such corpus
distribution occurred within the preceding 5 years, and (c) such amount is not later
availed of for any other purpose.

Treas. Reg. § 53.4942(a)-3(d) provides that a qualifying distribution made during a
taxable year is treated as made:

   (i) First, out of the undistributed income (if any) of the immediately preceding
   taxable year,
   (ii) Second, out of the undistributed income for the taxable year (unless election
   is made in accordance with Treas. Reg. § 53.4942(a)-3(d)(2) to treat the
   distribution as made out of corpus or out of undistributed income in earlier
   taxable years), and
   (iii) Third, out of corpus.

Treas. Reg. § 53.4942(a)-3(e)(1) provides generally that if a private foundation has an
excess of qualifying distributions (as determined under paragraph (e)(2)), such excess
may be used to reduce distributable amounts in any taxable year of the adjustment
period (as defined in paragraph (e)(3)). The distributable amount for a taxable year in
the adjustment period shall be reduced to the extent of the lesser of (i) the excess of
qualifying distributions made in prior taxable years to which such adjustment period
applies or (ii) the remaining undistributed income at the close of such taxable year after
applying any qualifying distributions made in such taxable year to the distributable
amount for such taxable year (determined without regard to this paragraph). If during
any taxable year of the adjustment period there is created another excess of qualifying
distributions, such excess shall not be taken into account until any earlier excess of
qualifying distributions has been completely applied against distributable amounts
during its adjustment period.

Treas. Reg. § 53.4942(a)-3(e)(2) provides that an excess of qualifying distributions is
created for any taxable year if:

   (i) The total qualifying distributions treated (under paragraph (d)) as made out of
   the undistributed income for such taxable year or as made out of corpus with
   respect to such taxable year (other than amounts distributed by an organization
   in satisfaction of section [170(b)(1)(F)(ii)] or paragraph (c) of this section, or
   applied to a prior taxable year by operation of the elections contained in
   paragraphs (c)(2)(iv) and (d)(2) of this section), exceeds
   (ii) The distributable amount for such taxable year (determined without regard to
   paragraph (e)).

Treas. Reg. § 53.4942(a)-3(e)(3) defines the adjustment period as the 5 taxable years
immediately following the taxable year in which the excess of qualifying distributions is
created. Thus, an excess for any 1 taxable year cannot be carried over beyond the
succeeding 5 taxable years.

Treas. Reg. § 301.7701-3(a) provides that an eligible entity with a single owner can
elect to be disregarded as an entity separate from its owner for federal tax purposes
generally. See also Ann. 99-102, 1999-2 C.B. 545.

Comm’r v. Disston, 325 U.S. 442 (1945), held that the statute of limitations does not
purport to preclude an examination into events of prior years for the purpose of correctly
determining gift tax liability for years which are still open.

Arrowsmith v. Comm’r, 344 US 6, 8-9 (1952), held that the principle that each taxable
year is a separate unit for tax accounting purposes was not breached by considering
several liquidation transaction events during 1937–1944 in order properly to classify the
nature of a 1944 loss for tax purposes.

State Farming Co. v. Comm'r, 40 T.C. 774 (1963), held that the Service could disallow
taxpayer’s net operating loss carryovers even though the disallowance was based on a
recalculation of the taxpayer’s taxable income in closed years.

Unser v. Comm'r, 59 T.C. 528 (1973), held that for purposes of determining the correct
amount of taxable income in the current year, the taxpayer must rely on correct taxable
income amounts in prior years, even if those prior years were closed by reason of the
statute of limitations.

In H. Fort Flowers Foundation, Inc. v. Comm’r, 72 T.C. 399 (1979), the Tax Court
rejected the taxpayer's classification of a transaction that occurred in a closed year,
thereby allowing the imposition of section 4942 tax in open years.

H.R. Rep. 413 (Pt. 1), 91st Cong., 1st Sess. 26 (Aug. 2, 1969), and S. Rep. 552, 91st
Cong., 1st Sess. 36 (Nov. 21, 1969), provide, “[a] further exception is provided where a
private foundation spends more than the minimum required payout in a given year.
Such excess expenditures may be applied against required payouts in the next 5
years.”

Rev. Rul. 69-543, 1969-2 C.B. 1, holds that the Service may assess and collect
deficiencies owed in open tax years relating to an investment tax credit that was
improperly claimed in a closed tax year and subsequently carried forward in part to
open tax years.

Rev. Rul. 74-61, 1974-1 C.B. 239, involving repealed income averaging provisions, held
that in determining average base period income for income averaging purposes, taxable
income for a base period year barred by the statute of limitations must be adjusted,
where necessary, to arrive at the correct taxable income for such year.

Rev. Rul. 78-387, 1978-2 C.B. 271, holds that when a private foundation has a
carryover of excess qualifying distributions as described in section 4942(i) and transfers
all its assets to another private foundation that is controlled by the same person or
persons, the transferee foundation may reduce its distributable amount in accordance
with the carryover.

Rev. Rul. 79-375, 1979-2 C.B. 389, holds that a private foundation that has made a
qualifying distribution equal to the purchase price of an asset and donates the asset to a
publicly supported charity will be allowed a second qualifying distribution only to the
extent that the fair market value of the asset on the date of contribution exceeds the
amount of the first qualifying distribution.

Rev. Rul. 81-88, 1981-1 C.B. 585, holds in part that a taxpayer may apply a net
operating loss carryforward to an open year for purposes of reducing its taxable income,
even though the taxpayer failed to claim the deduction in a closed year that would have
created the carryforward.

Rev. Rul. 82-49, 1982-1 C.B. 5, holds that a taxpayer is entitled to carry over into an
open year the unused portion of an investment tax credit (calculated as though the
credit had been claimed), even if the taxpayer failed to claim the credit on an income tax
return in a closed tax year, or in a timely claim for refund for the year property was
placed in service.

Foundation represents that the Lease of property to X furthers Foundation’s charitable
purposes, that the purchase or Lease in Year 1 and the addition to the Lease in Year 5
were qualifying distributions in accordance with Treas. Reg. § 53.4942(a)-3(a)(2)(ii),5,
and that the leased property constitutes an exempt-use asset for purposes of Treas.
Reg. § 53.4942(a)-2(c)(3)(ii)(f), excludable from Foundation’s minimum investment
return calculations.

Further, Foundation represents that the same person or persons effectively controlled
the trust and the corporation during the transfer of assets in Year 4. Therefore, the
corporation may be treated as if it were the trust for purposes of section 4942 under
Treas. Reg. § 1.507-3(a)(9)(i) (and therefore the transfer itself cannot be treated as a
qualifying distribution but is disregarded for section 4942 purposes). Consistent with
Rev. Rul. 78-387, the corporation may apply carryforwards (referred to in the section
4942 regulations as carryovers) in accordance with any excess qualifying distributions
made by the trust. In addition, Y as a disregarded entity is treated as part of Foundation,
including for purposes of section 4942.

Foundation seeks to reduce its distributable amount in tax years for which returns were
not yet filed when its ruling request was filed (Year 6 and Year 7) by carrying forward
excess qualifying distributions relating to the Lease of property6 despite erroneously
failing to treat the purchase or Lease or addition to the Lease as qualifying distributions
and failing to treat the leased property as exempt-use property (properly disregarded in
determining minimum investment return) in its section 4942 calculations in prior years.
Year 1 would be a closed year under the general 3-year limitations period of section
6501(a).

Neither section 4942 nor the regulations thereunder speak directly to this issue.
However, the statutory design and legislative history of section 4942 indicate that
Congress meant to relieve private foundations from the minimum charitable distribution
requirements to the extent that, during the preceding five years, they made excess
qualifying distributions.

In other areas of tax law (including analogous situations involving carryovers), the
Service and courts have taken the position that adjustments may be made to closed tax
years for purposes of determining the correct taxable income in an open year. Most of

5 Consistent with Rev. Rul. 79-375, Foundation is generally limited to only one qualifying distribution for a

purchase and subsequent charitable lease of property.
6 Excess qualifying distributions in Year 1 could not be carried forward beyond Year 6 given the maximum

5-year period for carryovers under Treas. Reg. § 53.4942(a)-3(e)(3).

the relevant authorities appear to hold in favor of the IRS in disputes with taxpayers
over tax assessments in open years. See, e.g., Comm’r v. Disston, 325 U.S. 442
(1945); Arrowsmith v. Comm’r, 344 US 6, 8-9 (1952); State Farming Co. v. Comm'r, 40
T.C. 774 (1963); Unser v. Comm'r, 59 T.C. 528 (1973); H. Fort Flowers Foundation, Inc.
v. Comm’r, 72 T.C. 399 (1979); and Rev. Rul. 69-543, 1969-2 CB 1. The IRS has,
however, recognized that the principle also applies in favor of taxpayers in appropriate
situations. Each example bears similarities to Foundation’s fact pattern. In Rev. Rul. 82-
49, the Service ruled that a taxpayer may carry into an open year the unused portion of
an investment tax credit (calculated as though the credit had been claimed), even if
taxpayer failed to timely claim the credit. In Rev. Rul. 81-88, the Service ruled that a
taxpayer may apply a net operating loss carryforward to an open year for purposes of
reducing its taxable income, even if taxpayer failed to claim the deduction in a closed
year that would have created the carryforward. And Rev. Rul. 74-61, 1974-1 C.B. 239,
an apparently neutral provision involving the Code’s former income averaging
provisions, held that in determining average base period income for income averaging
purposes, taxable income for a base period year barred by the statute of limitations
must be adjusted, where necessary, to arrive at the correct taxable income for such
year.

Accordingly, Foundation may recalculate its minimum investment return and qualifying
distribution carryovers relating to the Lease in prior years for purposes of applying
excess qualifying distribution carryovers in its Year 6 and 7 tax years. By reason of
Foundation’s additional qualifying distributions relating to the Lease in Year 1, the
addition to the Lease in Year 5, and the reduction of Foundation’s minimum investment
return by treating the leased property as an exempt-use asset in prior years, Foundation
has excess qualifying distribution carryovers. Under Treas. Reg. § 53.4942(a)-3(e)(1),
excess qualifying distributions may be carried forward to reduce distributable amounts
in subsequent years within the five-year adjustment period. The distributable amount for
a taxable year in the adjustment period is reduced to the extent of the lesser of (i) the
excess of qualifying distributions made in prior taxable years to which such adjustment
period applies (with the oldest carryovers applied first) or (ii) the remaining undistributed
income at the close of such taxable year after applying any qualifying distributions made
in such taxable year to the distributable amount for such taxable year (determined
without regard to § 53.4942(a)-3(e)).

We caution, however, that a private foundation cannot (in effect) apply excess qualifying
distribution carryovers in a year in which the foundation has already satisfied its
minimum distribution requirements under the ordering rules of section 4942(h) and
Treas. Reg. § 53.4942(a)-3(d) and thereby create a new excess qualifying distribution
for the current year that can be carried forward for an additional five years. Moreover,
making an election under section 4942(h)(2) and Treas. Reg. § 53.4942(a)-3(d)(2) to
treat a current-year qualifying distribution as made out of corpus rather than out of
current-year undistributed income does not change the result. This caution involves
some explanation.

By definition, under Treas. Reg. § 53.4942(a)-3(e)(2), an excess of qualifying
distributions is created for a taxable year if:

    (i) The total qualifying distributions treated (under § 53.4942(a)-3(d)) as made out
    of the undistributed income for such taxable year or as made out of corpus with
    respect to such taxable year (disregarding certain qualifying distributions)
    exceeds
    (ii) The distributable amount for such taxable year (determined without regard to
    § 53.4942(a)-3(e)7).

The disregarded qualifying distributions under Treas. Reg. § 53.4942(a)-3(e)(2)(i) are
amounts distributed by an organization in satisfaction of section 170(b)(1)(F)(ii) or
section 4942(g)(3) (and Treas. Reg. § 53.4942(a)-3(c)), or applied to a prior taxable
year by operation of the elections contained in § 53.4942(a)-3(d)(2)8 or § 53.4942(a)-
3(c)(2)(iv)9. The logic of this carve-out under § 53.4942(a)-3(e)(2)(i) is that a qualifying
distribution may only be used once; if a current-year qualifying distribution is treated as
a distribution out of corpus to qualify the foundation for section 170(b)(1)(F)(ii) status for
the benefit of a contributor, to qualify the distribution under section 4942(g)(3) for the
benefit of a foundation grantor, or to correct an under-distribution in a prior year, then
the qualifying distribution is disregarded in determining whether, for the tax year at
issue, the foundation has excess qualifying distributions (that the foundation might use
to offset distributable amounts in future years or for other purposes).

Thus, a foundation has an excess of qualifying distributions in a taxable year only to the
extent that its qualifying distributions treated as made out of undistributed income for the
taxable year or out of corpus for the taxable year (disregarding certain qualifying
distributions discussed above) exceed the distributable amount for the taxable year.
While carryovers of excess qualifying distributions from prior years may be used to
reduce the distributable amount in a taxable year in the five-year adjustment period,
such carryovers are disregarded in determining whether a foundation has an excess of
qualifying distributions in a taxable year.

7 As previously noted, Treas. Reg. § 53.4942(a)-3(e) allows an excess qualifying distribution carryover to

reduce the distributable amount for taxable years in the succeeding 5-year adjustment period. Such
carryovers are disregarded in determining the distributable amount under Treas. Reg. § 53.4942(a)-
3(e)(2)(ii).
8 Treas. Reg. § 53.4942(a)-3(d)(2) allows a foundation to elect (pursuant to section 4942(h)(2) to treat any

portion of a qualifying distribution (other than the portion treated as made out of the undistributed income
of the immediately preceding taxable year) as made out of the undistributed income of a designated prior
taxable year (to correct an under-distribution for such year).
9 The reference in Treas. Reg. § 53.4942(a)-3(e)(2)(i) to § 53.4942(a)-3(c)(2)(iv) may be in error because

that provision only contemplates carryforwards of excess qualifying distributions to comply with the
distribution requirements of section 4942(g)(3) or 170(b)(1)(F)(ii), not carrybacks.

                                     RULINGS

Based on the foregoing, and assuming the accuracy of the facts and representations set
forth herein, we rule as follows:

1) The Foundation may take into account understatement of its qualifying
distributions and overstatement of its minimum investment return in prior years
relating to its property leased to X in computing its minimum investment return
and qualifying distribution carryforwards for its Year 6 and Year 7 tax years.

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Foundation and accompanied by a penalty of perjury
statement executed by an individual with authority to bind Foundation, and upon the
understanding that there will be no material changes in the facts. While this office has
not verified any of the material submitted in support of the request for a ruling, it is
subject to verification on examination. The Associate office will revoke or modify a letter
ruling and apply the revocation retroactively if there has been a misstatement or
omission of controlling facts; the facts at the time of the transaction are materially
different from the controlling facts on which the ruling was based; or, in the case of a
transaction involving a continuing action or series of actions, the controlling facts
change during the course of the transaction. See Rev. Proc. 2026-1, section 11.05.

This letter does not address the applicability of any section of the Code or Regulations
to the facts submitted other than with respect to the sections specifically described, and,
except as expressly provided in this letter, no opinion is expressed or implied
concerning the tax consequences of any aspects of any transaction or item of income
discussed or referenced in this letter.

Because it could help resolve questions concerning federal tax status, this letter should
be kept in Foundation's permanent records.

A copy of this letter must be attached to any tax return to which it is relevant.
Alternatively, if Foundation files a return electronically, this requirement may be satisfied
by attaching a statement to the return that provides the date and control number of this
letter.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to Foundation's authorized representatives.

This ruling letter is directed only to Foundation. Section 6110(k)(3) provides that it may
not be used or cited as precedent.

                                            Sincerely,

                                            Ward L. Thomas
                                            Senior Counsel
                                            Exempt Organizations Branch 1
                                            (Employee Benefits, Exempt Organizations, and
                                            Employment Taxes)

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