Heard on the Web: Madoff Scandal May Implicate Jeopardizing Investment Tax Rules

Heard on the Web: Madoff Scandal May Implicate Jeopardizing Investment Tax Rules

News story posted in Compliance on 12 February 2009| 3 comments
audience: National Publication | last updated: 18 May 2011
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Summary

According to an article in the February 11, 2009 issue of the New York Times, private foundations that invested with Bernard Madoff might lose more than their investments. Private foundations and certain charitable trusts (along with their managers/trustees) might be subject to private foundation excise taxes applicable to making jeopardizing investments.

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)

Do you think private foundations and charitable trusts (and their trustees) that invested with Madoff should be subject to these taxes? We welcome your comments.

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