Private foundations are subject to tax under Internal Revenue Code (IRC) section 4940 on their net investment income, and under section 4942 on the amount of undistributed income. Regulations under section 4940 include in the income amounts subject to tax certain undistributed income of split interest trusts described in section 4947(a)(2). These regulations were invalidated in Ann Jackson Family Foundation v. Commissioner, 97 T.C. 534 (1991), aff'd 15 F.3d 917 (9th Cir. 1994).

Notice 2004-35 discusses a proposed modification of the IRC 4940 regulations to eliminate the disparate treatment of distributions from various types of trusts and estates.  Until further guidance is issued, income distributions from trusts and estates will not be included in the foundation's net investment income for purposes of section 4940.  In addition, foundations may seek refunds of any overpayment of section 4940 taxes attributable to the inclusion of this income in any open year. 

Notice 2004-36 discusses a proposed modification of the IRC 4942 regulations consistent with the courts' decisions in the Jackson Family Foundation case.  Until further guidance is issued, private foundations will not be required to include the income portion of distributions received from section 4947(a)(2) split-interest trusts in determining the distributable amount under section 4942.  In addition, foundations that paid a section 4942 excise tax in any open year for a failure to distribute the income portion of distributions from split-interest trusts may seek a refund of that tax.