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We examine three categories of private foundations with tax incentives to increase their qualifying distributions: (1) foundations barely qualifying for the 1 percent tax rate on net investment income, (2) foundations barely avoiding the tax on undistributed income, and (3) foundations that pay an excise tax on undistributed income. We expect tax-motivated foundations to use allocations across expense categories and over time to increase their qualifying distributions. Our sample consists of a balanced panel of 1,974 private foundations over a 12-year period from 1995 through 2006, resulting in 23,688 foundation years. We find that foundations barely meeting the 1 percent tax benchmark use tax-motivated allocations both across expense categories and over time to increase qualifying distributions. In contrast, foundations barely avoiding or minimizing the tax on undistributed income use set-aside amounts to allocate distributions over time, but do not use allocations across expense categories to increase qualifying distributions.

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