Title: Introduction to Private Foundations and Public Charities
1Introduction to Private Foundations and Public
Charities
- Adam Liebling
- American Society for the Prevention of Cruelty to
Animals (ASPCA) - adam.liebling_at_aspca.org
- (212) 876-7700 ext 4498
2Agenda
- Definitions
- Similarities Distinctions
- Types of Foundations
- Determining Exempt Status
- Expenditure Responsibility
- Current Issues Concerns
- Best Practices
3The 501(c) Universe
4501(C)(3)
- 501(c)(3) - Organized and operated exclusively
for religious, charitable, scientific, testing
for public safety, literary, or educational
purposes, or to foster national or international
amateur sports competition, to promote the arts,
or for the prevention of cruelty to children or
animals.
5Public Charity - Definition
- Public charity is a generic term for all exempt
organizations described in IRC Section 501(c)(3)
that is not a private foundation - Characteristics
- Organized and operated exclusively for a
charitable purpose - No part of its activities may involve political
activities for or against political candidates - No substantial part of its activities may involve
lobbying - Usually has a broad revenue base
6Types of Charities
- Categories under 501(c)(3)
- 509(a)(1) Inherently charitable, The
Institutions churches, educational
institutions, hospitals, medical research
organizations, some governmental units. And
publicly supported organizations that receive
substantial support from a governmental unit or
from the general public. - 509(a)(2) Exempt purpose activity-supported
charities, that is, charities supported by
program service revenue, e.g. museums,
nonprofit magazines, etc. - 509(a)(3) Supporting organizations Orgs similar
to private foundations that are connected to, and
support, a specific (a)1 or (a)2 charity (i.e.
university printing press)
7Private Foundation - Definition
- Negative definition A private foundation is a
charitable organization that is not a public
charity as described under 509(a). - Characteristics
- Organized and operated exclusively for charitable
purpose - Initially funded from one source
- Its ongoing income is derived from investments
- Typically makes grants to other organizations,
rather than operate its own program
8Similarities
- Both must be organized and operated exclusively
for a charitable purpose - Both are exempt under IRC Section 501(c)(3)
- No part of its activities can involve political
activity (i.e. electioneering/campaigning) - Private inurement doctrine cannot engage in
activities that result in private inurement or
private benefit. Resources cannot be transferred
to persons in a private capacity. - Both can make grants!
9Distinctions
- Foundations
- Pays excise taxes (2 of net investment income)
- Required to make a minimum distribution annually
(5 of assets) - Prohibited from lobbying
- Must refrain from self-dealing
- Initially funded by one or few sources relies on
investment earnings for ongoing support
- Public Charities
- Pays no excise taxes
- No minimum distribution charity can sit on
money - Can lobby in limited capacity
- Self-dealing acceptable in certain cases must be
disclosed - Must demonstrate that its income is derived from
a broad base (Public Support Test)
10Taxes on Private Foundations
- Because PFs are privately funded and controlled,
the IRS feels there is an increased likelihood of
improper benefits to those controlling the PF.
Therefore, more rules, restrictions, taxes, and
penalties than on PCs. - 2 of net investment income can be reduced to
1 if foundation increases its qualifying
distributions by a certain amount - The IRC imposes a two-tier excise tax on private
foundations, foundation managers, or other
disqualified persons that engage in certain
prohibited acts. These are (1) the taxes on
self-dealing between private foundations and
their substantial contributors or other
disqualified persons (2) requirements that the
foundation annually distribute income for
charitable purposes and (3) penalty excise taxes
designed to discourage behavior detracting from a
foundation's ability to further charitable
purposes. Thus, the IRS may assess excise taxes
on
11Taxes (continued)
- Certain foundation holdings in private
businesses - Foundation investments that jeopardize the
carrying out of exempt purposes - Expenditures for certain activities not
furthering exempt purposes. - Violation of these provisions give rise to taxes
and penalties against the private foundation and,
in some cases, its managers, its substantial
contributors, and certain related persons. The
first tier (initial) tax is automatically imposed
if the foundation engages in a prohibited
act. With the exception of self-dealing acts
under section 4941, the initial taxes may be set
aside if it is established that (1) a taxable
event was due to reasonable cause and not to
willful neglect, and (2) the event was corrected
within the correction period.
12So, To Sum Up
- Public Charities Have an Advantage!
- No excise tax, no minimum distribution
requirement, more flexibility with lobbying - And Also
- Fewer reporting requirements
- Higher allowances for donors to contribute (they
can deduct up to 50 of adjusted gross income vs.
30 to foundations). Therefore, easier to
fundraise. - Easier for public charities to receive from
private foundations difficult for private
foundations to receive from other private
foundations - More flexibility in their giving and charitable
activities
13Life Cycles for PFs and PCs
- Must be organized for charitable purpose
- Must be incorporated under state or regulatory
law - Protects board from being held personally liable
in case of lawsuit - Charter/Articles of Incorporation primary
statements regarding purpose/mission and location
of a corporation must be filed with state or
regulatory agency - Certificate of Incorporation issued by state or
regulatory agency - By-Laws further details on how the corporation
will be run (powers and voting rights of the
board meetings quorums etc.). Can be revised. - Apply to IRS for Employer Identification Number
(EIN) - For PCs, register with state agencies where you
plan to do fundraising - Apply for Recognition of Exemption with IRS,
receive IRS Determination Letter (aka Exemption
Letter) - Apply for other state tax exemptions (sales tax,
property tax, etc.) - File annual information returns (Forms 990
990-PF) - Alert IRS to material changes or termination
14A Note on Political Activity
- "Under the Internal Revenue Code, all section
501(c)(3) organizations are absolutely prohibited
from directly or indirectly participating in, or
intervening in, any political campaign on behalf
of (or in opposition to) any candidate for
elective public office. Contributions to
political campaign funds or public statements of
position (verbal or written) made on behalf of
the organization in favor of or in opposition to
any candidate for public office clearly violate
the prohibition against political campaign
activity. Violating this prohibition may result
in denial or revocation of tax-exempt status and
the imposition of certain excise taxes. - Organizational leaders at 501(c)(3)s should not
make partisan comments in writing or at official
or public functions.
15Other Types of Foundations/PCs
- Private
- Corporate Foundations
- Family Foundations
- Operating Foundations
- Public
- Community Foundations
- Public Foundations
- Donor-Advised Funds
16Corporate Foundations
- Private foundation that derives its funds from a
for-profit company - Focus and grantmaking usually related to the
companys interests - Can benefit from other company support, such as
shared staff departments - Can be affected by downturns at corporation,
layoffs, mergers, etc. - Different from corporate-giving programs.
Corporate foundations are separate legal entities
whereas corporate-giving programs are
administered within the corporation.
17Family Foundations
- Private foundation in which the donor or donors
relatives play a significant governing role. - Assets endowed by family wealth
- Generations of family members are stewards of the
philanthropy and family legacy - Many private independent foundations began as
family foundations
18Operating Foundations
- Foundation/charity hybrid.
- Like private foundations, does not generally
raise funds from the public - Like public charities, uses resources for own
charitable programs and services - Rarely makes grants to other organizations
- Different minimum distribution requirements and
excise taxes than from PFs
19Community Foundations
- An organization that pools assets within a
community to service that community - Provides a number of consultancy, administrative,
and investment services for donors and local
organizations looking to be philanthropic in
their community - Endowments, scholarships, grant programs, etc.,
created with donor intent (but CF retains
discretion and control) - Often operated as a public foundation or a
donor-advised fund (DAF).
20Public Foundations
- Simply, a public charity that focuses more on
grantmaking than on providing direct charitable
services - Follows normal IRS rules for public charities,
but many adopt foundation best practices for
grantmaking - ASPCA can be considered a public foundation
21Donor-Advised Funds
- A public charity that manages charitable
donations on behalf of another organization,
individual, or family. - Allows donors to be grantmakers without having to
set up a private foundation - DAFs provide all due diligence and administrative
functions, but retain control and discretion of
funds donors can provide recommendations but
DAFs have final say - First DAF was in 1931 (New York Community Trust),
but DAFs were first legally defined by the
Pension Protection Act of 2006
22Determining Exempt Status
- IRS Determination Letter
- Includes a lot of important info (next slide)
- Guidestar.org
- Notes whether org is 501(c)(3) and Public Charity
or Private Foundation and in good standing - Some grants management systems connect to
Guidestar - New tools include better monitoring and alerts
- Seal of approval by the IRS
- IRS Publication 78
- Huge publication (also on IRS.gov as searchable
database). Includes most deductible orgs and
their deductible codes - IRS.gov includes revocations, suspensions,
additions and deletions
23IRS Determination Letter
- Date of letter
- Federal Tax ID/Employer Identification Number
(EIN) - Legal name
- Verifies not a PF and specifies type of charity
under 509(a) - Advance ruling (No longer required as of 2008)
24Expenditure Responsibility
- Who can foundations and public charities give
grants to? - What is expenditure responsibility (X-REP/ER)?
- What do foundations have to do to exercise X-REP?
- Alternatives to X-REP
25X-REP Why?
- IRC Section 4945 Grants to organizations that
are not public charities as described in
509(a)(1), (2), or (3) are considered taxable
expenditures and subjected to excise taxes,
unless Expenditure Responsibility is maintained. - Non-Public Charities that PFs might make grants
to foreign charities, for-profits, other private
foundations, and public charities that have lost,
or not yet received, their status
26X-REP The Rules
- Under the Internal Revenue Code, if a section
501(c)(3) private foundation makes a grant to an
organization that is not a section 501(c)(3)
public charity described in sections 509(a)(1),
(2), or (3) (or, in the case of a foreign
organization, treated as such), the private
foundation must exercise expenditure
responsibility over the grant. To exercise
expenditure responsibility over a grant, a
foundation must exert all reasonable efforts
and establish adequate procedures - To see that the grant is spent solely for the
purpose for which it is made - To obtain full and complete records from the
grantee detailing how the grant funds are spent
and - To make full and detailed reports with respect to
such expenditures to the IRS.
27X-REP Other IRS Requirements
- In addition, the exercise of expenditure
responsibility should include the following - A pre-grant inquiry
- A written grant agreement, signed by an officer,
director or trustee of the grantee, containing
the grantees agreement to - To repay any amount not used for the purposes of
the grant, - To submit full and complete annual reports to the
grantor foundation on the manner in which the
funds are spent and the progress made in
accomplishing the purposes of the grant, - To keep records of receipts and expenditures and
to make its books and records available to the
grantor at reasonable times, and - Not to use any of the funds to influence
legislation, to influence the outcome of
elections, to carry on voter registration drives,
to make grants to individuals or other
organizations, or to undertake any nonexempt
activity, when such use of the funds would be a
taxable expenditure if made directly by the
foundation.
28Alternatives to X-REP
- Using intermediaries/fiscal agents
- Must be very careful because of earmarking rules.
- Equivalency Determination
- Legal opinion based on affidavits and detailed
grantee information that grantee can be treated
as equivalent to a US public charity. Can be
burdensome and expensive, but there can be
advantages. - Note If grantee is a for-profit, equivalency
determination not an option
29Fiscal Agency/Pass-Through Grantmaking
- Traditionally used to avoid taking X-REP
- Foundation makes grant to an intermediary
(usually a nonprofit with exempt status), who
then grants to a non-exempt organization - The intermediary MUST retain discretion and
control over money. Otherwise, it is considered
earmarking. - Earmarked grants are as if foundation made grant
directly to final recipient - No longer considered a viable alternative to
X-REP, needlessly complicates grantmaking
30Current Issues Concerns
- Sarbanes-Oxley
- Patriot Act
- Pension Protection Act of 2006 (HR4)
- Other Congressional Activities
- Recent IRS Activity
- Local Activity
- Media Scrutiny
- Public Confidence
- Greening
- Other Trends
- Best Practices
31Sarbanes-Oxley
- Enacted in 2002 in response to corporate scandals
- Additional financial disclosure, enhanced
accountability and corporate responsibility,
auditor independence, significantly harsher
penalties for violations - Does not apply to nonprofits only publicly-held
organizations - Many foundations and charities implemented some
Sarbanes-Oxley provisions
32Patriot Act Related
- Patriot Act Stiff fines/prison terms for those
that willingly fund terrorism - Executive Order 13224 Govt can freeze assets
of any terrorist or individual or organization
that supports terrorism. Very vague and broad
with no requirement that support include
knowledge or intent. - Embargoes and Sanctions Foundations cannot
violate them except for very narrowly defined
activities. - So-called Voluntary Best Practices Treasury
Depts Office of Foreign Assets Control (OFAC)
guidelines for nonprofits on complying with these
issues
33Pension Protection Act of 2006
- Largest charitable reforms since the Tax Reform
Act of 1969 - Affects mainly donor-advised funds and supporting
organizations - However, burden is on foundations now to ensure
they take proper actions when funding a 509(a)(3)
Type III supporting organization.
34Other Congressional Activities
- Lobbying and ethics scandals ? The Legislative
and Accountability Act new rules for covering
expenses of members of Congress - Frequent talk about raising the minimum
distribution percentage - Frequent talk about executive compensation
- Lower charitable deduction being considered for
wealthy donors - Estate Tax frequently debated
- Independent Sector promotes self-regulation -
Panel on the Nonprofit Sector recommended actions
to strengthen governance, ethical conduct of
nonprofits
35Recent IRS Activity
- Stronger enforcement scrutiny of exempt
organizations engaging in political activity - Substantial changes to the 990 in 2008
charities have to now report more about their
governance and structure - Beginning 2007, ALL nonprofits have to file the
990 or 990-EZ (or 990-N postcard for orgs with
annual revenue under 25,000) - Grace period just ended tens of thousands of
nonprofits lost their exempt status - Soon all nonprofits will have to file
electronically
36Local Activity
- Greenlining Institutes push for a Foundation
Diversity and Transparency Act would have made
charities and foundations gather data and report
on the ethnic makeup of their boards and their
grantees boards - NY recently considered exemption of nonprofits
from property taxes tax on richest
philanthropists - Kansas reconsidering exemption from sales tax
- Hawaii considering a 1 income tax
- Churches may still be exempt
- Michigans AG had considered enforcing
MI-incorporated foundations to make 50
distributions within MI
37Media Scrutiny
- Much coverage of large charities in the wake of
9/11 and Hurricane Katrina, focusing on
ineffectiveness and inappropriate handling of
funds - Higher coverage of, and public exposure to, the
nonprofit sector for reasons positive
(Gates/Buffett) and negative (scandals) - Blogs/online opinion pieces that cover the
nonprofit sector are proliferating, but not
always accurate
38Public Confidence
- Trust in institutions very low
- Church scandals
- University scandals
- Eroding confidence of charities
- Historically low approval of Congress
- High suspicion of government programs
39Greening
- Greening The active process by which
organizations critically analyze their
procedures, policies and practices in order to
reduce their impact on the environment. - Recycle, Reduce, Reuse
- Promoting energy efficiency
- Going paperless and telecommuting to reduce
carbon imprint - Encouraging public transportation
- Addressing food product safety and
sustainability - Leadership in Energy and Environmental Design
(LEED) Certification - Many organizations are now (at least) going for
the low-hanging fruit
40Change
41Other Trends
- Online Grantmaking
- Common Applications
- Uniform Coding
- Digital Archiving
- Data Gathering
- Emphasis on Outcomes/Metrics/Impact
- Social Media
- Endowments/Donations Down, Volunteerism Up
- Economic downturn
42Best Practices for Nonprofits
- For PFs, no self-dealing and avoid appearance of
self-dealing. Okay for public charities in some
cases. - No political activity
- Conflict of interest, whistleblower policies
- Consistent and formalized record keeping and file
retention - Transparency internally externally
- Establish an audit committee, if appropriate
- Environment-conscious/greening policies
43The Era of Grants Management
- Grants Managers are more important than ever!
- Grants managers are on the forefront of
- Streamlining, doing more with less creating new
policies, processes, procedures, and technical
solutions - Greening paperless grantmaking
- Developing metrics for outcomes, evaluation, and
impact - Communicating the organizations grantmaking
successes - Proper due diligence and compliance having the
right amount of expertise in finance, law, audit,
and IT. Keeping an eye on changes to the law.
44Supporting the Sector
- Groups
- Council of Foundations
- Foundation Center
- Independent Sector
- Also
- Center for Effective Philanthropy
- Chronicle on Philanthropy
- Grantmakers for Effective Organizations
- Philanthropy Roundtable
- Regional Associations of Grantmakers
(Philanthropy New York) - Emerging Practitioners in Philanthropy
- Health Research Alliance
- Grants Managers Network
- Activities
- Testifying before Congress
- Self-defense lobbying
- Independent studies and recommendations
- Op-Eds
- Conferences
- Education dissemination (news alerts,
publications, etc.)
45Thank you for coming!