Private Foundations Tax Law and Compliance

Private foundations, although constituting a relatively small portion of the charitable community, are burdened with extensive federal tax law requirements that belie their numbers, and substantially regulate and circumscribe their operations. This body of law has steadily grown since its inception as a considerable portion of the Tax Reform Act of 1969. This book came about in reflection of this expanding and expansive aspect of the law pertaining to these unique forms of tax-exempt organizations. We have attempted to both capture and summarize this law, and to provide guidance as to compliance with it.

Preface

Acknowledgments

Book Citations

Chapter 1 Introduction to Private Foundations

§ 1.1 Private Foundations: Unique Organizations

§ 1.2 Definition of Private Foundation

§ 1.3 History and Background

§ 1.4 Private Foundation Law Primer

§  1.5 Statistical Profile

§ 1.6 Foundations in Overall Exempt Organizations Context

§ 1.7 Definition of Charity

§1.8 Operating for Charitable Purposes

§1.9 Organizational Rules

§1.10 Private Foundation Sanctions

Chapter 2 Starting and Funding a Private Foundation

§2.1 Choice of Organizational Form

§2.2 Funding a Foundation

§2.3 Estate Planning Principles

§2.4 Foundations and Planned Giving

§2.5 Acquiring Recognitions of Tax-Exempt Status

§2.6 Special Requirements for Charitable Organizations

§2.7 When to Report Back to the IRS

Chapter 3 Types of Private Foundations

§3.1 Private Operating Foundations

§3.2 Conduit Foundations

§3.3 Common Fund Foundations

§3.4 Research and Experimentation Funds

§3.5 Other Types of Foundations

§3.6 Nonexempt Charitable Trusts

§3.7 Split-Interest Trusts

§3.8 Foreign Private Foundations

Chapter 4 Disqualified Persons

§ 4.1 Substantial Contributors

§ 4.2 Foundation Managers

§ 4.3 Certain 20 Percent Owners

§ 4.4 Family Members

§ 4.5 Corporations or Partnerships

§ 4.6 Trusts or Estates

§ 4.7 Private Foundations

§ 4.8 Governmental Officials

§ 4.9 Terminating Disqualified Person Status

Chapter 5 Self-Dealing

§ 5.1 Private Inurement Doctrine

§ 5.2 Private Benefit Doctrine

§ 5.3 Definition of Self-Dealing

§ 5.4 Sale, Exchange, Lease, or Furnishing of Property

§ 5.5 Loans and Other Extensions of Credit

§ 5.6 Payment of Compensation

§ 5.7 Indemnification and Insurance

§ 5.8 Uses of Income or Assets by Disqualified Persons

§ 5.9 Sharing Space, People, and Expenses

§ 5.10 Payments to Government Officials

§ 5.11 Indirect Self-Dealing

§ 5.12 Property Held by Fiduciaries

§ 5.13 Early Terminations of Charitable Remainder Trusts

§ 5.14 Additional Exceptions

§ 5.15 Issues Once Self-Dealing Occurs

Chapter 6 Mandatory Distributions

§6.1 Distribution Requirements—In General

§6.2 Assets Used to Calculate Minimum Investment Return

§6.3 Measuring Fair Market Value

§6.4 Distributable Amount

§6.5 Qualifying Distributions

§6.6 Distributions to Certain Supporting Organizations

§6.7 Satisfying the Distribution Test

§6.8 History of the Mandatory Distribution Requirement

Chapter 7 Excess Business Holdings

§7.1 General Rules

§7.2 Permitted and Excess Holdings

§7.3 Functionally Related Businesses

§7.4 Rules Applicable to Certain Supporting Organizations

§7.5 Rules Applicable to Donor-Advised Funds

§7.6 Excise Taxes on Excess Holdings

Chapter 8 Jeopardizing Investments

§8.1 General Rules

§8.2 Prudent Investments

§8.3 Program-Related Investments

§ 8.4 Investment Frauds

§8.5 Excise Taxes for Jeopardizing Investments

Chapter 9 Taxable Expenditures

§9.1 Legislative Activities

§9.2 Political Campaign Activities

§9.3 Grants to Individuals

§9.4 Grants to Public Charities

§9.5 Grants to Foreign Organizations

§9.6 Expenditure Responsibility

§9.7 Internet and Private Foundations

§9.8 Spending for Noncharitable Purposes

§9.9 Distributions to Certain Supporting Organizations

§9.10 Excise Tax for Taxable Expenditures

Chapter 10 Tax on Investment Income

§10.1 Rate of Tax

§10.2 Reducing the Excise Tax

§10.3 Formula for Taxable Income

§10.4 Reductions to Gross Investment Income

§10.5 Foreign Foundations

§10.6 Exemption from Tax on Investment Income

§10.7 Legislative Proposal

Chapter 11 Unrelated Business Income

§11.1 General Rules

§11.2 Exceptions

§11.3 Rules Specifically Applicable to Private Foundations

§11.4 Unrelated Debt-Financed Income

§11.5 Calculating and Reporting the Tax

Chapter 12 Tax Compliance and Administrative Issues

§12.1 Successful Preparation of Form 990- PF

§12.2 Reports Unique to Private Foundations

§12.3 Compliance Issues

Chapter 13 Termination of Foundation Status

§ 13.1 Voluntary Termination

§ 13.2 Involuntary Termination

§ 13.3 Transfer of Assets to a Public Charity

§ 13.4 Operation as a Public Charity

§ 13.5 Mergers, Split-ups, and Transfers between Foundations

§ 13.6 Termination Tax

§ 13.7 Abatement

Chapter 14 Charitable Giving Rules

§ 14.1 General Rules

§ 14.2 Gifts of Appreciated Property

§ 14.3 Deductibility of Gifts to Foundations

§ 14.4 Deduction Reduction Rules

§ 14.5 Planned Giving Revisited

§ 14.6 Administrative Considerations

Chapter 15 Private Foundations and Public Charities

§ 15.1 Distinctions between Public and Private Charities

§ 15.2 Evolution of Law of Private Foundations

§ 15.3 Organizations with Inherently Public Activity

§ 15.4 Publicly Supported Organizations—Donative Entities

§ 15.5 Service Provider Organizations

§ 15.6 Comparative Analysis of the Two Categories of Publicly Supported Charities

§ 15.7 Supporting Organizations

§ 15.9 Noncharitable Supported Organizations

§ 15.10 Relationships Created for Avoidance Purposes

§ 15.11 Reliance by Grantors and Contributors

§ 15.12 Other Rules

§ 15.13 Public Safety Organizations

§ 15.14 Termination of Public Charity Status

Chapter 16 Donor-Advised Funds

§ 16.1 Basic Definitions

§ 16.2 General Concept of a Gift

§ 16.3 Types of Donor Funds

§ 16.4 IRS Challenges to Donor Funds

§ 16.5 Prohibited Material Restrictions

§ 16.6 Department of Justice Position

§ 16.7 Public Charity Status of Funds

§ 16.8 Interrelationship of Private Foundation Rules

§ 16.9 Statutory Criteria

§ 16.10 Congressional Research Service Study

Chapter Seventeen Corporate Foundations

§ 17.1 Corporate Foundation Overview

§ 17.2 Reasons for Establishment of Corporate Foundation

§ 17.3 Private Inurement Doctrine

§ 17.4 Disqualified Persons Rules

§ 17.5 Self-Dealing Rules

§ 17.6 Other Private Foundations Rules

Chapter Eighteen Nonprofit Governance and Private Foundations

§ 18.1 State Law Overview

§ 18.2 Board of Directors Basics

§ 18.3 Principles of Fiduciary Responsibility

§ 18.4 Duties of Directors

§ 18.5 Board Composition and Federal Tax Law

§ 18.6 Sources of Nonprofit Governance Principles

§ 18.7 Relevant Nonprofit Governance Issues

§ 18.8 Nonprofit Governance Policies

§ 18.9 Role of IRS in Nonprofit Governance

§ 18.10    Council on Foundations Principles and Practices

§ 18.11 Governance Principles and Private Foundations

About the Authors

About the Companion Website

Index

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