Grantmaking Presentation at Dallas Nonprofit Study Group

Ripples in a pond.

Grants creating impact.

I am fortunate to work with many private non-operating foundations (both family foundations as well as independent foundations) with varied grantmaking programs. Some of these foundations make grants only to public charities while others have scholarship programs. Some make grants to governmental entities for public projects while others focus their efforts on international aid. What is consistent across all of these organizations, is their need to satisfy their minimum distribution requirement under Section 4942 of the Internal Revenue Code (foundations must generally distribute at least 5% of the aggregate fair market value of their nonexempt use assets on an annual basis in qualifying distributions) and their desire to avoid the making of taxable expenditures.

A couple of days ago I had the opportunity to speak to the Dallas Bar Association’s Nonprofit Study Group on grantmaking activities of private foundations with a specific focus on qualifying distributions (when grants constitute qualifying distributions, when they don’t, and when out of corpus rules must be followed) and taxable expenditures (when grants constitute taxable expenditures, when they don’t, and when special rules such as expenditure responsibility must be followed). We had a good discussion particularly related to what I view as nontraditional grants, such as grants to supporting organizations, grants to non-501(c)(3)s for charitable purposes, etc. A copy of my reference paper can be found here and a copy of the PowerPoint slides can be found here.

The Dallas Bar Association’s Nonprofit Study Group meets at noon on the 3rd Wednesday of every month (with summers off) in the Rain Room at the Belo Mansion in Dallas. If you are a nonprofit professional in the Dallas/Fort Worth area, I encourage you to check it out.


Treasury Issues New Examples of Program-Related Investments

Last month the Treasury Department and IRS issues an Advanced Notice of Proposed Rulemaking which would modify the Treasury Regulations to provide new examples of program-related investments (PRIs) for private foundations.  This is a welcome development as these examples provide further clarity with respect to the breadth of PRIs.

While foundations generally accomplish their charitable purposes (and satisfy their payout requirement) by making grants to public charities, the rules are actually much broader and include (among other qualifying distributions), the making of PRIs.  PRIs are an alternative form of financing to flow capital to charitable programs, a form that allows for (and anticipates) repayment thereby enabling reinvestment of that same capital and other charitable programs.  A program-related investment is an investment that has a primary purpose of accomplishing one or more charitable purposes, no significant purpose of producing income or appreciation of property, and no purpose to accomplish prohibited political purposes.  The Treasury Regulations have for the past 40 years provided ten examples of program-related investments.  Because these examples have not necessarily kept pace with the changes in forms of financing and opportunities for the making of PRIs, the new examples were needed.  These additional examples demonstrate the use of PRI’s in other contexts (including international contexts) and with other forms of financing (loans, equity investments, credit enhancement, etc.).  The flexibility of PRIs and their allowance for reinvestment and recirculation of capital make PRIs an attractive complement to a foundation’s standard grantmaking activities.

The new examples (which can be relied upon now) can be found at this link.  For a more detailed discussion on the rules related to program-related investments see the my paper on PRI’s presented in August 2011 at the State Bar of Texas’s Governance of Nonprofit Organizations Course.


Recognizing and Avoiding Self-Dealing: Both Direct and Indirect

moore-slider3In recognition of the societal benefits achieved as a result of the work of the independent sector, the laws of the United States provide various benefits to specific types of philanthropic organizations.  Chief among those benefits is exemption from federal income tax for organizations that meet specific requirements as set out in the Internal Revenue Code. For organizations formed for more narrowly defined purposes (including religious, charitable, scientific, and educational purposes among others) federal tax law provides what amounts to a double subsidy—exemption from federal income tax along with the ability to receive donations that are deductible from the personal income tax obligations of the donors.

The Internal Revenue Code further categorizes charitable organizations as public charities and private foundations.  Public charities are those charitable organizations that have a traditional public purpose (churches, schools, and hospitals) or are publicly supported.  Private non-operating foundations generally do not directly perform charitable programs or services, but rather pursue their charitable purposes through their grantmaking activities (in 2010, foundations gave approximately $45.78 billion for charitable purposes).  Because private foundations do not attract broad public support and thus allow donors (at least in theory) to retain more control over assets owned by the private foundation, Congress has imposed certain prohibitions that apply specifically to private foundations including prohibitions on self-dealing, failing to distribute income, maintaining excess business holdings, investing in ways that jeopardize the charitable purposes of the organization, and making taxable expenditures.

Perhaps the most onerous of these prohibitions is that prohibiting self-dealing between a private foundation and its disqualified persons.  This prohibition forbids specific transactions regardless of the fairness of the transaction – even where the transaction is a sweetheart deal to the foundation.  Because of the broad nature of this prohibition and the excise tax penalties resulting from violation, it is critical for private foundations (and their donors, board members, and other related parties) to be familiar with the relevant definitions, concepts, and exceptions.