When Giving Money Isn’t Enough: Direct Charitable Activities of Private Foundations

2015 Tax Seminar (Salk Institute), La Jolla, California

92969426 - CopyYour foundation wants to go beyond its grant-making programs and increase its involvement, perhaps through leveraging your expertise, supplementing your grant-making dollars, and/or investing strategically and programmatically.  But how do you expand while still being subject to the prohibited transaction rules set out in the Internal Revenue Code?  This paper and presentation examine key issues of direct charitable activities, program-related investments, advantages and disadvantages of private operating foundations, and use of separate and subsidiary entities for related activities.

A Basic Framework of the Nonprofit Sector

A Basic Framework of the Nonprofit Sector (paper), 30th Annual Nonprofit Organizations Institute, Austin, Texas, January 16-17, 2013

A Basic Framework of the Nonprofit Sector (ppt)

moore-slider6This seminar paper and presentation) provides a basic framework for the entire nonprofit sector, explaining the differences between private foundations and public charities and briefly discussing other types of nonprofit entities. In addition, this paper lays out the various types of structures and nonprofit entities and discusses choice of form. Finally, this paper discusses end of life issues of nonprofit organizations as well.

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.