Private Foundations: A practical Guide to Key Issues, Choices, and Risks

Philanthropy Southwest and the Oklahoma Center for Nonprofits, Oklahoma City, Oklahoma

160910502Consider this paper the “CliffsNotes” to the planning, creation, and operation of private foundations.  If you need to go back to the basics of charitable planning, start here.  [Looking for a reference outline on public charities?  See my paper posted in 2014 titled Article: Public Charity Basics.]

Private Foundations: What Should be Keeping You Up at Night

Philanthropy Southwest, 2014 Annual Conference, Phoenix, Arizona

“Cradle to grave” in scope, this reference outline and presentation incorporate the fundamental factors of the organization, creation, and operation of private foundations from formation to termination and everything in between.  Intended as an overview of planning considerations for the practitioner to help clients define and achieve their philanthropic goals, this is a great resource if you want to learn more about the life cycle of a foundation.

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.