A Study on the Financial Results of Charitable Private Foundation Holding the shares of Business Group
Authors:   Asia-Europe Perspective Association, Sin Seong Im , Yoon Jae Won 
Published: June 2018

A private foundation is a nonprofit organization that is privately funded and controlled by few persons such as a wealthy family or a corporation. Private foundations also typically derive their revenue from investment fund managed by its own directors and make grants to other charitable organizations rather than operate their own programs. Because a private foundation maintain or aid charitable, educational, religious, or other activities serving the public good substitute for government, the extensive tax exemptions are allowed by law. However, it has been concerned for many years that some private foundations are ostensively formed and used as tax shelters for a wealthy family or a corporation rather than for the charitable purposes. Thus current tax law has various rules to prevent the abuse of tax benefit of private foundations, but still there is concern that they are not ineffective.
One of main concerns is that a private foundations is used as a holding company for a owner or parent company without paying gift taxes. A private foundation can receive stocks of business enterprise as tax-free gifts from its founder, and the founder of a private foundation can control or make an influence on business enterprise. Thus current gift tax law limits the ownership of private foundation in a single business enterprise to 5%(10% if a private foundation is fulfilled with honest tax payer’s conditions). Also, gift tax law limits the combined ownership of private foundation in business group to 30%(50% if a private foundation is fulfilled with honest tax payer’s conditions). If there is effective regulation, the stocks benefited from gift tax exemption could be lacked in a private foundation and never be used for charitable purpose.
This study reviews current accounting standards and tax law for charitable organization and analyze the financial characteristics of charitable private foundation holding the shares of business groups based on the financial data.
The findings are summarized as follows: first, the average stock ownership ratio of private foundation owning business group stocks was 2.28%, and the stock ownership ratio for total assets was 40.35%. Private foundation holds 83% of assets for business purpose and majority of assets are consist of stocks and other financial assets. In contrast, comparison charitable organization holds 90% of total assets for charitable purpose. Second, private foundation makes operating revenue more from its own business, while comparison charitable organization is relied more on donation. Third, expenses to unrestricted net assets ratio for private foundation is 585%, significantly higher than 142% for comparison charitable organization. It shows that the private foundation may not make enough charitable expenditure and used for private benefit to avoid tax rather than for the charitable purposes.
Based on these empirical results, we argue that a more strict rules are need to insure that their charitable purposes are fulfilled. Regulation of excess business holdings of stocks imposing gift taxes is still required and their activities should be more closely watched. we also propose the legislative changes of more strict set of rules governing private foundation operations, based on principal of public purpose fulfillment and financial ratio requirement. To prevent accumulating money without tax and promote charitable activities, the rule which require foundations to meet the certain ratio of mandatory charitable expenditure is need to add to tax law. Furthermore, it is required to improve the accounting and public disclosure system for non-profit corporations, providing more reliable and comparable information for the public donors and regulators.