Source: https://www.americanbar.org/content/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/familyfoundation.html
Timestamp: 2017-10-21 16:01:13
Document Index: 568246186

Matched Legal Cases: ['§ 509', '§ 509', '§ 170', '§ 509', '§ 170', '§ 509', '§ 509', '§ 4941', '§ 501', '§ 501', '§ 4958', '§ 501', '§ 170']

An organization organized and operated for charitable purposes is presumed to be a private foundation unless it demonstrates that it fits one of the exceptions listed in Code § 509(a): (1) organizations that are, by definition or activity, public charities (described in Code § 509(a)(1) and Code § 170(b)(1)(A)(i)-(v)); (2) publicly supported charities (Code § 509(a)(2) or Code § 170(b)(1)(A)(vi)); (3) supporting organizations (Code § 509(a)(3)); or (4) organizations organized and operated exclusively to test for public safety (Code § 509(a)(4)).
Organization of a Private Foundation -- Form of Entity
Organizational documents should be in compliance with applicable state law. To comply with federal law, the organizational documents should state that the organization is organized and operated exclusively for its exempt purpose and should define the exempt purpose (charitable, educational, or similar charitable purpose). There should be a prohibition upon the earnings of the foundation inuring to any insider and a prohibition upon private benefit. The document should contain a statement that no part of the foundation's activities shall consist of attempts to influence legislation and that it shall not participate in political campaigns. In addition, there should be a statement that the corporation will comply with the requirements of Code § § 4941 through 4945. (Sample language for these trust or corporate provisions can be found in IRS Publication 557, Tax-Exempt Status for Your Organization.)
Form 1023, Application for Recognition of Exemption Under § 501(c)(3) of the Internal Revenue Code should be filed within 15 months from the end of the month of the foundation's organization. An automatic extension allows filing within 27 months of the foundation's organization. Further extension may be granted for reasonable action, good faith, and a showing of no prejudice to the government. If Form 1023 is timely filed, exempt status will relate back to the date of organization. Otherwise, exempt status relates back only to the date of filing of Form 1023. Occasionally, the IRS will request supplemental information about the foundation, especially if the foundation has been funded before the application for exempt status has been filed. For this reason, the author advises clients not to fund until a determination letter is received.
If Form 1023 is approved, the IRS will issue a "determination letter" as evidence that the foundation is exempt as organized under Code § 501(c)(3). Once exempt status is granted, many states grant exemption from state income and franchise taxes once they are provided with a copy of the IRS determination letter. Procedures vary from state to state.
Operation of a Private Foundation -- Restrictions
Private foundations are subject to the following restrictions: (1) a tax of 2% (can be reduced to 1%) of the net investment income of a private foundation for the taxable year (not applicable to operating foundations), (2) restrictions on acts of self-dealing, (3) minimum requirements for distribution of income, (4) restrictions on retention of "excess business holdings," (5) restrictions on investing assets in a manner that jeopardize the carrying out of the exempt purposes, (6) restrictions on expenditures, and (7) tax upon termination of status as a private foundation, unless certain requirements are met. Private foundations are not subject to the intermediate sanctions rules applicable to public charities under Code § 4958. Although beyond the scope of this article, private foundations are subject to other rules related to Code § 501(c)(3) organizations, such as prohibitions upon private inurement or private benefit and taxes on unrelated business income.
. any sale, exchange, or lease of property between the private foundation and the disqualified person;
. lending of money or extension of credit between a private foundation and a disqualified person;
. furnishing of goods, services, or facilities between a private foundation and a disqualified person (unless such goods, services, or facilities are made available to the general public on at least as favorable a basis as they are made to the disqualified person);
. payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person (unless for personal services reasonable and necessary to carry out the exempt purposes and not excessive);
. transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and
. agreement by a private foundation to make any payment of money or other property to a government official other than an agreement to employ such individual for any period after determination of his government service if such individual is terminating his government service within a 90-day period.
As part of its grant making procedures, the private foundation should (1) obtain a copy of the grantee organization's determination letter granting exempt status as a public charity, (2) verify that the grantee is listed in the most current Publication 78, Cumulative List of Exempt Organizations (a searchable version is available online at www.irs.gov), (3) review the grantee's current Form 990, Schedule A, Part IV, to review its proof of non-private status, and (4) file reports, if necessary, regarding the grant's status with the private foundation's annual information return, checking the appropriate box pertaining to expenditure responsibility.
In addition to the restrictions and excise taxes imposed on private foundations, other rules and limitations regarding private foundations make them less attractive to donors. For gifts of cash and non-appreciated property, a donor's income tax deduction is limited to an amount equal to 30% of the donor's adjusted gross income in the taxable year, as opposed to 50% for gifts of cash and other non-appreciated property to public charities and to other foundations that qualify as public charities. Any excess can be carried forward for the next five years. The deduction may be zero, however, if the donor has contributed capital gain property to public charities in excess of the 30% deduction limitation. Corporate contributions are limited to 10% of taxable income with a five-year carry forward of excess contributions. For gifts of appreciated property, a donor's income tax deduction is limited to 20% of the donor's adjusted gross income, as opposed to 30% for gifts of appreciated property to public charities. In addition, gifts of appreciated assets are limited to a deduction of only the donor's basis in the asset, unless the asset is publicly traded stock. Any excess can be carried forward for the next five years. But there is an exception to the deduction rules for gifts to certain private foundations that are treated as pass-through foundations. If a foundation meets the criteria of Code § 170(b)(1)(E)(ii) (pass-through foundation), the donor may receive a deduction as if the gift were made to a public charity. A pass-through foundation is described as any foundation which makes qualifying distributions in an amount equal to 100% of the foundation's contributions for the year before the fifteenth day of the third month following the close of the foundation's taxable year. No special election is necessary; the foundation should just make the appropriate qualifying distributions. To substantiate the higher deduction, the taxpayer must obtain adequate records or other sufficient evidence from the foundation showing that the foundation made the appropriate qualifying distributions. Pass-through treatment of a foundation may be an attractive planning tool for a founder who would be willing to make the required distributions from the foundation during his or her life to receive the 50% deduction, and then further endow the foundation at his or her death.