This memorandum will attempt to outline certain reporting and compliance obligations relating to private foundations. You should also review a booklet which you may have received from the Internal Revenue Service entitled “Compliance Guide For 501(c)(3) Private Foundations” (Publication 4221PF) (available at www.irs.gov).
There is a hierarchy as to how donations are allocated if donations are made both to public charities and private foundations. Furthermore, to the extent that any of the 20/30/50% limitations are exceeded in any one year, there is a carryover for up to five years.
An important difference with respect to the treatment of private foundations and public charities is that donations of capital gains property to a “public charity” are valued at the current market value, while contributions of capital gains property to private foundations are deemed contributed at the contributor’s cost or other basis (and may have recapture issues). However, contributions of “qualified appreciated stock” (generally publicly traded securities, including mutual funds) to a private foundation are also deemed contributed at fair market value (See IRS Publication 526).
The use of a private foundation in connection with estate planning is a valuable tool. With the possible re-enactment of a substantial estate tax and gift regime in 2011, a private foundation can be used as an estate planning tool to provide continuing support for causes that the testator supported during his life. While the estate will receive a charitable deduction, a bequest to a private foundation allows the trustees of the foundation sufficient discretion as to the amount, timing and recipients of such contributions. You may consider revising your estate and gift plans in light of these considerations.
Recent events have focused the need for private foundation trustees to do due diligence and constant follow-up regarding a Foundation’s investments. In addition, fiduciary duty requires that a Foundation with a large endowment to diversify its portfolio.
The Code provides financial and other sanctions in the event of prohibited transactions and
a penalty personally assessed upon the Foundation’s managers.