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 20/30/60% 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 long term capital gains property to a “public charity” are valued at the current fair 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)(1) However, contributions of “qualified appreciated stock” (generally publicly traded securities, including mutual funds) to a private foundation are 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. 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 use due diligence and constant follow-up regarding a Foundation’s investments. In addition, fiduciary duty requires that a Foundation with a large endowment diversify its portfolio.
Acts of self-dealing that are specifically prohibited include:
A private foundation and a disqualified person may not engage in any direct or indirect sale, exchange, or leasing of property, regardless of how competitive the price. A lease between a foundation and a disqualified person under which the foundation pays rent (even at below market rates) is generally not allowed. On the other hand, if the foundation merely pays the cost for direct services (e.g. cleaning, telephone, etc.) the transaction would be allowable.
A private foundation may not lend money or extend any other form of credit to a disqualified person. However, a disqualified person may lend money to a foundation, although there must be no interest or other charge, so long as the proceeds are used strictly for charitable purposes.
A disqualified person may be paid only for limited personal services provided and for expenses incurred in carrying out the exempt purposes of the private foundation. The total amount of compensation and reimbursement for expenses must be reasonable.
NOTE: We suggest that counsel should be consulted in advance with regard to any transactions that may raise self-dealing concerns.
The Code provides financial and other sanctions in the event of prohibited transactions and a penalty personally assessed upon the Foundation’s managers.
P.O. Box 98293
Washington, D.C. 20090-8293
Tel. No. (888) 239-5221/(301) 645-7303
Fax No. (301) 843-0159
If you have any questions regarding the matters discussed in this
memorandum, please feel free to contact our office.
1A viable alternative is to donate the property to a Donor Advised Fund (which is generally a public charity.)
2 A “Substantial Contributor” is a person whose aggregate gifts are more than $5,000 and exceed 2% of the total contributions received by the foundation from its inception.