Private Foundations

BRUCE R. HOPKINS (Kansas City MO) is a senior partner with the firm Polsinelli Shughart PC. He is also the author of more than 35 books, including The Law of Tax-Exempt Organizations, 10e, The Law of Fundraising, 4e, Nonprofit Law for Colleges and Universities, Nonprofit Governance, and Nonprofit Law Made Easy, as well as the monthly newsletter Bruce R. Hopkins' Nonprofit Counsel, all published by Wiley. JODY BLAZEK, CPA, (Houston TX) is a partner in Blazek & Vetterling, LLP, an accounting firm that focuses on financial planning, tax compliance, and auditing for tax-exempt organizations and the individuals who create, fund, and work for them.

Preface xiii Book Citations xix 1 Introduction to Private Foundations 1 1.1 Private Foundations: Unique Organizations 1 1.2 Definition of Private Foundation 5 1.3 History and Background 6 1.4 Private Foundation Law Primer 9 1.5 Statistical Profile 16 1.6 Foundations in Overall Exempt Organizations Context 17 1.7 Definition of Charity 18 1.8 Operating for Charitable Purposes 19 1.9 Organizational Rules 24 1.10 Private Foundation Sanctions 26 2 Starting and Funding a Private Foundation 33 2.1 Choice of Organizational Form 33 2.2 Funding a Foundation 36 2.3 Estate Planning Principles 38 2.4 Foundations and Planned Giving 39 2.5 Acquiring Recognition of Tax-Exempt Status 44 2.6 Special Requirements for Charitable Organizations 104 2.7 When to Report Back to the IRS 107 3 Types of Private Foundations 117 3.1 Private Operating Foundations 117 3.2 Conduit Foundations 139 3.3 Common Fund Foundations 141 3.4 Research and Experimentation Funds 142 3.5 Other Types of Foundations 143 3.6 Nonexempt Charitable Trusts 144 3.7 Split-Interest Trusts 147 3.8 Foreign Private Foundations 149 4 Disqualified Persons 153 4.1 Substantial Contributors 153 4.2 Foundation Managers 158 4.3 Certain 20 Percent Owners 159 4.4 Family Members 161 4.5 Corporations or Partnerships 162 4.6 Trusts or Estates 162 4.7 Private Foundations 163 4.8 Governmental Officials 163 4.9 Terminating Disqualified Person Status 166 5 Self-Dealing 169 5.1 Private Inurement Doctrine 171 5.2 Private Benefit Doctrine 174 5.3 Definition of Self-Dealing 180 5.4 Sale, Exchange, Lease, or Furnishing of Property 184 5.5 Loans and Other Extensions of Credit 196 5.6 Payment of Compensation 200 5.7 Indemnification and Insurance 221 5.8 Uses of Income or Assets by Disqualified Persons 227 5.9 Sharing Space, People, and Expenses 238 5.10 Payments to Government Officials 243 5.11 Indirect Self-Dealing 245 5.12 Property Held by Fiduciaries 251 5.13 Early Terminations of Charitable Remainder Trusts 256 5.14 Additional Exceptions 257 5.15 Issues Once Self-Dealing Occurs 260 6 Mandatory Distributions 273 6.1 Distribution Requirements In General 273 6.2 Assets Used to Calculate Minimum Investment Return 275 6.3 Measuring Fair Market Value 285 6.4 Distributable Amount 294 6.5 Qualifying Distributions 297 6.6 Distributions to Certain Supporting Organizations 319 6.7 Satisfying the Distribution Test 322 6.8 History of the Mandatory Distribution Requirement 329 7 Excess Business Holdings 335 7.1 General Rules 335 7.2 Permitted and Excess Holdings 341 7.3 Functionally Related Businesses 347 7.4 Rules Applicable to Certain Supporting Organizations 350 7.5 Rules Applicable to Donor-Advised Funds 350 7.6 Excise Taxes on Excess Holdings 351 8 Jeopardizing Investments 353 8.1 General Rules 354 8.2 Prudent Investments 359 8.3 Program-Related Investments 373 8.4 Investment Frauds 379 8.5 Excise Taxes for Jeopardizing Investments 382 9 Taxable Expenditures 387 9.1 Legislative Activities 389 9.2 Political Campaign Activities 399 9.3 Grants to Individuals 402 9.4 Grants to Public Charities 424 9.5 Grants to Foreign Organizations 434 9.6 Expenditure Responsibility 440 9.7 Internet and Private Foundations 459 9.8 Spending for Noncharitable Purposes 465 9.9 Distributions to Certain Supporting Organizations 468 9.10 Excise Tax for Taxable Expenditures 468 10 Tax on Investment Income 477 10.1 Rate of Tax 478 10.2 Reducing the Excise Tax 480 10.3 Formula for Taxable Income 488 10.4 Reductions to Gross Investment Income 501 10.5 Foreign Foundations 509 10.6 Exemption from Tax on Investment Income 510 10.7 Legislative Proposal 511 11 Unrelated Business Income 513 11.1 General Rules 514 11.2 Exceptions 525 11.3 Rules Specifically Applicable to Private Foundations 532 11.4 Unrelated Debt-Financed Income 543 11.5 Calculating and Reporting the Tax 547 12 Tax Compliance and Administrative Issues 553 12.1 Successful Preparation of Form 990-PF 558 12.2 Reports Unique to Private Foundations 575 12.3 Compliance Issues 595 13 Termination of Foundation Status 669 13.1 Voluntary Termination 671 13.2 Involuntary Termination 673 13.3 Transfer of Assets to a Public Charity 674 13.4 Operation as a Public Charity 681 13.5 Mergers, Split-Ups, and Transfers between Foundations 683 13.6 Termination Tax 698 13.7 Abatement 699 14 Charitable Giving Rules 701 14.1 General Rules 701 14.2 Gifts of Appreciated Property 704 14.3 Deductibility of Gifts to Foundations 706 14.4 Deduction Reduction Rules 707 14.5 Planned Giving Revisited 710 14.6 Administrative Considerations 710 15 Private Foundations and Public Charities 715 15.1 Distinctions between Public and Private Charities 716 15.2 Evolution of Law of Private Foundations 719 15.3 Organizations with Inherently Public Activity 721 15.4 Publicly Supported Organizations Donative Entities 727 15.5 Service Provider Organizations 743 15.6 Comparative Analysis of the Two Categories of Publicly Supported Charities 754 15.7 Supporting Organizations 757 15.8 Change of Public Charity Category 784 15.9 Noncharitable Supported Organizations 786 15.10 Relationships Created for Avoidance Purposes 786 15.11 Reliance by Grantors and Contributors 787 15.12 Other Rules 792 15.13 Public Safety Organizations 792 15.14 Termination of Public Charity Status 792 16 Donor-Advised Funds 795 16.1 Basic Definitions 796 16.2 General Concept of a Gift 797 16.3 Types of Donor Funds 799 16.4 IRS Challenges to Donor Funds 802 16.5 Prohibited Material Restrictions 803 16.6 Department of Justice Position 808 16.7 Public Charity Status of Funds 809 16.8 Interrelationship of Private Foundation Rules 810 16.9 Statutory Criteria 812 16.10 Department of Treasury Study 816 16.11 Congressional Research Service Study 816 17 Corporate Foundations 821 17.1 Corporate Foundation Overview 821 17.2 Reasons for Establishment of a Corporate Foundation 822 17.3 Private Inurement Doctrine 823 17.4 Disqualified Persons Rules 824 17.5 Self-Dealing Rules 825 17.6 Other Private Foundations Rules 833 About the Authors 837 About the Online Resources 841 Index 843