I'm in beautiful Seattle for the Fourth Annual Private Foundation National Conference. Day One highlights below:
Primer on private foundations - Jody Blazek
- Motivation for starting a private foundation must be charitable
- Special rules and excise taxes apply to private foundations (n/a to public charities)
- Self-dealing penalties cannot be abated
- The statute of limitations on acts of self-dealing will not run if such acts were not properly disclosed to the IRS
- Important to use professionals to understand when and how the minimum distribution requirement can be reduced to 1 percent
- Less than 100 private foundations make PRIs - see Leveraging the Power of Foundations-An Analysis of Program-Related Investing (IUPUI)
- See Tax Information for Private Foundations (IRS)
Private Foundation Sector Update - King McGlaughon
- The majority group of private foundations (other than the top 5-10% in size) increased their giving during the recession, and their founders/benefactors increased their giving to their private foundations during this time
- Distributions from these private foundations (particularly the $1-10M foundations) from 2008-2011 (through the recession) were about twice the amount of the minimum amounts required
- These "entrepreneurial foundations" are led by individuals who are driven by their charitable motivations (as opposed to more "institutional foundations" that are often set to operate in perpetuity)
Effectively Understanding and Evaluating Grantee Indirect Costs - Panel
- The true cost of running a program includes its direct cost and its fair share of indirect cost
- There is no single definition of "indirect cost"
- Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective
- Indirect costs include both management & general costs AND shared program costs that cannot easily be identified with a specific program or cost objective
- An indirect cost rate is not a measure of program efficacy
- Fundraising for a shortfall in recovery of indirect costs is very difficult
- Because of the way government reimbursements of indirect costs work, raising private foundation grants that do not pay indirect costs can result in the grantee being in a worse financial situation than if it did not accept the foundation grant
- Example of the problem of relying on a single metric and not reviewing multiple metrics in context: Land trust: raises $1M and buys conservation land for $1M. While 100% of funds raised went to directly advance its charitable purpose, its programmatic expense ratio is 0%.
Trends in Philanthropy - Aubrey Haberman
- Proportion of Northwest dollars by subsector in 2010 included: 30% education; 18% human services; 17% international; 12% public benefits; 8% health; 7% environment; 7% arts; 1% religion
Trends in Family Philanthropy - Craig Muska
- "Wealthy American families increasingly are considering family offices — private entities that manage investments, trusts, and other financial planning — to manage their philanthropic giving ...." See Wealthy Families Using Family Offices to Manage Giving (PND)
Excess Business Holdings Rules - Jeffrey Haskell
- Excess business holdings (EBH) rules limit the holdings that a private foundation, together with its disqualified persons (e.g., substantial contributors, insiders like directors and officers, and related persons and entities), may have in a business enterprise.
- The EBH rules are meant to prevent the shifting of a foundation's focus away from its charitable/exempt activities and a foundation's unfair competition with for-profit businesses by taking advantage of a much lower tax rate (1% or 2%).
- See Taxes on Excess Business Holdings (IRS)
Self-dealing Case Studies - panel
- Private foundation self-dealing analysis: (1) Is there value flowing from the foundation to a disqualified person? (2) Is there an exception to self-dealing rules applicable? (3) Is the amount of the transaction excessive? (4) Does the transaction advance the foundation's charitable/exempt purposes?
- Foundation credit cards used for personal purposes creates a self-dealing problem. Be very careful with policies on credit card use (including enforcement of such policies).
- Reimbursement to a disqualified person may be permissible or may be a self-dealing transaction subject to penalties. Consider whether the transaction advances the foundation's charitable/exempt purposes; whether it was reasonable; whether the purchase by the individual was authorized; whether the individual was acting as an agent of the foundation; and/or whether the individual was acting as a lender to the foundation?
- If a disqualified person leases space to a foundation for free (which is okay in and of itself) but is indemnified for fire caused by a foundation employee, the indemnification may be a prohibited self-dealing transaction.
- If a disqualified person leases space to a foundation for free (with respect to rent), but the foundation must pay for associated services, the foundation should pay such service fees directly to vendors. If it pays the foundation, there may be a violation of the self-dealing rules.
- A private foundation may pay a family management company for personal services (like administrative management) without violating self-dealing rules. However, janitorial and maintenance services are not covered under this exception.
- A sponsorship paid 90% by a foundation and 10% by a disqualified person that results in benefits used by a number of people including the disqualified person may be a violation of the self-dealing rules (to the extent that the disqualified person availed himself of a benefit that would not have accrued without the foundation's payment).
These are short summaries of statements made by speakers at a conference regarding highly complex rules that should be discussed with an attorney, CPA or other qualified professional.