Foundation (United States law)

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A foundation in the United States is a type of charitable organization. Though, the Internal Revenue Code distinguishes between private foundations (usually funded by an individual, family, or corporation) and public charities (community foundations and other nonprofit groups that raise money from the general public). Private foundations have more restrictions and fewer tax benefits than public charities like community foundations.

Contents

History

The two most famous philanthropists of the Gilded Age pioneered the sort of large-scale private philanthropy of which foundations are a modern pillar: John D. Rockefeller and Andrew Carnegie. The businessmen each accumulated private wealth at a scale previously unknown outside of royalty, and each in their later years decided to give much of it away. Carnegie gave away the bulk of his fortune in the form of one-time gifts to build libraries and museums before divesting almost the entirety of his remaining fortune in the Carnegie Foundation and the Carnegie Corporation of New York. Rockefeller followed suit (notably building the University of Chicago) and gave nearly half of his fortune to create the Rockefeller Foundation.

Meanwhile, in 1914, Frederick H. Goff, a well-known banker at the Cleveland Trust Company, sought to eliminate the "dead hand" of organized philanthropy and so created the first community foundation in Cleveland. He created a corporately structured foundation that could utilize community gifts in a responsive and need-appropriate manner. Scrutiny and control resided in the "live hand" of the public as opposed to the "dead hand" of the founders of private foundations. [1]

Starting at the end of World War II, the United States' high top income tax rates spurred a burst of new foundations and trusts, many of which were simply tax shelters. President Harry S. Truman publicly raised this issue in 1950, resulting in a federal law later that year that brought new rigor and definition to the practice. The law did not go very far in regulating tax-exempt foundations, however—a fact made obvious throughout the rest of that decade as financial advisers continued to push the foundation-as-tax-refuge model to wealthy families and individuals. Several attempts at passing a more complete reform during the 1960s culminated in the Tax Reform Act of 1969, which remains the controlling legislation in the United States. [2]

Types

In the United States, an entity with "foundation" in its name is generally expected, in most cases, to be a charitable foundation. Nonetheless, an organization may have the word "foundation" in its name and not be a charitable foundation—though state law may impose restrictions. For example, Michigan permits its use only for nonprofits with "the purpose of receiving and administering funds for perpetuation of the memory of persons, preservation of objects of historical or natural interest, educational, charitable, or religious purposes, or public welfare". [3] The distinction between charitable organizations and non-profit organizations elaborates on this point.

The Internal Revenue Code defines many kinds of non-profit organizations that do not pay income tax. However, only charitable organizations can receive tax-deductible contributions and avoid paying property and sales tax. For instance, a donor would receive a tax deduction for money given to a local soup kitchen if the organization was classified as a 501(c)(3) organization, but not for giving money to the Green Bay Packers, even though the NFL team is a 501(c)(6) non-profit association. [4] Neither a public charity nor a foundation can pay for or participate in partisan political activity, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.

Tax-exempt charitable organizations fall into two categories: public charities and private foundations. A community foundation is a public charity. The US Tax Code in 26 USCA 509 governs private foundations. Meanwhile, 26 USCA 501(c)(3) governs public charities.

Community foundation

Community foundations are instruments of civil society designed to pool donations into a coordinated investment and grant-making facility dedicated mostly to the social improvement of a given place. In other words, a community foundation is like a public foundation. This type of foundation requires community representation in the governing board and grants made to improve the community. Often, a city has a community foundation with a governing board composed of many leaders of the business, religious, and local interests. Grants that the community foundation makes must benefit the people of that city.

Express public involvement and oversight in community foundations allow their classification as public charities rather than private foundations. [5]

Private foundation

Private foundations typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. When a person or a corporation founds a private foundation frequently family members of that person or agents of the corporation are members of the governing board. [6] This limits public scrutiny over the private foundation, which entails unfavorable treatment compared to community foundations.

The differing treatment of private foundations compared to public charities including community foundations is as follows:

Operating and non-operating

For tax purposes, there are a few variants of private foundations. The material difference is between "operating" foundations and "grant-making" foundations. Operating foundations use their endowment to achieve their goals directly. Grant-making foundations use their endowment to make grants to other organizations, which indirectly carry out the goals of the foundation. Operating foundations have preferential tax treatment in a few areas, including allowing individual donors to contribute more of their income and allowing grant-making foundation contributions to count towards the 5% minimum distribution requirement. [7]

Private foundation

The Tax Reform Act of 1969 defined the fundamental social contract offered to private foundations. In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a private foundation must (a) payout at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits.

Administrative and operating expenses count towards the 5% requirement; they range from trivial at small unstaffed foundations, to more than half a percent of the endowment value at larger staffed ones. Congressional proposals to exclude those costs from the payout requirement typically receive much attention during boom periods when foundation endowments are earning investment returns much greater than 5% (such as the late 1990s); the idea typically fades when foundation endowments are shrinking in a down market (such as 2001–2003).

See also

Related Research Articles

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In the United States, federal grants are economic aid issued by the United States government out of the general federal revenue. A federal grant is an award of financial assistance from a federal agency to a recipient to carry out a public purpose of support or stimulation authorized by a law of the United States.

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<span class="mw-page-title-main">Tides Foundation</span> American public charity and fiscal sponsor

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A foundation is a type of nonprofit organization or charitable trust that usually provides funding and support to other charitable organizations through grants, while also potentially participating directly in charitable activities. Foundations encompass public charitable foundations, like community foundations, and private foundations, which are often endowed by an individual or family. Nevertheless, the term "foundation" might also be adopted by organizations not primarily engaged in public grantmaking.

<span class="mw-page-title-main">Fundraising</span> Process of gathering donations

Fundraising or fund-raising is the process of seeking and gathering voluntary financial contributions by engaging individuals, businesses, charitable foundations, or governmental agencies. Although fundraising typically refers to efforts to gather money for non-profit organizations, it is sometimes used to refer to the identification and solicitation of investors or other sources of capital for for-profit enterprises.

<span class="mw-page-title-main">Charitable organization</span> Nonprofit organization with charitable purpose

A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being.

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<span class="mw-page-title-main">Financial endowment</span> Legal structure for managing investments

A financial endowment is a legal structure for managing, and in many cases indefinitely perpetuating, a pool of financial, real estate, or other investments for a specific purpose according to the will of its founders and donors. Endowments are often structured so that the inflation-adjusted principal or "corpus" value is kept intact, while a portion of the fund can be spent each year, utilizing a prudent spending policy.

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In the United States, a donor-advised fund is a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals. To participate in a donor-advised fund, a donating individual or organization opens an account in the fund and deposits cash, securities, or other financial instruments. They surrender ownership of anything they put in the fund, but retain advisory privileges over how their account is invested, and how it distributes money to charities.

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<span class="mw-page-title-main">Supporting organization (charity)</span> Legal category of charity in the United States

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<span class="mw-page-title-main">Private foundation</span> Type of charitable organization

A private foundation is a tax-exempt organization that does not rely on broad public support and generally claims to serve humanitarian purposes.

Until 1969, the term private foundation was not defined in the United States Internal Revenue Code. Since then, every U.S. charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a "private foundation" unless it demonstrates to the IRS that it falls into another category such as public charity. Unlike nonprofit corporations classified as a public charity, private foundations in the United States are subject to a 1.39% excise tax or endowment tax on any net investment income.

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The Commission on Private Philanthropy and Public Needs, better known as the Filer Commission, was formed in 1973 to study philanthropy, the role of the private sector in American society, and then to recommend measures to increase voluntary giving. Organized as a privately supported citizen's board, the Commission came into being through the efforts of John D. Rockefeller III, Wilbur D. Mills, George P. Shultz, and William E. Simon. The selection of participants on the Commission reflected a desire for diversity of experience and opinions and included heads of religious and labor groups, former cabinet secretaries, corporate and Foreign Securities Corporation and President of Metropolitan Museum of Art.

  1. Edwin D. Etherington, Former President of Wesleyan University and Trustee of Alfred P. Sloan Foundation.
  2. Bayard Ewing, Tillinghast, Collins and Graham and Vice Chairman of United Way of America.
  3. Frances Tarlton Farenthold, Past Chairperson of National Women's Political Caucus.
  4. Max M. Fisher, Chairman of United Brands Company and Honorary Chairman of United Foundations.
  5. Reverend Raymond J. Gallagher, Bishop of Lafayette-in-Indiana.
  6. Earl G. Graves, Publisher of Black Enterprise and Commissioner of Boy Scouts of America.
  7. Paul R. Haas, President and Chairman of Corpus Christi Oil and Gas Company and Trustee of Paul and Mary Haas Foundation.
  8. Walter A. Haas Jr., Chairman of Levi Strauss and Company and Trustee of the Ford Foundation.
  9. Philip M. Klutznick, Klutznick Investments and Chairman of Research and Policy Committee and Trustee of Committee for Economic Development.
  10. Ralph Lazarus, Chairman of Federated Department Stores, Inc. and Former National Chairman of United Way of America.
  11. Herbert E. Longenecker, President Emeritus of Tulane University and Director of United Student Aid Funds.
  12. Elizabeth J. McCormack, Special Assistant to the President of Rockefeller Brothers Fund, Inc.
  13. Walter J. McNerney, President of Blue Cross Association.
  14. William H. Morton, Trustee of Dartmouth College.
  15. John M. Musser, President and Director of General Service Foundation.
  16. Jon O. Newman, Judge, U.S. District Court and Chairman of Hartford Institute of Criminal and Social Justice.
  17. Graciela Olivarez, State Planning Officer and Director of Council on Foundations, Inc.
  18. Alan Pifer, President of Carnegie Corporation of New York.
  19. George Romney, Chairman of the National Center for Voluntary Action.
  20. William Matson Roth, Regent of University of California and Chairman of San Francisco Museum of Art.
  21. Althea T. L. Simmons, Director for Education Programs of the NAACP Special Contribution Fund.
  22. Reverend Leon H. Sullivan, Pastor of Zion Baptist Church, Philadelphia.
  23. David B. Truman, President of Mount Holyoke College.

Western Indiana Community Foundation ("WICF") was incorporated on November 30, 1990 for the betterment of Fountain County, Indiana and Vermillion County, Indiana and its citizens. The community foundation is a U.S. registered 501(c)(3) non-profit charity.

<span class="mw-page-title-main">Philanthropy in the United States</span> Overview article

Philanthropy in the United States is the practice of voluntary, charitable giving by individuals, corporations and foundations to benefit important social needs. Its long history dates back to the early colonial period, when Puritans founded Harvard College and other institutions. Philanthropy has been a major source of funding for various sectors, such as religion, higher education, health care, and the arts. Philanthropy has also been influenced by different social movements, such as abolitionism, women’s rights, civil rights, and environmentalism. Some of the most prominent philanthropists in American history include George Peabody, Andrew Carnegie, John D. Rockefeller, Henry Ford, Herbert Hoover, and Bill Gates.

In philanthropy, donor intent is the purpose, sometimes publicly expressed, for which a philanthropist intends a charitable gift or bequest. Donor intent is most often expressed in gift restrictions, terms, or agreements between a donor and donee, but it may also be expressed separately in the words, actions, beliefs, and giving practices of a philanthropist. Donor intent is protected in American law regarding charitable trusts, and trustees' primary fiduciary obligation is to carry out a donor's wishes.

References

  1. ↑ "Cleveland Foundation 100 - Introduction". The Cleveland Foundation Centennial. Retrieved 2019-04-04.
  2. ↑ For more details on that legislative history, see .
  3. ↑ MCL 450.2212(3)
  4. ↑ Those Nonprofit Packers (The New Yorker)
  5. ↑ Council on Foundations overview of Foundation Basics
  6. ↑ Olk, Jennifer; Wendy Richards; Godfrey & Kahn S.C. (December 25, 2013). "Choosing the Right Charitable Vehicle: A Comparison of Private Foundations, Supporting Organizations, and Donor Advised Funds". The National Law Review. Retrieved January 2, 2014.
  7. ↑ IRS Overview of Types of Foundations

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