The Legal and Regulatory Framework Governing Foundations

1
The Legal and Regulatory Framework Governing
Foundations
Presented By Douglas N. Varley, Esq. Caplin
Drysdale, Chartered Washington, DC
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Section 501(c)(3)

• Foundations are tax-exempt charities
• Operate exclusively for charitable purposes
• No private inurement
• No partisan political activity
• No substantial lobbying

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Tax Benefits

• Donor
• Immediate income tax deduction (30 AGI)
• Estate tax deduction
• Foundation
• No corporate income tax

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Foundation Rules

• History
• Congressional Concerns
• Avoidance of Estate Tax
• Delayed distributions
• Ways and Means Hearings
• Tax Reform Act of 1969

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Foundation Rules

• Excise tax on investment income (2/1)
• Prohibition against self-dealing
• Mandatory distributions
• Limits on business ownership
• Investment restrictions
• Program restrictions

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Basic Penalty Structure

• Two-tiered penalty tax on the foundation
• Small tax on violation
• Big tax if violation is not corrected
• Two-tiered penalty tax on officers and directors
  who approved violation and oppose correction

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Self-Dealing

• No financial transactions between a foundation
  and its disqualified persons
• Donors, officers, directors, family members,
  related entities
• Exception for personal services
• Compensation may not be excessive relative to
  market for similar services

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Mandatory Distributions

• A foundation must spend 5 of its assets on
  charitable purposes every year
• Grants count
• Direct charitable programs count
• Reasonable administrative expenses count
  (currently)

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Excess Business Holdings

• A foundation and its disqualified persons cannot
  own more than 20 of a business enterprise.

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Jeopardizing Investments

• Foundations are not permitted to make excessively
  risky investments
• Prudent investor rule

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Program Restrictions

• Lobbying
• Partisan electioneering (voter registration)
• Grants for travel, study, and similar purposes
• Grants to organizations
• Noncharitable expenditures

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IRS Audits

• Chance of an IRS audit is not high but getting
  higher
• Market segment study

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The Legal and Regulatory Framework Governing
Foundations

Presented By Douglas N. Varley, Esq. Caplin
Drysdale, Chartered Washington, DC