Tuesday, March 16, 2010

The Misunderstood "Foundation"

Tuesday, March 16, 2010
Although I have developed a special affinity for and interest in tax-exempt organizations, my real bread and butter, so to speak, is as a tax professional. And as I look at the calendar, today is March 15. This means we are right in the belly of the tax season beast. I also lost an hour of sleep over the weekend which I am not too happy about.

Corporate returns need to be filed or extended today! Then we get into the stretch run, the march towards April 15. “Into the valley of death……”. No food or water for days. Your family forgets who you are, sometimes intentionally. You get home at night only to find that your 70-pound greyhound (“Roxy”) has taken over your side of the bed, and isn’t moving for anybody. Off to the couch and Seinfeld reruns.

Now you might be asking, what has any of this to do with foundations? I will respond- absolutely nothing! That’s why blogging is so much fun. However, the real point of my tirade is that I haven’t really had the time to focus on a specific topic to blog about. And, with all kidding aside, these blogs are important to me and my non-profit colleagues, as well as our firm. Thus, here’s a little conversation about foundations.

The reason I use the word misunderstood is based on my experiences over the years with individuals who are thinking about, or who are in the process of, forming a charitable organization. About 50% will say that they are forming a charitable foundation, at which time I will put on my “Mr. Smarty Pants” hat and say, “Are you talking about forming a private foundation?” And, even though they may be on the telephone, I can see their face transforming into a large question mark.

Inevitably, they are simply talking about forming a “publicly” supported public charity, not a “privately” supported private foundation. To their defense, we do see many publicly supported charities use the term foundation within the name of the organization. There are also many private foundations that do not have the word foundation as part of their name.

So, when someone is talking to you about a foundation, be sure you know exactly what they are talking about. This is important from an advisory standpoint since each type of charitable organization, whether it be publicly supported or a private foundation, has specific issues, guidelines, etc. that must be addressed and adhered to. For example, after 5 years in existence, a publicly supported charity will need to make sure that it does not fail the public support test for 2 years in a row. A private foundation does not have this concern. However, a private foundation does have to calculate a required distribution each year. This required distribution amount is a percentage of the foundation’s average non-charitable use assets, and the foundation has until the end of the following year to make the distribution.

Private foundations pay tax on their net investment income. Publicly supported charities as a rule do not, unless the income is determined to be unrelated business income. One area where both types of these charitable organizations have to “toe the line” is in regard to situations where a private individual may personally benefit from the organization’s assets or income. Public charities have the private inurement, private benefit and intermediate sanction rules to deal with when these types of transactions arise. Private foundations have the self-dealing rules which are in place to prevent these types of activities.

Well, I could go on and on about private foundations, but it is time to get back to the tax returns and the long march to April 15. Let’s raise a glass to large tax refunds, pleasant client relationships, and getting home before Roxy gets into the bed!


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