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Strategic
Source Online
October 2004
Planning Ideas: Five Common Foundation Mistakes
With appreciation to Jeffrey D. Haskell, Senior Vice President, Foundation Source, whose article in Trusts and Estates in April, 2004, was the basis for this checklist, here are some important traps to avoid. For even more detail, you will want to read the entire article by Mr. Haskell. Next month, we’ll give you another five to remember.
- Providing direct scholarship grants. While a foundation may qualify to give scholarships to individuals that it selects, it may only do so if it has been pre-qualified by the IRS. Most foundations choose to fund public charities and educational institutions that make the selections of scholarship recipients. Under this procedure, advance approval is not required. However, to fund scholarships directly, the foundation must demonstrate that the criteria and procedure will be objective and non discriminatory. If the IRS does not contact the foundation within 45 days of receiving the request, the foundation may proceed.
- Paying personal pledges with foundation funds. We’ve looked at this before. Short answer – never do it. This constitute self-dealing. However, the foundation’s grant obligation to an organization would be reduced by the individual paying all or any portion directly. In other words, it’s ok for an individual to offset a foundation obligation, but not the reverse.
- Hosting fund raising events. Just as with any charitable organization, if the foundation is hosting a fund raising event, like a golf tournament, for which a donor derives some personal benefit (playing golf, or attending the dinner), the donor must receive a receipt that reflects the value of the goods or services receives (cost of the green fees or dinner). If the donor fails to receive this receipt before filing his or her personal income tax return, the deduction may well be lost.
- Validating the tax status of the grantee before making the grant. Most foundations request a copy of the IRS determination letter that confirms that tax exempt status of the grant applicant. But this letter, which may be years old, may not necessarily be current. You can confirm the status by reviewing IRS Publication 78, published by the IRS quarterly. Or, you may go on line to www.guidestar.org and do your research there. Sometimes a charity, especially a church organization, is not listed in Pub 78, because it’s part of the umbrella exemption of the parent church body. Some organizations are tax exempt but are not qualified as a public charity. There are actually 26 different categories of tax exempt entities under Internal Revenue Code section 501, and public charities are listed under only one (section 501(c)3). You should always request the current status of the organization at the time of the grant request and prior to distributing any grant proceeds. You may also want to require that the grantee notify you immediately upon any change in status.
- Attending the big gala under a foundation grant. Here’s another common mistake that we’ve discussed before. This problem became a big issue for one of the largest commercially-sponsored donor advised funds, and was one of the targets of the IRS audit. If a foundation makes a contribution for a charity’s fund raising dinner, the IRS will permit a representative of the foundation to attend, if it is related to the representative’s responsibility to the foundation and intended to show support for the charity. But it is not permitted to bring friends, associates, and other guests, which might otherwise be available because of the size of the contribution. In other words, one attendee (and presumably a spouse or escort) is acceptable, but no others. The risk, however, is still great, and should probably be avoided. The foundation should have a formal policy on this procedure. Many foundations use their tickets to enable attendance of groups that might not otherwise have the resources to attend, such as students, or employees of the charity, etc.
Philanthropy Update:
What effect on philanthropy would result if the estate tax were repealed?
This is a hotly debated question, and one which has drawn a wide range of opinions and conflicting research. The latest study was issued in July by the Congressional Budget Office (CBO). Under the findings of the author of this study, who works in the CBO’s Tax Analysis Division, raising the amount of wealth exempt from estate tax to either $2.0 million or $3.5 million would reduce charitable giving by less than 3 percent. However, if the estate tax were repealed permanently, it is estimated that it would reduce the level of charitable lifetime contributions and bequests from 6 percent to 12 percent. While this may have serious implications for the non-profit world, it may help to encourage Congress to proceed, because the reduced contributions would increase the revenues that will result from higher income taxes.
A previous study, published in 2002 by David Joulfaian, estimated that the estate tax repeal would cause charitable bequests to decline by about 12 percent. Jon Bakija published a study in 2003, estimated that the repeal would reduce charitable bequests by 37 percent. The author of the current study applied their analytical methods to simulate the effect on charitable deductions using actual 1999 and 2000 data.
Announcement: New Certificate Program in Foundation Management
IFF Advisors, Inc., and the Fielding Graduate Institute, announce a new program in foundation management.
Fielding, a premier distance education provider and IFF Advisors, one of the largest and most experienced foundation consulting companies in the nation, have created a program that offers a unique mix of face-to-face and online discussion, covering the full range of traditional management issues, including organizational design and governance, grant making, asset management, and administration, as well as the often thorny and unfamiliar challenges of families working together in a shared enterprise.
The program is offered in three distinct modules and each kicks off with a two-day face-to-face group meeting that will include both lecture and small group work, followed by a six week on-line facilitated discussion. Nationally recognized experts at IFF will share their knowledge and skills during each module, while Fielding’s experienced Human & Organization faculty will facilitate the on-line follow-up discussions. Combining rigorous reading and preparation with case studies and field work, this certificate program provides an exciting combination of scholarship and real life experience, designed to enhance the effectiveness and efficiency of foundation management, and to respond to the unique challenges of family philanthropy.
The first module will be held on January 23, 2005, in Santa Barbara.
 Fielding Graduate Institute: Press Release - Back to School: Become a Foundation Expert
Fielding Graduate Institute: Foundation Management Certificate
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