Unique Issues of Private Foundations

Private foundations are an important source of social capital for our hospitals, schools, religious organizations, and public charities. Private foundations typically do not carry out charitable activities of their own, but use their extensive resources to make grants to public charities. Public charities are those charitable organizations that have a broad base of philanthropic support from the general public or significant income related to the performance of the organizations' exempt purposes. In contrast, private foundations are typically funded by one or a few families or corporations, and derive the bulk of their new funds from investments. The Ford Foundation, the Rockefeller Foundation, the Microsoft Foundation, and the Meadows Foundation of Texas are examples of private foundations.

All charitable organizations are defined to be private foundations unless they are specifically excluded as some other type of charity such as churches, schools, hospitals or publicly supported social welfare organizations. Most charitable organizations prefer not to be classified as a private foundation. We work closely with our public charity clients to ensure that they are structured and operated to continue to qualify as other than a private foundation. Exclusion from private foundation status depends on sources and types of income, and organizational structure.

Private foundations are subject to a greater degree of oversight by the Internal Revenue Service. They are also subject to a series of special excise taxes enacted to ensure that foundation resources are annually made available to public charities. Significantly, rates for many of these excise taxes were doubled by the Pension Protection Act of 2006, effective for taxable years beginning after August 17, 2006. In addition, annual contributions to private foundations are subject to more restrictive limitations than donations to public charities.

Certain private foundations do conduct their own charitable activities. These private operating foundations are hybrid organizations in that they have some characteristics of a private foundation and other characteristics of a public charity. We are familiar with these organizations and have used this format successfully to meet our clients' objectives.

Private foundations are entirely appropriate for the purposes for which they were established. They play a vital role, not only in making grants to public charities, but also in family, estate, and transgenerational planning for high net worth families.

One of our roles in serving private foundation clients is to help them avoid exposure to the special excise taxes on improper operation and to ensure that they meet all reporting and disclosure requirements. The tax law regarding private foundations is complex and currently under Congressional review. The current law was written in 1969 to curb abuses in the use of family controlled charitable organizations. New abuses are occurring today and invite increased oversight by the Internal Revenue Service. We are familiar with the complexities and nuances of that law and its proposed revisions and guide our clients accordingly.

©2008 Ronnie C. McClure, PhD, CPA