Table of Contents

Preface ix

Book Citations xi

1 Introduction to Private Foundations 1

  1.1 Private Foundations: Unique Organizations 1

  1.2 Definition of Private Foundation 2

  1.4 Private Foundation Law Primer 2

  1.5 Foundations in Overall Exempt Organizations Context 2

  1.6 Definition of Charity 2

  1.7 Operating for Charitable Purposes 2

  1.9 Private Foundation Sanctions 3

  1.10 Statistical Profile 11

  1.11 Private Foundations and Law 50 Years Later 11

2 Starting, Funding, and Governing a Private Foundation 17

  2.1 Choice of Organizational Form 17

  2.3 Estate Planning Principles 17

  2.4 Foundations and Planned Giving 17

  2.5 Acquiring Recognition of Tax-Exempt Status 18

  2.6 Special Requirements for Charitable Organizations 19

  2.7 When to Report Back to the IRS 19

3 Types of Private Foundations 21

  3.1 Private Operating Foundations 21

  3.3 Conduit Foundations 22

  3.8 Split-Interest Trusts 22

  3.9 Foreign Private Foundations 22

4 Disqualified Persons 25

  4.1 Substantial Contributors 25

  4.2 Foundation Managers 25

  4.3 Certain 20 Percent Owners 25

  4.4 Family Members 26

  4.5 Corporations or Partnerships 26

  4.6 Trusts or Estates 26

5 Self-Dealing 27

  5.1 Private Inurement Doctrine 27

  5.2 Private Benefit Doctrine 28

  5.3 Definition of Self-Dealing 31

  5.3a Excess Compensation Tax 31

  5.4 Sale, Exchange, Lease, or Furnishing of Property 37

  5.5 Loans and Other Extensions of Credit 37

  5.6 Payment of Compensation 38

  5.8 Uses of Income or Assets by Disqualified Persons 39

  5.11 Indirect Self-Dealing 42

  5.12 Property Held by Fiduciaries 50

  5.14 Additional Exceptions 58

  5.15 Issues Once Self-Dealing Occurs 58

6 Mandatory Distributions 65

  6.1 Distribution Requirements—in General 65

  6.2 Assets Used to Calculate Minimum Investment Return 66

  6.3 Determining Fair Market Value 66

  6.5 Qualifying Distributions 69

7 Excess Business Holdings 71

  7.1 General Rules 71

  7.2 Permitted and Excess Holdings 73

  7.3 Functionally Related Businesses 74

  7.7 Excise Taxes on Excess Holdings 74

8 Jeopardizing Investments 75

  8.2 Prudent Investments 75

  8.3 Program-Related Investments 75

9 Taxable Expenditures 77

  9.1 Legislative Activities 77

  9.2 Political Campaign Activities 78

  9.3 Grants to Individuals 78

  9.4 Grants to Public Charities 82

  9.5a Funding of Employee Hardship Programs 83

  9.6 Grants to Foreign Organizations 88

  9.8 Internet and Private Foundations 88

  9.9 Spending for Noncharitable Purposes 88

  9.10a Distributions to Group Exemption Organizations 90

  9.11 Excise Tax for Taxable Expenditures 92

10 Tax on Investment Income 93

  10.1 Rate of Tax 93

  10.3 Formula for Taxable Income 93

  10.5 Foreign Foundations 94

11 Unrelated Business Activity 95

  11.1 General Rules 95

  11.2 Exceptions 95

  11.3 Rules Specifically Applicable to Private Foundations 96

  11.4 Unrelated Debt-Financed Income Rules 97

  11.5 Calculating and Reporting the Tax 98

12 Tax Compliance and Administrative Issues 101

13 Termination of Foundation Status 103

  13.1 Voluntary Termination 103

  13.3 Transfer of Assets to a Public Charity 104

  13.4 Operation as a Public Charity 104

  13.6 Termination Tax 106

14 Charitable Giving Rules 107

  14.1 Concept of Gift 107

  14.2 Basic Rules 108

  14.4 Deductibility of Gifts to Foundations 108

  14.5 Qualified Appreciated Stock Rule 109

  14.8 Planned Giving Revisited 109

  14.9 Administrative Considerations 109

15 Private Foundations and Public Charities 115

  15.2 Evolution of Law of Private Foundations 115

  15.3 Organizations with Inherently Public Attributes 115

  15.4 Publicly Supported Organizations—Donative Entities 118

  15.5 Service Provider Organizations 119

  15.7 Supporting Organizations 120

  15.8 Change of Public Charity Category 121

  15.9 Noncharitable Supported Organizations 122

16 Donor-Advised Funds 123

  16.1 Basic Definitions 123

  16.3 Types of Donor Funds 123

  16.7 Public Charity Status of Funds 123

  16.9 Statutory Criteria 123

  16.12 Tax Regulations 124

  16.13 DAF Statistical Portrait 124

  16.14 Criticisms and Commentary 126

17 Corporate Foundations 135

  17.2 Reasons for Establishment of a Corporate Foundation 135

  17.3 Private Inurement Doctrine 135

  17.3A Private Benefit Doctrine 135

  17.5 Self-Dealing Rules 136

  17.6 Other Private Foundations Rules 137

  17.7 Tax on Excess Compensation: Potentially Applicable Exceptions Illustrated 137

Table of Cases 143

Table of IRS Revenue Rulings and Revenue Procedures 149

Table of IRS Private Determinations Cited in Text 153

Table of IRS Private Letter Rulings, Technical Advice Memoranda, and General Counsel Memoranda 161

About the Author 177

About the Online Resources 179

Cumulative Index 181

About the Author

BRUCE R. HOPKINS practices, with the Bruce R. Hopkins Law Firm, LLC, in the field of tax-exempt organizations, including private foundations, and is widely recognized as one of the country's leading lawyers in the field.

JODY BLAZEK is a partner in Blazek & Vetterling, a CPA firm focusing on tax and financial planning for exempt organizations and the individuals who create, fund, and work with them and is recognized as a leading accountant in the field.