Foundation Source has developed a 15-question assessment tool to help private foundations identify activities that could increase the foundation’s exposure to risk. This useful resource may be accessed by clicking here.
The excess business holdings rules (IRC Section 4943) limit the stock a private foundation may hold to 20 percent of a corporation’s voting stock less stock held by its disqualified persons (including trustees, directors, officers, and their family members). A special rule gives a private foundation five years to dispose of any stock that constitutes an excess business holding if it was acquired by gift. In light of the current economy, private foundations may find it difficult to dispose of excess business holdings within this five year period without selling for a substantial discount.
Fortunately, an additional five years may be granted if (1) the foundation made diligent efforts to dispose of the stock, (2) disposition within the initial 5-year period has not been possible, except at a price substantially below fair market value, by reason of such size and complexity or diversity of such holdings, (3) prior to the expiration of the initial 5-year period, the private foundation submits to the IRS and relevant Attorney General a plan for disposing of all of the excess business holdings involved in the extension, and (4) the IRS determines that such plan can reasonably be expected to be carried out before the close of the extension period. In Priv. Ltr. Rul. 201028044, the IRS granted a 5-year extension to a private foundation where the value of its stock had declined by more than 50% and the timing of the foundation’s disposition was affected by federal securities laws. In light of the stock market decline, numerous private foundations may currently be in a similar position. Private foundations faced with the pending deadline to reduce its excess business holdings should expl0re prior to the expiration of the initial 5-year period whether an additional 5-year extension may be available.
A corporate sponsored charitable organization may conduct a scholarship program for the benefit of its sponsoring corporation’s employees and/or children of such employees. Scholarships must be awarded on an objective and non-discriminatory basis. The scholarship program may not be used to induce employment or represent compensation for services, and availability must be limited by non-employment related factors. With respect to a corporate sponsored private foundation, the scholarship selection committee must also be independent from the private foundation and sponsoring corporation, and the scholarship program must be approved in advance by the IRS. See IRS Rev. Proc. 76-47 for additional requirements. If the requirements are satisfied, donors who contribute to the charitable organization are entitled to an income tax deduction and the scholarship payment is not treated as taxable compensation to the employee.
A corporate sponsored charitable organization may conduct disaster relief and emergency hardship assistance programs for the benefit of its sponsoring corporation’s employees. With respect to a corporate sponsored “private foundation” (e.g., where the charitable organization receives substantially all of its support from the corporation), relief may be provided to employees who are victims of any Presidentially declared disaster, which may include an earthquake, flood, hurricane, or tornado. With respect to a corporate sponsored “public charity” (e.g., where the charitable organization receives support from the corporation and employees), relief may be provided to employees who are victims of any Presidentially declared disaster or any emergency hardship resulting from a severe personal crisis, such as a fire, accident, illness, death, or crime.
Relief must be provided based on an objective determination of need and the selection committee should be comprised of individuals who are not in a position to exercise substantial influence over the sponsoring corporation. In addition, the disaster relief and emergency hardship assistance programs cannot be used by the sponsoring corporation to recruit or induce employment or otherwise satisfy an obligation to provide employee benefits. See IRS Publication 3833, Disaster Relief, for additional discussion regarding disaster relief and emergency hardship programs. If the requirements are satisfied, donors who contribute to the charitable organization are entitled to an income tax deduction and the relief payment is not treated as taxable compensation to the employee.
Corporate and family sponsored charitable organizations typically qualify as private foundations because most of their support is provided by the sponsoring corporation or family. Under these circumstances, sponsoring corporations and individuals often limit their donations to cash contributions since the deduction for contributions of appreciated property to a private foundation is generally limited to the cost basis in the property. If the private foundation can qualify as a “conduit” foundation in the year of contribution, however, the amount of the charitable deduction with respect to a donation of appreciated property may equal the fair market value of such property, assuming there is no depreciation recapture with respect to the property.
A private foundation can qualify as a conduit foundation if it (a) satisfies the minimum distribution requirements for the current and all prior years and (b) makes additional distributions in an amount equal to the contributions received (excluding cash) for the year. These requirements may seem difficult to satisfy in light of the large required distribution, however, these requirements may be satisfied by making actual current distributions and/or by electing to treat as current distributions any excess distribution carryovers from the prior five taxable years. See Treas. Reg. § 53.4942(a)-3(c)(2)(iv). Many corporate and family foundations have thousands, possibly millions, of excess distribution carryovers that expire unused each year. The governing body of a private foundation should explore possible uses of such excess distribution carryovers.