The Legal and Regulatory Framework Governing Foundations Presented By: Douglas N. Varley, Esq. Caplin & Drysdale, Chartered Washington, DC

Section 501(c)(3) Foundations are tax-exempt charities Operate exclusively for charitable purposes No private inurement No partisan political activity No “substantial” lobbying

Tax Benefits Donor Foundation Immediate income tax deduction (30% AGI) Estate tax deduction Foundation No corporate income tax

Foundation Rules History Tax Reform Act of 1969 Congressional Concerns Avoidance of Estate Tax Delayed distributions Ways and Means Hearings Tax Reform Act of 1969

Foundation Rules Excise tax on investment income (2%/1%) Prohibition against self-dealing Mandatory distributions Limits on business ownership Investment restrictions Program restrictions

Basic Penalty Structure Two-tiered penalty tax on the foundation Small tax on violation Big tax if violation is not corrected Two-tiered penalty tax on officers and directors who approved violation and oppose correction

Self-Dealing No financial transactions between a foundation and its “disqualified persons” Donors, officers, directors, family members, related entities Exception for personal services Compensation may not be excessive relative to market for similar services

Mandatory Distributions A foundation must spend 5% of its assets on charitable purposes every year Grants count Direct charitable programs count Reasonable administrative expenses count (currently)

Excess Business Holdings A foundation and its disqualified persons cannot own more than 20% of a “business enterprise.”

Jeopardizing Investments Foundations are not permitted to make excessively risky investments Prudent investor rule

Program Restrictions Lobbying Partisan electioneering (voter registration) Grants for travel, study, and similar purposes Grants to organizations Noncharitable expenditures

IRS Audits Chance of an IRS audit is not high but getting higher Market segment study

The Legal and Regulatory Framework Governing Foundations Presented By: Douglas N. Varley, Esq. Caplin & Drysdale, Chartered Washington, DC