A SIGNATURE PROGRAM OF Indiana Philanthropy Alliance

Transcription

1 A SIGNATURE PROGRAM OF Indiana Philanthropy Alliance

2 STAYING LEGAL WITH DONOR ADVISED FUNDS AND SCHOLARSHIPS Philip M. Purcell, JD Consultant, Indiana Philanthropy Alliance Copyright rights reserved

3 OUTLINE Overview of Tax Exempt Organizations History and Purpose of Pension Protection Act Donor Advised Funds Expenditure Responsibility Best Practices for Scholarship Administration

4 UNDERSTANDING EXPENDITURE RESPONSIBILITY: PENSION PROTECTION ACT OF 2006 SCHOLARSHIP FUND ADMINISTRATION OVERVIEW OF TAX EXEMPT ORGANIZATIONS

5 Section 501(c) Tax Exempt Organizations Mutual Benefit Orgs Public Charities 501(c)(3) Private Foundations 501(c)(3) 501(c)(4)-Civic leagues 501(c)(6)-Business leagues, chambers of commerce, real estate boards 501(c)(7)-Social & recreational clubs 501(c)(8)-Fraternal benefit societies, associations. 501(c)(13)-Credit unions 501(c)(19)-Veterans organizations Traditional Charities 509(a)(1) No Public Support Test: Hospitals Schools Churches Government Public Support Test Required: Community Foundations and Other Publicly Supported Charities Other Publicly Supported Charities 509(a)(2) Public Support Test required Type 1 Supporting Organizations 509(a)(3) Type 2 Type 3 Public Safety Organizations 509(a)(4) Functionally Integrated Non-functionally Integrated

6 TAX CODE NUMBERS MATTER! Your fund agreements reference grants to Internal Revenue Code section 170 and 509 organizations and purposes IRS determination letters for tax exempt organizations reference these same numbers The numbers indicate whether the organization and purpose is charitable and whether expenditure responsibility is required (or not)!

7 TWO TYPES OF TAX EXEMPT ORGANIZATIONS Mutual Benefit Organizations that require expenditure responsibility: 501(c)(4), etc. organizations Public Benefit Organizations/Charities that do not generally require expenditure responsibility: 501(c)(3), 170 and 509 organizations

8 WHAT IS CHARITABLE? Definition of charitable expanded over time to evolve from care for the poor and needy to now include organizations (charities) that serve a public benefit. Mutual benefit organizations serve members and do not generally provide public benefit qualifying as charitable.

9 MUTUAL BENEFIT ORGANIZATIONS 501(c)(4) Civic leagues 501(c)(6) Business leagues, chambers of commerce, real estate boards 501(c)(7) Social and recreational clubs 501(c)(8) Fraternal benefit societies, associations 501(c)(13) Credit unions 501(c)(19) Veterans organizations

10 MUTUAL BENEFIT ORGANIZATIONS Tax exempt No tax on income. Not charitable So no income tax charitable deduction for donors. Note: some exceptions. May perform charitable activities such as grants for scholarships or disaster relief aid. Expenditure responsibility required. May have related 501(c)(3) foundations for charitable activities - Expenditure responsibility is not required for grants to such charitable foundations, assuming you confirm 501(c)(3) status by copy of IRS determination letter and recipients signs grant receipt confirming qualified use of grant funds.

11 PUBLIC BENEFIT ORGANIZATIONS (CHARITIES): SECTION 501(C)(3) REQUIREMENTS 1. Organized and operated exclusively for an exempt purpose (i.e., religious, charitable, scientific, test for public safety, literary or educational ) 2. No private inurement. 3. No substantial amount of lobbying. 4. No political activities.

12 Qualify per 501(c)(3): Presumed to be a private foundation unless proven otherwise Must file 990-PF and fulfill private foundation rules: 1. 5% payout requirement 2. 2% excise tax 3. No lobbying or campaigning 4. No jeopardy investments 5. No self-dealing PRIVATE FOUNDATIONS

13 PUBLIC BENEFIT CHARITIES Organizations described in 501(c)(3) except churches - are presumed private foundations unless proven otherwise. Six categories of public charities pursuant to 501(c)(3) are described in IRC Sec. 509(a)(1) which incorporates by reference IRC Sec. 170(b)(1)(A)(i) to (vi). Two categories of public charities pursuant to 501(c)(3) are described in 509(a)(2) and 509(a)(3).

14 PUBLIC BENEFIT CHARITIES NO PUBLIC SUPPORT TEST Section 509(a)(1): Organizations described in Section 170(b)(1)(A) other than subsections (vii) and (viii) that do not require passing a public support test: Section 170(b)(1)(A)(i): Churches Section 170(b)(1)(A)(ii): Schools Section 170(b)(1)(A)(iii): Hospitals and Medication Research Organizations Section 170(b)(1)(A)(iv): State University Foundations Section 170(b)(1)(A)(v): Governmental Units

15 PUBLIC BENEFIT CHARITIES PUBLIC SUPPORT TEST (INCLUDING COMMUNITY FOUNDATIONS) Section 509(a)(1): Section 170(b)(1)(A)(vi)-Publicly Supported Charities requires a public support test: oone-third of the charity s total support is from the general public. ono one contributor s donation can count toward public support more than 2% of total support.

16 PUBLIC BENEFIT CHARITIES PUBLIC SUPPORT TEST Section 509(a)(2): Other Public Benefit Charities that require a different public support test: o One-third of the charity s total support is from the general public and from fees for services rendered. o Examples: Zoo, Museum, Symphony o No more than one-third of the charity s total support is from investment income and UBIT (unrelated business income).

17 PUBLIC BENEFIT CHARITIES 509(a)(3): Supporting organizations - not a private foundation by virtue of a close and continuing relationship with a public benefit charity and not controlled by a disqualified person.

18 TYPES OF SUPPORTING ORGANIZATIONS Type I: operated, supervised or controlled by the supported organization. Expenditure responsibility may be required. Type II: supervised or controlled in connection with the supported organization. Expenditure responsibility may be required. Type III: operated in connection with the supported organization. Expenditure responsibility is required depending on type of Type III SO.

19 Section 501(c) Tax Exempt Organizations Mutual Benefit Orgs Public Charities 501(c)(3) Private Foundations 501(c)(3) 501(c)(4)-Civic leagues 501(c)(6)-Business leagues, chambers of commerce, real estate boards 501(c)(7)-Social & recreational clubs 501(c)(8)-Fraternal benefit societies, associations. 501(c)(13)-Credit unions 501(c)(19)-Veterans organizations Traditional Charities 509(a)(1) No Public Support Test: Hospitals Schools Churches Government Public Support Test Required: Community Foundations and Other Publicly Supported Charities Other Publicly Supported Charities 509(a)(2) Public Support Test required Type 1 Supporting Organizations 509(a)(3) Type 2 Type 3 Public Safety Organizations 509(a)(4) Functionally Integrated Non-functionally Integrated

20 WHEN IS EXPENDITURE RESPONSIBILITY REQUIRED? Section 501(c) Tax Exempt Organizations Mutual Benefit Orgs Public Charities 501(c)(3) Private Foundations 501(c)(3) 501(c)(4)-Civic leagues 501(c)(6)-Business leagues, chambers of commerce, real estate boards 501(c)(7)-Social & recreational clubs 501(c)(8)-Fraternal benefit societies, associations. 501(c)(13)-Credit unions 501(c)(19)-Veterans organizations Traditional Charities 509(a)(1) No Public Support Test: Hospitals Schools Churches Government Public Support Test: Community Foundations and other publicly supported charities Publicly Supported Charities 509(a)(2) Public Support Test required Type 1 Supporting Organizations 509(a)(3) Type 2 Type 3 Public Safety Organizations 509(a)(4) Expenditure responsibility required. Expenditure responsibility may be required. Functionally Integrated Non-functionally Integrated Expenditure responsibility not required.

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22 UNDERSTANDING EXPENDITURE RESPONSIBILITY: PENSION PROTECTION ACT OF 2006 SCHOLARSHIP FUND ADMINISTRATION PENSION PROTECTION ACT OF 2006 (A.K.A. HR 4 )

23 WHY PENSION PROTECTION ACT OF 2006? Senate Finance Committee review of abuses in the charitable sector: Abuse of donor advised funds Over-valuation of non-cash gifts Control by donors over scholarships Personal benefit by donors Misuse of supporting organizations And other problems!

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25 ABUSE OF DAFS? U.S. v. Mosley, Northern District of California (2003). Charitable income tax deductions claimed for gifts to DAF at National Heritage Foundation. DAF paid tuition for education at private school of donor s child. Criminal tax evasion: jail and financial penalties. Follow rules of PPA for donor advising!

26 Defined Donor Advised Funds ( DAFs ) for the first time Distinguished DAFs from single advised funds and scholarships with donor advising Delineated key aspects of due diligence for expenditure responsibility Created the IRA Charitable Rollover New penalties for improper valuation of non-cash gifts Revised 990 and more! HIGHLIGHTS OF PPA

27 UNDERSTANDING EXPENDITURE RESPONSIBILITY: PENSION PROTECTION ACT OF 2006 SCHOLARSHIP FUND ADMINISTRATION DONOR ADVISED FUNDS

28 PPA DEFINITION OF DONOR ADVISED FUND (A) the term donor advised fund means a fund or account (i) which is separately identified by reference to contributions of a donor or donors, (ii) which is owned and controlled by a sponsoring organization, and (iii) with respect to which a donor (or any person appointed or designated by such donor) has. advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor s status as a donor.

29 EXCEPTIONS TO DAFS: SINGLE FUNDS (B) EXCEPTIONS The term donor advised fund shall not include any fund or account (i) which makes distributions only to a single identified organization or governmental entity, or

30 EXCEPTIONS TO DAFS: SCHOLARSHIP ADVISING (ii) with respect to which a person described in A (iii) advises as to which individuals receive grants for travel, study, or other similar purposes, if (I) such person s advisory privileges are performed exclusively by such person in the person s capacity as a member of a committee all of the members of which are appointed by the sponsoring organization,

31 EXCEPTIONS TO DAFS: SCHOLARSHIP ADVISING (II) no combination of persons described in subparagraph (A)(iii) (or persons related to such persons) control, directly or indirectly, such committee, and

32 EXCEPTIONS TO DAFS: SCHOLARSHIP ADVISING (III) all grants from such fund or account are awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the board of directors of the sponsoring organization, and such procedure is designed to ensure that all such grants meet the requirements of paragraph (1), (2), or (3) of section 4945(g).

33 PPA PLANNING POINTERS Donors who establish donor advised funds, single organization funds and scholarships with donor advising may include individuals, families, corporations and tax exempt organizations. A charitable organization should not accept donor advised funds if its mission does not provide for granting to other charitable organizations. Your community foundation may be more restrictive than the law permits. Example: You may choose not to allow donor advising on investments of a fund.

34 DONOR ADVISING ON INVESTMENTS Permitted by PPA and IRS private letter rulings Not a legal right owned by the donor Be careful with drafting the agreement to avoid conveying a legal right only opportunity to advise or recommend Subject to community foundation due diligence oversight and fiduciary investment duties of Uniform Prudent Management of Institutional Funds Act (UPMIFA)

35 ENDOWED VS. EXPENDABLE DAFS Both are subject to investment, spending and fee policies No mandate to grant a certain amount each year from either Congress declined to require minimum annual payments from DAFs - See An Analysis of Charitable Giving and Donor Advised Funds by Congressional Research Service (2012) DAFs must address designation of residual some or all may be unrestricted (operating support) and/or designated for one or more purposes as endowment or expendable depending on the gift agreement Remember: True endowment is what is agreed to by the donor and the community foundation!

36 PROHIBITED GRANTS FROM DAFS PER PPA Grants to individuals, including both grants made directly to an individual and grants made to an organization, such as a school, for the benefit of a specified individual. Grants to donor, advisors, or related parties. Grants to pay charitable pledges legal obligations of the donor and not the community foundation per IRS PLR Grants for non-charitable purposes. Grants to private foundations are discouraged due to IRS concern that donors will circumvent the less attractive tax benefits for gifts to private foundations.

37 ALLOWED DAF GRANTS Grants to charitable organizations. Grants for charitable purposes. Grants to funds held by charitable organizations that assist a general charitable class of individuals such as scholarship funds and disaster relief funds so long as the donor advisor is not selecting the recipient nor has control over selection of the recipient.

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39 UNDERSTANDING EXPENDITURE RESPONSIBILITY: PENSION PROTECTION ACT OF 2006 SCHOLARSHIP FUND ADMINISTRATION EXPENDITURE RESPONSIBILITY

40 WHAT IS EXPENDITURE RESPONSIBILITY ( ER )? Reasonable and prudent due diligence to confirm that a grant is used for a qualified charitable organization, purposes and/or programs.

41 DISTINGUISH EXPENDITURE RESPONSIBILITY FROM NORMAL DUE DILIGENCE Normal due diligence for grants to 501(c)(3) public charities: 1. Confirm 501(c)(3) status by copy of IRS determination letter or checking Guidestar/IRS site 2. Ask grant recipient to sign letter, receipt or other document verifying that grant was used for qualified charitable purposes and affirming no private inurement or benefit to nonqualified persons or other prohibited uses (e.g., no political campaigning, etc.).

42 WHY IS ER IMPORTANT? Fulfills legal duty that gifts and grants are used for qualified charitable organizations or programs. Fiduciary duty of care owed by staff and board of directors. Satisfies duty of obedience owed to donors, IRS, Attorney General and general public.

43 WHEN IS ER REQUIRED? Grants from Donor Advised Funds Grants from Unrestricted Funds Grants from Field of Interest Funds Fiscal Sponsorships grants to unincorporated associations and non-charitable entities

44 WHEN IS ER REQUIRED? Grants to any mutual benefit or other organization not qualified per 501(c)(3). Grants to a few types (not all) of tax exempt organizations qualified per 501(c)(3) if the donor or related party (family, employees or designees of donor) control: 1. Private Foundations 2. Public Benefit (Charitable) Supporting Organizations or the organizations they support.

45 WHEN IS EXPENDITURE RESPONSIBILITY REQUIRED? Section 501(c) Tax Exempt Organizations Mutual Benefit Orgs Public Charities 501(c)(3) Private Foundations 501(c)(3) 501(c)(4)-Civic leagues 501(c)(6)-Business leagues, chambers of commerce, real estate boards 501(c)(7)-Social & recreational clubs 501(c)(8)-Fraternal benefit societies, associations. 501(c)(13)-Credit unions 501(c)(19)-Veterans organizations Traditional Charities 509(a)(1) No Public Support Test: Hospitals Schools Churches Government Public Support Test: Community Foundations and other publicly supported charities Publicly Supported Charities 509(a)(2) Public Support Test required Type 1 Supporting Organizations 509(a)(3) Type 2 Type 3 Public Safety Organizations 509(a)(4) Expenditure responsibility required. Expenditure responsibility may be required. Functionally Integrated Non-functionally Integrated Expenditure responsibility not required.

46 FIVE STEPS OF ER 1. Pre Grant Inquiry: Reasonable investigation of grantee to confirm that grant will be used for charitable purpose. 2. Written Agreement: Spelling out the charitable purpose that grant will be used for. Also to prohibit non-charitable uses of grant. 46

47 FIVE STEPS OF ER 3. Separate Account: Grantee must keep grant funds in separate financial account from all noncharitable funds. 4. Regular Reports: Grantee must provide regular reports on the charitable use of the granted funds Reporting: Community foundation should report all grants requiring ER including name of grantee, dollar amounts and charitable purposes. Use Schedule O to explain details. 47

48 FISCAL SPONSORSHIP Used to accept gifts and make grants to unincorporated associations and other organizations that are not qualified per IRC 501(c)(3). Requires use of both a fund agreement and fiscal sponsorship agreement with the organization.

49 FISCAL SPONSORSHIP: ACCEPTABLE Pursuant to a fiscal sponsorship agreement, charitable gifts receipted by the community foundation are to be granted to non-charitable organization for a charitable program and purpose. Expenditure responsibility required.

50 FISCAL AGENT: NOT RECOMMENDED Being a fiscal agent means that the community foundation may be legally required to control and be responsible for the actions of the grantee or vice versa. This level of responsibility and potential liability is not recommended.

51 COST/BENEFIT OF ER Fee schedule for funds subject to ER. Consideration of extra time and effort. Size of gift as a consideration. Can you leverage a larger gift or pledge?

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53 UNDERSTANDING EXPENDITURE RESPONSIBILITY: PENSION PROTECTION ACT OF 2006 SCHOLARSHIP FUND ADMINISTRATION SCHOLARSHIP FUND ADMINISTRATION AND PENSION PROTECTION ACT

54 OVERVIEW Important Definitions of Scholarships Philanthropy and Scholarship Funds Best Practices Reporting

55 Scholarships Important Definitions

56 WHAT IS A SCHOLARSHIP? A scholarship or fellowship is tax-free only if: 1. Awarded to a candidate for a degree at an eligible educational institution, and 2. Used to pay qualified education expenses. IRS Publication 970, Tax Benefits for Education. IRS Publication 525, Taxable and Nontaxable Income.

57 CANDIDATE FOR A DEGREE Attend a primary or secondary school, or Pursue a degree at a college/university, or Attend an accredited educational institution that is authorized to provide: 1. A program that is acceptable for full credit toward a bachelor s or higher degree, or 2. A program of training to prepare students for gainful employment in a recognized occupation.

58 ELIGIBLE EDUCATION INSTITUTION Maintains a regular faculty and curriculum, and Normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

59 QUALIFIED (TAX-FREE) EDUCATIONAL EXPENSE Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in the course of instruction.

60 Room and board Travel Research NON-QUALIFIED EXPENSES Clerical help Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. Note: Even if the expense must be paid as a condition of enrollment.

61 An income tax charitable deduction is allowed for gifts that may require reporting of income tax by the beneficiary of the grant so long as the gift is for a charitable purpose. Examples: TAX DEDUCTION ALLOWED Room and board for students enrolled in college Travel for enrolled students or charitable organization staff for training related to their official capacity Operational grants used to pay the salary of the staff of a charitable organization

62 GIFT TAX EXCLUSION $14,000 annual gift tax exclusion for gifts to as many persons as one wishes Gift splitting by a husband and wife permits $28,000 per recipient Any amount paid on behalf of any individual is not a taxable gift if: 1. For tuition only and 2. Paid directly to the educational institution.

63 529 Plans A plan operated by a state or educational institution, with tax advantages to make it easier to save for college and other postsecondary training for a designated beneficiary, such as a child or grandchild. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible. Some states offer income tax credits for 529 Plan contributions. See See

64 Philanthropy and Scholarship Funds

65 WHAT IS A CHARITABLE GIFT? Definition of gift to qualify for a charitable deduction: Intent and an irrevocable transfer with no return benefit or quid pro quo. IRS Publication 526, Charitable Contributions. IRS Publication 1771, Substantiation and Disclosure.

66 DONOR CONTROL DENIES DEDUCTION Deduction denied if charity acts as a conduit of financial benefit for a person chosen by a donor. Private Letter Ruling Earmarking is defined as any oral or written agreement or understanding that funds will be distributed in a specified fashion.

67 CLASS OF RECIPIENTS OR BENEFICIARIES Large and indefinite class. No pre-selection of specific persons. Selection by the educational institution. Donations to a university for scholarships are deductible when the university selects the recipient. Rev. Rul , CB 105.

68 CHARITABLE CLASSES OTHER THAN SCHOLARSHIPS Individual Achievement Awards: to achieve a specific objective, produce a report or other similar product to assist mission of charity. Awards and Prizes to Achieve a Specific Objective: to improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee to assist mission of charity.

69 APPROVED SCHOLARSHIP CLASSES Specific religions Gender specific Geographic location Commonly used: majors, field of study, GPA, class rank, test scores, activities, personal traits, financial need and graduates of a specific school. Descendants of a named individual may be in the class, but not given any preference. Scholarship for a specific surname. But denied when shared by only 603 families.

70 CRITERIA TO AVOID Extensive essays, interviews or other requirements that impose costly administrative burden. Personal traits difficult to evaluate (patriotic, loyal, honest). Traits deemed in violation of the mission, vision and values of organization such as forms of discrimination. Violation of public policy (e.g., race based criteria may be subject to particular scrutiny if evidence of organization-wide discrimination)

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72 Best Practices

73 BEST PRACTICES FOR SCHOLARSHIP AGREEMENTS Signed agreements with donors. Template approved by legal counsel and board of directors. Internal review procedure among staff for approval of scholarship agreements. State scholarship criteria as preferences. Define the class of recipients as broadly as possible.

74 BEST PRACTICES FOR SCHOLARSHIP AGREEMENTS Community foundation retains ultimate control over selection. Avoid involvement of the donor or strictly limit such involvement. Follow PPA procedure if donor advising is involved. Always include variance power in the gift agreement to allow amendments to comply with law and changing needs.

75 Fund agreement has a purpose statement for scholarship and non-scholarship uses. Best to segregate the scholarship fund from the nonscholarship activity using new agreements with donor. If donor is deceased, consider use of variance power with court approval if counsel recommends. Rationale: HYBRID FUNDS 1. Concern for PPA requirements 2. On-going payment obligation to scholarship recipients if the award is renewable 3. Less opportunity for confusion over time

76 BEST PRACTICES FOR SCHOLARSHIPS WITH DONOR ADVISING Annual approval of scholarships with donor advising per the Pension Protection Act. Donor may be an individual or organization Use a form evidencing approval by board of directors including: 1. Names of committee members (showing no donor control) 2. Criteria of scholarship

77 Scholarship Compliance Certification Form

78 Name Qualifications Relationship to Donor Donor, representative of donor s family or representative outside entity Community Foundation Scholarship Compliance Certification Form COMPLIANCE: Pursuant to the Pension Protection Act (PPA) of 2006, the Community Foundation ( CF ) Board of Directors ( Board ) must annually review and approve certain aspects of scholarship funds and/or funds making awards for scholarships. The aspects to be approved by the Board include: criteria for scholarship selection, procedure for selection and selection committee members. Further, the Board should review and approve the qualifications of the selection committee members and their relationship(s) to the scholarship fund donor. Selection committee members must disclose that neither they, nor their family or staff, are scholarship applicant(s). Donors, donor representatives, and/or representatives of outside entities (e.g., high schools, service clubs) may review applications and provide suggested ranking for recommended applicants to the selection committee for review with final approval by the Board pursuant to the requirements and procedures stated herein. SCHOLARSHIPS: Fund Name and Number SELECTION COMMITTEE: [approved by community foundation board] 1. Signed disclaimer indicating that he/she nor a family or staff member are scholarship applicants 1. CF Staff or Board 2. Signed disclaimer indicating that he/she nor a family or staff member are scholarship applicants 1. CF Staff or Board 2. Signed disclaimer indicating that he/she nor a family or staff member are scholarship applicants N/A N/A Page 1 of 2 SCHOLARSHIP SELECTION CRITERIA: List selection criteria specific to this scholarship fund.

79 Page 2 of 2 PROCEDURE FOR SCHOLARSHIP SELECTION: 1. The Compliance Certification Form will be completed to verify the selection committee members, selection criteria and procedure for selection. The Compliance Certification Form will be approved by the CF Board. 2. Donor(s), representative(s) of donor s family or outside entity (e.g., high schools, service clubs) may recommend one representative to serve on the selection committee, serving in minority to CF staff. 3. The donor(s), representative(s) of donor s family or outside entity may review applicants based on the selection criteria and provide suggested ranking for the recommended applicants. 4. The selection committee will review applications, vote on recommended applicant(s) and complete the Scholarship Recommendation Form. 5. All members of the selection committee will sign the Scholarship Recommendation Form certifying that: All scholarship recommendations are made on an objective and nondiscriminatory basis using the selection criteria and process outlines above. Donors, and family or employees of the donor, do not control the selection directly or indirectly. Only advisory recommendations are offered for the CF Board s final selection. No donor, family or employee of a donor to the scholarship fund is recommended to receive a scholarship award. 6. The Board votes to approve awardees. 7. Once approved by the Board, a scholarship notification will be sent to awardees requesting a current tuition bill and/or any other documentation required for the specific scholarship. 8. Once tuition bill and/or documentation is received by CF, the award will be paid to the college/university on behalf of the recipient. CERTIFICATION BY CF BOARD OF DIRECTORS President or Secretary of the Board pursuant to Board resolution dated : Signature Date Printed Name

80 BEST PRACTICES FOR COMMITTEES All selection committee members must be appointed by the CF board. The CF may appoint donors or donor representatives to selection committee, HOWEVER At no time shall donors or the donor representative constitute a majority of the committee s membership or otherwise directly or indirectly control the committee.

81 Donors and parties related to donors collectively must have a minority vote on scholarship funds with advising: 1. Donors 2. Family of Donors MINORITY VOTE 3. Employees of Donors 4. Members of Donors (if Donor is a Mutual Benefit Organization) 5. Other designees or representatives of Donors

82 DEFINITION OF FAMILY MEMBER IRC SEC. 4946(D) 1. A person is a disqualified person if he or she is a member of the family of any individual described in IRC 4946(a)(1)(A), (B), or (C). 2. Under Regs (h), "members of the family" are limited to an individual s spouse, ancestors, lineal descendants, and the spouses of his or her lineal descendants. Also, the legally adopted child of an individual is his or her child within the meaning of this regulation. IRC 4946(d) provides that the family of any individual shall include only his spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren. For years prior to January 1, 1985, members of the family includes all lineal descendants and their spouses. 3. Regs (h) provides that the legally adopted child of an individual is his or her child within the meaning of IRC The surviving spouse of a child, grandchild, or great grandchild of a substantial contributor to a private foundation is a member of the family of the substantial contributor, and is, thus, a disqualified person with respect to the foundation until remarriage.

83 USE OF OUTSIDE COMMITTEES Follow PPA protocol for scholarships awarded by civic organizations, high schools, education foundations, families or other independent entities. Representative(s) of the organization have a minority vote. Recusal if any conflicts exist. No personal benefit to donors, committee members or family of donors or committee members.

84 PROCEDURE FOR DONOR, FAMILY, EMPLOYEES, OUTSIDE ENTITY RECOMMENDATIONS 1. PPA certification form with name(s) of donors, family, employees or outside entity representative (i.e., outsiders ) in minority approved by CF board 2. Outsiders review applications then submits recommendations to community foundation committee using a recommendation form 3. Community foundation scholarship committee reviews applications and outsider recommendations then recommends award winners to the board using final recommendation form. 4. Foundation board approves winners 5. Community foundation pays college

85 Scholarship Recommendation Form

86 Community Foundation Scholarship Recommendation Form Page 1 of 2 COMPLIANCE: Pursuant to the Pension Protection Act (PPA) of 2006, the Community Foundation ( CF ) Board of Directors ( Board ) must annually review and approve certain aspects of scholarship funds and/or funds making awards for scholarships. The aspects to be approved by the Board include: criteria for scholarship selection, procedure for selection and selection committee members. Further, the Board must review and approve the qualifications of the selection committee members and their relationship(s) to the scholarship fund donor. Selection committee members must disclose that neither they, nor their family or staff, are scholarship applicant(s). Donors, donor representatives, and/or representatives of outside entities (e.g., high schools, service clubs) may review applications and provide suggested ranking for recommended applicants to the selection committee for review with final approval by the Board pursuant to the requirements and procedures stated herein. SCHOLARSHIPS: Fund Name and Number SCHOLARSHIP SELECTION CRITERIA: List selection criteria specific to this scholarship fund. PROCEDURE FOR SCHOLARSHIP SELECTION: 1. The Compliance Certification Form will be completed to verify the selection committee members, selection criteria and procedure for selection. The Compliance Certification Form will be approved by the CF Board. 2. Donor(s), representative(s) of donor s family or outside entity (e.g., high schools, service clubs) may recommend one representative to serve on the selection committee, serving in minority to CF staff. 3. The donor(s), representative(s) of donor s family or outside entity may review applicants based on the selection criteria and provide suggested ranking for the recommended applicants. 4. The selection committee will review applications, vote on recommended applicant(s) and complete the Scholarship Recommendation Form. 5. All members of the selection committee will sign the Scholarship Recommendation Form certifying that: All scholarship recommendations are made on an objective and nondiscriminatory basis using the selection criteria and process outlines above. Donors, and family or employees of the donor, do not control the selection directly or indirectly. Only advisory recommendations are offered for the CF Board s final selection. No donor, family or employee of a donor to the scholarship fund is recommended to receive a scholarship award. 6. The Board votes to approve awardees. 7. Once approved by the Board, a scholarship notification will be sent to awardees requesting a current tuition bill and any other documentation required for the specific scholarship. 8. Once tuition bill and documentation is received by CF, the award will be paid to the college/university on behalf of the recipient.

87 RECOMMENDATIONS FOR SCHOLARSHIP AWARDEES: Page 2 of 2 SELECTION COMMITTEE CERTIFICATION: We certify and confirm that: All scholarship recommendations are made on an objective and nondiscriminatory basis using the selection criteria and procedure outlined above. Donors, donor s family and/or employees of the donor, do not control the selection of scholarship awardees directly or indirectly. Only advisory recommendations are offered for final selection by the CF Board. No donor, family or employee of a donor to the above named scholarship fund is recommended to receive a scholarship award from the above named scholarship fund. Selection Committee Members: Signature Date Printed Name Signature Date Printed Name Signature Date Printed Name

88 PROCEDURE FOR RECOMMENDATIONS AND APPROVAL PPA Certification Form approved by CF board Community Foundation receives applications. Donor, family or outside entity reviews applicants and shares recommendations to CF committee (via donor or a representative). CF committee reviews applications and recommendations. Submits Recommendation Form to CF Board for final approval. 4 CF approves and grants To college on behalf of student once dollar amount is confirmed.

89 PRACTICE POINTERS Each scholarship does not require a separate committee. Committee decision should be approved by board of directors. Note: Community Foundation National Standards require approval of all grants by board of directors. Committee process evidences expenditure responsibility and legal control.

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91 JUST BECAUSE WE CAN, DOESN T MEAN WE SHOULD: WE WORK IN A FISH BOWL How do you offer advising or other options to one donor and explain that you cannot do so to another? Should you award scholarships to staff, board or family of staff or board? Beware setting precedent. Avoid the appearance of impropriety.

92 SCHOLARSHIPS FOR SELECTION COMMITTEE MEMBERS/FAMILY Scholarships should not be awarded to selection committee members or their family from any scholarship funds administered by the selection committee.

93 SCHOLARSHIPS FOR COMMUNITY FOUNDATION DIRECTORS/FAMILY Scholarships may be awarded to directors/officers and their family from any scholarship funds so long as: 1. They do not serve on the selection committee, and 2. They recuse themselves from review and approval of the scholarship recommendations of the selection committee.

94 SCHOLARSHIPS FOR COMMUNITY FOUNDATION STAFF/FAMILY Scholarships may be awarded to staff and their family from a scholarship funds so long as: 1. They do not serve on the selection committee, and 2. They recuse themselves from review and approval of the scholarship recommendations of the selection committee.

95 SCHOLARSHIPS FOR SUBSTANTIAL CONTRIBUTORS/FAMILY Scholarships may be awarded to substantial contributors and their family from scholarship funds so long as: 1. The award is not from a scholarship donated by the substantial contributor, and 2. They do not serve on the selection committee.

96 CORPORATE SCHOLARSHIP FUNDS Rules that apply to corporate private foundations are recommended for community foundations that administer scholarship funds on behalf of companies for corporate employees and children of employees. See Rev. Proc , C.B. 670

97 CORPORATE SCHOLARSHIP RULES Scholarships may not be used to recruit or retain employees or induce employees to follow a course of action. Grantee class must be large enough to avoid preidentification of recipients, which is a problem for small companies. Selection committee must be completely independent of the employer or company foundation.

98 CORPORATE SCHOLARSHIP RULES Employment-related requirement may not exceed three years. Scholarships may not be terminated if grantee departs the company. Other more detailed criteria required by private foundation guidelines. Seek counsel.

99 Reporting of Scholarships and Other Awards

100 REPORTING If the income is completely tax-free scholarship or fellowship, no tax return reporting is required. If all or part of the scholarship or fellowship is taxable, then a tax return is required whether or not a W-2 is received. Reporting by community foundation or educational institution. Clarify with educational institution.

101 REPORTING Form 1098-T: Reporting total payments made. Form 1099-Misc: Report non-qualified education payments to students (required for payments above $600). Form 1098-E: Student Loan Interest Statement reporting payments of interest over $600.

102 1098-T REPORTING 1. Payer issues a 1098-T (not a 1099) to the recipients of financial aid (scholarships for tuition/fees, room/board, etc.). 2. If the community foundation (CF) cuts checks directly to the students, then the CF has the responsibility to issue the 1098-T as payer. If the CF cuts checks to the college, then the college is the payer and must issue the 1098-T. 3. The amount "billed" to the student is stated in box 2 of the 1098-T. This box only includes tuition and related expenses - not room/board billings.

103 1098-T REPORTING 4. The amount of financial aid (scholarships for tuition/fees plus room/board) is stated in box 5 of the 1098-T. 5. Tax-free income (scholarships for tuition/certain fees) and taxable income (room/board financial aid) are NOT separately identified on the 1098-T. The burden is on the student/parent (recipient of the financial aid) to determine and report/pay income tax on the taxable financial aid.

104 REPORTING OTHER AWARDS AND PAYMENTS Other types of awards exceeding $600 will require 1099-MISC reporting payments: 1. Individual Achievement Awards 2. Awards and Prizes to Achieve a Specific Objective 3. Disaster relief payments from Good Samaritan and other funds Note: Recipient must determine if payment is to be considered taxable income or a non-taxable gift.

105 INCOME TAX EXCEPTION No income tax liability for an award for charitable, educational, religious, scientific, artistic, literary or cultural achievement if awardee: 1. Did not apply for the award, 2. Was not required to provide substantial services, and 3. Designates that the award be paid to a charitable organization within 45 days. Note: Awardee is not entitled to an income tax charitable deduction.

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108 D. Elton Trueblood, Earlham College