You Can Do THAT with a Private Foundation?! Jeffrey D. Haskell Chief Legal Officer 21st Annual Maine Tax Forum -Nov2017 1
An Introduction to Foundation Source 21st Annual Maine Tax Forum -Nov2017 2
Who We Are Foundation Source is the nation s largest provider of comprehensive support services for private foundations. Founded in 2000 Headquartered in Connecticut National footprint Over 1,300 private foundation clients Administers $10.4 billion in foundation assets 6,000 users of Foundation Source Online 277,000 grants totaling $4.0 billion 97% client satisfaction 98% client retention 21st Annual Maine Tax Forum -Nov2017 3
Foundation Source Services Our suite of services allows your client to focus more on mission, strategy, and priorities, rather than on administration. Administrative Support Accounting Compliance monitoring Transaction processing Tax preparation and filings Financial and grant reporting Online Management Tools Online research Online grantmaking Online tracking Online reporting Online grants management Advisory Services Private Client Advisors Set-up, training, support Philanthropic Directors Effective philanthropy, family engagement, governance 21st Annual Maine Tax Forum -Nov2017 4
Administrative Support We handle all the back-office details, so your client can focus on your philanthropy. Administration: Compliance: Foundation set-up Federal & state filings Distribution tracking Document management Foundation governance Real-time monitoring of activity Verification of 501(c)3 status 5% distribution requirement Jeopardizing transactions Review for self-dealing Processing: Foundation funding Grant requests Grant checks Tax payments Fees & expenses Taxes & Filings: Preparation & filing Federal and state Annual 990-PF return Quarterly excise taxes Year-end 1099s/1042s Reporting: Financial reporting Regulatory reporting Foundation activity Transaction history Fees & expenses 21st Annual Maine Tax Forum -Nov2017 5
Online Foundation Management Tools The foundation s own secure, web-based command center. Key Features: Secure, custom website Online charity research Compliance monitoring Automated grantmaking Tracking and analytics Financial reporting 21st Annual Maine Tax Forum -Nov2017 6
Working with Attorneys Our services are complementary, not competitive We handle the ongoing compliance monitoring and administrative services that law firms typically don t provide If desired, we can assist with foundation creation: Delaware corporate structure IRS Form 1023 for exempt status Ready for funding in less than one week Working behind the scenes or directly with the client Attorney may review all documents before submission 21st Annual Maine Tax Forum -Nov2017 7
Grants to Individuals 21st Annual Maine Tax Forum -Nov2017 8
Grants to Individuals Two Categories Do not require advance IRS approval No strings attached Examples: Financial hardship Emergency/disaster relief Prizes/awards for past accomplishments Require advance IRS approval Grants for travel, study or other similar purposes Examples: Scholarship (including employer-related scholarships) Travel Enhance a skill or talent (including physical) Accomplish an objective (paint a mural, author a book, etc.) 21st Annual Maine Tax Forum -Nov2017 9
21st Annual Maine Tax Forum -Nov2017 10
Grants to Individuals Proper Procedures (1 of 2) Required procedures for all grants to individuals: Charitable purpose Insiders are not eligible Broad charitable class Criteria must be related to purpose Objective and nondiscriminatory basis Get the word out Maintain records 21st Annual Maine Tax Forum -Nov2017 11
Grants to Individuals Proper Procedures (2 of 2) Additional procedures for grants for travel, study, or similar purposes: Obtain advance approval from the IRS 45 Day Rule Obtain annual and final reports from grantees Investigate any possible misuse of funds Reduced reporting and monitoring requirements for scholarship grants paid directly to educational institution 21st Annual Maine Tax Forum -Nov2017 12
Grants to U.S. Non-Public Charities 21st Annual Maine Tax Forum -Nov2017 13
Grants to U.S. Non-Public Charities Required Process: Expenditure Responsibility Pre-grant inquiry Written grant agreement (with IRS mandated terms) Segregate or separately account for grant funds (if non-foundation) Follow-up reporting from grantee 990-PF reporting 21st Annual Maine Tax Forum -Nov2017 14
Grants to U.S. Non-Public Charities Types of U.S. organizations requiring ER: For-profit orgs with charitable programs Exempt orgs that not 501(c)(3) charities (such as 501(c)(4)s, etc.) Private Foundations New public charities ER recommended until issuance of IRS determination letter 21st Annual Maine Tax Forum -Nov2017 15
International Grants 21st Annual Maine Tax Forum -Nov2017 16
International Grants Options Recognized by IRS Foreign government International organization Expenditure responsibility (ER) Equivalency determination Anti-terrorism/OFAC concerns 21st Annual Maine Tax Forum -Nov2017 17
Foundation Expenses 21st Annual Maine Tax Forum -Nov2017 18
Foundation Expenses Must be reasonable and necessary Must advance foundation purpose Generally, two types: Investment related offset investment income Charitable/administrative count towards 5% payout May be paid directly by the foundation or reimbursed to an officer, employee, or other authorized person (even if an insider) Accountable plan rules for substantiation, etc. 21st Annual Maine Tax Forum -Nov2017 19
Examples Examples of charitable expenses: Travel expenses for site visit Rent for foundation office space (from unrelated third party) Tax return preparation fees Legal advice for governance issues Examples of investment-related expenses: Investment advisory fees Bank charges Storage fees for investment (non-charitable) assets Legal services for negotiating investment contract Examples of expenses that are neither: Federal tax payments 21st Annual Maine Tax Forum -Nov2017 20
Direct Charitable Activities 21st Annual Maine Tax Forum -Nov2017 21
What Is a Direct Charitable Activity (DCA)? A program or event run directly by the foundation Examples: Soup kitchen Publication of an educational book/literature Employment counseling for disadvantaged youth Production of documentary to raise awareness about a social issue 21st Annual Maine Tax Forum -Nov2017 22
More About DCAs DCA expenses are just the portion of the foundation s total expenses that are related to a foundation program. For informational purposes only, the description of and total expenses for each DCA are reported on a designated section of the 990-PF (aside from reporting on the revenue and expenses section) 21st Annual Maine Tax Forum -Nov2017 23
Compensation 21st Annual Maine Tax Forum -Nov2017 24
Compensation Compensation may be paid to: Employees Independent contractors Insiders (officers, directors, family members, related businesses) Must be reasonable (not lavish) and necessary Employee v. independent contractor analysis (W-2 v. 1099) Proper classification is important 21st Annual Maine Tax Forum -Nov2017 25
Compensation to Insiders Special precautions where an insider is being compensated: Services must be personal services PF should research what similar foundations are paying those with similar qualifications for similar services PF should have disinterested committee determine reasonableness Committee should concurrently document the procedures/due diligence 21st Annual Maine Tax Forum -Nov2017 26
Set-Asides 21st Annual Maine Tax Forum -Nov2017 27
Set-Aside Basics General rule = only amounts actually spent during the tax year will count towards that year s 5% payout Exception = A set-aside allows a foundation to set-aside funds in one year that will be spent down over the next several (up to five) years and count the entire amount towards the 5% payout in the set-aside year. A set-aside may be useful when looking to fund an ambitious project, such as: Purchasing a collection of paintings by regional artists to donate to a local museum Collaborating with a charity on a matching grants program Constructing a building to house a foundation s antique maps and historical artifacts for public display 21st Annual Maine Tax Forum -Nov2017 28
Types of Set-Asides Cash distribution set-aside Does not require IRS approval Applies mainly to new or newly funded foundations No need to demonstrate that the project can be better accomplished by set-aside than immediate payment Must record a liability on the 990-PF for the amount of the set-aside outstanding Suitability set-aside Requires IRS approval Foundation must demonstrate that the project can be better accomplished by a set-aside than by immediate payment Must record a liability on the 990-PF for the amount of the set-aside outstanding 21st Annual Maine Tax Forum -Nov2017 29
Program-Related Investments 21st Annual Maine Tax Forum -Nov2017 30
PRI Basics (1 of 2) Advantages Counts as a grant Excluded from 5% investment asset base Exception to excess business holdings rule Not a jeopardizing investment Recipient can be any type of organization ER usually is necessary if recipient is not a U.S. public charity 21st Annual Maine Tax Forum -Nov2017 31
PRI Basics (2 of 2) Three requirements Primary purpose is charitable PF would not have made the investment but for the relationship between the PRI and the charitable purposes of the PF Must significantly further the PF s exempt purposes Income/asset appreciation is not a significant purpose No electioneering or lobbying Three Types Loan Equity Loan Guarantee 21st Annual Maine Tax Forum -Nov2017 32
Where Do PRIs Fit In? TRADITIONAL GRANTS PROGRAM-RELATED INVESTMENTS TRADITIONAL INVESTMENTS P R O G R A M M A T I C R E T U R N S F I N A N C I A L R E T U R N S PRIs OCCUPY A MIDDLE GROUND BETWEEN TRADITIONAL GRANTS AND INVESTMENTS Source: PROGRAM-RELATED INVESTMENTS A TECHNICAL MANUAL FOR FOUNDATIONS, CHRISTIE I. BAXTER (1997). 21st Annual Maine Tax Forum -Nov2017 33
Questions? 21st Annual Maine Tax Forum -Nov2017 34
Foundation Source IMPORTANT INFORMATION ABOUT OUR SERVICES Foundation Sources does not give tax or legal advice. You should consult with your attorney or tax advisor regarding your specific situation. This material is not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or taxrelated matter(s). 21st Annual Maine Tax Forum -Nov2017 35
Thank You! Jeffrey D. Haskell Chief Legal Officer jhaskell@foundationsource.com 516.870.7726 55 Walls Drive, 3 rd Floor Fairfield, CT 06824 21st Annual Maine Tax Forum -Nov2017 36