Copyright PRIMEDIA Business Magazines & Media Inc. Nov 2005From David T. Leibell and Daniel L. Daniels of Cummings & Lockwood LLC in Stamford, Conn., we have this update:
* The Internal Revenue Service has introduced website assistance for starting and administering a private foundation. The IRS has been in a charitable mood lately. In August, the Service issued excellent new model forms for charitable remainder trusts (Revenue Procedures 2005-52 through 2005-59). Now the IRS has added a helpful new section to its website (www.irs.gov) called the "Life Cycle of a Private Foundation," similar to the "Life Cycle of a Public Charity" information put on the website in 2004. Private foundations are very complicated planning vehicles. Starting and administering a private foundation is fraught with potential tax traps. It's nice to have the IRS provide an official roadmap.
Life Cycle of a Private Foundation is divided into five sections: (1) "Starting Out," (2) "Applying to IRS," (3) "Required Filings," (4) "Ongoing Compliance," and (5) "Significant Events."
Starting Out describes private foundations in general as well as the different types of private foundations available to a donor, including private grantmaking foundations and private operating foundations. The Starting Out section also discusses that foundations can be organized either as a corporation or trust, and provides sample articles of incorporation and trust language containing provisions the IRS requires for exempt status. There is also information about how to obtain an employer identification number for the foundation, and information on state registration and solicitation requirements. The section ends with information on how to contact the IRS with questions about establishing a private foundation and links to relevant IRS publications.
The Applying to the IRS section walks you through the process of obtaining taxexempt status for a private foundation. It includes exemption application forms as well as a discussion on how the IRS processes such forms. It explains that, if the application is not considered complete, the IRS may request additional information and, once the application is complete, the IRS can either issue a positive advance ruling or an adverse determination. If an adverse determination is issued, the section describes the appeals process.
The Required Filings section details the ongoing filings required to remain a private foundation. There is a description of the annual information return (Form ggo-PF), including information about when and where the Form ggo-PF should be filed, and the penalties for failure to file a timely return. The concept of the unrelated business income tax (UBIT) is discussed, making clear, for example, that although the foundation may be tax-exempt, it still can be liable for UBlT. There's also a link to Publication 598, "Tax and Unrelated Business Income for Exempt Organizations." The section ends with a detailed description of employment taxes for foundations with compensated workers.
The Ongoing Compliance section focuses not only on compliance issues but also tax returns-with a particular focus on the private foundation excise taxes found in Chapter 42 of the Internal Revenue Code. The excise taxes discourage certain behavior by private foundations and disqualified persons with respect to the foundation. There are descriptions of the excise taxes for self-dealing, failure to distribute income for charitable purposes, excess business holdings, jeopardizing investments and taxable expenditure, as well as the annual tax on net investment income. There is also a discussion of the activities that can result in a foundation losing its tax-exempt status, including the prohibition against substantial lobbying activities. The Ongoing Compliance section also describes the substantiation and disclosure requirements for charitable contributions to the foundation and ends with a discussion of the public disclosure requirements for certain private foundation information and returns.
The Significant Events section includes notifying the IRS of material changes, such as a merger or a significant change in the form or activities of the foundation. There is also a discussion of activities that require the IRS's prior approval, including the administration of scholarship programs, treating amounts set aside for future programs as qualifying distributions and extension of the time period for the foundation to divest itself of excess business holdings. The section outlines how the IRS conducts audits of private foundations, the possible consequences of an audit and the appeals process. The Significant Events section ends with a description of the different ways to terminate a private foundation, voluntarily or involuntarily.
The sheer volume of information on the IRS's Life Cycle of a Private Foundation website should serve as a cautionary note for advisors who recommend private foundations to their clients. The website demonstrates how complicated private foundations are. Many of the private foundations established during the stock market boom of the late 19903 are now being terminated because the clients were not aware of what they were committing themselves to. Private foundations are most appropriate for individuals who demand complete control of their philanthropy are willing to put at least $1 million into the organization, and understand the substantial compliance issues. Those who want the benefits of a private foundation without all that paperwork should turn instead to donoradvised funds (DAFs) offered by community foundations, Jewish federations or commercial firms. What donors give up in terms of control with DAFs is more than made up for the convenience DAFs provide.
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