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

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

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

4. 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

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

6. 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

7. 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

8. 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)

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

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

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

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

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