In recognition of the societal benefits achieved as a result of
the work of the independent sector, the laws of the United States
provide various benefits to specific types of philanthropic
organizations.?? Chief among those benefits is exemption from federal
income tax for organizations that meet specific requirements as set out
in the Internal Revenue Code. For organizations formed for more narrowly
defined purposes (including religious, charitable, scientific, and
educational purposes among others) federal tax law provides what amounts
to a double subsidy???exemption from federal income tax along with the
ability to receive donations that are deductible from the personal
income tax obligations of the donors.
The Internal Revenue Code further categorizes charitable
organizations as public charities and private foundations.?? Public
charities are those charitable organizations that have a traditional
public purpose (churches, schools, and hospitals) or are publicly
supported.?? Private non-operating foundations generally do not directly
perform charitable programs or services, but rather pursue their
charitable purposes through their grantmaking activities (in 2010,
foundations gave approximately $45.78 billion for charitable purposes).??
Because private foundations do not attract broad public support and
thus allow donors (at least in theory) to retain more control over
assets owned by the private foundation, Congress has imposed certain
prohibitions that apply specifically to private foundations including
prohibitions on self-dealing, failing to distribute income, maintaining
excess business holdings, investing in ways that jeopardize the
charitable purposes of the organization, and making taxable
Perhaps the most onerous of these prohibitions is that prohibiting
self-dealing between a private foundation and its disqualified persons.??
This prohibition forbids specific transactions regardless of the
fairness of the transaction ??? even where the transaction is a sweetheart
deal to the foundation.?? Because of the broad nature of this
prohibition and the excise tax penalties resulting from violation, it is
critical for private foundations (and their donors, board members, and
other related parties) to be familiar with the relevant definitions,
concepts, and exceptions.?? For a detailed look at these issues and
consideration of various case studies,??see the Resources and Seminars page at www.BWWLAW.com
to download the paper written by Darren B. Moore of BWW???s Nonprofit
Organizations Practice Group recently presented at the Dallas CPA
Society???s annual conference.
Mr. Moore can be reached at firstname.lastname@example.org or (817) 877-1088.