Foundation (United States law): Difference between revisions

A '''foundation''' in the United States is a type of charitable organization. HoweverThough, the [[Internal Revenue Code]] distinguishes between [[private foundation]]s (usually funded by an individual, family, or corporation) and [[publiccharitable charityorganization|public charities]] ([[community foundation]]s and other nonprofit groups that raise money from the general public). Private foundations have more restrictions and fewer tax benefits than public charities like community foundations.

Meanwhile, in 1914, [[Frederick H. Goff]], a well-known banker at the [[Cleveland Trust Company]], sought to eliminate the "dead hand" of organized philanthropy and so created the first community foundation in Cleveland. He created a corporately structured foundation that could utilize community gifts in a responsive and need-appropriate manner. Scrutiny and control resided in the "live hand" of the public as opposed to the "dead hand" of the founders of private foundations.<ref>{{Cite web|url=https://www.clevelandfoundation100.org/foundation-of-change/invention/introduction/|title=Cleveland Foundation 100 - Introduction|website=The Cleveland Foundation Centennial|language=en-US|access-date=2019-04-04}}</ref>

Starting at the end of [[World War II]], the United States's high top [[income tax]] rates spurred a burst of new foundations and trusts, many of which were simply [[tax shelter]]s. President [[Harry S. Truman]] publicly raised this issue in 1950, resulting in a federal law later that year that brought new rigor and definition to the practice. The law did not go very far in regulating tax-exempt foundations, however—a fact made obvious throughout the rest of that decade as financial advisers continued to push the foundation-as-tax-refuge model to wealthy families and individuals. Several attempts at passing a more complete reform during the 1960s culminated in the [[Tax Reform Act of 1969]], which remains the controlling legislation in the United States. <ref>For more details on that legislative history, see [http://www1.law.nyu.edu/ncpl/pdfs/1999/Conf1999_Troyer_Final.pdf].</ref>

In the United States, an entity with "foundation" in its name is generally expected, in most cases, to be a charitable foundation. Nonetheless, an organization may have the word "foundation" in its name and not be a charitable foundation—though state law may impose restrictions. For example, [[Michigan]] permits its use only for nonprofits with "the purpose of receiving and administering funds for perpetuation of the memory of persons, preservation of objects of historical or natural interest, educational, charitable, or religious purposes, or public welfare.".<ref>[http://www.legislature.mi.gov/%28S%28mwvi4i3o2hojhpvrtxlsoa45%29%29/mileg.aspx?page=getObject&objectName=mcl-450-2212 MCL 450.2212(3)]</ref> The distinction between [[charitable organization]]s and [[non-profit organization]]s elaborates on this point.

The Internal Revenue Code defines many kinds of non-profit organizations that do not pay income tax. However, only charitable organizations can receive tax-deductible contributions and avoid paying property and sales tax. For instance, a donor would receive a tax deduction for money given to a local soup kitchen if the organization was classified as a [[501(c)(3)]] organization, but not for giving money to the NationalGreen FootballBay LeaguePackers, even though the NFL team is a [[501(c)(6)]] non-profit association. <ref>[httphttps://www.cofnewyorker.orgcom/filessports/Documentssporting-scene/Legal/tax&charity.pdfthose-non-profit-packers CouncilThose onNonprofit FoundationsPackers Guide(The toNew Tax Treatment of Charities (pdfYorker)]</ref> Neither a public charity nor a foundation can pay for or participate in partisan political activity, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.

Community foundations are instruments of civil society designed to pool donations into a coordinated investment and grant-making facility dedicated primarilymostly to the social improvement of a given place. In other words, a community foundation is like a public foundation. This type of foundation requires community representation in the governing board and grants made to improve the community. Often, a city has a community foundation with a governing board composed of many leaders of the business, religious, and local interests. Grants that the community foundation makes must benefit the people of that city.

Private foundations typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. When a person or a corporation founds a private foundation frequently family members of that person or agents of the corporation are members of the governing board.<ref>{{cite news |last1=Olk |first1=Jennifer |title=Choosing the Right Charitable Vehicle: A Comparison of Private Foundations, Supporting Organizations, and Donor Advised Funds|url=http://www.natlawreview.com/article/choosing-right-charitable-vehicle-comparison-private-foundations-supporting-organiza|accessdateaccess-date=January 2, 2014|newspaper=The National Law Review|date=December 25, 2013 |author2=Wendy Richards|author3=Godfrey & Kahn S.C.}}</ref> This limits public scrutiny over the private foundation, which entails unfavorable treatment compared to community foundations.

For tax purposes, there are a few variants of private foundationfoundations. The material difference is between "operating" foundations and "grant-making" foundations. Operating foundations use their endowment to achieve their goals directly. Grant-making foundations use their endowment to make grants to other organizations, which indirectly carry out the goals of the foundation. Operating foundations have preferential tax treatment in a few areas, including allowing individual donors to contribute more of their income and allowing grant-making foundation contributions to count towards the 5% minimum distribution requirement.<ref>[https://www.irs.gov/charities/foundations/article/0,,id=136403,00.html IRS Overview of Types of Foundations]</ref>

The [[Tax Reform Act of 1969]] defined the fundamental social contract offered to private foundations. In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a private foundation must (a) pay outpayout at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits.

Administrative and operating expenses count towards the 5% requirement; they range from trivial at small unstaffed foundations, to more than half a percent of the endowment value at larger staffed ones. Congressional proposals to exclude those costs from the payout requirement typically receive much attention during boom periods when foundation endowments are earning investment returns much greater than 5% (such as the late 1990s); the idea typically fades when foundation endowments are shrinking in a down market (such as 2001-&ndash;2003).

*[[Foundation (charitynonprofit)]]

*[[501(c) organization]]

*[[Non-profitNonprofit organization]]