Private foundation (United States)

A private foundation is a charitable organization recognized by the US Tax Code at UnitedStatesCode|26|509 and section 501(c)(3). It is defined by a negative definition, in other words, it is defined by what it is not. A private foundation formed in the United States is a charity, but it is not a public charity (a term of art defined by the 501(c)(3)) and is not a supporting organization.

Function

Private foundations serve a charitable purpose by either funding public charities or performing the activities of public charities.

A private foundation has an endowment fund with which it invests and then uses the investment returns to fund public charities. If a private foundation does not invest in public charities then the private foundation may directly perform the function of a public charity by using the investment returns as the funding.

Most of the familiar large foundations such as Rockefeller or the Bill and Melinda Gates Foundation are private foundations.

A family foundation is a type of private foundation where the board of directors is entirely or mostly made up of the extended family of the founder(s). Some family foundations eventually transition to being freestanding self-perpetuating private institutions not controlled by a single family. Perhaps the most-famous example is the Ford Foundation. Outsiders often erroneously believe that a family foundation can somehow be wrested away from the family's control; in fact, such transitions are always the result of an explicit decision by the controlling family (either when they created the institution in the first place, or later).

History

The Tax Reform Act of 1969 created the private foundation as we know of it today where the tax code imposed the present day legal framework. These restrictions came about as a reform effort to remedy perceived abuses of private foundations such as the claim that this type of charitable organization more likely served the private interests of the rich rather than the intended charitable purpose. Such criticism asserted that private individuals created private foundations as a vehicle to protect their assets from taxation meanwhile the descendents may assert control over these assets almost in perpetuity. This is the context from which the present day legal framework arose.

In 2007 the Wall Street Journal reported that wealthy families are both increasing the number of foundations they close as well as increasing the number they establish. One trend is to put a time limit on the life of a foundation, under the assumption that heavy spending over a short period of time will do more good than slower spending over the long term. Some foundations are closed due to family disputes, concern about the effect of foundation wealth on descendants, and concern that future generations will not share the political beliefs that spurred the original establishment of the foundation. Sometimes one is close, only to be reopened with a new purpose. [ [http://online.wsj.com/article/SB117677618145972189.html Beatty, Sally, "Families Wrestle With Closing Foundations",] Wall Street Journal, April 27,2007.]

Legal framework

Private foundations must adhere to a legal framework to ensure that they serve a charitable purpose and are not abused by managers or substantial contributors who may seek to derive excess benefit.

Payout rate

The base payout rate for a private foundation is 5% of the endowment fund. Should a private foundation exceed this payout rate then the private foundation may reduce the taxes on their investment income from 2% to 1%.

Excess benefit

Disqualified persons may not derive excess benefit from the private foundation. Should they derive excess benefit in the form of favorable loans or control over the private foundation then they may be subject to the intermediate sanctions, which punishes not the private foundation but the manager and the contributor.

Excess business holdings

Should the private foundation hold businesses not related to their charitable purpose then the private foundation shall have to pay the Unrelated Business Income Tax, which levies a tax on the income from said business.

ee also

*Foundation (United States law)
*Private foundation
*Foundation (charity)
*Philantropy

References

External links

* [http://www.irs.gov/charities/charitable/article/0,,id=96114,00.html IRS webpage, which defines private foundations.]
* [http://www.irs.gov/charities/foundations/index.html IRS webpage index on private foundations]