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Private Foundations: Tax Law and Compliance, 3rd Edition



Private Foundations: Tax Law and Compliance, 3rd Edition

Bruce R. Hopkins, Jody Blazek

ISBN: 978-0-470-44737-6 December 2008 768 Pages


With more than 50,000 private foundations in the United States and the increasing scrutiny of the IRS, this much-needed, annually updated manual provides you with a wide range of tax rules and regulations for these foundations. Coauthored by a lawyer and tax accountant, the revised and expanded Third Edition includes practical tax compliance suggestions and in-depth legal explanations. Capturing all-new developments in the private foundations arena, the new edition presents you with line-by-line instructions, sample-filled IRS forms, and complete citations.

Chapter One: Introduction to Private Foundations.

§ 1.1 Private Foundations: Unique Organizations.

§ 1.2 Definition Of Private Foundation.

§ 1.3 History And Background.

§ 1.4 Foundations In Overall Exempt Organizations Context.

§ 1.5 Definition Of Charity.

§ 1.6 Operating For Charitable Purposes.

§ 1.7 Organizational Rules.

§ 1.8 Private Foundation Sanctions.

Chapter Two: Starting and Funding a Private Foundation.

§ 2.1 Choice Of Organizational Form.

§ 2.2 Funding A Foundation.

§ 2.3 Estate Planning Principles.

(a) Decedents' Estates.

(b) Estate and Gift Tax Considerations.

§ 2.4 Foundations And Planned Giving.

(a) Introduction to Planned Giving.

(b) Charitable Remainder Trusts.

(c) Other Planned Giving Vehicles.

(d) Interrelationships with Private Foundation Rules.

§ 2.5 Acquiring Tax-Exempt Status.

(a) Preparing Form 1023.

(b) The Substantially Completed Application.

(c) Recognition Application Procedure and Issuance of Determination Letters and Rulings.

(d) Application Processing Timeline.

(e) Issues Causing Applications to Be Routed to EO Technical.

(f) User Fees.

§ 2.6 Special Requirements For Charitable Organizations.

§ 2.7 When To Report Back To IRS.

(a) When Should a Ruling Be Requested?

(b) Changes in Tax Methods.

(c) Amended Returns.

(d) Weathering an IRS Examination.

(e) Achieving Positive Results.

Chapter Three: Types of Private Foundations.

§ 3.1 Private Operating Foundations.

(a) Direct Charitable Distributions.

(b) Grants to Other Organizations.

(c) Individual Grant Programs.

(d) Income Test.

(e) Asset, Endowment, or Support Test.

(f) Compliance Period.

(g) Advantages and Disadvantages of Private Operating Foundations.

(h) Conversion to or from Private Operating Foundation Status.

(i) Exempt Operating Foundations.

§ 3.2 Conduit Foundations.

§ 3.3 Common Fund Foundations.

§ 3.4 Research And Experimentation Funds.

§ 3.5 Other Types Of Foundations.

§ 3.6 Nonexempt Charitable Trusts.

§ 3.7 Split-Interest Trusts.

§ 3.8 Foreign Private Foundations.

Chapter Four: Disqualified Persons.

§ 4.1 Substantial Contributors.

§ 4.2 Foundation Managers.

§ 4.3 Certain 20 Percent Owners.

§ 4.4 Family Members.

§ 4.5 Corporations Or Partnerships.

§ 4.6 Trusts Or Estates.

§ 4.7 Private Foundations.

§ 4.8 Governmental Officials.

Chapter Five: Self-Dealing.

§ 5.1 Private Inurement Doctrine.

§ 5.2 Private Benefit Doctrine.

§ 5.3 Definition Of Self-Dealing.

(a) Six Specific Acts.

(b) Statutory Exceptions.

(c) Exceptions Provided in Regulations.

§ 5.4 Sale, Exchange, Lease, Or Furnishing Of Property.

(a) Transactions by Agents.

(b) Exchanges.

(c) Leasing of Property.

(d) Furnishing of Goods, Services, or Facilities.

(e) Co-owned Property.

§ 5.5 Loans And Other Extensions Of Credit.

(a) Gifts of Indebted Property.

(b) Interest-Free Loans.

§ 5.6 Payment Of Compensation.

(a) Definition of Personal Services.

(b) Definition of Compensation.

(c) Definition of Reasonable.

(d) Finding Salary Statistics.

(e) Commissions or Management Fees.

(f) Expense Advances and Reimbursement.

(g) Bank Fees.

(h) IRS Executive Compensation Study.

§ 5.7 Indemnification And Insurance.

(a) Noncompensatory Indemnification and Insurance.

(b) Compensatory Indemnification and Insurance.

(c) Fringe Benefit Rules and Volunteers 192

§ 5.8 Uses Of Income Or Assets By Disqualified Persons.

(a) Securities Transactions.

(b) Payment of Charitable Pledges.

(c) For the Benefit of Transactions.

(d) Incidental or Tenuous Benefits.

(e) Memberships.

(f) Benefit Tickets.

(g) Other Acts.

§ 5.9 Sharing Space, People, And Expenses.

(a) Determining What the Private Foundation Can Pay.

(b) Office Space and Personnel.

(c) Group Insurance.

(d) Public Facilities.

§ 5.10 Payments To Government Officials.

§ 5.11 Indirect Self-Dealing.

§ 5.12 Property Held By Fiduciaries.

(a) General Rules.

(b) Control Situations.

§ 5.13 Early Terminations Of Charitable Remainder Trusts.

§ 5.14 Additional Exceptions.

§ 5.15 Issues Once Self-Dealing Occurs.

(a) Undoing the Transaction.

(b) Amount Involved.

(c) Date of Valuation.

(d) Payment of Tax.

(e) Advice of Counsel.

(f) Abatement.

(g) Court Jurisdiction as to the Tax.

§ 5.16 IRS Regulation Project.

Chapter Six Mandatory Distributions.

§ 6.1 Distribution Requirements - In General.

§ 6.2 Assets Used To Calculate Minimum Investment Return.

(a) What Are Investment Assets?

(b) Future Interests or Expectancies.

(c) Exempt Function Assets.

(d) Dual-Use Property.

(e) Assets Held for Future Charitable Use.

(f) Acquisition Indebtedness.

§ 6.3 Measuring Fair Market Value.

(a) Valuation Methods.

(b) Date of Valuation.

(c) Partial Year.

(d) Readily Marketable Securities.

(e) Unique Assets.

(f) Cash and Other Types of Assets.

§ 6.4 Distributable Amount.

(A) Controversial Addition.

(B) Distribution Deadline.

§ 6.5 Qualifying Distributions.

(a) Direct Grants.

(b) Direct Charitable Expenditures.

(c) Controversial Proposal.

(d) Set-asides.

(e) Distributions to Foreign Recipients.

§ 6.6 Distributions To Certain Supporting Organizations.

§ 6.7 Satisfying The Distribution Test.

(a) Timing of Distributions.

(b) Planning for Excess Distributions.

(c) Calculating the Tax.

(d) Abatement of the Tax.

(e) Exception for Certain Accumulations.

§ 6.8 History Of The Mandatory Distribution Requirement.

Chapter Seven: Excess Business Holdings.

§ 7.1 General Rules.

(a) Definition of Business Enterprise.

(b) Passive Income Businesses.

(c) Certain Investment Partnerships.

(d) Percentage Limitations.

§ 7.2 Permitted And Excess Holdings.

(a) General Rules.

(b) Partnerships, Trusts, and Proprietorships.

(c) Constructive Ownership.

(d) Disposition Periods.

§ 7.3 Functionally Related Businesses.

§ 7.4 Rules Applicable To Certain Supporting Organizations.

§ 7.5 Rules Applicable To Donor-Advised Funds.

§ 7.6 Excise Taxes On Excess Holdings.

Chapter Eight: Jeopardizing Investments.

§ 8.1 General Rules.

(a) Defining Jeopardy.

(b) Donated Assets.

§ 8.2 Prudent Investments.

(a) Evaluating Investment Alternatives.

(b) Facing the Unknown.

(c) Risk versus Return.

(d) Total Return Investing.

(e) How Income Is Reported.

(f) Measuring Investment Return.

§ 8.3 Program-Related Investments.

§ 8.4 Excise Taxes For Jeopardizing Investments.

(a) When a Manager Knows.

(b) Reliance on Outside Advisors.

(c) Removal from Jeopardy.

Chapter Nine: Taxable Expenditures.

§ 9.1 Legislative Activities.

(a) Law Applicable to Charities Generally.

(b) Law Specifically Applicable to Private Foundations.

(c) Grants to Charities That Lobby.

(d) Nonpartisan Study of Social Issues.

(e) Self-Defense Exception.

§ 9.2 Political Campaign Activities.

(a) Law Applicable to Charities Generally.

(b) Law Specifically Applicable to Private Foundations.

(c) Voter Registration Drives.

§ 9.3 Grants To Individuals.

(a) Grants for Travel, Study, or Other Purposes.

(b) Other Individual Grants.

(c) Compensatory Payments.

(d) Selection Process.

(e) Employer-Related Programs.

(f) Reports and Monitoring.

(g) Seeking Approval.

(h) Individual Grant Intermediaries.

§ 9.4 Grants To Public Charities.

(a) Rationale for Public Charities Grants.

(b) Documenting Public Charity Grants.

(c) The Reliance Problem.

(d) Intermediary Grantees.

§ 9.5 Grants To Foreign Organizations.

§ 9.6 Expenditure Responsibility.

(a) General Rules.

(b) Pre-Grant Inquiry.

(c) Grant Terms.

(d) Monitoring System.

(e) Reports from Grantees.

(f) Grantee's Procedures.

(g) Reliance on Grantee Information.

(h) Reports to IRS.

(i) Retention of Documents.

(j) Grantee Diversions.

§ 9.7 Internet And Private Foundations.

(a) Exempt Status Issues.

(b) Providing Information.

(c) Providing Services.

(d) Links.

§ 9.8 Spending For Noncharitable Purposes.

§ 9.9 Distributions To Certain Supporting Organizations.

§ 9.10 Excise Tax For Taxable Expenditures.

(a) Tax on Managers.

(b) Paying or Abating the Tax.

(c) Additional Tax.

(d) Correcting the Expenditure.

Chapter Ten: Tax on Investment Income.

§ 10.1 Rate Of Tax.

§ 10.2 Reducing The Excise Tax.

(a) Qualification for 1 Percent Rate.

(b) Distributing, Rather than Selling, Property.

(C) Another Tax Reduction Possibility.

§ 10.3 Formula For Taxable Income.

(a) Gross Investment Income.

(b) Capital Gains and Losses.

(c) Interest.

(d) Dividends.

(e) Rentals.

(f) Royalties.

(g) Estate or Trust Distributions.

(h) Partnerships.

(i) Questionable Taxable Gains before 2007.

§ 10.4 Reductions To Gross Investment Income.

(a) Deductions Allowed.

(b) Deductions Not Allowed.

§ 10.5 Foreign Foundations.

§ 10.6 Exemption From Tax.

Chapter Eleven: Unrelated Business Income.

§ 11.1 General Rules.

(a) Overview.

(b) Trade or Business Income.

(c) Substantially Related Activity.

(d) Regularly Carried on.

(e) Real Estate Activities.

§ 11.2 Exceptions.

(a) Royalties.

(b) Rents.

(c) Research.

(d) Nonbusiness Activities.

(e) Revenue Produced on the Internet.

§ 11.3 Rules Specifically Applicable To Private Foundations.

(a) Business Enterprises.

(b) Permitted Businesses.

(c) Partnerships and S Corporations.

§ 11.4 Unrelated Debt-Financed Income.

(a) Acquisition Indebtedness.

(b) Related-Use Exceptions.

(c) Includible Income.

§ 11.5 Calculating And Reporting The Tax.

Chapter Twelve: Tax Compliance and Administrative Issues.

§ 12.1 Successful Completion Of FORM 990-PF.

(a) Part I, Analysis of Revenue and Expenses.

(b) Line-by-Line Instructions.

(c) Expense Allocations.

(d) Part II, Balance Sheets.

(e) Part III, Analysis of Changes in Net Worth or Fund Balances.

(f) Part IV, Capital Gains and Losses for Tax on Investment Income.

§ 12.2 Reports Unique To Private Foundations.

(a) Part V, Qualification for Reduced Tax on Net Investment Income.

(b) Part VI, Excise Tax on Investment Income.

(c) Part VII-A, Statements Regarding Activities.

(d) Part VII-B, Statements Regarding Activities for Which Form 4720 May Be Required.

(e) Part VIII, Information about Officers, Directors, Trustees, Foundation Managers, Highly Paid Employees, and Contractors.

(f) Part IX-A and B, Summary of Charitable Activities.

(g) Part IX-B, Summary of Program-Related Investments.

(h) Part X, Minimum Investment Return.

(i) Part XI, Distributable Amount.

(j) Part XII, Qualifying Distributions.

(k) Part XIII, Undistributed Income.

(l) Part XIV, Private Operating Foundations.

(m) Part XV, Supplementary Information.

(n) Part XVI-A, Analysis of Income-Producing Activity and Part XVI-B, Relationship of Activities.

(o) Part XVII, Information Regarding Transfers to and Transactions and Relationships with Noncharitable Exempt Organizations.

§ 12.3 Compliance Issues.

(a) Historic Public Inspection Requirements.

(b) Document Dissemination Rules.

(c) Where and When to File Form 990-PF.

(d) First-Year Issues.

(e) Reporting Violations and Other IRS Issues.

(f) Employment Tax Considerations.

(g) Reporting Requirements for Offshore Investments.

Chapter Thirteen: Termination of Foundation Status.

§ 13.1 Voluntary Termination.

§ 13.2 Involuntary Termination.

§ 13.3 Transfer Of Assets To A Public Charity.

(a) Terms of Transfer.

(b) Reservation of Rights.

(c) Eligible Public Charity Recipients.

§ 13.4 Operation As A Public Charity.

§ 13.5 Mergers, Split-Ups, And Transfers Between Foundations.

(a) IRS Road Map for Reforming a Foundation.

(b) Questions Answered in Ruling.

(c) Unanswered Question.

§ 13.6 Termination Tax.

§ 13.7 Abatement.

Chapter Fourteen: Charitable Giving Rules.

§ 14.1 General Rules.

(a) Deduction Variables.

(b) Percentage Limitations.

(c) Estate and Gift Tax Deductions.

§ 14.2 Gifts Of Appreciated Property.

§ 14.3 Deductibility Of Gifts To Foundations.

§ 14.4 Deduction Reduction Rules.

(a) Capital Gain Property Deduction Rule.

(b) Qualified Appreciated Stock Rule.

(c) Other Deduction Reduction Rules.

§ 14.5 Planned Giving Revisited.

§ 14.6 Administrative Considerations.

(a) Substantiation Rules.

(b) Disclosure Rules.

(c) Appraisal Rules.

(d) Reporting Requirements.

(e) State Fundraising Regulation.

Chapter Fifteen: Private Foundations and Public Charities.

§ 15.1 Distinctions Between Public And Private Charities.

§ 15.2 Evolution Of Law Of Private Foundations.

§ 15.3 Organizations With Inherently Public Activity.

(a) Churches.

(b) Educational Institutions.

(c) Hospitals and Other Medical Organizations.

(d) Public College Support Foundations.

(e) Governmental Units.

§ 15.4 Publicly Supported Organizations' Donative Entities.

(a) General Rules.

(b) Support Test.

(c) Facts and Circumstances Test.

(d) Community Foundations.

(e) Community Foundation Compliance Check Project.

§ 15.5 Service Provider Organizations.

(a) Investment Income Test.

(b) Concept of Normally.

(c) Unusual Grants.

(d) Limitations on Support.

§ 15.6 Comparative Analysis Of The Two Categories Of Publicly Supported Charities.

(a) Definition of Support.

(b) Major Gifts and Grants.

(c) Types of Support.

§ 15.7 Supporting Organizations.

(a) Organizational Test.

(b) Operational Test.

(c) Specified Public Charities.

(d) Required Relationships.

(e) Operated, Supervised, or Controlled by (Type I).

(f) Supervised or Controlled in Connection with (Type II).

(g) Operated in Connection with (Type III).

(h) Application of Excess Benefit Transactions Rules.

(i) Limitation on Control.

(j) Hospital and Other Reorganizations.

(k) Use of For-Profit Subsidiaries.

(l) Department of Treasury Study.

§ 15.8 Change Of Public Charity Category.

(a) From § 509(a)(1) to § 509(a)(2) or Vice Versa.

(b) From § 509(a)(3) to § 509(a)(1) or § 509(a)(2.

(c) From a § 509(a)(3) Type III to a § 509(a)(3) Type I or II.

§ 15.9 Noncharitable Supported Organizations.

§ 15.10 Relationships Created For Avoidance Purposes.

§ 15.11 Reliance By Grantors And Contributors.

(a) Verifying an Organization’s Public Charity Status.

(b) Reliance on Current Determination Letter.

§ 15.12 Other Rules.

§ 15.13 Public Safety Organizations.

§ 15.14 Termination Of Public Charity Status.

Chapter Sixteen: Donor-Advised.

§ 16.1 Basic Definitions.

§ 16.2 General Concept Of A Gift.

§ 16.3 Types Of Donor Funds.

§ 16.4 IRS Challenges To Donor Funds.

§ 16.5 Prohibited Material Restrictions.

§ 16.6 Department Of Justice Position.

§ 16.7 Public Charity Status Of Funds.

§ 16.8 Interrelationship Of Private Foundation Rules.

§ 16.9 Statutory Criteria.

Appendix A: Sources of the Law.

Appendix B: Internal Revenue Code Sections.

Table of Cases.

Table of IRS Revenue Rulings and Revenue Procedures.

Table of IRS Private Determinations Cited in Text.

Table of IRS Private Determinations Discussed in Bruce R. Hopkins' Nonprofit Counsel.

Table of IRS Private Letter Rulings, Technical Advice Memoranda, and General Counsel Memoranda.


"….is a handy how-to reference for stewards of these charitable arms, bound as they are by the IRS Code and regulations. The book is organized with an eye to procedural questions, from organizing and applying for tax-exempt status to managing mandatory distribution, to reporting annually to the IRS, to winding up a foundation's affairs." (Journal of Accountancy, April 1st, 2009)

"It is written in a clean and direct style, and builds logically from fundamental concepts and explanations to more complex organizational and legal issues. The authors have produced a most impressive offering in this third edition. Its appearance is both timely and welcome. Highly recommended." (Estate Planning, February 2009)