Make sense of the new regulatory requirements with expert clarification and practical tools for compliance

Private Foundations: Tax Law and Compliance, 5^th Edition provides clarification, expert insight, and helpful instruction for executives and supporting professionals navigating extensive federal tax law requirements. Despite their relatively low numbers, private foundations are subject to complex, burdensome regulations that continue to expand; the recent tax overhaul has compounded this issue, bringing massive changes beyond the usual annual adjustments, and throwing a wrench into the status quo of compliance-as-usual. This book summarizes and clarifies the statutory regulations governing private foundations, offers expert insight into the underlying logic, and provides a host of practical tools that ease the filing process and help ensure compliance with the latest laws.

Detailed explanations are bolstered by checklists, sample documents and letters, practice forms, and real-world examples in order to provide both conceptual and practical guidance for maintaining tax-exempt eligibility and tax compliance. By untangling the complex maze of constantly-evolving requirements, this book offers a much-needed resource to those tasked with ensuring compliance amidst regulatory changes year after year.

• Learn how the recent changes to tax laws affect private foundations and related organizations
• Understand the practical implications of maintaining compliance
• Access critical tools that help streamline the filing process

• Avoid mistakes and oversights with line-by-line instruction

This book is updated annually to provide guidance based on the most recent iteration of the law, but this year’s edition is unusually critical; federal law has undergone sweeping changes that will substantially alter filings across the board, and the complex nature of the regulations governing private foundations promises additional confusion as the new laws are applied. Private Foundations: Tax Law and Compliance, 5^th Edition provides insight, clarification, and explanation from the nation’s leading authority on tax-exempt organizations to help private foundations maintain compliance amidst the changes. 

BRUCE R. HOPKINS practices, with the Bruce R. Hopkins Law Firm, LLC, in the field of tax-exempt organizations, including private foundations, and is widely recognized as one of the country's leading lawyers in the field.

JODY BLAZEK is a partner in Blazek & Vetterling, a CPA firm focusing on tax and financial planning for exempt organizations and the individuals who create, fund, and work with them and is recognized as a leading accountant in the field.

Preface xiii

Book Citations xix

1 Introduction to Private Foundations 1

§1.1 Private Foundations: Unique Organizations 1          

§ 1.2 Definition of Private Foundation 4

§ 1.3 Background 5

§ 1.4 Private Foundation Law Primer 8

§ 1.5 Foundations in Overall Exempt Organizations Context 15

§ 1.6 Definition of Charity 16

§ 1.7 Operating for Charitable Purposes 17

§ 1.8 Organizational Rules 21

§ 1.9 Private Foundation Sanctions 24

§ 1.10 Statistical Profile 28

2 Starting, Funding, and Governing a Private Foundation 29

§ 2.1 Choice of Organizational Form 30

§ 2.2 Funding a Foundation 31

§ 2.3 Estate Planning Principles 33

§ 2.4 Foundations and Planned Giving 34

§ 2.5 Acquiring Recognition of Tax-Exempt Status 39

§ 2.6 Special Requirements for Charitable Organizations 61

§ 2.7 When to Report Back to the IRS 63

§ 2.8 Governance 71

3 Types of Private Foundations 85

§ 3.1 Private Operating Foundations 85

§ 3.2 Exempt Operating Foundations 107

§ 3.3 Conduit Foundations 107

§ 3.4 Common Fund Foundations 109

§ 3.5 Research and Experimentation Funds 110

§ 3.6 Other Types of Foundations 111

§ 3.7 Nonexempt Charitable Trusts 112

§ 3.8 Split-Interest Trusts 115

§ 3.9 Foreign Private Foundations 117

4 Disqualified Persons 121

§ 4.1 Substantial Contributors 121

§ 4.2 Foundation Managers 124

§ 4.3 Certain 20 Percent Owners 124

§ 4.4 Family Members 127

§ 4.5 Corporations or Partnerships 128

§ 4.6 Trusts or Estates 128

§ 4.7 Private Foundations 129

§ 4.8 Governmental Officials 129

§ 4.9 Termination of Disqualified Person Status 131

5 Self-Dealing 135

§ 5.1 Private Inurement Doctrine 137

§ 5.2 Private Benefit Doctrine 140

§ 5.3 Definition of Self-Dealing 146

§ 5.4 Sale, Exchange, Lease, or Furnishing of Property 150

§ 5.5 Loans and Other Extensions of Credit 163

§ 5.6 Payment of Compensation 167

§ 5.7 Indemnification and Insurance 182

§ 5.8 Uses of Income or Assets by Disqualified Persons 188

§ 5.9 Sharing Space, People, and Expenses 200

§ 5.10 Payments to Government Officials 204

§ 5.11 Indirect Self-Dealing 206

§ 5.12 Property Held by Fiduciaries 212

§ 5.13 Early Terminations of Charitable Remainder Trusts 218

§ 5.14 Additional Exceptions 219

§ 5.15 Issues Once Self-Dealing Occurs 221

6 Mandatory Distributions 235

§ 6.1 Distribution Requirements—In General 235

§ 6.2 Assets Used to Calculate Minimum Investment Return 237

§ 6.3 Measuring Fair Market Value 247

§ 6.4 Distributable Amount 255

§ 6.5 Qualifying Distributions 257

§ 6.6 Distributions to Certain Supporting Organizations 279

§ 6.7 Satisfying the Distribution Test 281

§ 6.8 History of the Mandatory Distribution Requirement 288

7 Excess Business Holdings 293

§ 7.1 General Rules 293

§ 7.2 Permitted and Excess Holdings 300

§ 7.3 Functionally Related Businesses 306

§ 7.4 Philanthropic Businesses 310

§ 7.5 Rules Applicable to Certain Supporting Organizations 310

§ 7.6 Rules Applicable to Donor-Advised Funds 311

§ 7.7 Excise Taxes on Excess Holdings 311

8 Jeopardizing Investments 315

§ 8.1 General Rules 316

§ 8.2 Prudent Investments 321

§ 8.3 Program-Related Investments 331

§ 8.4 Investment Frauds 336

§ 8.5 Excise Taxes for Jeopardizing Investments 340

9 Taxable Expenditures 345

§ 9.1 Legislative Activities 347

§ 9.2 Political Campaign Activities 356

§ 9.3 Grants to Individuals 359

§ 9.4 Grants to Public Charities 380

§ 9.5 Grants to Exempt Operating Foundations 384

§ 9.6 Grants to Foreign Organizations 385

§ 9.7 Expenditure Responsibility 388

§ 9.8 Internet and Private Foundations 399

§ 9.9 Spending for Noncharitable Purposes 404

§ 9.10 Distributions to Certain Supporting Organizations 408

§ 9.11 Excise Tax for Taxable Expenditures 408

10 Tax on Investment Income 415

§ 10.1 Rate of Tax 416

§ 10.2 Reducing Excise Tax 417

§ 10.3 Formula for Taxable Income 422

§ 10.4 Reductions to Gross Investment Income 432

§ 10.5 Foreign Foundations 438

§ 10.6 Exemption from Tax on Investment Income 440

11 Unrelated Business Activity 441

§ 11.1 General Rules 442

§ 11.2 Exceptions 451

§ 11.3 Rules Specifically Applicable to Private Foundations 459

§ 11.4 Unrelated Debt-Financed Income Rules 469

§ 11.5 Calculating and Reporting the Tax 474

12 Tax Compliance and Administrative Issues 479

§ 12.1 Successful Preparation of Form 990-PF 482

§ 12.2 Reports Unique to Private Foundations 501

§ 12.3 Compliance Issues 522

13 Termination of Foundation Status 567

§ 13.1 Voluntary Termination 569

§ 13.2 Involuntary Termination 571

§ 13.3 Transfer of Assets to a Public Charity 572

§ 13.4 Operation as a Public Charity 580

§ 13.5 Mergers, Split-Ups, and Transfers Between Foundations 581

§ 13.6 Termination Tax 595

§ 13.7 Abatement 597

14 Charitable Giving Rules 599

§ 14.1 Concept of Gift 599

§ 14.2 Basic Rules 602

§ 14.3 Gifts of Appreciated Property 604

§ 14.4 Deductibility of Gifts to Foundations 605

§ 14.5 Qualified Appreciated Stock Rule 606

§ 14.6 Deduction Reduction Rules 608

§ 14.7 Special Gift Situations 609

§ 14.8 Planned Giving Revisited 612

§ 14.9 Administrative Considerations 613

15 Private Foundations and Public Charities 621

§ 15.1 Distinctions between Public and Private Charities 622

§ 15.2 Evolution of Law of Private Foundations 624

§ 15.3 Organizations with Inherently Public Activity 626

§ 15.4 Publicly Supported Organizations—Donative Entities 633

§ 15.5 Service Provider Organizations 645

§ 15.6 Comparative Analysis of Categories of Publicly Supported Charities 655

§ 15.7 Supporting Organizations 658

§ 15.8 Change of Public Charity Category 688

§ 15.9 Noncharitable Supported Organizations 689

§ 15.10 Relationships Created for Avoidance Purposes 690

§ 15.11 Reliance by Grantors and Contributors 691

§ 15.12 Other Rules 693

§ 15.13 Public Safety Organizations 694

§ 15.14 Termination of Public Charity Status 694

16 Donor-Advised Funds 697

§ 16.1 Basic Definitions 698

§ 16.2 General Concept of a Gift 699

§ 16.3 Types of Donor Funds 701

§ 16.4 IRS Challenges to Donor Funds 704

§ 16.5 Prohibited Material Restrictions 705

§ 16.6 Department of Justice Position 709

§ 16.7 Public Charity Status of Funds 710

§ 16.8 Interrelationship of Private Foundation Rules 712

§ 16.9 Statutory Criteria 714

§ 16.10 Department of Treasury Study 717

§ 16.11 Congressional Research Service Study 717

§ 16.12 Tax Regulations 721

17 Corporate Foundations 729

§ 17.1 Corporate Foundation Overview 729

§ 17.2 Reasons for Establishment of a Corporate Foundation 731

§ 17.3 Private Inurement Doctrine 731

§ 17.4 Disqualified Persons Rules 732

§ 17.5 Self-Dealing Rules 733

§ 17.6 Other Private Foundations Rules 743

About the Authors 747

About the Online Resources 751

Index 753