Private Foundations: Tax Law and Compliance

Private Foundations: Tax Law and Compliance

by Bruce R. Hopkins, Jody Blazek

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Product Details

ISBN-13: 9781118532492
Publisher: Wiley
Publication date: 06/16/2014
Series: Wiley Nonprofit Authority
Sold by: Barnes & Noble
Format: NOOK Book
Pages: 896
File size: 10 MB

About the Author

BRUCE R. HOPKINS is a senior partner in the law firm of Polsinelli Shalton Flanigan Suelthaus PC, practicing in the firm's Kansas City, Missouri, and Washington, D.C., offices. He specializes in the representation of private foundations and other taxexempt organizations. His practice ranges over the entirety of law matters involving exempt organizations, with emphasis on the formation of nonprofit organizations, acquisition of recognition of tax-exempt status for them, the private inurement and private benefit doctrines, the intermediate sanctions rules, legislative and political campaign activities issues, public charity and private foundation rules, unrelated business planning, use of exempt and for-profit subsidiaries, joint venture planning, tax shelter involvement, review of annual information returns, Internet communications developments, the law of charitable giving (including planned giving), and fundraising law issues.
Mr. Hopkins served as Chair of the Committee on Exempt Organizations, Tax Section, American Bar Association; Chair, Section of Taxation, National Association of College and University Attorneys; and President, Planned Giving Study Group of Greater Washington, D.C.
Mr. Hopkins is the series editor of Wiley's Nonprofit Law, Finance, and Management Series. In addition to co-author of Private Foundations: Tax Law and Compliance,Third Edition, he is the author of The Law of Tax-Exempt Organizations, Ninth Edition;The Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries;IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures; The Tax Lawof Charitable Giving, Third Edition; The Law of Fundraising, Third Edition; The Tax Law ofAssociations; The Tax Law of Unrelated Business for Nonprofit Organizations; The Nonprofits'Guide to Internet Communications Law; The Law of Intermediate Sanctions: A Guide forNonprofits; Starting and Managing a Nonprofit Organization: A Legal Guide, Fifth Edition;Nonprofit Law Made Easy; Charitable Giving Law Made Easy; Private Foundation Law MadeEasy; 650 Essential Nonprofit Law Questions Answered; The First Legal Answer Book forFund-Raisers; The Second Legal Answer Book for Fund-Raisers; The Legal Answer Book forNonprofit Organizations; The Second Legal Answer Book for Nonprofit Organizations; andThe Nonprofit Law Dictionary; and is the co-author, with Jody Blazek, of The Legal AnswerBook for Private Foundations; with Thomas K. Hyatt, of The Law of Tax-ExemptHealthcare Organizations, Third Edition; with David O. Middlebrook, of Nonprofit Lawfor Religious Organizations: Essential Questions&Answers; and with Douglas K. Anning, Virginia C. Gross, and Thomas J. Schenkelberg, of The New Form 990: Law, Policyand Preparation. He also writes Bruce R. Hopkins' Nonprofit Counsel, a monthly newsletter, published by John Wiley&Sons.
Mr. Hopkins received the 2007 Outstanding Nonprofit Lawyer Award (Vanguard Lifetime Achievement Award) from the American Bar Association, Section of Business Law, Committee on Nonprofit Corporations. He is listed in The Best Lawyers inAmerica, Nonprofit Organizations/Charities Law, 2007-2008.
Mr. Hopkins earned his J.D. and L.L.M. degrees at the George Washington University National Law Center and his B.A. at the University of Michigan. He is a member of the bars of the District of Columbia and the state of Missouri.

JODY BLAZEK is a partner in Blazek&Vetterling LLP, a Houston CPA firm focusing on tax and financial planning for exempt organizations and the individuals who create, fund, and work with them. BV serves over 400 nonprofit organizations providing financial reports and tax compliance and planning services.
Ms. Blazek's accounting career has concentrated on nonprofit organizations for over 38 years. This focus began with KPMG (then Peat Marwick) when she studied and interpreted the Tax Reform Act of 1969 as it related to charitable organizations and the creation of private foundations. From 1972 to 1981 she gained nonprofit management experience as treasurer of the Menil Interests, where she worked with John and Dominique de Menil to plan the Menil Collection, The Rothko Chapel, and other projects of the Menil Foundation. She reentered public practice in 1981 to found the firm she now serves.
She is the author of six books in the Wiley Nonprofit Series: Nonprofit FinancialPlanning Made Easy (2008); IRS Form 1023 Preparation Guide (2005); IRS Form 990 TaxPreparation Guide for Nonprofits (2004); Tax Planning and Compliance for Tax-Exempt Organizations,Fourth Edition (2004); Private Foundations: Tax Law and Compliance, ThirdEdition (2008); and The Legal Answer Book for Private Foundations (2002), the latter two volumes co-authored with Bruce R. Hopkins. Ms. Blazek serves on the Panel of the Nonprofit Sector, Transparency and Financial AccountabilityWork Group.
Ms. Blazek is past Chair of the Tax-Exempt Organizations Resource Panel and a member of Form 1023 and 999 Revision Task Forces for the American Institute of Certified Public Accountants; she serves on the national editorial board of Tax Analysts'The Exempt Organization Tax Review and the AICPA's The Tax Advisor; and is an advisor to the Volunteer Service Committee of the Houston Chapter of Certified Public Accountants. She is a founding director of Texas Accountants and Lawyers for the Arts and a member of the board of the Anchorage Foundations, Houston Artists Fund, and the River Pierce Foundation. Ms. Blazek is a frequent speaker at nonprofit symposia, including AICPA Not-for-Profit Industry Conference; University of Texas Law School Nonprofit Organizations Institute; Texas, New York, Arizona, and Washington State CPA Societies' Nonprofit Conferences; conference of Southwest Foundations and Association of Small Foundations; and Resource Center's Nonprofit Legal and Accounting Institute, among others.
Jody Blazek received her BBA from University of Texas at Austin in 1964 and took selected taxation courses at South Texas School of Law. She and her husband, David Crossley, nurture two sons, Austin and Jay Blazek Crossley.

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Table of Contents

Preface xiii

Book Citations xix

1 Introduction to Private Foundations 1

1.1 Private Foundations: Unique Organizations 1

1.2 Definition of Private Foundation 5

1.3 History and Background 6

1.4 Private Foundation Law Primer 9

1.5 Statistical Profile 16

1.6 Foundations in Overall Exempt Organizations Context 17

1.7 Definition of Charity 18

1.8 Operating for Charitable Purposes 19

1.9 Organizational Rules 24

1.10 Private Foundation Sanctions 26

2 Starting and Funding a Private Foundation 33

2.1 Choice of Organizational Form 33

2.2 Funding a Foundation 36

2.3 Estate Planning Principles 38

2.4 Foundations and Planned Giving 39

2.5 Acquiring Recognition of Tax-Exempt Status 44

2.6 Special Requirements for Charitable Organizations 104

2.7 When to Report Back to the IRS 107

3 Types of Private Foundations 117

3.1 Private Operating Foundations 117

3.2 Conduit Foundations 139

3.3 Common Fund Foundations 141

3.4 Research and Experimentation Funds 142

3.5 Other Types of Foundations 143

3.6 Nonexempt Charitable Trusts 144

3.7 Split-Interest Trusts 147

3.8 Foreign Private Foundations 149

4 Disqualified Persons 153

4.1 Substantial Contributors 153

4.2 Foundation Managers 158

4.3 Certain 20 Percent Owners 159

4.4 Family Members 161

4.5 Corporations or Partnerships 162

4.6 Trusts or Estates 162

4.7 Private Foundations 163

4.8 Governmental Officials 163

4.9 Terminating Disqualified Person Status 166

5 Self-Dealing 169

5.1 Private Inurement Doctrine 171

5.2 Private Benefit Doctrine 174

5.3 Definition of Self-Dealing 180

5.4 Sale, Exchange, Lease, or Furnishing of Property 184

5.5 Loans and Other Extensions of Credit 196

5.6 Payment of Compensation 200

5.7 Indemnification and Insurance 221

5.8 Uses of Income or Assets by Disqualified Persons 227

5.9 Sharing Space, People, and Expenses 238

5.10 Payments to Government Officials 243

5.11 Indirect Self-Dealing 245

5.12 Property Held by Fiduciaries 251

5.13 Early Terminations of Charitable Remainder Trusts 256

5.14 Additional Exceptions 257

5.15 Issues Once Self-Dealing Occurs 260

6 Mandatory Distributions 273

6.1 Distribution Requirements—In General 273

6.2 Assets Used to Calculate Minimum Investment Return 275

6.3 Measuring Fair Market Value 285

6.4 Distributable Amount 294

6.5 Qualifying Distributions 297

6.6 Distributions to Certain Supporting Organizations 319

6.7 Satisfying the Distribution Test 322

6.8 History of the Mandatory Distribution Requirement 329

7 Excess Business Holdings 335

7.1 General Rules 335

7.2 Permitted and Excess Holdings 341

7.3 Functionally Related Businesses 347

7.4 Rules Applicable to Certain Supporting Organizations 350

7.5 Rules Applicable to Donor-Advised Funds 350

7.6 Excise Taxes on Excess Holdings 351

8 Jeopardizing Investments 353

8.1 General Rules 354

8.2 Prudent Investments 359

8.3 Program-Related Investments 373

8.4 Investment Frauds 379

8.5 Excise Taxes for Jeopardizing Investments 382

9 Taxable Expenditures 387

9.1 Legislative Activities 389

9.2 Political Campaign Activities 399

9.3 Grants to Individuals 402

9.4 Grants to Public Charities 424

9.5 Grants to Foreign Organizations 434

9.6 Expenditure Responsibility 440

9.7 Internet and Private Foundations 459

9.8 Spending for Noncharitable Purposes 465

9.9 Distributions to Certain Supporting Organizations 468

9.10 Excise Tax for Taxable Expenditures 468

10 Tax on Investment Income 477

10.1 Rate of Tax 478

10.2 Reducing the Excise Tax 480

10.3 Formula for Taxable Income 488

10.4 Reductions to Gross Investment Income 501

10.5 Foreign Foundations 509

10.6 Exemption from Tax on Investment Income 510

10.7 Legislative Proposal 511

11 Unrelated Business Income 513

11.1 General Rules 514

11.2 Exceptions 525

11.3 Rules Specifically Applicable to Private Foundations 532

11.4 Unrelated Debt-Financed Income 543

11.5 Calculating and Reporting the Tax 547

12 Tax Compliance and Administrative Issues 553

12.1 Successful Preparation of Form 990-PF 558

12.2 Reports Unique to Private Foundations 575

12.3 Compliance Issues 595

13 Termination of Foundation Status 669

13.1 Voluntary Termination 671

13.2 Involuntary Termination 673

13.3 Transfer of Assets to a Public Charity 674

13.4 Operation as a Public Charity 681

13.5 Mergers, Split-Ups, and Transfers between Foundations 683

13.6 Termination Tax 698

13.7 Abatement 699

14 Charitable Giving Rules 701

14.1 General Rules 701

14.2 Gifts of Appreciated Property 704

14.3 Deductibility of Gifts to Foundations 706

14.4 Deduction Reduction Rules 707

14.5 Planned Giving Revisited 710

14.6 Administrative Considerations 710

15 Private Foundations and Public Charities 715

15.1 Distinctions between Public and Private Charities 716

15.2 Evolution of Law of Private Foundations 719

15.3 Organizations with Inherently Public Activity 721

15.4 Publicly Supported Organizations—Donative Entities 727

15.5 Service Provider Organizations 743

15.6 Comparative Analysis of the Two Categories of Publicly Supported Charities 754

15.7 Supporting Organizations 757

15.8 Change of Public Charity Category 784

15.9 Noncharitable Supported Organizations 786

15.10 Relationships Created for Avoidance Purposes 786

15.11 Reliance by Grantors and Contributors 787

15.12 Other Rules 792

15.13 Public Safety Organizations 792

15.14 Termination of Public Charity Status 792

16 Donor-Advised Funds 795

16.1 Basic Definitions 796

16.2 General Concept of a Gift 797

16.3 Types of Donor Funds 799

16.4 IRS Challenges to Donor Funds 802

16.5 Prohibited Material Restrictions 803

16.6 Department of Justice Position 808

16.7 Public Charity Status of Funds 809

16.8 Interrelationship of Private Foundation Rules 810

16.9 Statutory Criteria 812

16.10 Department of Treasury Study 816

16.11 Congressional Research Service Study 816

17 Corporate Foundations 821

17.1 Corporate Foundation Overview 821

17.2 Reasons for Establishment of a Corporate Foundation 822

17.3 Private Inurement Doctrine 823

17.4 Disqualified Persons Rules 824

17.5 Self-Dealing Rules 825

17.6 Other Private Foundations Rules 833

About the Authors 837

About the Online Resources 841

Index 843

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