Visit the Council’s Glossary of Philanthropic Terms for a more comprehensive glossary.
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501(c)(3)
Section of the Internal Revenue Code that designates an organization as charitable and tax-exempt. Organizations qualifying under this section include religious, educational, charitable, amateur athletic, scientific, or literary groups, organizations testing for public safety, or organizations involved in the prevention of cruelty to children or animals. Most organizations seeking foundation or corporate contributions secure a Section 501(c)(3) classification from the Internal Revenue Service (IRS). Note: The tax code sets forth a list of sections-501(c)(4-26)-to identify other nonprofit organizations whose function is not solely charitable (e.g., professional organizations, chambers of commerce, fraternal societies, etc.).
C
Charity
In its traditional legal meaning, the word "charity" encompasses religion, education, assistance to the government, promotion of health, relief of poverty or distress, and other purposes that benefit the community. Nonprofit organizations that are organized and operated to further one of these purposes generally will be recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (see 501(c)(3)) and will be eligible to receive tax-deductible charitable gifts.
Community Foundation
A community foundation is a tax-exempt, nonprofit, autonomous, nonsectarian philanthropic institution supported by the public with the long-term goals of:
- Building permanent, component funds established by many separate donors to carry out their charitable interests
- Supporting the broad-based charitable interests and benefitting the residents of a defined geographic area, typically no larger than a state
- Serving in leadership roles on important community issues
Community foundations provide an array of services to donors who wish to establish endowed funds without incurring the administrative and legal costs of starting independent foundations. There are more than 800 community foundations across the United States today. The Cleveland Foundation is the oldest; the Silicon Valley Community Foundation is the largest.
Corporate Foundation
A corporate (company-sponsored) foundation is a private foundation that derives its grantmaking funds primarily from the contributions of a profit-making business. The company-sponsored foundation often maintains close ties with the donor company, but it is a separate, legal organization, sometimes with its own endowment, and is subject to the same rules and regulations as other private foundations. There are nearly 2,200 corporate foundations in the United States holding some $68 billion in assets (see also Corporate Giving Program).
Corporate Giving Program
A corporate giving (direct giving) program is a grantmaking program established and administered within a profit-making company. Gifts or grants go directly to charitable organizations from the corporation. Corporate foundations/giving programs do not have a separate endowment; their expense is planned as part of the company's annual budgeting process and is usually funded with pre-tax income.
D
Direct Global Grantmaking
Direct global grantmaking refers to when a U.S. public charity or private foundation makes a grant directly to a foreign charitable organization rather than through a U.S.-based organization. When making direct global grants, private foundations and donor-advised funds must follow the two processes laid out by the IRS: equivalency determination or expenditure responsibility.
Learn more about direct global grantmaking
Donor-Advised Fund
A fund may be classified as donor-advised if it has at least three characteristics: (1) a donor or person appointed or designated by the donor has, or reasonably expects to have, advisory privileges with respect to the fund’s distributions or investments, (2) the fund is separately identified by reference to contributions of the donor(s), and (3) the fund is owned and controlled by a sponsoring organization, such as a community foundation. A fund possessing these characteristics may be exempt from the donor-advised fund classification if it grants to one single public charity or government unit or if the fund meets certain requirements applicable to scholarship funds. See IRC section 4966(d)(2).
E
Equivalency Determination
Equivalency determination (ED) is the process by which a private foundation or a donor-advised fund can make a “good-faith determination” that a foreign organization is the legal and operational equivalent to a U.S. 501(c)(3) public charity. ED can be used instead of expenditure responsibility when making international grants and generally allows for more flexibility for the usage of grant funds. Grantors relying on ED must ensure that their grant wouldn’t cause the grantee to fail to qualify as publicly supported (see Tipping).
Learn more about equivalency determination
Expenditure Responsibility
When a private foundation or donor advised fund makes a grant to an organization that is not classified by the IRS as tax-exempt under Section 501(c)(3) and as a public charity according to Section 509(a), it is required by law to ensure that the funds are spent for charitable purposes and not for private gain or political activities. The set of procedures established by the Treasury Department for documenting grants by private foundations to non-charities is called expenditure responsibility (ER). Grants made using ER require a pre-grant inquiry and a detailed, written agreement. Grantees are required to hold grant funds in a separate account and must provide regular reports to the foundation on the status of the grant. ER grants must be reported on the foundation's IRS Form 990-PF as long as any grant funds are unexpended or a grant report is still outstanding. This process may be used to grant to non-charities located within the U.S. as well as to non-U.S. organizations.
Learn more about expenditure responsibility
F
Family Foundation
"Family foundation" is not a legal term, and therefore, it has no precise definition. The Council on Foundations defines a family foundation as a foundation whose funds are derived from members of a single family. At least one family member must continue to serve as an officer or board member of the foundation, and as the donor, they or their relatives play a significant role in governing and/or managing the foundation throughout its life. Most family foundations are run by family members who serve as trustees or directors on a voluntary basis,receiving no compensation. In many cases, second- and third-generation descendants of the original donors manage the foundation. Many family foundations concentrate their giving locally, in the communities they are located in.
Form 990/Form 990-PF
Form 990 and Form 990-PF are the IRS forms filed annually by public charities and private foundations respectively. The letters PF stand for private foundation. The IRS uses this form to assess compliance with the Internal Revenue Code. Both forms list organization assets, receipts, expenditures, and compensation of officers.
G
Global Grantmaking Intermediary
Global grantmaking intermediary generally refers to an organization established and specialized to assist U.S. funders with working and granting internationally. These organizations may be registered in the United States and can offer donor-advised funds or fiscal sponsorship to facilitate international giving. They also may be registered in other countries. If using a global grantmaking intermediary located outside the U.S., U.S. funders would need to follow equivalency determination or expenditure responsibility.
Grant
A grant is an award of funds to an organization or individual to undertake charitable activities.
Grant Monitoring
Grant monitoring is the ongoing assessment of the progress of the activities funded by a donor, with the objective of determining if the terms and conditions of the grant are being met and if the goal of the grant is likely to be achieved.
Grantee
A grantee is the individual or organization that receives a grant.
Grantor
A grantor is the individual or organization that makes a grant.
I
Independent Private Foundation
Independent private foundations are usually founded by one individual, often by bequest. They are occasionally termed "non-operating" because they do not run their own programs. Sometimes individuals or groups of people, such as family members, form a foundation while the donors are still living. Many large independent foundations, such as the Ford Foundation, are no longer governed by members of the original donor's family but are run by boards made up of community, business, and academic leaders. Private foundations make grants to other tax-exempt organizations to carry out their charitable purposes. Private foundations must make charitable expenditures of approximately 5% of the market value of their assets each year. Although exempt from federal income tax, private foundations must pay a yearly excise tax of 1.39% of their net investment income.
Internal Revenue Service (IRS)
The IRS is the federal agency responsible for oversight and enforcement of U.S. tax laws, including the regulation of charitable organizations and their activities. You can learn more at www.irs.gov.
L
Lobbying
Efforts to influence legislation by influencing the opinion of legislators, legislative staff, and government administrators directly involved in drafting legislative proposals. The Internal Revenue Code sets limits on lobbying by organizations that are exempt from tax under Section 501(c)(3). Public charities (see Public Charity) may lobby as long as lobbying does not become a substantial part of their activities. Private foundations generally may not lobby except in limited circumstances such as on issues affecting their tax-exempt status or the deductibility of gifts to them. Conducting nonpartisan analysis and research and disseminating the results to the public generally is not lobbying for purposes of these restrictions.
Resources on advocacy and lobbying
N
Non-U.S. Foundation
This term Non-U.S. Foundation generally refers to a foundation not legally registered in the United States.
O
Operating Foundation
Also called private operating foundations, operating foundations are private foundations that use the bulk of their income to provide charitable services or to run charitable programs of their own. They make few, if any, grants to outside organizations. To qualify as an operating foundation, specific rules, in addition to the applicable rules for private foundations, must be followed.
Operating Support
Operating support refers to a contribution given to cover an organization's day-to-day, ongoing expenses, such as salaries, utilities, office supplies, etc.
P
Private Foundation
A private foundation is a nongovernmental, nonprofit organization with funds (usually from a single source, such as an individual, family, or corporation) and programs managed by its own trustees or directors, established to maintain or aid social, educational, religious, or other charitable activities serving the common welfare, primarily through grantmaking. U.S. private foundations are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and are classified by the IRS as private foundations as defined in the code. See IRC section 509.
Public Charity
A public charity is a nonprofit organization that is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and that receives its financial support from a broad segment of the general public. Religious, educational, and medical institutions are deemed to be public charities. Other organizations exempt under Section 501(c)(3) must pass a public support test (see Public Support Test) to be considered public charities, or must be formed to benefit an organization that is a public charity (see Supporting Organization). Charitable organizations that are not public charities are private foundations and are subject to more stringent regulatory and reporting requirements (see Private Foundation).
Public Support Test
There are two public support tests, both of which are designed to ensure that a charitable organization is responsive to the general public rather than a limited number of persons. One test, sometimes referred to as 509(a)(1) or 170(b)(1)(A)(vi) for the sections of the Internal Revenue Code where it is found, is for charities like community foundations that mainly rely on gifts, grants, and contributions. To be automatically classed as a public charity under this test, organizations must show that they normally receive at least one-third of their support from the general public (including government agencies and foundations). However, an organization that fails the automatic test still may qualify as a public charity if its public support equals at least 10 percent of all support and it also has a variety of other characteristics—such as a broad-based board—that make it sufficiently "public."
The second test, sometimes referred to as the section 509(a)(2) test, applies to charities, such as symphony orchestras or theater groups, that get a substantial part of their income from the sale of services that further their mission, such as the sale of tickets to performances. These charities must pass a one-third/one-third test. That is, they must demonstrate that their sales and contributions normally add up to at least one-third of their financial support, but their income from investments and unrelated business activities does not exceed one-third of support.
S
Self-Dealing
A private foundation is generally prohibited from self-dealing, which is broadly defined as entering into any financial transaction with disqualified persons or which directly or indirectly benefit disqualified persons. The few exceptions to this rule include paying reasonable compensation to a disqualified person for services that are necessary to fulfilling the foundation's charitable purposes. Violations will result in an initial penalty tax equal to 10% of the amount involved, payable by the self-dealer.
T
Tipping
Tipping refers to the situation that occurs when a gift or grant is made that is large enough to significantly alter the grantee's funding base and cause it to fail the public support test. Such a gift or grant results in "tipping" or conversion from public charity to private foundation status.
