Understanding Private Operating Foundations
What is a private operating foundation?
A private operating foundation is a type of Section 501(c)(3) charity that uses its income primarily to directly operate a charitable program. For example, a private operating foundation may be a museum that is established and funded predominately by one or a few donors. In this case, the museum would be a private foundation because of its very limited pool of donors, but could qualify as an operating foundation because it is directly carrying out a charitable program. In contrast, the more familiar private non-operating foundation fulfills its charitable purposes primarily by making grants to other organizations.
An operating foundation must meet certain tests to obtain private operating foundation status. Very generally, it must meet an income test that requires the foundation to use substantially all of its income directly for its own charitable activities. In addition, it must meet either an assets test, endowment test, or a support test. Each test is designed to determine whether the foundation is actively operating its own charitable program.
Can a corporate private foundation qualify as an operating foundation?
Yes. While unusual, a corporate foundation could obtain IRS approval as a private operating foundation if it is carrying out an active charitable service or program and meets the above-mentioned tests.
How will a corporate grantmaker know if a prospective grantee is a private operating foundation?
If your grantmaking program uses IRS Publication 78 to check the status of potential grantees, private operating foundations are indicated by the code number 3. If you are reviewing the organization’s IRS letter of determination, you will notice that the determination letter specifies whether the grantee is a private operating foundation.
Can a corporate foundation or giving program make a grant to a private operating foundation?
Yes. A grant from a corporate giving program to a corporate foundation is permitted and eligible for a charitable deduction. Grants from a corporate private foundation are also permitted but certain rules must be followed since the grantee is not a public charity. Specifically, the corporate private foundation must follow expenditure responsibility rules. Expenditure responsibility rules ensure that a grant is used for charitable purposse and that the private foundation maintains appropriate oversight and documentation of the grant.
How does a corporate grantmaker exercise expenditure responsibility for a grant to a private foundation?
Expenditure responsibility for a grant to a private foundation consists of four steps:
- A pre-grant inquiry that includes a reasonable investigation of the grantee to ensure that the proposed activity is charitable and that the grantee is able to perform the proposed activity.
- A written agreement with the grantee that specifies the grant’s charitable purposes and includes provisions prohibiting use of the funds for lobbying activities and requiring the grantee to return any funds not used for the designated purposes.
- Regular reports by the grantee on the use of the funds and the charitable activity supported by the grant.
- A report on Form 990-PF about the grant, including a brief description, amount, charitable purpose, and current status of the grant.
Grantees must keep records of their expenditures and copies of reports submitted to the corporate private foundation for at least four years after the grant funds are expended.
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