Community Foundations

Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism

FatimaNajiy — Mon, 13 Sep 2021 14:25:35 +0000

Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism FatimaNajiy Mon, 09/13/2021 - 10:25

Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism

In late 2020, the Council on Foundations (the Council) launched the Values-Aligned Philanthropy project to continue to build on their previous efforts within the philanthropic sector to respond to growing concern about the issue of funding hate and extremism. The Council took this step recognizing that while there is significant work being done by grantmakers and social sector leaders across the country to prevent hate funding, there has not been a comprehensive analysis of what has been done and who is doing what from the perspective of philanthropy. The Council believes that mapping the eco-system will provide a baseline for identifying gaps, best practices, and next steps to addressing this problem. Research and writing for the project have been provided by Roey Thorpe, an independent consultant, with guidance from Council staff.

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Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism

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Sample Documents for Scholarship Funds

council-webteam — Thu, 04 Jul 2019 01:05:43 +0000

Sample Documents for Scholarship Funds council-webteam Wed, 07/03/2019 - 21:05

Sample Documents for Scholarship Funds

Community foundations that award scholarships and other grants to individuals from funds with donor involvement should be sure these funds comply with the requirements of the Pension Protection Act of 2006.

The PPA prohibits grants to individuals from funds that meet the fairly broad definition of donor-advised funds. For this reason, all funds that will be making grants to individuals must be sure not to fall within the definition of donor-advised funds, even inadvertently. Under Section 4966 of the Tax Code, a fund will not be considered a donor-advised fund if all of the following are true:

The sponsoring organization (the community foundation) appoints all of the members of the scholarship committee and the donor's advice is given solely as a member of the committee.
Neither the donor nor the parties related to the donor control the scholarship committee directly or indirectly.
All grants are awarded on an objective and nondiscriminatory basis using a procedure that has been approved in advance by the board of directors of the sponsoring organization and that has been designed to ensure that all such grants meet the requirements of paragraphs (1), (2), or (3) of section 4945(g) of the Tax Code.

The following are all of the Council’s sample scholarship procedures designed to help foundations meet the third prong of the above test as well as properly conveying information to grantees.

Sample Scholarship Fund Documents

Scholarship Policies & Procedures

Scholarship Fund Agreement

Board Resolution for Scholarship Funds

Scholarship Award Letter

These sample documents are being provided for informational purposes only as part of your participation in the Community Foundations National Standards program and are not to be shared without the permission of the Council on Foundations. Use of the sample document does not create an attorney-client relationship, and the information provided is not a substitute for expert legal, tax, or other professional advice tailored to your specific circumstances. The information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

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Disaster Relief: A Practical Guide for Foundations and Corporations

council-webteam — Tue, 25 Nov 2014 03:56:55 +0000

Disaster Relief: A Practical Guide for Foundations and Corporations council-webteam Mon, 11/24/2014 - 22:56

Disaster Relief: A Practical Guide for Foundations and Corporations

Moved by widely publicized human suffering and increased disaster aid requests, foundations and corporations are becoming more active in the disaster relief field. Grantmakers have a distinct role to play in disasters because of their ongoing relations with grantees, long-term perspective, flexibility, and convening capacity. Lacking the sizable emergency relief resources of governments and some well-known nongovernmental organizations (NGOs), foundations and corporate grantmakers nevertheless can make a significant contribution — for instance, by filling critical gaps in underfunded areas like disaster rehabilitation, prevention, research, and education.

Based on lessons learned from a year-long joint study of the European Foundation Centre and the Council on Foundations, we concluded that grantmakers can be more effective and strategic in addressing disasters by following eight principles:

First, do no harm.
Not all disaster assistance is beneficial. Inappropriate items can overwhelm limited transportation, storage, and distribution capacities, thereby delaying the delivery of assistance that is desperately needed. Aim to ensure that your grant contributes to the solution and not to the problem.
Stop, look, and listen before taking action.
Information is the key to good disaster grantmaking. Every disaster has unique characteristics. Take the time to learn about the specifics of a disaster before deciding how to respond.
Don't act in isolation.
Coordination among disaster grantmakers, among NGOs operating on the ground, and between these two groups can reduce duplication of effort, make efficient use of resources, and ensure that the highest-priority needs are addressed first. Grantmakers can participate in various standing and ad hoc fora - both real and virtual - where needs are discussed, information is exchanged, and assistance is coordinated.
Think beyond the immediate crisis to the long term.
The emergency phase of a disaster attracts most of the attention and resources. Grantmakers can play a very useful role before the crisis by supporting disaster prevention and preparedness activities and afterward by filling gaps between emergency relief and long-term development programs.
Bear in mind the expertise of local organizations.
Community-based organizations and NGOs with a local presence are the first on the scene when disasters occur. They know best what assistance is needed and they understand the complex political, social, and cultural context of a disaster. However, these organizations are often hampered by the lack of resources and organizational capacity to carry out their important role. Working with and/or supporting these organizations can prove mutually beneficial.
Find out how prospective grantees operate.
Organizations that work on disasters vary greatly in their approaches and overall philosophies. Some specialize only in emergency relief, while others have a long-term development orientation. Some support the work of local organizations, while others do not. It is wise to know what approach you are supporting before making a grant.
Be accountable to those you are trying to help.
Grantmakers should be accountable not only to their donors, boards, and shareholders, but also to the people they seek to assist. Grantmakers need to go beyond merely determining how their grant was spent to engage their grantees in a process that assesses social impact.
Communicate your work and use it as an educational tool.
Highlighting examples of good disaster grantmaking is an excellent way for grantmakers to educate both internal and external audiences about the disaster process. It is useful to build a knowledge base, capture lessons learned, and share your experience with boards, staff, employees, other grantmakers, the media, community groups, public officials, and international organizations.

A number of practical suggestions for good disaster grantmaking flow from these principles and are highlighted in this guide.

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Disaster Relief: A Practical Guide for Foundations and Corporations

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FAQ: Global Grantmaking

council-webteam — Sun, 16 Nov 2014 14:40:42 +0000

FAQ: Global Grantmaking council-webteam Sun, 11/16/2014 - 09:40

FAQ: Global Grantmaking

What are the legal requirements for private foundations wishing to make cross-border grants?
What are the legal requirements for public charities wishing to make cross-border grants?
What anti-terrorism actions and policies of the U.S. Government relate to global grantmaking?

What are the legal requirements for private foundations wishing to make cross-border grants?

Private foundations wishing to make a cross-border grant must ensure that:

The grant is clearly for a charitable purpose, and
The grant counts as a qualifying distribution for the purpose of meeting the foundation’s annual distribution requirement.

The easiest way for a private foundation to satisfy both of these requirements is to choose a grantee that is recognized by the IRS as a public charity.

If a private foundation chooses to make a grant to a non-U.S. organization that is not recognized by the IRS as a public charity, the foundation must follow one of the two options provided in the tax code:

Determine that the non-U.S. grantee is the “equivalent” of a U.S. public charity (“equivalency determination”), or;
Exercise “expenditure responsibility.”

What is Equivalency Determination?

Equivalency determination is a process designed to assess whether a potential non-U.S. grantee organization is the equivalent of a U.S. public charity. It involves collecting certain information from the grantee about its origins, activities, and finances through an affidavit (see link below for sample affidavit). On the basis of the information provided in the affidavit, the private foundation then makes a good-faith determination concerning U.S. public charity equivalency and documents that decision. The determination may be made by the private foundation on its own or relying on the written opinion of counsel or the potential grantee’s counsel. The process need not be complicated; many private foundations routinely conduct equivalency reviews of prospective grantees.

The following documents, translated into English, are necessary to make an equivalency determination:

Founding documents of the organization.
A description of the purposes of the organization as well as its past and present activities.
Dissolution provisions, either contained in the founding documents or applicable law (see link below to country notes).
Restrictions on private benefit, non-charitable activities, lobbying, and participation in political campaigns, either contained in the founding documents or applicable law (see link below to country notes)
Detailed financial records (excluding religious institutions or medical or educational organizations).

Advantages of Equivalency Determination

This method does not require grantee reports at the end of each accounting period, a separate account dedicated to charitable purposes, or detailed reporting on Form 990-PF.

Disadvantages Equivalency Determination

This method requires substantial documentation in English plus financial reporting from previous years.

What is Expenditure Responsibility?

Expenditure responsibility is a method of making direct cross-border grants to a non-U.S. organization whereby the private foundation assumes full responsibility for ensuring that its grant is used for a charitable purpose. The process need not be unduly burdensome for either the grantmaker or grantee. Private foundations may apply expenditure responsibility grants to their payout requirement if they take the following steps:

Undertake a pre-grant inquiry with reasonable determination that the intended grantee is capable of fulfilling the charitable purposes of the grant.
Conclude a grant agreement that includes spending and reporting responsibilities and commits the grantee to spend the money only for the specified charitable purposes.
Require grantee to maintain grant funds in a separate account for charitable purposes.
Require one or more reports from the grantee detailing how the funds have been spent.
Report the grant on the foundation’s form 990-PF.

Reporting for expenditure responsibility grants:

The U.S. Department of the Treasury requires that recipients of expenditure responsibility grants provide reports on how the funds were used. Existing IRS guidance does not provide clear answers on the following aspects of the reporting requirement: grants for capital equipment, grants for endowment, and reasonable efforts to secure reports from grantees. In the absence of guidance from the IRS, the Council on Foundations has made available its recommendations to international grantmakers in a letter to the U.S. Department of the Treasury: Guidance on Expenditure Responsibility: Council on Foundations Letter to Treasury (in PDF).

Advantages of Expenditure Responsibility

Because equivalency determination can occasionally be a lengthy and ultimately unsuccessful process (i.e., the prospective grantee turns out not to be the equivalent of a U.S. public charity), grantmakers often choose to exercise expenditure responsibility instead.

Disadvantages of Expenditure Responsibility

Grant reports are required from the grantee until all funds have been expended, which may require monitoring the grant over a period of several years.

How do I decide whether to use Equivalency Determination or Expenditure Responsibility?

In 2001, the IRS made clear in a letter to the Council on Foundations that a private foundation wishing to make a grant to a foreign organization could choose between expenditure responsibility and equivalency determination, and that there was no obligation to rule out equivalency before turning to expenditure responsibility.

Table 1: When There Is No Choice

Situation	Required Action
Grantee is a non-charitable enterprise that will use the grant for charitable purposes	Expenditure responsibility is the only way to make this grant
Grantee cannot supply the information required for an equivalency affidavit	Grantor must use expenditure responsibility because it does not have enough information for an equivalency determination
Grantor evaluates the affidavit and concludes that despite everyone’s best efforts, the grantee is not the equivalent of a public charity	Expenditure responsibility is the only way to make the grant

Table 2: When the Grantor Can Choose

Circumstances that favor Equivalency	Circumstances that favor Expenditure Responsibility
Grantor expects long-term relationship	Grantor plans a one-time grant
Grantee can supply governing documents and no financial data is needed (i.e., grantee is a school, hospital, or church)	Grantee may have considerable difficulty in supplying historical financial data or obtaining a certified copy of its governing documents
Grantor wants flexible reporting procedures	Grantor wants strict reporting provisions
Grantor wants to make a general support grant
Grantee plans to re-grant funds received to accomplish its exempt purposes

What are the legal requirements for public charities wishing to make cross-border grants?

International grantmaking requirements for public charities are significantly less onerous than those for private foundations, yet public charities still have a fiduciary duty to ensure that grant funds are used exclusively for charitable purposes. Although they are not required to do so, most public charities follow the grantmaking rules for private foundations.

The Pension Protection Act of 2006, signed into law by President Bush on August 17, 2006, introduced new rules for international grants made from donor-advised funds. International grantmaking from donor-advised assets now requires equivalency determination or expenditure responsibility. While the Council is seeking guidance as to what expenditure responsibility means for public charities, the regulations for private foundations provide some guidance.

The suggested approach by the Council on Foundations for public charities that do not use donor-advised funds for their international grantmaking is as follows:

Obtain English copies of organizational documents and a description of the activities and programs of the grantee.
Enter into a specific written agreement, documenting the grantee’s commitments and the use of funds for charitable purposes.
Obtain a yearly accounting of the funds for each year until the funds are expended.

What anti-terrorism actions and policies of the U.S. Government relate to international grantmaking?

The U.S. government took a number of steps to ensure that charitable funds were not diverted to terrorists and their organizations in the United States and around the world following the terrorist attacks of September 11, 2001. These included Executive Order 13224 and the USA Patriot Act, both issued shortly after 9/11, as well as the Treasury Department’s “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities,” originally issued in November 2002 and most recently re-issued on September 29, 2006. This section provides a brief description of U.S. government anti-terrorism initiatives:

Executive Order 13224
U.S.A. Patriot Act
U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities

What does Executive Order 13224 do?

Executive Order 13224 was signed by President George W. Bush on September 24, 2001, to cut off resources to terrorists and terrorist organizations through asset blocking. The Executive Order prohibits transactions with those entities deemed by the Executive Branch to be associated with terrorism and freezes all assets controlled by or in the possession of these entities and those who support them. The EO prohibits the provision of any financial or material support to any entity specifically listed in an Annex or determined by the Secretaries of State or Treasury, as well as any associated entities. Several U.S. government agencies have created lists of known or suspected terrorists, as has the United Nations and the European Union. The most comprehensive of the U.S. lists is the Treasury Department's Specially Designated Nationals (SDN) list. Both the Treasury Department and Executive Order lists are physically included in the Executive Order. The open-endedness of the prohibitions contained in the EO is worrisome for grantmakers. No distinction is made in the EO between domestic and international terrorism.

How does the U.S.A. Patriot Act relate to grantmaking?

The U.S.A. Patriot Act was enacted in October 2001 and reauthorized in 2005. Among its many provisions, the Act increased existing criminal penalties for knowingly or intentionally providing material support or resources for terrorism. For grantmakers, these criminal statutes open the possibility that they could be found -- despite their best intentions -- to have knowingly or intentionally provided material support or resources for terrorism. Another concern for grantmakers is potential civil liability should their grants end up in the wrong hands. Nonprofit grantmaking organizations are not immune to potential legal liability because of the inherent charitable or humanitarian nature of their missions.[1]

What are the Treasury Department’s Voluntary Anti-Terrorist Financing Guidelines?

On September 29, 2006, the U.S. Department of the Treasury issued an updated version of the “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities.” The “Guidelines” were originally issued in November 2002 and revised in December 2005 to assist charitable organizations in complying with Executive Order 13224 and the USA Patriot Act following 9/11. The new Guidelines may be accessed here: Revised Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities

On the same day, the Treasury Department released a document responding to public comments it received during the comment period following the release of the second version of the Guidelines in December 2005. This document may be accessed: Response to Comments Submitted on the U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (PDF).

These comments include a submission by the Treasury Guidelines Working Group, a broadly representative group of more than 40 U.S. charities, foundations, religious organizations, corporations, umbrella associations, watchdog groups, and advisors, created in the spring of 2004 and coordinated by the Council on Foundations. In February 2006, the Treasury Guidelines Working Group submitted comments in response to the invitation for public comments on the revised “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities” issued on December 5, 2005. Download the comments (PDF).

The working group developed the Principles of International Charity (PDF) that identifies eight principles to guide the anti-terrorism efforts of charities. The Principles of International Charity were submitted to the Treasury Department as an alternative to the Guidelines in March 2005.

Read the revised Anti-Terrorist Financing Guidelines: Voluntary Best Practices For U.S.-Based Charities
Download the Treasury Guidelines Working Group Comments (PDF) submitted to the Treasury Department in February 2006
Download the Principles of International Charity (PDF)
Download Council on Foundation Comments on Original U.S. Department of Treasury Anti-Terrorist Financing Guidelines (PDF) submitted in June 2003.

How should grantmakers respond to these various anti-terrorism measures?

Despite the attention paid in the media to a handful of charities alleged to have helped finance and aid terrorist activities, the Executive Order and the U.S.A. Patriot Act are not targeted directly at grantmaking organizations. As a result, they do not spell out specific procedures that grantmakers should undertake in order to comply with the law.

In the absence of such guidance, grantmakers will have to rely a good deal on common sense. Some useful ideas to consider include:

Know as much as you can about your grantees and their associates.
Know what you can about donors who play a role in identifying grantees.
Involve your donors and grantees in the compliance process.
Educate board and staff about internal anti-terrorism measures.
Consider developing an anti-terrorism policy statement.
Discuss concerns with legal counsel.
Document steps taken to comply with the Executive Order and the Patriot Act.
Keep informed about anti-terrorism developments.
Consult International Grantmaking: A Guide for Funders Making Grants Outside the United States.

International grantmakers are responding to the federal anti-terrorism policies in many ways. The Council’s global philanthropy experts conducted an informal survey of a representative sample of approximately 35 of the Council’s international grantmaking members to determine what, if any, changes they had made or were planning to make in their procedures because of the government’s anti-terrorism actions. Read the results of this survey in: "Federal Anti–Terrorism Measures: How Foundations and Corporate Grantmakers are Responding."

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FAQ: Scholarships

council-webteam — Mon, 10 Nov 2014 17:12:03 +0000

FAQ: Scholarships council-webteam Mon, 11/10/2014 - 12:12

FAQ: Scholarships

What are the advantages, disadvantages, and likely costs of scholarship programs?
What do the private foundation rules require, and how should community foundations apply the rules?
What rules or procedures govern community foundation scholarship programs?
Does a community foundation need to notify the IRS before starting a scholarship program?
What are the community foundation's tax reporting requirements in connection with scholarship assistance? What are the tax consequences to the student who receives scholarship aid?
Can a community foundation make scholarship grants to individuals?
May a scholarship fund be established through a donor-advised fund?
What constitutes a charitable class in establishing a scholarship program?
To whom should the community foundation make out the scholarship check, the student, or the school?
May a community foundation give a scholarship to a student attending a for-profit school, such as a vocational school?
Are there sample documents for scholarship funds?
Can we increase the number or size of awards after recipients are selected?

What are the advantages, disadvantages, and likely costs of scholarship programs?

Scholarship programs focus on youth and education, two central concerns of most community foundations. Good publicity about these programs can help create community awareness of the foundation's existence and resources and can generate contributions from diverse segments of the population. Through convening scholarship granting committees, the community foundation can bring new volunteers into its activities. The drawback of scholarship programs is that they involve a good deal of administrative work on the community foundation's part. Publicizing the existence of the programs, collecting applications, coordinating the work of review committees, disbursing funds, and tracking recipients are among the tasks that are involved in running scholarships. Traditionally, community foundations have estimated that administrative costs run from five to twenty percent of the programs. If administrative costs are to be deducted from the particular scholarship fund to which they are attributable, donors should be made aware of such charges from the start. Similarly, if the community foundation opts to levy a fixed administrative fee on scholarship funds, the donor should be aware of the amount.

What do the private foundation rules require, and how should community foundations apply the rules?

In addition to the existence of a charitable class, the private foundation rules require that grants be made in a objective and non-discriminatory fashion. The selection criteria for a foundation's grants should be reasonably related to the purpose of the grant. Thus, for a scholarship grant, likely criteria on which a decision might be based include prior academic performance; test scores; recommendations from instructors; and conclusions regarding an applicant's motivation, character, and potential that are formed from an interview with them. Financial need is another legitimate consideration. Donors may also want to identify particular skills and achievements; scholar-athletes and musicians are frequently targeted for scholarship aid.

The private foundation rules further provide that people charged with selecting scholarship recipients must not be in a position to derive an economic benefit, directly or indirectly, from the scholarship process. In general, relatives of applicants should not serve on committees that will consider these requests for aid. However, there may be circumstances in which it is impossible to avoid a conflict (when a scholarship committee is required to include the principal of the local high school and she has a son who's a terrific candidate for the award). The community foundation should attempt to spot such conflicts in advance and adopt policies to resolve them (for example, allowing the principal to recuse herself from voting that year so that her child can be eligible).

Private foundations have a duty to monitor the spending of the grant and ensure that it was used for a charitable purpose. Community foundations would be wise to track their scholarship grants as well by, for example, requesting that a recipient to whom a check is made out forward a verified copy of his or her transcript. Grants that are not used for educational purposes should be refunded to the community foundation.

These rules are explained and their relevance to community foundations discussed in Grants to Individuals by Community Foundations (Nober, J. Council on Foundations, 2000).

What rules or procedures govern community foundation scholarship programs?

Like all community foundation grants, scholarship grants must be made for charitable purposes. Since furthering education is a charitable purpose, scholarships are almost by definition a charitable activity, so long as the persons benefited are members of a charitable class (see #4 below). Beyond these general principles, there are actually no specific IRS rules for how community foundations are to make scholarship grants to individuals. In the absence of such guidance, the Council recommends that community foundations look to the very exacting requirements imposed on private foundations. While community foundations need not follow these rules to the letter (although in the case of scholarship programs administered for corporate employees and their children, close attention is highly recommended), they provide a set of guidelines that the IRS has approved. If a community foundation's scholarship program substantially complies with the private foundation rules, the community foundation can be fairly certain that it is operating safely. The guidelines for a community foundation's scholarship program should be clear, consistent, and widely available.

Does a community foundation need to notify the IRS before starting a scholarship program?

Newly formed community foundations that plan to offer scholarships should disclose this proposed activity in their Application for Exemption on Form 1023. Established community foundations that decide to establish scholarship programs should inform the IRS of this new activity when they file their next tax return on Form 990. Unlike private foundations, community foundations need not secure advance approval of their procedures for making scholarship grants to individuals. When private foundations establish scholarship funds through community foundations, however, the advance approval requirement may apply.

What are the community foundation's tax reporting requirements in connection with scholarship assistance? What are the tax consequences to the student who receives scholarship aid?

Under current IRS practice, community foundations making grants for scholarships have no tax-reporting requirements except to the extent that such payments represent compensation for services provided by the recipient. To the extent that the scholarship grant pays for costs other than tuition; fees; or books, supplies and equipment required for study at a tax-exempt institution, a student may be liable for income taxes on the grant, but it is not the community foundation's responsibility to provide tax advice to its grantees. Indeed, because it will be hard to know each individual's circumstances fully, it would be irresponsible and unwise to offer such advice.

Can a community foundation make scholarship grants to individuals?

Generally, yes, but a community foundation wishing to embark on a scholarship program should first determine that its governing instruments authorize the community foundation to make grants to individuals for educational purposes. In some cases a governing instrument will specify that grants may be made only to "organizations," and the community foundation will have to weigh whether it wants to amend the documents to allow grants to individuals. If changing the documents is not desirable, the foundation may still make grants for scholarship purposes to educational institutions and give the institutions the discretion to select the individual scholarship recipients. No community foundation should embark on a scholarship program without consulting expert legal counsel.

May a scholarship fund be established through a donor-advised fund?

No. The Pension Protection Act of 2006 prohibits grants to individuals from a donor-advised fund.

What constitutes a charitable class in establishing a scholarship program?

In general, a charitable class is a group that is large enough so that an indefinite number of individuals may benefit. However, a charitable class may properly be comprised of a comparatively small number of beneficiaries, provided the class is open and the identities of the individuals to be benefited remain indefinite. "All the graduating seniors at a local high school" is a common and generally acceptable class. A class that includes members of a single family, on the other hand, is likely to be too small to qualify as charitable. Potential recipients may be limited to members of one sex or an economically disadvantaged group. Race-based limitations pose special questions and should certainly be discussed with expert counsel.

To whom should the community foundation make out the scholarship check, the student or the school?

Either one is fine, but making the check out to the school may be easier for monitoring purposes. If the community foundation makes the payment to an educational institution and requires that the institution use the funds to defray the student’s expenses only if they are enrolled and their status is consistent with the conditions of the grant, the community foundation essentially places much of the monitoring burden on the school.

May a community foundation give a scholarship to a student attending a for-profit school, such as a vocational school?

To the extent that such a grant is for a charitable purpose, there should be no bar to providing financial assistance to a student attending vocational school. Establishing a fund to assist students at particular for-profit institution may also raise problems that establishing a fund for students attending a particular state university would not.

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Conflicts of Interest - Key Issues for Foundations

council-webteam — Sun, 09 Nov 2014 16:00:46 +0000

Conflicts of Interest - Key Issues for Foundations council-webteam Sun, 11/09/2014 - 11:00

Conflicts of Interest - Key Issues for Foundations

With Congress and the media focusing on corporate governance and foundation administration, now is the time to make sure that all grantmakers have a strong conflict of interest policy in place. Both private foundations and public charities (such as community foundations) should have clear guidelines on financial or other interests that must be disclosed and transactions that must be scrutinized or avoided. The policy should cover both board members and foundation staff. A robust conflicts policy can not only help a grantmaker stay on the right side of the law, but can also keep the organization from engaging in behavior that gives even the appearance of conflict.

While the Tax Code does not require that a charitable organization have a conflicts policy in place, it would be difficult to achieve or demonstrate compliance with applicable provisions of the law without such a document.

The Law on Conflicts

Board members or trustees of a charity have fiduciary duties to the organization. This means that they must be careful stewards of the charity's assets and must put the charity's interests first. On occasion, however, a board member's other involvements–business interests, family relationships, or political or other charitable activities–may make it impossible for him or her to provide disinterested advice to the charity. Especially when the matter affects the financial interests of a board member, this duality of loyalties may become a conflict of interest.

In addition, for private foundations, Section 4941 of the Tax Code prohibits a variety of financial transactions between the foundation and "disqualified persons." This category includes substantial contributors to the foundation and its managers, plus members of both those groups' families and businesses in which they have a large stake. Specifically barred transactions include rent payments to a disqualified person and loans from the foundation to a disqualified person, even when the terms of the deal would benefit the foundation substantially.

There's also a general prohibition on the use of a private foundation's income or assets "by or for the benefit of” a disqualified person. That means that a foundation's grants and other expenditures must not provide tangible economic benefits to disqualified persons. An exception to the bar on self-dealing allows foundations to pay disqualified persons reasonable compensation for very limited personal services that are necessary to the foundation's operation.

For public charities such as community foundations, financial transactions between the charity and its board members, as well as other "insiders,” are covered by the intermediate sanctions rules in Section 4958 of the Tax Code. Insiders also include major donors, charity executives, and their families. If any payments to such insiders, including salaries and payments for goods or services, exceed fair market value, the insiders, and possibly members of the organization's board, will be subject to penalty excise taxes.

In addition to those federal rules, some states have laws that regulate whether a board member or other charity official may participate in voting or other actions when the board member has a financial interest in the outcome.

Getting into Compliance

Legal rules help shape the outlines of the conflicts policy that a charity should have. Both private foundations and public charities should have written rules, approved by the board, that require board members and executives to disclose business or other ties that may result in a conflict of interest or bias (for or against) making a particular grant or investment. Ideally, this disclosure happens on a regular basis, say, at the beginning of the year or when a director's term begins. At the very least, foundation managers must be required to make full disclosure when a relevant matter is under consideration by the foundation.

Depending on what the manager's conflict is, it may be appropriate for him or her to abstain from voting on or even discussing the matter. For example, if a partner in the foundation's investment management firm serves on the board, he or she should not vote on any resolution to retain or dismiss the firm. The minutes of the board or committee meeting should note this abstention.

Foundation staff, too, should be required to disclose positions or interests that may give rise to conflicts. Does the program officer have a spouse who works at a potential grantee? Does the program officer personally receive consulting fees from nonprofits that may apply for funds? Depending on the size and activities of the foundation, it may be wise to have a parallel conflicts policy for staff members.

In addition, foundations should prepare themselves for situations where there may be no legal conflict but there may be the appearance of conflict. A board member's printing firm, for example, might seek the contract to produce the community foundation's annual report. One approach is to bar board members from doing business with the foundation. Another approach is to mandate a rigorous bidding process so that foundation managers can be confident that the best bid, even if it comes from a foundation insider, will win.

The stronger and more comprehensive a foundation's conflict of interest policy is, the easier it should be to spot conflicts and address them before they become a problem. Furthermore, when a foundation has evidence that it has gone through the procedures required by its conflicts policy, it will more easily be able to defend its actions to the media or government authorities.

Some conflicts, once disclosed, turn out not to be conflicts at all. Where a foundation board member serves on the board of an organization seeking a foundation grant, the foundation may generally make the grant without penalty. Disclosing this tie provides other board members with an opportunity to learn about the applicant charity from their colleague. Foundation policy may require that the board member abstain from voting on the grant, although there is no federal legal requirement that he or she do so. Because the board member's dual role has been disclosed, other board members may weigh his or her comments appropriately.

But some conflicts cannot be cured by disclosure. Where a community foundation proposes to pay above-market rates to a fundraising firm operated by the executive's spouse, no amount of disclosure can make the problem go away. Where a private foundation's investment manager uses foundation assets to manipulate the price of a stock held by disqualified persons, there's a genuine conflict (and probably an act of self-dealing, too).

Feeling Conflicted?

Conflicts of interest often give rise to interesting questions for the legal staff at the Council on Foundations. Members with a particular situation that they are uncertain of should not hesitate to contact Council legal staff at legal@cof.org.

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Recommended Best Practices in Managing Foundation Investments

council-webteam — Fri, 07 Nov 2014 22:44:14 +0000

Recommended Best Practices in Managing Foundation Investments council-webteam Fri, 11/07/2014 - 17:44

Recommended Best Practices in Managing Foundation Investments

The Council's Board of Directors released this guidance memorandum in March 2010 and strongly recommends that when reviewing and approving foundation investment policies and procedures practices, all foundations—private and public—consider these best practices in foundation investment management.

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FAQ: Donor-Advised Fund

council-webteam — Mon, 02 Jun 2014 19:43:49 +0000

FAQ: Donor-Advised Fund council-webteam Mon, 06/02/2014 - 15:43

FAQ: Donor-Advised Fund

The Pension Protection Act of 2006 includes the first comprehensive regulation of donor-advised funds. These requirements generally took effect at the beginning of the tax year following enactment of the Act, for charities that hold assets in such funds. However, a provision barring the payment from donor-advised funds of grants, compensation, and similar payments to donors, advisors, and persons related to them took effect immediately on August 17, 2006. Understanding the definition of a donor-advised fund also is important to the implementation of the Act’s charitable IRA rollover provision because rollovers are not permitted into donor-advised funds.

What is a donor-advised fund?
A fund must possess three characteristics to be a donor-advised fund:

It must be separately identified with reference to the contribution of a donor or donors
It must be owned and controlled by a sponsoring organization
The donor or a person appointed by the donor must have, or must reasonably expect to have, the privilege of providing advice with respect to the fund’s investments or distributions

If any one of these characteristics is absent, the fund is not a donor-advised fund.

What does it mean for a fund to be separately identified with reference to the contribution of a donor or donors?
Examples of separate identification include naming the fund after a donor or persons related to the donor or tracking contributions to the fund with respect to the specific donor or donors on the organization’s books.

Are funds for a single designated organization or a single governmental entity donor-advised?
No. These funds are exempted by the legislation even if a donor provides advice with respect to investments or distributions. This exemption covers both designated funds and agency endowments.

Are field-of-interest funds donor-advised?
Funds that attract contributions from several donors are not donor-advised as long as the fund is not tracked with reference to the gift of any particular donor. This remains the case even if the fund is advised by an advisory committee that includes some donors to the fund.

Is any fund with a specific charitable purpose a field-of-interest fund?
No. A fund that is tracked by the gift of a particular donor is a donor-advised fund if the donor reasonably expects to provide advice about the fund’s investments or distributions, even if the fund agreement restricts grants to a particular purpose, such as supporting the arts or improving the environment.

I have a donor who would like to create a restricted fund to protect the environment. Apart from specifying the fund’s purpose in the gift agreement, the donor will not provide advice about the fund’s investments or distributions nor will she appoint anyone else to do so. Does specifying the fund’s purpose make it a donor-advised fund?
No. Even though the fund will be tracked by reference to the donor’s gift, the legislative history clearly differentiates between advisory privileges and legal obligations. Legal restrictions, such as a designated purpose, are not advice and will not make the fund a donor-advised fund.

A donor would like to create a fund, to be named for the donor, to benefit arts organizations. The donor would like to recommend three individuals with expertise in the arts to serve as an advisory committee to the fund. Is this a donor-advised fund?
No. As long as the donor only recommends the individuals, and they are persons with expertise that can be documented, the donor will not be considered to have designated or appointed them. Therefore, the fund is not donor-advised.

Are funds, such as those for giving circles or Social Venture Partners, which are established by groups of unrelated donors, donor-advised funds?
No. As in the case of field-of-interest funds, these funds pool the contributions of several unrelated donors, the funds are not tracked by reference to the gift of any individual member of the group, and grant recommendations are a group decision. These funds are not donor-advised.

Memorial funds usually have many donors. Are they donor-advised?
A memorial fund generally is a separate fund tracked by reference to the decedent. Although the decedent is not a donor, the legislative history makes clear that contributions by related persons, such as the decedent’s spouse or a child, can constitute a fund that is separately identified by the contribution or a donor or donors. If the fund is one for which family members of the decedent will provide advice, the fund should be treated as a donor-advised fund even though it has multiple contributors unless it is otherwise exempt because it is, for example, an exempt scholarship fund or a fund designated for a single charitable organization.

Are scholarship funds donor-advised if a donor is a member of the selection committee?
A scholarship fund is not a donor-advised fund, even if a donor or fund advisor is a member of the selection committee, if it meets the following tests:

The sponsoring organization appoints all of the members of the committee and the donor’s advice is given solely as a member of the committee;
The donor, and parties related to the donor, do not control the committee directly or indirectly; and
All grants are awarded on an objective and nondiscriminatory bases using a procedure that has been approved in advance by the board of directors of the sponsoring organization and the procedure is designed to ensure that all such grants meet the requirements of paragraphs (1), (2), or (3) of section 4945.

What are the requirements of paragraphs (1), (2), or (3) of section 4945?
Grants to individuals for travel, study, or similar purposes must fit into one of three categories:

Paragraph (1) allows grants that are qualified scholarships and fellowships. These are scholarships that pay for tuition, books, room, and board, and so forth.
Paragraph (2) sanctions grants that are prizes or awards. The recipient must be chosen from the general public, without any action to enter a contest or proceeding, and must not be required to provide services as a consequence of receiving the award.
Paragraph (3) permits grants to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, testing or other similar capacity, skill, or talent of the grantee. This is the broadest category and covers, for example, awards to artists to create works of art and scholarships that do not fit under paragraph (1).

Can the donor recommend the other members of a scholarship selection committee?
Yes, as long as it is clear that the recommendation is based on objective criteria related to the expertise of the person recommended. As an example, the legislative history states that if a donor recommends the heads of the science departments at local secondary schools to be on a committee to award grants for the advancement of science at those schools, the persons so recommended will not be considered to be designated or appointed by the donor.

Learn more about Scholarship Funds and PPA Compliance.

The donor’s attorney is among those she has recommended for the selection committee. May the community foundation appoint the attorney?
Yes, the attorney can be a member of the selection committee, but the attorney must be considered to be appointed or designated by the donor in determining whether the donor and parties related to her control the committee.

Are funds that provide disaster relief or emergency hardship grants to individuals donor advised?
They are not donor-advised if the donor does not sit on or designate the members of the advisory committee. We believe funds that provide assistance to employees of a particular employer and that are advised by employee committees should be exempt from the donor-advised rules, but the Treasury Department has not issued any guidance and the Secretary of the Treasury has not yet exempted such funds.

Disclaimer: The information provided here is based on our continuing analysis of the law. Every effort has been made to ensure accuracy of this information. Please understand, however, that due to the complexity of the law and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, this information is subject to change. This information is not a substitute for expert legal, tax, or other professional advice and we strongly encourage grantmakers and donors to work with their counsel to determine the impact of this legislation on their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

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Networking for Success: Building Networks Is Essential to Investment in Social Impact Bonds

council-webteam — Tue, 04 Mar 2014 15:14:20 +0000

Networking for Success: Building Networks Is Essential to Investment in Social Impact Bonds council-webteam Tue, 03/04/2014 - 10:14

Networking for Success: Building Networks Is Essential to Investment in Social Impact Bonds

Working in collaboration with the Center for American Progress, the Council co-hosted conversations among foundations, community development financial institutions, and investment firms about social impact bonds and Pay for Success. Out of these conversations, two issue briefs were created:

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Legal Basics: What Every Foundation Leader Should Know

council-webteam — Sat, 30 Nov 2013 01:12:18 +0000

Legal Basics: What Every Foundation Leader Should Know council-webteam Fri, 11/29/2013 - 20:12

Legal Basics: What Every Foundation Leader Should Know

A guide to legal basics for foundation leaders covering: tax on investment income, self-dealing, payout requirements, excess business holdings, jeopardy investment rules, taxable expenditures, intermediate sanctions, reasonable compensation, and grants to non-charities.