Fundamentals

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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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.

Download Document

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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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Board Compensation

council-webteam — Sun, 17 Nov 2013 18:50:44 +0000

Board Compensation council-webteam Sun, 11/17/2013 - 13:50

Board Compensation

Introduction

Should your foundation board members be compensated for service, or should they serve in a voluntary capacity? Whether you are considering this issue for the first time, or whether it’s a question that has arisen before, compensation has become more than an internal management question. It has become part of keeping the public trust.

A note on Excessive Compensation
The Council board of directors is firmly opposed to excessive or unreasonable compensation. Even the public perception of excessive compensation can be damaging to the entire field of philanthropy.

What follows is a description of the basic legalities of compensation, a sampling of the most common practices and a breakdown of the pros of both compensated and voluntary board service. Unless otherwise noted, the word “compensation” throughout this brief refers to payment for overall board service and should not be confused with reimbursement for expenses such as travel or professional development, or compensation for professional services such as investment management, accounting or legal advice.

What is legal?

Under federal law, all types of foundations are allowed to compensate their boards as long as the compensation is reasonable. The source of the regulation differs, however, depending upon whether the foundation is private (such as independent or family foundations) or whether it is public (such as community foundations). Private foundations must keep compensation “reasonable” under the self-dealing rules. A similar obligation applies to community and other public foundations under the intermediate sanctions regulations. Regardless of the defining rule or regulation, however, “reasonable” for all foundations is determined through comparisons of what similarly situated people are paid for similar work.

Who compensates?

Even though compensation is legal, less than a quarter of foundations pay some or all of their trustees for their board service. Many nonprofit board members view their board service as an extension of their public service. The percentage, according to the Council on Foundations’ Foundation Management Reports, has stayed fairly even over the past two decades. In its 2007-2008 Member Survey Report, the Association of Small Foundations reported a somewhat higher percentage. Of the survey respondents, 31 percent compensate their boards.

Both studies show that compensation practices vary by type and size of foundation. Of all the foundation types, independent foundations offer compensation more frequently and at higher levels. Community foundations, on the other hand, rarely, if ever, compensate their board members. Somewhere in the middle are family foundations which are frequently unstaffed and whose board members often fulfill a variety of staff and management functions.

Typically, the larger the foundation, the more likely they are to compensate.

The chart below gives a quick overview of the common practices by the different types of foundations.

Community	213	1.40%
Family	114	31.60%
Independent	138	58.70%
Public	53	7.50%
All	518	23.90%

Source: Council on Foundations Foundation Management Series, 2010 Edition, Board Composition and Compensation.

What do you pay for?

If your practice is to compensate, it’s important to know and document what you (and others like you) are paying for. The work board members are compensated for varies from foundation to foundation depending upon factors such as asset size, spending level, program complexity, staff capabilities and foundation culture.

Some trustees receive an annual fee in payment for performing a broad oversight role. Sometimes, in newer boards or boards without staff, members may be paid for being involved operationally and taking on part or all of typical staff functions. Occasionally, individual board members may perform specific professional services—legal, accounting, investment management or advisement—but rather than be paid on a fee-for-service basis, compensation for those duties are rolled into their annual compensation. Note that these “personal services” must be reasonable and necessary to the foundations work, and compensation for these services may not be excessive.

There are also some foundations that compensate their boards for attendance at each board or committee meeting.

Among those foundations that compensated board members, 81.1 percent used some combination of set fees, with most paying an annual fee (60.6 percent) and/or a fee per board meeting (64.6 percent).

How much should you pay?

While remembering that what is typical changes depending upon the type and size of a foundation, statistics suggest that the overall actual, nominal amount of board compensation has increased at a slow but steady rate since 1986, while the real data in the chart below suggests a slow but steady decrease in the last decade.

1986	$4,500	$4,500	Both the Council on Foundations and the Association of Small Foundations have collected information on the amount and type of trustee compensation. Although neither study is a comprehensive indicator of current practices for all foundations, they both list ranges to help you determine whether your compensation practices fall within the norm.
1988	$5,000	$4,632
1990	$6,000	$5,031
1992	$5,000	$3,906
1994	$8,000	$5,916
1997	$6,300	$4,302
1999	$10,000	$6,579
2001	$10,000	$6,189
2003	$10,000	$5,957
2006	$12,000	$6,524
2009	$11,000	$5,620

Source: Council on Foundations, Foundation Management Series, various years.

But how do you determine what is reasonable and fair within the range? Most foundations have specific criteria by which they determine how much to pay. Factors that affect compensation include the following:

Size and anticipated growth of the foundation’s current assets
Number and amount of the grants and the frequency of the grant making process
Experience and management responsibilities of the board member
Amount of time spent on foundation matters
Complexity of the foundation
Independence of the individuals who establish the compensation level

Finally, for those who do compensate, it’s important to remember that, under federal law, all board compensation must be reported on the IRS form 990 or 990-PF. This information must also be made available in some form to the public.

Should you or should you not compensate?

Assuming you work within accepted compensation levels, there are a number of arguments for either practice.

The Case for Compensated Boards:

The Case for Voluntary Boards Quality of member: Compensation is needed in order to attract quality candidates. Too often, people with high visibility and valuable contacts won’t serve without pay.
Technical expertise and talent: A board is often expected to bring a level of sophistication to complex topics. Compensation helps attract individuals with strong technical, professional or subject matter expertise.
Risk: There are personal and professional risks inherent in board service. Compensation may help tip the balance in favor of serving.
Loyalty: A paid person is less apt to take advantage of board service for personal gain. Being compensated might strengthen one’s obligation to duty.
Interest: Because trustees, like anyone else, have only so much time, compensation may help sustain their interest, helping them to be more responsive and pay greater attention to their board responsibilities.
Equal pay for equal work: Both trusts and for-profit boards have a history of paying their trustees. Since the obligations and responsibilities are similar for foundation boards, why shouldn’t they be paid the same for the same work?
Diversity: Compensation promotes the recruitment of a diverse board. It opens service up to individuals from different cultures, classes, ages or personal situations who might not otherwise be able to serve as volunteers.

The Case for Uncompensated Boards:

Inspired board members: Serving without compensation encourages board members to express their philanthropic values, encourages altruism and places public benefit above self-interest.
Charitable resources: Board compensation reduces the amount of money available for grants and programs. Money not spent on compensation frees up resources to further the foundation mission.
Fairness: Public charities rarely compensate their boards. Since the obligations and responsibilities of foundation boards are essentially the same, why should they be paid?
Public trust: Compensation sends the wrong message and erodes the quality of public perception. Foundations should be particularly concerned about the models they present.
Conflict of Interest: Because volunteers aren’t paid, they are free from potential conflict that might result from trying to protect an income stream. Therefore, they are less susceptible to conflicts between what is the right thing to do and what is in the best interest of those who are signing their paycheck.
Leadership by example: Foundations often expect grantees to make the most of their charitable dollars, including keeping their administrative overhead low and using volunteer boards. A foundation can set the tone by modeling the same behaviors.

In Sum, Ask Yourselves

What is our practice when it comes to compensating our board?
How do we compare with other foundations that are of similar type and size?
How does public perception shape our views?
How do we document compensation on our IRS Form 990 or 990-PF?

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Planning for CEO Succession

council-webteam — Sun, 17 Nov 2013 15:35:19 +0000

Planning for CEO Succession council-webteam Sun, 11/17/2013 - 10:35

Planning for CEO Succession

Many foundations may be uncertain about what’s involved when it comes to succession planning. Some wonder why they should worry about the future at all when they have so much work to do in managing their grantmaking, community leadership and development, and administrative duties.

Succession planning is more than just replacing a CEO. It’s an opportunity to evaluate what works at your foundation—and identify areas in which you can improve. It can give both the board and staff a clear picture of long-term goals, and help you set priorities and make decisions.

Planning ahead can also help ease anxiety and create a smooth transition from one CEO to the next.

Ask Yourself

Does your foundation currently have a succession plan? How will planning ahead help you?
What will you do in case of an emergency departure or prolonged absence of your CEO?
Will you need to appoint an interim CEO? What are the required qualifications?
If your CEO resigns, how long should the transition period be?
How much time, if any, will the departing CEO spend training his successor?
In what areas is your foundation functioning well?
What areas could a new CEO improve?
What talents, experience, and personality traits are you looking for in your next CEO?
What do your staff and board perceive to be the foundation’s needs?

Succession Planning Basics

It is the board’s responsibility, often in conjunction with the CEO and the executive staff, to develop a succession plan policy. A succession plan policy (see the sample plan below) typically includes the following key components:

a statement of commitment to prepare for inevitable leadership change
a statement of commitment to assess leadership needs before beginning a search
a plan to appoint interim leadership to ensure smooth operations and compliance with contractual obligations
an outline of succession procedures, including:
- the internal management line of succession to the interim position
- a time frame for making the interim appointment
- a time frame for appointing a board transition committee
- the responsibilities of the transition committee, such as communicating with stakeholders, identifying a transition management consultant, conducting an organizational assessment, and designing the search plan

Source: TransitionGuides

Frequently Asked Questions

What do we do if the leadership change occurs unexpectedly?

The board should always have a clear CEO succession plan in case of emergencies. Such a plan ensures the continuous coverage of executive duties and provides guidelines for temporarily appointing an acting CEO.

An emergency plan can guide the board through a hectic time by identifying what will happen if the CEO is absent for a short or long period. Usually the best course of action is to appoint an interim CEO. With this in mind, the emergency plan should include:

a list of the current CEO’s priority functions
several staff members, board members, or consultants who could be appointed as acting CEO
how the acting CEO will be trained and compensated, and what level of authority this individual will hold
a description of the hiring process, if needed, for the next CEO, including the appointment of a transition or search committee
how to communicate changes to donors, grantees, and the community

If change is anticipated, what can the current CEO do to prepare for the transition?

If you are a departing CEO, you and the other staff members can help your board implement a succession plan. Here’s how:

Help the board appoint an acting CEO to serve during the transition if there is no overlap between the current and incoming CEO.
Complete performance reviews for all personnel before you leave. This ensures that the staff receives your feedback before you leave—giving personnel a fair opportunity to reflect on their past performance, and giving the new CEO the input needed about each employee.
Organize your office, ensuring that there are labels on all documents and drawers. Meet with appropriate staff and board members to review where you keep files and important documents. A staff member should keep a key to the office and appropriate board members should have keys to the desk drawers and file cabinets.
Distribute emergency contacts to your staff. Give your staff the names and phone numbers of at least two board members whom they can contact if needed.
Hold weekly staff meetings. Depending on the size of the organization, have weekly meetings with the full staff (if small) or all managers (if the staff is large) during the transition and until a new CEO is hired. Have a board member attend the meetings. Designate a staff member to attend portions of the board meetings.
Meet with a board member once a week before you leave. Review the status of work activities, any current issues, etc.
Help the board and staff prepare for the new CEO’s orientation. Discuss who among the board and staff members will lead the orientation and what materials will be presented.
Discuss with the board how to handle public relations. The community will soon hear that the CEO is leaving. Agree on how this message will be conveyed to the community.
Move your duties to the new CEO. If possible, spend some time training the new CEO.

How do we inform community members about the upcoming change?

As soon as the CEO gives their departure date (or departs unexpectedly) and you have appointed an interim CEO, send a press release and post a notice on your website announcing the change. Try to be as transparent as possible about when the CEO is leaving and how the foundation will seek a successor. In the case of an unexpected departure or leave of absence, simply state who is acting as interim CEO and fill in the remaining details later, as they are determined.

How do we start the hiring process for a new CEO?

If your foundation’s CEO is departing in a year, then the new CEO should be on site and getting up to speed in 11 months. That may seem like a long time at the outset of the search process, but an executive search committee may need months to narrow down the candidate pool. Depending on how frequently your board meets, board approvals may hinder the process—special sessions may be required to avoid slowing things down. Deadline creep could keep your foundation from meeting its goal of a smooth transition, so don’t let it occur. Be sure to consider holidays, conferences, and other major events that may slow or halt work for a week or two.

Do we need to appoint a transition committee?

In times of transition, you should have a few trusted people who are actively managing the change. Whether they are board or executive staff members, outside associates, or ex-officios, these people should understand what the foundation needs, how it operates, who the key players are, and what challenges may arise.

Keep the committee’s size manageable—three to five people is usually recommended. Too large a committee could hinder the process with scheduling challenges alone. If the board appoints a committee, make sure expectations are clear by outlining responsibilities, key dates for meetings or calls, and deadlines.

How long do transition periods last?

It varies, depending on the circumstances of the CEO’s departure and how well the foundation has planned in advance.

A good rule to follow: Allow more time than you think you need. Good candidates will need time to wind down at their current position and to get up to speed with your community foundation and its operations. With more time, you’ll be in a better position to choose the best candidate for your organization. If your outgoing CEO is comfortable with long-term planning, request one year’s notice. While that may be wishful thinking, a year is optimal for conducting a careful search and implementing a smooth transition process.

We chose a successor. Now what?

During a CEO transition, the executive staff will often work closely with the board to ensure a smooth process. Ways the executive staff members can assist the new CEO:

Prepare a list of key stakeholders. Make a list of key stakeholders the new CEO should know about (e.g., donors, nonprofits, and advisors (legal, accounting, real estate), or peer organizations.
Ask the board to send a letter to stakeholders, if it has not done so already, announcing the new CEO’s arrival, start date, background, and other details. Be aware of the effect transitions may have on donors and others in the field.
Send a news release announcing the change to key organizations, community associations, field publications, and local newspapers.
Ask all staff members to document their activities. Staff members might share a to-do list of their current important activities, planned activities over the coming two months, and any major issues. These lists can help the new CEO get up to speed.
Update the administrative calendar for the organization. Make a schedule of all major recurring activities during the year (performance reviews, special events, staff meetings, one-on-one meetings, lease or contract expiration dates, paydays, etc.)
Create authorization lists. In conjunction with the board chair, decide who will issue paychecks and sign them during a CEO transition. Often, the board treasurer or secretary will assume this role.

What support and orientation will the new CEO need?

The staff can also do a lot to help the new CEO get his bearings upon arrival and during the first few weeks on the job. Here are some ideas:

Familiarize the new CEO with the office. Be sure the new CEO is given keys, a tour of the offices, and an orientation for the copy, fax, computer, and telephone systems and any special billing procedures.
Schedule any needed training, such as computer training, including use of passwords, overview of software and documentation, location and use of peripherals, and where to go to ask questions.
Support the new CEO with an ongoing information exchange. During the first six weeks, the executive staff may want to meet regularly with the new CEO to discuss the transition, hear any pending issues or needs, and establish a good working relationship.

How much CEO overlap is useful?

Although it depends on the size of your foundation, two to three weeks is usually an acceptable time frame. One week may end up creating a time crunch and information overload for the incoming CEO. With the outgoing CEO on hand for a bit longer, the new CEO can become acclimated and ask questions. However, the outgoing CEO must be careful to begin loosening their grip on the reins when the incoming CEO arrives. Here are some views from your colleagues:

“I shadowed my predecessor half-time for one month. I also attended the Community Foundation Fundamentals course just two weeks after that. I did not know the field at all but still felt that one month was a little long—three weeks would have been better for me. The previous executive continued to assume the role and responsibilities until she left. Staff was ready for a change and that made the transition easier.”
“My predecessor and I overlapped by about six weeks. It was helpful but probably longer than necessary. I was immediately ‘in charge’ and he finished up some assignments.”

How do we avoid the “lame duck” syndrome?

Keep the outgoing CEO engaged, even though they are leaving. What planning processes can they participate in? Are there any unrealized—or perhaps unspoken—goals the CEO had for the community foundation that could be implemented before they leave? What are the challenges the outgoing CEO knows their successor will face? How can the CEO pave the way for their successor? These are just some of the questions you may want to consider.

While a leadership change usually brings with it a few difficulties, planning ahead can help smooth the CEO succession process. Letting go of the status quo can be a challenge for the staff and board members as well as for the outgoing CEO. But it also brings opportunities to reflect on one’s role and on the strategic direction of the community foundation.

Sample Succession Plan

Courtesy of TransitionGuides

A change in executive leadership is inevitable for all organizations and can be a very challenging time. Therefore, it is the policy of the [ORGANIZATION] to be prepared for an eventual permanent change in leadership – either planned or unplanned – to insure the stability and accountability of the organization until such time as new permanent leadership is identified. The board of directors shall be responsible for implementing this policy and its related procedures.

It is also the policy of the board to assess the permanent leadership needs of the organization to help insure the selection of a qualified and capable leader who is representative of the community, a good fit for the organization’s mission, vision, values, goals and objectives, and who has the necessary skills for the organization. To insure the organization’s operations are not interrupted while the board of directors assesses the leadership needs and recruits a permanent executive officer, the board will appoint interim executive leadership as described below. The interim chief executive officer shall ensure that the organization continues to operate without disruption and that all organizational commitments previously made are adequately executed, including but not limited to, loans approved, reports due, contracts, licenses, certifications, memberships, obligations to lenders or investors of the [ORGANIZATION], and others.

It is also the policy of the [ORGANIZATION], to develop a diverse pool of candidates and consider at least three finalist candidates for its permanent CEO position. The [ORGANIZATION], shall implement an external recruitment and selection process, while at the same time encouraging the professional development and advancement of current employees. The interim CEO and any other interested internal candidates are encouraged to submit their qualifications for review and consideration by the transition committee according to the guidelines established for the search and recruitment process.

Procedures for Succession

In the event the chief executive officer (CEO) of the [ORGANIZATION], is no longer able to serve in this position (i.e., leaves the position permanently), the executive committee of the board of directors shall do the following:

Within 5 business days appoint an interim CEO according to the following line of succession:
1. chief operating officer (COO) of [ORGANIZATION]
2. senior vice president of of the [ORGANIZATION]
3. external consultant (with experience as an interim executive director)
Within 15 business days appoint an executive transition committee, in the event that a permanent change in leadership is required. This committee shall be comprised of at least one member of the executive committee and two members of the board of directors. It shall be the responsibility of this committee to implement the following preliminary transition plan:
1. Communicate with key stakeholders regarding actions taken by the board in naming an interim successor, appointing a transition committee, and implementing the succession policy. The organization shall maintain a current list of key stakeholders who must be contacted, such as lenders and investors of the [ORGANIZATION], foundations, government agencies, and other.
2. Consider the need for consulting assistance (i.e., transition management or executive search consultant) based on the circumstances of the transition.
3. Review the organization’s business plan and conduct a brief assessment of organizational strengths, weaknesses, opportunities and threats to identify priority issues that may need to be addressed during the transition process and to identify attributes and characteristics that are important to consider in the selection of the next permanent leader.
4. Establish a time frame and plan for the recruitment and selection process.
5. Refer to the CEO Hiring Policy and Procedures in the Personnel Guidebook for additional procedures.

The board should use similar procedures in case of an executive transition that simultaneously involves the chief executive officer and other key management. In such instance, the board may also consider temporarily subcontracting some of the organizational functions from trained consultant or other organizations.

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Basic Options for Global Grantmaking by U.S. Foundations

council-webteam — Wed, 13 Nov 2013 22:51:54 +0000

Basic Options for Global Grantmaking by U.S. Foundations council-webteam Wed, 11/13/2013 - 17:51

Basic Options for Global Grantmaking by U.S. Foundations

The Council on Foundations' definition of “international grantmaking” includes grants made by U.S. foundations and corporations to overseas recipients as well as grants made to U.S.-based organizations operating international programs. This also includes grants made toward activities wholly within the Unites States that have significant international purpose and impact.

U.S. foundations and corporations interested in international grantmaking have several options:

U.S. 501(c)(3) Organizations

The simplest option is to make a grant directly to another U.S. 501(c)(3) charitable organization to support its international programs or activities.

What is a U.S. 501(c)(3) organization?

“Friends of” Organizations

Another easy option is to make a grant to a U.S.-based 501(c)(3) “friends of” organization that has been set up to raise funds for a specific charitable program or activity outside the U.S., often a university, museum, or hospital.

How a Private Foundation Can Use "Friends Of" Organizations

Donor-Advised Funds

Still another relatively straightforward option is to establish a donor-advised fund with a U.S.-based 501(c)(3) public charity that can, for a fee, provide a range of legal and monitoring services to donors wishing to support organizations located outside the United States. One increasingly popular option for making international grants is to set up a donor-advised fund with a willing U.S. community foundation, some of which are linking local ethnic communities that they serve with the communities' countries of origin.

A donor-advised fund is not a separate public charity. It is instead owned, controlled, and administered by a public charity, subject to an agreement under which the donor (or an adviser designated by the donor) has the right to make recommendations with respect to the distributions and/or investments. Community foundations and some intermediary organizations offer donor-advised funds as a giving option for their donors.

Direct Cross-Border Grants

Making cross-border grants directly to organizations located in other countries is an option that requires some additional steps due to special IRS rules for private foundations, but the process need not be difficult. Many private foundations choose this option because it enables them to have a one-to-one relationship with their overseas grantee partners.

Legal resources on the Council’s website explain the two approaches embodied in the IRS rules —equivalency determination and expenditure responsibility—that private foundations may choose if they wish to make direct grants to non-U.S. grantees. Public charities often follow these rules as well, although they are not required to do so.

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Determining Supporting Organization Status

council-webteam — Mon, 11 Nov 2013 22:54:43 +0000

Determining Supporting Organization Status council-webteam Mon, 11/11/2013 - 17:54

Determining Supporting Organization Status

Private foundations and donor advised funds must follow special rules when making grants to certain supporting organizations.

Why is it important to determine if a public charity grantee is a supporting organization?

Supporting organizations are a type of Section 501(c)(3) public charity. Supporting organizations are further broken down into several types under Section 509(a)(3) of the Internal Revenue Code. The rules for making grants to supporting organizations can vary depending on the supporting organization’s type, and the presence of control. For example, grants to Type III non-functionally integrated supporting organizations must be made following special expenditure responsibility requirements if made from a private foundation or a donor advised fund, and will not count toward a private foundation’s minimum distribution (payout) requirement.

What are the types of supporting organizations?
Supporting organizations are Section 501(c)(3) public charities. However, they are further classified under Section 509(a)(3) of the Internal Revenue Code. Generally, supporting organizations fall into three categories: Type I, Type II and Type III. The type indicates the nature of the relationship between the supporting organization and the public charity being supported.

Type I: By far the most common, this type is often described as indicating a parent-subsidiary relationship and generally involves the supported charity appointing a majority of the board of the supporting organization.
Type II: The least common of the three, this usually involves an overlapping board relationship where at least a majority of the members of the supporting organization’s board are also members of the supported charity’s board.
Type III: These operate with a greater degree of independence from the organization they support. Typically the supported organization appoints one member of the governing board of the supporting organization and institutes other procedures designed to ensure that the supporting organization is responsive to it. Type III supporting organizations may provide financial support to their supported organization or they may directly carry out a program or function for it. Type III supporting organizations are further broken down into functionally integrated and non-functionally integrated.

What are the legal requirements?

As a result of requirements imposed by the Pension Protection Act of 2006 (PPA), private foundations and donor advised funds must follow special rules when making grants to certain supporting organizations.

Private foundations must follow a process known as expenditure responsibility for grants to a Type III supporting organization that is not functionally integrated. Private foundations must also use expenditure responsibility for grants to any type of supporting organization if any of the private foundation’s disqualified persons (alone or together) control the supporting organization or an organization that the supporting organization supports. Further, private non-operating foundations may not count such grants toward their minimum distribution (payout) requirement.

Organizations that hold donor-advised funds are called sponsoring organizations. Sponsoring organizations must exercise expenditure responsibility for grants from donor-advised funds to Type III supporting organizations that are not functionally integrated. Similarly, expenditure responsibility is required for donor-advised fund grants to any type of supporting organization (Type I, II, or III) for which the donor advisor (or related parties) control an entity that the supporting organization supports.

How do I Determine a Supporting Organization’s Status and Type?

The IRS issued guidance to help foundations determine whether an organization is a supporting organization and, if so, how to determine its type and whether an issue of control is present.

Step 1: Obtain information from a reliable source to determine whether a public charity is a supporting organization.

According to IRS guidance, grantmakers may rely on any of the following sources:

Select Check, an online IRS tool using data from the IRS public charity list, known as IRS Publication 78,
IRS Business Master File (BMF)
Reliable third party such as Guidestar's Charity Check Service

Important: Grantmakers may not rely on these sources for information once the IRS publishes notice that the organization’s status has changed. In addition, a grantmaker that was responsible for, or aware of, the circumstances that result in the supporting organization’s change in status will not be able to rely on Publication 78 or the IRS BMF for these purposes.

Relying on a Third Party: IRS guidance provides that a grantmaker may use a third party to obtain information from the IRS BMF to determine whether or not a charity is a supporting organization, provided that the grantmaker obtains a report from the third party that includes all of the following:

the grantee’s name, Employer Identification Number, and public charity classification under Section 509(a)(1), (2), or (3)
a statement that the information is from the most currently available IRS monthly update to the BMF, along with the IRS BMF revision date
the date and time of the grantmaker’s search

The grantmaker must retain the report in electronic or hard-copy form.

Step 2: Determine the supporting organization’s type.

If the potential grantee is a supporting organization, the next step is to determine its type, and whether it is functionally integrated with the organization it supports. According to IRS guidance, grantmakers may rely on the sources described in Step 1 for information about the supporting organization’s type and whether or not it is functionally integrated.

Useful Tip: The Select Check tool is typically easier to search than the Business Master File and will state whether the potential grantee is a (1) Type I, Type II, or functionally integrated Type III supporting organization; (2) a non-functionally integrated Type III supporting organization; or (3) a supporting organization of an unspecified type.

Unfortunately, many supporting organizations will be listed as “unspecified type.” For those organizations listed as “unspecified” in Select Check, grantmakers must use one of the following alternative bases for determining supporting organization type:

Alternative 1:

To Determine Whether the Organization Is a Type I or II Supporting Organization, grantmakers may:

Obtain, review and rely on a written representation signed by an officer, director, or trustee of the grantee, if both of the following are true:
The representation describes the process used for selecting the grantee’s officers, directors, or trustees and references the pertinent provisions of the grantee’s organizing documents that establish the grantee’s relationship to its supported organizations.
The grantmaker collects and reviews copies of the grantee’s governing documents. If the grantee’s organizing documents are not sufficient to establish the relationship, the grantmaker must also collect organizing documents from the supported organization.

To Determine Whether the Organization is a Functionally Integrated Type III, grantmakers may obtain and review:

The grantee’s written representation identifying the organizations it supports.
The grantee’s organizing documents (and those of the supported organizations if necessary).
A written representation signed by an officer, director, or trustee of each supported organization stating that the supporting organization is functionally integrated and that but for the involvement of the supporting organization, the supported organization normally would engage in those activities itself.

Notice 2006-109 affirms that the IRS will apply the “but for” test from Treas. Reg.
1.509(a)-4(i)(3)(ii) in deciding whether a Type III supporting organization is functionally integrated. The IRS did not clarify the status of supporting organizations whose sole purpose is fundraising for the supported organization, a point on which several persons have requested guidance.

Alternative 2:
Grantmakers may also rely on a reasoned written opinion of counsel of either the grantee or the grantmaker in making the determination that a supporting organization is a Type I, Type II, or functionally integrated Type III supporting organization.

Step 3: Determine if there is a presence of control that would trigger expenditure responsibility.

After determining a supporting organization’s type, grantmakers must also consider whether control exists in such a way that would trigger the expenditure responsibility rules. The IRS uses the definition of control found in the regulations under Section 4942 in deciding whether a private foundation disqualified person or a donor advisor (or related parties) controls an organization that a supporting organization supports.

For private foundations, the same test must be used to determine if disqualified persons of the private foundation control the supporting organization itself. For easier compliance, IRS guidance suggests that grantmakers obtain lists of all supported organizations from potential supporting organization grantees.

How does the IRS define control for purposes of these rules?
The Section 4942 regulations provide that an organization is controlled if disqualified persons can, by aggregating their votes or positions of authority, require the supported organization to make, or refrain from making, an expenditure.

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FAQ: Supporting Organizations

council-webteam — Mon, 11 Nov 2013 22:32:44 +0000

FAQ: Supporting Organizations council-webteam Mon, 11/11/2013 - 17:32

FAQ: Supporting Organizations

Summary

A supporting organization qualifies as a public charity because it has a close relationship with another publicly supported section 501(c)(3) organization. Based on the relationship of the supporting organization to the public charity it supports, a supporting organization will be classified as a type I, II or III. Section 1241 of the Pension Protection Act of 2006 (PPA) modifies some of the requirements for how an organization can qualify as a supporting organization.

What is a supporting organization?

Put simply, a supporting organization is a section 501(c)(3) organization that qualifies as a public charity (and not a private foundation) because it has a close relationship with another publicly supported section 501(c)(3) organization. Usually, in order to qualify as a public charity, an organization must receive at least one-third (or in special cases as little as 10 percent) of its support each year from gifts, grants and contributions from a variety of sources. A supporting organization is not required to meet this public support test on its own if it provides meaningful support (financial, programmatic or both) and gives some degree of structural and operational control to another organization that is already classified as a public charity, rather than a private foundation. Based upon the relationship of the supporting organization to the public charity it supports, a supporting organization will be classified as a type I, II or III. A supporting organization may not be controlled by someone who is a disqualified person with respect to the supporting organization.

What are the different classifications of supporting organization?

Generally, supporting organizations fall into three categories: type I, type II and type III. The type indicates the nature of the relationship between the supporting organization and the charity being supported.

Type I: By far the most common, this type is often described as indicating a parent-subsidiary relationship and generally involves the charity appointing a majority of the board of the supporting organization.
Type II: The least common of the three, this usually involves an overlapping board relationship where at least a majority of the members of the supporting organization’s board are also members of the supported charity’s board.
Type III: These operate with a greater degree of independence from the organization they support. Typically the supported organization appoints one member of the governing board of the supporting organization and institutes other procedures designed to ensure that the supporting organization is responsive to it. Type III supporting organizations may provide financial support to their supported organization or they may directly carry out a program or function for it.

Simplified chart of the types of supporting organizations

The chart below is from a report published by the General Accountability Office, “Tax-Exempt Organizations: Collecting More Data on Donor-Advised Funds and Supporting Organizations Could Help Address Compliance Challenges,” GAO-06-799 (July 2006).

The PPA modified the rules for type III supporting organizations organized as trusts subsequent to the publication of the GAO report. The diagram below states the old rule that a supporting organization that is a charitable trust can qualify for type III status if the supported organization is a named beneficiary of the trust and has the power to enforce the trust and compel an accounting. Under the new rules, the power to enforce the trust will not be sufficient to meet the responsiveness test required for type III supporting organizations.

Note that the PPA modified the rules for type III supporting organizations organized as trusts subsequent to the publication of the GAO report. The diagram below states the old rule that a supporting organization that is a charitable trust can qualify for type III status if the supported organization is a named beneficiary of the trust and has the power to enforce the trust and compel an accounting. Under the new rules, the power to enforce the trust will not be sufficient to meet the responsiveness test required for type III supporting organizations.

What is a functionally integrated type III supporting organization?

The PPA includes a subcategory of type III supporting organizations that are considered to be functionally integrated with their supported organizations, and exempts them from several of the additional rules imposed on regular type III supporting organizations.
In general, supporting organizations must meet the “responsiveness” and the “integral part” tests to qualify for type III status. The responsiveness test is meant to guarantee that the supported organization will have the ability to influence the supporting organization’s activities.

The integral part test is intended to demonstrate that the supporting organization is an integral part of the organization it supports. The integral part test can be met one of two ways:

The supporting organization performs functions of, or carries out purposes of, the supported organization that, but for the supporting organization, the supported organization would engage in directly. For example, a type III supporting organization that operates a printing press for a university would meet this “but for” test if otherwise the university would carry out the activity directly.
The supporting organization provides funding or other benefits for the supported organization at a level sufficient to ensure that the supported organization will pay significant attention to the operations of the supporting organization. This is called the “attentiveness” test, and it has several other requirements that must be satisfied.

Under the PPA, an organization that satisfies the integral part requirement under the “but for” test is functionally integrated. Organizations that meet the integral part test simply through payments to the supporting organization will not be considered functionally integrated.

Are there requirements under the PPA for qualifying as a type I supporting organization?

Yes, the PPA includes one requirement applicable to type I supporting organizations. An organization will fail to qualify for type I status (and will be converted to private foundation status) if it accepts a gift from a person who directly or indirectly controls the supported organization. In addition, charitable contributions to type I supporting organizations where the donor or advisor controls a supported organization will not be tax-deductible.

Persons who directly or indirectly control the supported organization include:

Persons (including supporting organizations, but not other publicly-supported charities) who directly or indirectly control, either alone or together with persons described in (2) and (3) below, the governing body of the supported organization
Family members of an individual described above (spouse, siblings, spouses of siblings, ancestors, lineal descendants, and spouses of lineal descendants)
Corporations, partnerships, trusts, or estates in which a person described above owns more than 35% of the voting power, profits interest, or beneficial interest

Are there PPA requirements for qualifying as a type II supporting organization?

No.

Are there PPA requirements for qualifying as a type III supporting organization?

Yes, there are several such requirements. First, an organization will fail to qualify for type III status if it accepts a gift from a person who directly or indirectly controls the supported organization (see discussion of changes for type I organizations above). Second, type III supporting organizations must provide such information as the Secretary of the Treasury requires to each supported organization to ensure that the supporting organization is responsive to the needs or demands of the supported organization. Third, type III supporting organizations may not support foreign organizations (existing organizations have three years to comply with this requirement). Finally, under the old rules, a supporting organization that was a charitable trust could qualify for type III status if the supported organization was a named beneficiary of the trust and had the power to enforce the trust and compel an accounting. Under the new rules, the power to enforce the trust will not be sufficient to meet the responsiveness test required for type III supporting organizations. This requirement is effect on date of enactment for new organizations and one year after date of enactment for trusts in existence on date of enactment. The delayed effective date for charitable trusts is to allow the Treasury Department time to promulgate new regulations defining what charitable trusts must do to meet the responsiveness test.

Are the requirements listed above all of the provisions of the Act affecting supporting organizations?

No. The requirements listed above only reflect the provisions that affect how an organization can qualify as a supporting organization. Other provisions affect the operations of supporting organizations. A chart of these other requirements, titled “Provisions Affecting Supporting Organizations,” provides an overview of all changes.

How can I tell if a charity is a supporting organization? How can I tell what type a supporting organization is? How do I determine whether a type III is functionally integrated?

The Council Summary of IRS Interim Guidance on Supporting Organizations and Donor-Advised Funds provides answers to these questions.

Questions?

Connect with Council Staff

Supporting Organizations

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FAQ: Agency Endowment Funds

council-webteam — Mon, 11 Nov 2013 20:05:28 +0000

FAQ: Agency Endowment Funds council-webteam Mon, 11/11/2013 - 15:05

FAQ: Agency Endowment Funds

What is an agency endowment?
What types of organization can establish an agency endowment at a community foundation?
When a public charity establishes an agency endowment at a community foundation, which organization owns the contributed funds?
Since the agency is releasing legal ownership of the transferred assets, how can the agency’s board agree to the transfer of assets to establish an agency endowment without violating its fiduciary duties?
Can a community foundation accept a non-endowed fund from an agency?
Should fund agreements for agency endowments include the variance power?
If the fund is endowed, can the fund agreement still permit an agency to access principal?
Can a nonprofit reserve the right to force a distribution of the fund (or a part of the fund) back to itself?
Can the community foundation maintain a hybrid fund (i.e., contributions from the agency and contributions from third parties in one fund) or should the community foundation create two separate funds?
Where can I find a sample agency endowment agreement?
Should a community foundation include contributions to agency endowments as contributions to the community foundation on its Form 990?
The question of whether a third-party donor was aware that the contribution for the benefit of an agency was a contribution to the community foundation and subject to the foundation’s variance power is a key to determining the accounting treatment for a contribution. What should a foundation do if variance power is not easily determined?
Where can I find additional resources on the accounting treatment of agency endowments for the community foundation and beneficiary agency?

Agency Endowment Basics

What is an agency endowment?

An agency endowment is a type of designated fund established by a charity at a community foundation for the charity’s own benefit or the benefit of a related entity. That is, the donor or resource provider and the beneficiary or recipient organization is the same entity. For example, an art museum transfers funds to a community foundation to establish a fund that will provide annual distributions to the art museum for its own use. The instrument of transfer used in to establish an agency endowment references the variance power and transfers legal ownership over the assets to the community foundation.

What types of organization can establish an agency endowment at a community foundation?

A public charity under Section 509(a)(1), 509(a)(2), or 509(a)(3) may establish an agency endowment at a community foundation. This may include an endowment created by a government unit.

A community foundation should not establish an agency endowment for a private foundation or non-charity. Contributions to an agency endowment fund established for a private operating or non-operating foundation would likely be viewed as contributions subject to a material restriction, due to the private foundation status of the agency. In addition, such a fund would raise the question of whether the community foundation’s public charity status was being used by a private foundation to circumvent the private foundation minimum distribution requirements.

An agency endowment fund established by a non-charity would be problematic because distributions from an agency endowment are generally provided for the general support of the designated charity. In the case of a non-charity, the community foundation would need to establish significant processes to ensure that grants from the fund were only used for charitable purposes rather than for general support of the non-charity. For this reason, such a fund would likely be classified not as an agency endowment but as a field of interest fund.

When a public charity establishes an agency endowment at a community foundation, which organization owns the contributed funds?

The community foundation has legal ownership of funds contributed to an agency endowment. As such, the community foundation’s board has fiduciary responsibility over the funds. The legal ownership of the funds is a frequent a source of confusion between agencies and community foundations. Therefore, the ownership should be clarified in the fund agreement at the start of the relationship. The confusion arises, in part, because FAS 136 requires that an agency recognize a beneficial interest in assets held by a community foundation as an asset on the agency’s books. This leads some agencies and their advisors to believe they maintain legal ownership over the funds. However, FAS 136 only affects the accounting treatment of the funds, not the legal ownership.

Since the agency is releasing legal ownership of the transferred assets, how can the agency’s board agree to the transfer of assets to establish an agency endowment without violating its fiduciary duties?

The agency’s board must make the decision regarding whether transferring legal ownership of the funds to establish an agency endowment is consistent with its fiduciary duties. An agency’s board may decide that such a transfer is prudent and consistent with its fiduciary responsibility to the organization because of the benefits provided as a result of the relationship with the community foundation. For example, the agency may benefit from the expertise of the community foundation in long-term management of assets, the flexibility the community foundation may provide by accepting types of non-cash contributions not accepted by the agency, or the protection that the transfer will provide by establishing an endowment at a separate organization.

Can a community foundation accept a non-endowed fund from an agency?

If established properly, a community foundation may accept a non-endowed fund from an agency. The key is that the agency may not reserve the right to unilaterally withdraw the fund from the community foundation. Instead, grants to the agency must be subject to the community foundation’s approval. When establishing such a fund, it is important that the agreement clearly states that distributions are always subject to the approval of the community foundation. Such a fund could be called an “agency fund” to distinguish it from endowed funds.

Fund Agreements

Should fund agreements for agency endowments include the variance power?

Yes. Because an agency endowment comes with the legal restriction that distributions from the fund would benefit the named agency, the fund agreement should include the variance power. In addition, the National Standards for U.S. Community Foundations require that the variance power appear in the fund agreement. The variance power is the power held by the governing body of the community foundation to modify any restriction or condition on the distribution of funds for any specified charitable purpose or to any specified organization if, in the sole judgment of the governing body, such restriction or condition becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.

If the fund is endowed, can the fund agreement still permit an agency to access principal?

A fund agreement may permit an agency to request or recommend a distribution of principal. The fund agreement may contain a general provision permitting a request for distributions of principal or the agreement could outline specific reasons for which a distribution of principal may be requested (e.g., capital projects). In either case, the agreement should be carefully drafted to ensure that any such agency request or recommendation is solely advisory. The community foundation must maintain final authority and control over whether such a distribution of principal will be permitted.

Can a nonprofit reserve the right to force a distribution of the fund (or a part of the fund) back to itself?

No. A contribution to a community foundation is subject to the legal control of the community foundation. Allowing the nonprofit to reserve the right to force a distribution would be contrary to the foundation’s legal ownership of the fund. For this reason, the reservation of the power to unilaterally withdraw the fund in full or in part creates several potential results which are often undesirable. First, reservation of such power raises the question of whether a completed gift has been made by the agency to the community foundation. If the gift is not completed, it may not be included in the calculation of the community foundation’s public support test as a contribution. Second, an incomplete gift may lead to the conclusion that the community foundation is managing somebody else’s fund. Third, reservation of the right to unilaterally withdraw the funds may be considered a material restriction calling into question whether the fund is a component fund. Finally, a contribution to the community foundation is subject to the legal control of the community foundation. Allowing the nonprofit to reserve the right to force a distribution would be contrary to the foundation’s legal ownership of the fund.

Can the community foundation maintain a hybrid fund (i.e., contributions from the agency and contributions from third parties in one fund) or should the community foundation create two separate funds?

As a legal matter, one agreement could govern a fund that accepts contributions from third parties and contributions from the agency. However, because contributions from the agency and contributions from third parties may be treated distinctly for accounting purposes, a community foundation may find it more practical to establish two separate funds. In this situation, the community foundation should review FAS 136 and the materials available from FAOG on the subject to determine how the fund should be handled to ensure proper accounting.

Where can I find a sample agency endowment agreement?

Members of the Council on Foundations may access a sample agreement.

Form 990 Reporting

Should a community foundation include contributions to agency endowments as contributions to the community foundation on its Form 990?

Yes. The application of FAS 136 does not affect the legal treatment of contributions to and grants from agency endowments. Regardless of the treatment of such contributions under the accounting rules, a contribution to the community foundation for an agency endowment is treated as a contribution to the community foundation for the purposes of Form 990. This treatment allows contributions to be included in calculating the community foundation’s public support test and is consistent with the principle that the contributions are contributions to the community foundation and subject to the community foundation’s legal control. Grants from agency endowments to an agency should also be recorded as grants from the community foundation to the agency for the purpose of Form 990.

Additional Resources

The question of whether a third-party donor was aware that the contribution for the benefit of an agency was a contribution to the community foundation and subject to the foundation’s variance power is a key to determining the accounting treatment for a contribution. What should a foundation do if variance power is not easily determined?

Some examples of determining variance power may be found in the FAS 136 Implementation Guide for Community Foundations. If the treatment is not clear, consult local counsel for a specific legal opinion so you can establish the proper accounting for the endowment.

Where can I find additional resources on the accounting treatment of agency endowments for the community foundation and beneficiary agency?

See Accounting for Agency Endowment Funds Held at Community Foundations.

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 application of the law to 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.