The Differences in the Treatment Between Private and Community Foundations

A community foundation differs from a private foundation because it is not subject to the control of an individual family, corporation or other limited group. Instead, it is governed by a board of local residents knowledgeable about community needs and chosen to represent the public interest. Because of these attributes, a community foundation is classified by the Internal Revenue Service as “not a private foundation,” but as “a public charity.” That status entitles you to greater tax deductions than those accorded to donors of private foundations.

 

A community foundation is also not subject to the excise taxes, burdensome restrictions, penalties, or certain annual reporting and public disclosure requirements which apply to private foundations. The reason for this distinction is that a community foundation is monitored by the public that supports it, whereas a private foundation is not subject to such scrutiny. Because of this difference, private foundations are either prohibited, or closely restricted from making certain types of grants, from holding certain kinds of property and from engaging in various kinds of charitable initiatives. For these reasons, individuals, businesses, and private foundations are finding they can often better achieve a particular charitable objective if they work with their local community foundation.

 


Private Foundations

Community Foundations
For gifts of appreciated property, the donor may deduct only the cost plus 60% of the capital gain. For gifts of publicly-traded stock, however, the donor may deduct 100% of the full market value. Gifts of appreciated property are limited to 20% of taxpayer’s annual income. 100% of the market value of capital gain property is deductible from income, up to 30% of the donor’s annual income.
Self-dealings between a private foundation and those who manage, control or make large gifts to it and persons and corporations closely related to them are strictly regulated. These rules apply without regard to whether the foundation is better off as a result of such dealings. These regulations do not apply and a community foundation can deal with its contributors and managers at arms length and engage in transactions that yield the foundation advantage (e.g., borrowing money and renting office space from such managers at less than market rate).
Whether or not the foundation earns such an amount, no less than 5% of the foundation’s net investment asset value must be paid each year for charitable purposes. No minimum pay out requirement is imposed on a community foundation. It, therefore, has more flexibility in accepting gifts such as undeveloped real estate and other assets that currently produce little or no yield but which are being retained for future yield.
A 2% excise tax is imposed on the net investment income of the foundation. The tax may be reduced to 1% if certain payout conditions are met. No tax is imposed.
In meeting the 5% payout requirement, grant administrative expenses in excess of .65% of assets do not count. No such limitations on administrative expenses exists.
Ownership of the equity interest in a business when combined with the ownership by managers and contributors to the foundation cannot generally exceed 20% of the equity interest in the business. The object is to prevent the foundation and its contributors and managers from controlling a business. These regulations do not apply so that the community foundation can hold an unlimited interest in a business.
Investment in certain kinds of assets is proscribed. No federal investment requirements are imposed, but state fiduciary duties are similar.
Cumbersome and costly monitoring and reporting requirements are imposed on a foundation that awards scholarships, fellowships, or helps individuals, other private foundations or newly created and other charitable agencies that have not attained public charity status. In the absence of any federal requirement, a community foundation may follow such monitoring and reporting requirements as the foundation’s trustees may impose upon itself to insure that its money is being used by grantees for strictly charitable purposes.
Annual detailed reporting is required of the foundation’s investments, grants, trustee fees, staff salaries and other payments, and the tax return must be made available to the public. A community foundation reports annually to the IRS about its overall operations but funds established by donors can be treated anonymously, even though the tax return is available for public inspection.
The above requirements are enforced through assessment of penalty taxes, some of which can result in confiscation of all of a foundation’s assets for failure to correct abuses. The foundation’s managers are also taxed for certain violations. No such penalty taxes apply.

 

 

There are also other equally important practical and personal reasons to work with your community foundation.

1.  Historically, families often established a private foundation only to have their children show little interest in assuming responsibility for its management. In many instances, particularly with the third generation, descendants no longer live in the community.

 

2.  Even when the family continues to be involved, travel, other interests and/or illness often prevent needed attention to both the management of the assets and the distribution of the income.

 

3.  It is becoming increasingly difficult to focus grants where they will address predetermined priorities and know that they will truly make a difference. It is not that the board and staff of a community foundation are more knowledgeable, but rather that the board is chosen by broad-based community leadership representing the cultural, educational, health, and civic and social service interests of their local community.

 

4.  Access to the community foundation’s professional staff. The community foundation’s staff has a full-time commitment and responsibility to seek out, evaluate and follow-up on grant applications and recipients, as well as to help donors achieve their charitable goals.

 

5.  Finally, donors establishing or transferring charitable assets to the community foundation can participate in grant decisions by advising the community foundation as to the specific organizations they would like supported, defining their fields of interest, and/or limiting the distribution of their fund’s income to a particular organization.

 

 

Extracted from Council on Foundations Bulletin