Seven Charitable Foundation Rules: Myth and Reality

Federal statutes and regulations that apply to charitable foundations are complex and frequently misunderstood. To add to the confusion, they often are counterintuitive. Here are just a few examples of rules governing foundation grantmaking that I, on numerous occasions, have found to be misconstrued or misunderstood:

Myth No. 1: Foundations are only permitted to support 501(c)(3) organizations.

Reality: As long as foundations comply with certain legal requirements, they are permitted to make grants for charitable purposes to a range of organizations and entities. For example, if the foundation undertakes a preliminary inquiry, both the grantor and the grantee commit in writing to comply with reporting requirements, and the prospective grant recipient commits in writing that the funds will be expended for charitable purposes, the foundation can legally make grants for charitable purposes to government agencies and even for-profit corporations.

Myth No. 2: Foundations are not permitted to support the development, publication, or distribution of materials that comment on positions taken by candidates in election campaigns or on positive or negative features of pending legislation.

Reality: Foundations are permitted to provide financial support to organizations for the preparation of voter information guides and educational materials about proposed legislation and other issues of public interest. Voter information guides must refer to each candidate's views on a cross-section of issues and include a fair and unbiased analysis of other positions. Educational materials supported by foundation dollars must present all sides of the issue in question and be sufficiently balanced to enable readers or listeners to form their own opinions. Foundations are not permitted to reveal their own positions or preferences with respect to an issue in such materials.

Myth No. 3: Foundations are required to receive and retain a grantee organization's written acknowledgement for any gift in excess of $250.

Reality: The $250 written acknowledgment rule applies to payers of income tax such as individuals and for-profit corporations, but not to foundations — which are exempt from income taxes. So long as a foundation retains proof of the support it has given to a grantee organization (such as a canceled check), it need not seek or retain that grantee organization's written acknowledgment of a gift.

Myth No. 4: Tickets that a foundation purchases to a charity fundraising event can be used by a foundation trustee and his or her family members and friends so long as the trustee pays with personal funds the portion of the cost of the tickets that is not tax deductible.

Reality: The Internal Revenue Service has ruled that a trustee's payment of the portion of the cost that is not tax deductible puts a foundation insider in a more favorable position than a non-insider. Foundation trustees and their family members are not permitted to accept benefits stemming from their insider relationships with a foundation that aren't available to others.

Myth No. 5: A foundation trustee is permitted to sell or lease property to the foundation so long as the cost to the foundation, as demonstrated by well-supported appraisals, is below the market price.

Reality: A foundation trustee is not permitted to sell property to the foundation under any circumstance. A trustee can lease property to the foundation only if the lease does not involve a charge and the foundation uses the property exclusively for charitable purposes.

Myth No. 6: Foundation donors, trustees, and officers are permitted to satisfy personal pledges of financial support out of foundation assets so long as the pledges are made to organizations that have received 501(c)(3) determination letters from the IRS.

Reality: The law specifically prohibits a foundation from making a grant to any organization, 501(c)(3) or otherwise, in satisfaction of a pledge of support by an individual who happens to be a trustee, officer, or major donor of the foundation or a close member of her or his family.

Myth No. 7: A foundation may provide a non-U.S. charity with financial support without having to meet technical "foreign-grantee" requirements by making its grant to the foreign charity's 501(c)(3) U.S. support organization with instructions that the granted funds be transferred to the foreign charity.

Reality: Although a foundation may provide a non-U.S. charity with financial support by making a grant to its 501(c)(3) U.S. support organization, the foundation is not permitted to impose the requirement that the support organization transfer those funds to the foreign charity. How the U.S. support organization uses the funds is up to the support organization itself. The IRS deems a foundation's directive to the support organization to transfer funds to the non-U.S. charity to be tantamount to the foundation's making the grant directly to the non-U.S. charity. That is permitted only if the foundation and foreign charity follow certain preliminary investigation, documentation, and reporting procedures or if the foundation receives a well-reasoned letter from the foundation's or foreign organization's attorney or an affidavit from an authorized officer of the foreign organization demonstrating that the foreign organization is the equivalent of a section 501(c)(3) public charity.

Foundation trustees and executives do not need to understand every detail of the Internal Revenue Code as it applies to tax-exempt charitable organizations. They should, however, have an understanding of the basic principles that is sufficient to enable them to identify problematic situations, come up with alternative ways to meet the foundation’s objectives, and recognize when the foundation needs experienced professional assistance to ensure compliance with the law. By relying on widely held assumptions that may be incorrect, trustees and executives could inadvertently put a foundation's tax-exempt status at risk — and undermine its mission and potential.

Daniel N. Belin is the owner of Belin Consulting, which provides consulting services to charitable foundations and their trustees. He is the author of Charitable Foundations: The Essential Guide to Giving and Compliance (Five Columns Press, 2015).