Perhaps the most rampant misconception among foundations is that once a grantee organization has been recognized as a public charity by the IRS, a foundation doesn’t need to verify the grantee’s tax
status each time a grant is made. Upon making an initial grant, many foundations do require a grantee to provide their determination letter, but this document may not reflect the organization’s current status. The IRS may revoke an organization’s public charity status at any time for any number of technical reasons. In fact, the IRS has revoked the charitable statuses of more than 450,000 organizations over the past several years for failure to file a tax return for three consecutive years. For this reason, a foundation should not simply accept a determination letter as incontrovertible proof of its applicant’s current status as a public charity. Instead, it must be careful to check the status each and every time a grant is made.

There are consequences to failing to validate an organization’s tax status. If the foundation makes a grant to an organization not classified as a public charity without following special procedures¹, the foundation may be subject to penalties. The “first tier” tax penalty is 20 percent of the grant amount and it necessitates filing a penalty return. Although a $4,000 penalty on a $20,000 grant might not constitute a devastating blow to the foundation’s endowment, it’s still an unpleasant surprise and a waste of charitable funds. If for some reason the penalty is uncorrected, a “second tier” tax penalty of 100 percent of the grant amount could be imposed.

So, how do you validate the status of your potential grantee as a public charity? Foundations may check the listing of an organization in Publication 78, which has been made a part of Exempt Organizations Select Check (“Select Check”), accessible on the IRS’s website, or in the IRS Business Master File Extract of key information on exempt organizations (the “BMF Extract”). Of these two options, the BMF Extract is the more comprehensive source for information concerning an organization’s tax status.

When an organization listed in Select Check or the BMF Extract ceases to qualify as a public charity, and the IRS subsequently revokes or changes its tax exempt status, the IRS notifies the public of such revocation or change by publication in the Internal Revenue Bulletin, which is published on a weekly basis via the IRS’s website. However, even after an organization’s tax exempt status has been revoked or changed, it might still be listed as a public charity by the IRS for a time.

Generally, the tax rules provide that when an organization has lost its public charity status but is still listed as such by the IRS, a grant made to it by a private foundation will not result in a tax penalty if the foundation:

• Was unaware of the change in or revocation of the grantee’s status at the time the grant was made;
• Was not responsible for or aware of the activities or deficiencies on the part of the grantee that gave rise to its loss of public charity status; and
• Made the grant prior to the date the IRS publicized the grantee’s loss of its public charity status in the Internal Revenue Bulletin or on the IRS’s website.

Although the BMF Extract is publicly available and provides detailed information, checking it yourself is difficult because it is neither simple nor easy to decipher. Foundations therefore typically rely on a user- friendly, third-party service to certify the nonprofit’s tax status in the BMF Extract. Per the IRS’s guidance in Revenue Procedure 2011-33, a foundation may rely upon third-party certification of an organization’s status as a public charity in the BMF Extract, provided that certain requirements are satisfied and the foundation retains a paper or electronic copy of the report that includes:

• The organization’s name and employer identification number (EIN);
• The organization’s tax status as a public charity (referred to by the IRS as “foundation status”) under Internal Revenue Code Section 509(a)(1), (a)(2), or (a)(3), including supporting organization type, if applicable;
• A statement of whether contributions to such organization are deductible;
• A statement that the information is from the most current update of the BMF Extract and the revision date of the BMF Extract referenced; and
• The date and time the information was provided to the foundation.

You will need to retain this printed or electronically stored record so that, if the IRS later revokes the organization’s exempt status, you can show that your foundation’s grant was based on up-to-date data from the IRS.

Although most third-party services charge a fee, Foundation Source, in accordance with our mission to encourage safe, sound, and responsible philanthropy, offers GrantSafe®, a proprietary database based on the BMF Extract, as a free service. To ensure your grant is IRS compliant, GrantSafe is updated weekly to reflect changes published in the IRS’s Internal Revenue Bulletin regarding modification or revocation of the tax statuses of listed organizations. Finding an organization is as easy as typing in the organization’s name or tax ID number. A green check mark or red “X” instantly tells you the status. It generates a time-stamped certificate evidencing the organization’s public charity status in the BMF Extract for your foundation’s records and, like the paid services, it meets every IRS requirement for validation.

A foundation that makes grants without researching the public charity status of a grantee beforehand does so at its own peril, as the potential penalties can be costly. On the one hand, the rules governing private foundations are nuanced, but, on the other hand, the IRS provides tools upon which foundations may rely to research the public charity status of grantees so that grants can be made without fear of penalty. Although the impetus driving research about a grantee’s tax status may be compliant with tax rules, the results of the research can be surprising, revealing details about the organization that can be genuinely useful to foundations in making grantmaking decisions.

The post How Private Foundations Can Validate the Tax Status of Grantees appeared first on Foundation Source.

The post Corporate Philanthropic Services appeared first on Foundation Source.

• A corporate foundation can engage in charitable activities that would not be tax deductible if handled directly by the company. These include loans for a charitable purpose that are paid back to the foundation; grants to for-profit entities when they are used for a charitable purpose or to advance the work of the foundation; scholarship programs; and even grants to individuals for disaster relief and economic hardship.
• It can allow for a more consistent level of giving: building an endowment in years when company profits are high that can be tapped into during less profitable years.
• The company can avoid capital gains taxes when highly appreciated assets—such as stock, land, and other appreciated property—are “gifted” to the corporate foundation.
• Staffing and overhead for the foundation can be paid by the foundation, resulting in a reduced cost to the company.
• When named for the company, the foundation’s charitable activities reflect positively on the company’s image. Similarly, a company with a well-known and respected name can generate greater public visibility for the foundation’s charitable activities.
• The foundation’s funding guidelines can help company executives gracefully turn down inappropriate funding requests, especially from friends, customers, and employees.
• Unlike donations made directly by the company, foundations are not required to collect substantiation receipts from nonprofits for gifts greater than $250. For companies with matching gift programs, or that make many small donations, this means they do not have to expend resources tracking and collecting these receipts.

Starting a Corporate Foundation Has Never Been Faster or Easier

Foundation Source will establish your corporate foundation and have it ready for funding in less than a week. Over the past decade, we’ve created over 2,000 foundations and have developed a proven and streamlined process.

Here’s what’s included:

• Creation of the foundation entity (a Delaware nonprofit corporation)
• Bylaws and essential governance policies
• Preparation and filing of the IRS application for exempt status (Form 1023)

OUTSOURCED EXPERTISE AND SUPPORT SERVICES TO ESTABLISH AND HELP YOU MANAGE YOUR CORPORATE FOUNDATION

Simplified Foundation Management

Foundation Source provides a full suite of services to keep your corporate foundation running efficiently, effectively, and compliantly. This allows your staff to devote their time to strategy and program development, as well as the needs of running your business.

We take care of everything: state and federal filings, transaction accounting, document management, compliance monitoring, transaction processing for grant checks, transmittal letters, expenses, and fees.

You’ll also enjoy peace of mind knowing that foundation experts are keeping watch to help you avoid compliance issues that can result in financial penalties, reputational harm, and even loss of exempt status.

Below is a brief summary of our foundation management services.

ADMINISTRATIVE SUPPORT

We provide the day-to-day support all corporate foundations need to operate efficiently and compliantly. This includes transaction recordkeeping, active compliance monitoring, grant check processing, and state and federal filings. There’s no need to hire additional staff or burden existing employees with duties they aren’t trained for.

ONLINE RESOURCES

Foundation Source Online® is a secure, web-based platform for managing foundation activities, including charity research, grantmaking, reporting, viewing investment balances across all accounts, and checking your 5% minimum distribution requirement. Viewing rights and permissions are individually defined for each staff member given access to the site. It provides transparency into foundation activities and facilitates communication and collaboration among those involved.

PHILANTHROPIC ADVISORY SERVICES

We have philanthropy, tax, and legal experts to get you started and then take your foundation to the next level. Services are coordinated through a dedicated Private Client Advisor, who serves as your primary contact and gets to know you and your foundation inside and out. In addition, our Philanthropic Advisory Services team has extensive experience in partnering with corporate foundations. Foundation Source clients have access to customized advisory services, tools and resources that enable foundations to maximize the impact and efficiency of their philanthropy. Contact us today to learn more.

STREAMLINED GRANTS MANAGEMENT

Applications facilitates the grantmaking process, making it easy for your foundation to accept and review online applications while also making the process convenient for your applicants. Because applications are submitted electronically, staff can efficiently organize and manage grant requests; centrally communicate about them; review them online; and easily generate data and reports.

Outcomes helps the foundation track the impact of its charitable donations, monitor performance, and request formal reports, all from a simple web console. It automates the process of collecting key performance information from nonprofits, including how grant funds were spent, grantee’s progress towards goals, unexpected challenges, and lessons learned.

EMPLOYEE ENGAGEMENT

These optional services are available through our network of preferred partners: workplace giving, volunteer tracking, international programs, fundraising campaigns, and disaster relief.

The post Corporate Foundations: Getting Started appeared first on Foundation Source.

Having a dual role also can make it challenging to keep the company’s foundation operations and objectives separate from the company’s primary business. This is of serious concern because the tax-favored status of private foundations, whether they are established by an individual or a company, is conferred with the expectation that they will operate exclusively for charitable purposes. The corporate foundation’s activities must further these charitable objectives, whether or not such objectives advance the company’s commercial interests.

For more than two decades, Foundation Source has supported companies with the administration and management of their foundations. In our experience, there are several key areas where corporate foundations may inadvertently stray into noncompliance. The practices discussed below might attract the interest of the IRS because they could violate private
foundation tax rules that were enacted as a result of the perception of past abuses by foundation insiders or “disqualified persons.” Being aware of the following compliance issues is of particular importance because even the mere suggestion of impropriety has the potential to damage a company’s reputation.

CORPORATE FOUNDATIONS DON’T ALWAYS RECEIVE THE ATTENTION AND EXPERTISE THEY NEED TO STAY IN COMPLIANCE

Sharing of Staff, Office Space, and Business Equipment

Companies often donate office space, equipment, and staff to their foundations, rather than seek reimbursement or attempt to share expenses. The tax rules prohibit foundations and their disqualified persons from entering into financial transactions with each other, such as lease arrangements, unless certain narrow exceptions apply.

Companies that fund their foundations are usually subject to these tax rules because they are considered to be “substantial contributors,” a type of disqualified person. In this context, the tax rules permit a company to lease office space at no charge to its company foundation.

What is less known is that a corporate foundation that leases space at no charge may, under certain conditions, be able to pay its fair share of related expenses for its use. For example, the foundation may be able to pay a percentage of the utility bill provided that it pays the utility company directly and not the for-profit parent company. We recommend that companies consult counsel before making any such arrangements.

Recognition for Grants

Grantee organizations often thank their corporate donors by giving them public recognition for their generous support. Sometimes the company itself is acknowledged for donations made through the corporate foundation. Even though this sort of public recognition and goodwill benefits the company, it should not result in self-dealing violations because the benefits to the company generally are considered to be merely “tenuous and incidental.”

However, companies need to be careful: Public recognition is one thing; but advertising the company’s services, products, or facilities as a result of the foundation’s donation is quite another. If corporate foundation grants are used to obtain advertising for the company’s for-profit business, a self-dealing violation may result because the benefit to the company could then be more than merely tenuous and incidental.

Self-Dealing

In the course of carrying out foundation operations, company employees may be presented with an opportunity to benefit personally from a grant made by the company foundation.
For instance, a grantee may provide free concert tickets to the corporate foundation, which, in turn, may wish to distribute the tickets to company employees who are unaffiliated with the foundation. This situation should be avoided because a self-dealing violation may result.

IF CORPORATE FOUNDATION GRANTS ARE USED TO OBTAIN ADVERTISING FOR THE COMPANY’S FOR-PROFIT BUSINESS, A SELF-DEALING VIOLATION MAY RESULT

There is some flexibility if a foundation’s own employees, officers, or directors attend an event on the foundation’s behalf with a specific charitable task in mind, such as monitoring a grantee’s performance, conducting a site visit, or showing support for the grantee by attending an event. However, if a company wishes to show its support for a charity by buying a table at an event and filling it up with company employees and their spouses who are unconnected to the foundation, then the company itself, rather than the foundation, should make this purchase.

Compensation

Corporate foundations are permitted to have paid employees carry out their missions, particularly if their charitable activities are time-consuming or complex.

If employees are compensated, the foundation should follow best practices by ensuring that the services rendered are necessary and professional in nature, and that the proposed compensation is reasonable.

Reasonableness of compensation can be established by a process known as “benchmarking,” which entails comparing the proposed compensation arrangement to compensation paid by similarly situated foundations and service providers.

Naturally, an employee who is paid by both the corporate foundation and the company should not render services to the company while on the foundation’s “clock.”

A company may provide services to its foundation for a reasonable fee, like any other paid service provider, if the services rendered are necessary and represent “personal services,” which are generally professional in nature.

Employer Scholarship Programs

Private foundations may receive permission from the IRS to offer scholarships directly to needy individuals and even, under certain conditions, to its own employees and children of employees. However, it is important to note that special rules apply when a company provides scholarships to its employees, officers, and directors, and to their children through its foundation’s “employer-related scholarship program.”

These rules are intended to prevent a company from improperly using its foundation’s scholarship program as a back-door way to recruit and retain employees, and to increase the value of benefits and compensation provided to the company’s employee base. For example, the rules require that scholarship recipients be selected by an independent committee composed of individuals who are not connected to the company or the company foundation and who are not former employees of either entity.

The rules also restrict the number of scholarship grants that may be awarded on an annual basis. To prevent the corporate foundation from granting scholarships to every eligible applicant, thereby effectively making the scholarship into an employment benefit, the foundation may award the scholarships only to a percentage of eligible applicants.

Conclusion

While manifesting themselves in different ways, the practices of compliant corporate foundations should mirror the practices of well-run companies: clarity of purpose, transparency, and independent transactions without conflicts of interest. Because vigilance around these areas of sensitivity is vital to the company’s brand as well as the success of its philanthropic endeavors, many companies engage an outsourced service provider, such as Foundation Source, to ensure that their foundations are compliant.

The post Keeping Your Corporate Foundation Compliant appeared first on Foundation Source.

The post Seven Steps to Selecting Ideal Nonprofit Partners appeared first on Foundation Source.

Having chosen a core issue, corporations commonly work toward their philanthropic goals by forming long-term, strategic partnerships with nonprofit organizations. Consider a technology company that wants to support and encourage the next generation of talent in the fields of science, technology, engineering, and math (STEM). The company could make grants to colleges and universities with academic programs in STEM subjects. By making these grants consistently and with the right partners, the company can achieve both its philanthropic aims (fostering the next generation of STEM professionals) and corporate objectives (brand recognition, positive publicity, etc.).

A thoughtful partnership could indirectly benefit the company’s business by:

• Publicizing the company’s e orts to prepare the next generation for STEM careers
• Aligning the company’s philanthropic pursuits with its commitment to high-tech innovation
• Building brand equity by linking the company’s name with prestigious academic institutions
• Providing opportunities for employees to mentor and cultivate talent

A Win-Win for Both Partners

Choosing the right partner is essential for success—on both sides of the equation. Beyond the fate of any specific philanthropic initiative, there are long-term benefits to be had for both partners.

The corporation stands to benefit from the nonprofit partner’s:

• Community roots and goodwill
• Expertise in the chosen funding area (e.g., autism, environmental conservation)
• Knowledgeable sta to function as “boots on the ground”
• Organizational reputation and credibility
• Track record of achievement

Although the most obvious benefit to the nonprofit partner is a steady, reliable stream of funding, there are additional ways in which partnership with a corporation can be helpful.

The nonprofit partner stands to gain:

• Heightened awareness of the organization and its mission
• Exposure to a broader funding base
• Connection to the corporation’s vendors and business partners
• A ready source of volunteers among corporate employees
• Access to professional expertise and services (IT, marketing, etc.)
• In-kind donations of goods and services

The post The Benefits of Strategic Partnerships appeared first on Foundation Source.

Evaluating a nonprofit to ensure there’s alignment with your mission really depends on the type of funder you are—or want to be. Are you an innovator? An advocate? A change agent? A capacity builder? For example, let’s say you want to contribute to education. There are several ways to go about this, but you want to be sure the steps you
take tie back to the defined role you want to play in fulfilling your philanthropic objectives. Do you want to advocate for education change on Capitol Hill? Or build schools in Africa? Those are two very different paths, so before you find the right nonprofit, it’s important to define your philanthropic personality.

EVALUATING A NONPROFIT TO ENSURE THERE’S ALIGNMENT WITH YOUR MISSION REALLY DEPENDS ON THE TYPE OF FUNDER YOU ARE—OR WANT TO BE.

2. Does the Organization Have a Clear Mission That Aligns with Your Passions and Values?

Look for specificity. It should be focused, concise and clearly explain the entity’s unique set of skills for strategically solving problems. Ambiguous intent with statements such as “We’re dedicated to making the world a better place” often leads to vague, intellectual work. What is the overriding purpose of the organization? Is it clearly focused on an issue or cause that matters to you? When you do receive a proposal, does the need addressed align with your mission and objectives? It should be a clear fit— from the population they serve to their organizational strengths.

3. Does It Meet a Critical Need?

In other words, does the nonprofit matter? You need to determine that there’s a clear need for its services and whether there’s substantial data available to justify its mission and e orts. It’s important to understand what its target population is and what percentage of that population it serves. Then you can examine whether these numbers have increased or decreased over time.

4. Do You Agree With Its Approach?

How is the nonprofit fulfilling its mission? A group of nonprofits with similar missions, say ending childhood hunger, may approach the same problem from di erent angles and perspectives. Be sure you agree with the organization’s strategy and tactics for addressing the issues you care about. Do they make sense? Are they based on credible research? Are you comfortable with them? For example, if the nonprofit frequently lobbies state and national legislatures yet you dislike politics, it may not be the right fit for your donation.

To compare nonprofits with a similar focus, visit “watchdog” organizations like CharityWatch, Charity Navigator, Give, and GiveWell. These websites apply uniform standards to grade the financial and programmatic quality of nonprofits. They will also help you beware of scams, fraudsters, and fake charities trying to trick unwary, but well-intentioned donors.

5. Is It Making a Positive Impact?

For many people, impact-driven philanthropy is a top priority. Will you achieve a bonafide positive impact by donating? Can the nonprofit prove its success? Does it report tangible evidence that it’s successfully meeting its goals? If results aren’t publicized, consider it a red flag, and instead donate to a nonprofit that tracks data and provides metrics of success. After all, you have to trust the recipient to make your contribution count.

To take it a step further, choose a nonprofit that will partner with you to measure impact. For example, a nonprofit could work with you to provide serial funding with future gifts that are contingent on results. But don’t base success only on output. Instead, look at the outcome. For example, if your goal is to help at-risk school children do better
in class–and you want to gauge how e ective a charity’s after school program is in achieving this—look beyond how many kids participate. That’s the program’s output, but what may really count is its outcome; how significantly the children’s performance in school improves.

ONE OF THE BEST WAYS TO GET TO KNOW YOUR PROSPECTIVE NONPROFIT IS TO PAY THEM A VISIT. MEET THEIR LEADERS AND CONSIDER VOLUNTEERING FOR THEM.

6. Does It Have a Solid Reputation and a Credible Board of Directors?

Check to see if the nonprofit has been in the news—and if that news has been positive. Does it have an upstanding reputation? Any allegations of bad conduct? Even if you suspect that the organization has been unfairly tarred by controversy, whether deserved or not, negative publicity can compromise success.

Additionally, look at the board of directors. Are its members chosen logically and thoughtfully, or are they seemingly chosen at random? Is the board dominated by the founder and a few insiders? Ideally, a mix of influential individuals and rainmakers should comprise the board along with experts relevant to the organization’s mission.

7. Are They Transparent?

Do they make their financial information readily available? If so, be sure their expenses are in line with their budget and look at their 990-PF form to verify its tax-exempt status. It’s also a good idea to do a quick search to see if other reputable donors are funding the organization. If they’re hiding something, it’s in your best interest to move on.

8. Have You Looked Locally?

You don’t have to look far from home to find those who are in need. Nonprofits with local ties, particularly with communities that are marginalized, are often disproportionately impacted. This has been starkly illustrated by COVID-19, racial and social justice concerns and recent natural disasters that are having the greatest impact on communities of color, low-income communities, LGBTQIA+ people and people with disabilities. Also, try seeking out nonprofits taking the long-view approach as opposed to just focusing on the immediate aftermath of attacks, situations and extreme weather-related events.

9. Have You Done a Site Visit?

One of the best ways to get to know your prospective nonprofit is to pay them a visit. Meet their leaders and consider volunteering for them. This is a great way to get to know the people, how they operate and the quality of the work. Site visits also help you build relationships–it’s a great first step to learn more about them even before you ask for a formal proposal or grant request. However, a site visit alone isn’t sufficient— what you learn while there must be considered in the context of the other steps to ensure the right fit.

10 Are You Factoring in Flexibility and Responsiveness When It Comes to Giving?

It’s not always what you give–it’s also how and when you give that matters, so that nonprofits can use the funding in the way that is most important at that moment. For instance, nonprofits everywhere have been impacted by changes in funding due to the acute and unpredictable needs that emerged in 2020, as well as supply chain issues and a reduction in government support. To help them keep the lights on, consider giving to general operational purposes rather than specifying how the funds should be used.

YOU DON’T HAVE TO LOOK FAR FROM HOME TO FIND THOSE WHO ARE IN NEED.

NEXT STEPS

If you’re not finding the information you need, contact the nonprofit. And if you’re contemplating a sizeable gift or ongoing commitment to the organization, this warrants additional due diligence to ensure your giving creates the desired impact.

By researching before donating, you’ll gain valuable insight and experience. With time, you’ll acquire the skills to determine when your donation isn’t just a gift, but an investment in progress.

The post Every Dollar Counts: How To Evaluate a Nonprofit appeared first on Foundation Source.

Don’t Make Decisions in the Dark

Harness the power of Outcomes and see exactly what your grants have achieved. It’s never been easier to get monitoring reports from your grantees.

Outcomes organizes and automates the process of collecting follow-up reports from your grantees, saving your foundation time and effort.

“As our foundation’s grant manager, I can say that the Outcomes module of the platform has been a huge timesaver! We have been able to customize our templates to meet our unique requests to our grantees, and the ‘Flag for Results’ button has further helped to ensure that important follow-ups are not missed.”

AMELIA WHITECULTURES OF RESISTANCE NETWORK

The post Outcomes appeared first on Foundation Source.

A Better Process

• Easily accept online applications
• Eliminate time spent on long-shot requests
• Review applications in real time
• Confirm eligibility of charities
• Track every activity

Foundations can post their guidelines and funding criteria to cut down on the number of extraneous requests for funding. Because applications are submitted electronically, the foundation can efficiently organize and manage grant requests; centrally communicate about them; review them online; and easily generate data and reports.

Our secure, web-based system is available 24/7 and easily accessible from any device.

A Better User Experience

• User friendly
• Accessible to everyone at the same time
• Information organized for your needs
• Customized to your foundation

“Switching from paper files to the Applications module has drastically improved our entire grant making program. The Board members are now able to review grant applications online and make comments for others to see which has streamlined the grantmaking decisions. Potential grantees have found the online application process to be easy to navigate with the ability to upload supporting documentation. This process has made our grantmaking process, from start to finish, more efficient.”

JAY H. SANDAK, PRESIDENT/CEOTHE HERBERT & NELL SINGER FOUNDATION

The post Applications appeared first on Foundation Source.

• Payments to charities for tickets to events, membership benefits, discounts, etc., that will be distributed to company employees who are not both serving as directors, officers, employees or volunteers of the foundation and receiving the tickets or benefits in that capacity.
• Payments to sponsor events where the company will reap advertising benefits (more than the mere recognition permitted in connection with a qualified sponsorship payment).
  • Benefits that cross the line from mere recognition to advertising:
    – Price information or other indications of saving or value
    – Endorsements
    – Inducement to buy/sell/use a service, facility, or product
    – Logos or slogans that are qualitative or comparative
• Grants to domestic or foreign charitable or governmental organizations with which the company is seeking a business relationship.
• Grants to charities in satisfaction of the company’s own pledges.
• Matching a company employee’s grants to charities in satisfaction of the company’s matching grants program, where the company is legally obligated to do so under its own program.
• Cause-related marketing programs.
• Grants that have any element of:
  • Lobbying
  • Voter registration drive
  • Electioneering
• Grants to company employees in connection with emergencies, disasters, or hardships that are not “qualified disasters,” as defined by the IRS (this usually means a presidentially declared disaster)
• Payments for purposes that are not considered charitable per the IRS

In sum: Whether an activity or payment should be funded by the company or the foundation depends upon the nature and extent of any benefits that the company might expect to receive in return for the payment. If the benefits are more than just “incidental or tenuous” under IRS rules, then the payment must be made by the company (not by the foundation) to avoid self-dealing violations and resulting penalties, which must be paid by the self-dealer (never by the foundation).

II. Activities that maybe funded by the foundation

• Domestic and foreign grants to organizations that further charitable purposes and that provide only a “tenuous and incidental” benefit to the company, such as:
  • Grants that will result in publicity, goodwill, and enhanced employee morale for the company
  • Grants that bestow naming rights
    – For example, if the foundation were to make a grant to a hospital, which agrees to name a wing after the company rather than the foundation
  • Matching a company employee’s grants to public charities under the foundation’s—not the company’s—matching grant program
• Grants to charities for whom company employees have volunteered their services; the grants can fund the charity’s programs relating to an employee’s volunteer activities
• Grants to charities in communities in which the company’s o ices or facilities are located
• Permissible recognition of the company in connection with the foundation’s grants:
  • The credit could read as follows:
    – The foundation (most conservative if the foundation is the only contributor) – The foundation, sponsored by the company
    – The foundation and the company (in any order, especially if both contribute) – The company, through the foundation
  • Permissible acknowledgements could include:
    – Logos and slogans that do not have qualitative or comparative descriptions of the company’s products, services, or facilities
    • However, counsel may advise if a company logo or slogan containing qualitative or comparative descriptions is permissible because it is an established part of the company’s identity
  • A list of the company’s locations; website address; contact information
  • Value-neutral descriptions of the company’s product line or services
• Payments to charities for tickets to events, membership benefits, dinners, etc., that will be used by foundation officers, directors, or staff to further a foundation (not a company or personal) purpose.
  • For instance, if the foundation funds the production of an opera, it would be reasonable for foundation personnel to attend opening night to evaluate how the grant funds were deployed
  • The foundation should not provide such tickets to the spouses or other family members of the foundation’s officers and directors (or any other disqualified persons) who do not serve the foundation in an official capacity
  • If it would be helpful to the charity sponsoring an event, the foundation may provide tickets to members of the community who may be potential donors or volunteers of the charity
    • However, tickets must not be provided as a reward to those doing business (or considering doing business) with the company
• Payments in fulfillment of the foundation’s own pledges (as opposed to pledges made by the company or by its executives).
• Emergency and hardship grants to individuals who are not company employees.
• Emergency grants to company employees in connection with a “qualified disaster,” as defined by the IRS (this usually means a presidentially declared disaster).
• Scholarship grants to individuals (NOTE: IRS pre-approval of grant procedures is required, and special rules apply to scholarships established for company employees and/or their children).
• Grants to educational institutions from which the company may wish to recruit employees or at which its employees may wish to enroll, so long as the company does not receive any preferential treatment in hiring or employee admissions.

III. Transactions to be avoided by the foundation

• Self-dealing would result if the foundation and the company were to split the cost of an event ticket by having the foundation cover the charitable portion of the ticket price and having the company cover the portion allocable to the value of goods and services received (for example, entertainment, food, and beverage at a charity dinner).
  • This prohibition against splitting the ticket cost would apply to any other disqualified person as well
  • The company may, however, purchase tickets separately, in parallel with any foundation grant, so long as the company is not paying less for the package resulting in receipt of tickets than would be required without regard to any foundation grants
• If the foundation receives a valuable perk, like ski lift tickets, in exchange for a grant, the foundation must not give the perk to a company executive or a disqualified person (such as a foundation officer or director or their family members), as a self-dealing violation might result.
• The foundation must not lease space either to the company or to any other disqualified person (even if the rates are fair or advantageous to the foundation). Note that the company will be deemed a disqualified person on account of being a “substantial contributor” to the foundation.
• The foundation must not loan funds to the company or any other disqualified person (even if the rates are advantageous to the foundation)
• Except with respect to certain qualifying redemptions of company stock, the foundation must not enter into a sale (or exchange) with the company or any other disqualified person. Accordingly, the foundation must not purchase stock from the company or any other disqualified person, and may sell stock to the company only in very limited circumstances.
• The foundation must not reimburse the corporation for its share of office supplies or equipment; however, the company may provide such supplies and equipment to the foundation at no charge
• The company must not benefit from the use of the foundation’s assets.
  • For example, the company cannot hang foundation-owned artwork in the company’s board room
• The foundation must not make grants, sponsor events, or run programs intended to market the company’s products or services, generate meaningful business opportunities, or provide the company with preferential treatment over others. For example:
  • A foundation grantee cannot be required to purchase products or services from the company
  • The foundation cannot make a grant to a company client as a reward for being a good client
• The foundation must not make a grant to a charity in satisfaction of a pledge made by the company, a company executive, or any other disqualified person.
• The foundation must not make payments to certain high-ranking government officials (with narrow exceptions)
• The foundation must not make payments for purposes that are not considered to be charitable, religious, scientific, literary or educational per the IRS.
• The company must not sign any agreement or pledge on behalf of the foundation, or commit its resources.
• Company’s executives who are not serving on the foundation must not approve the foundation’s donations and should not be able to require the foundation to make donations to a particular charity (although recommending potential grantees should be fine).
• The foundation must not reimburse the company for the wages of its employees who miss work to perform volunteer activities for the foundation.
• The foundation may not pay out-of-pocket expenses incurred by company employees when they undertake volunteer activities for the company.
  • Reimbursement of certain expenses incurred by foundation employees or volunteers may be permissible
• Self-dealing concerns are heightened if the foundation sponsors internships at the company.
  • Such programs are closely scrutinized by the IRS
  • Benefit to company vs. benefit to student interns

IV. Transactions that should be approached with caution

• The company or any other disqualified person may lease space to the foundation, provided that it is leased without charge.
  • If there is a no-charge lease, the foundation may pay a third-party vendor, such as a utility company, for expenses related to the foundation’s use of the space
  • Under no circumstances may the foundation pay these expenses directly or indirectly to the company or any other disqualified person for the payment to be passed along to the vendor
• The company or any other disqualified person may share space with the foundation, and the foundation may bear its fair share of third-party expenses arising from its use of the space, provided that:
  • The foundation and the company or other disqualified person enter into a written agreement containing a set of guidelines for sharing space, facilities, expenses, etc.
  • Areas on able method is used to ensure that the foundation pays only its fair share of expenses—it must not pay any expenses properly attributable to the company or any other disqualified person
    • For example, the foundation’s share of utility expenses may be calculated by applying a percentage based on the square footage occupied by the foundation in proportion to the entire space
  • Record keeping procedures need to be instituted to track the fair allocation of third-party expenses, time diaries, etc.
  • The foundation must directly pay the third-party vendors (who must not be disqualified persons); under no circumstances may the foundation directly or indirectly pay its share of these expenses to the company or any other disqualified person to be passed along to the vendor
• The company or any other disqualified person may loan funds to the foundation, provided that the loan is without interest and for a foundation-related purpose.
• The foundation may have its company stock (if any) redeemed, provided that certain conditions are satisfied. Please contact Foundation Source for additional information if this becomes relevant, as counsel likely will be needed to ensure that no violation results.
• The foundation may provide supplies, facilities, or equipment to the company, provided that:
  • Goods/services/facilities are made available to the general public on at least as favorable of a basis
    as they are to the company
  • A substantial number of people are actually using the goods/services/facilities in question; and
  • The foundation’s furnishing of such items is related to carrying out the charitable purpose(s) that is the basis for the PF’s exempt status
• The foundation may pay the company for certain services rendered to the foundation by the company’s employees, provided that: (1) the services are “personal services” per IRS rules, meaning that the services are professional and/or managerial in nature, (2) the services are reasonable and necessary, and (3) the amount paid for the services is not excessive.
  • Employees must keep records on time spent on company and foundation matters
  • If the foundation expects to make payments to the company or any other disqualified person for such services, the foundation should contact Foundation Source beforehand for additional information to help the foundation ensure that the above conditions are satisfied
• Some foundations and their sponsoring companies have the same or similar logos, which should be fine, provided that the logo doesn’t contain qualitative or comparative descriptions of the company’s products, services, or facilities.

V. Recommendations

• If the foundation wishes to make a grant to a charity where a company executive or any other disqualified person has a personal connection (for example, serves as a board member):
  • The connection should be disclosed to the foundation’s board
  • Some foundations adopt a policy requiring the individual with the personal connection to abstain from voting on the grant
  • The grant should be general and unrestricted grant or should not be earmarked by the foundation for the salary of the related individual
• A company usually staffs its foundation with company employees who are considered volunteers of the foundation. To help insulate the company and foundation from the other’s liability and prevent accidental self-dealing, the company employee/foundation volunteer should keep their roles separate and specify the capacity in which they are acting.
  • For example, in speaking with a potential grantee, the foundation staff member should be clear that they are communicating with the grantee as either a foundation staff person or as a company employee
• The company’s accounting team should determine whether the company’s donation of its own products directly to a public charity (rather than through the foundation) would provide better tax results for the company than the donation of such products to the foundation for distribution to other charitable organizations.
• Some foundations adopt a policy of disclaiming token gifts of nominal value that are provided in return for a grant. However, if token gifts are kept and given to disqualified persons, they may not present a problem if the gifts have no more than nominal value.
• The foundation should convene Board meetings at least annually and should maintain records of its meeting Minutes (or unanimous consents adopted in lieu of meetings). Foundation Source can provide a Minutes workbook, which contains an agenda and can be taken to Board meetings for completion.
• The foundation should consider authorizing certain individuals to enter grants and expenses and authorizing other individuals approve the same.
• If an executive of the company (or any other donor) makes a donation to the foundation, the donor may recommend that the donated funds be granted to a particular charity but should not require the foundation to do so. Requiring the foundation to grant the donated funds to a particular charity can lead to many complications that may impact the donor’s ability to claim a deduction and may prevent the foundation from counting its expenditure of the funds towards meeting its annual 5% minimum payout requirement.

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