private foundations

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As we previously reported, the IRS has updated its guidance with helpful examples concerning program-related investments for private foundations.  In its recently issued Notice 2015-62, the IRS provides further assurance that private foundations may take the accomplishment of charitable purposes into account in investing decisions, in addition to financial return.

Among other restrictions, private foundations are subject to Section 4944 of the Internal Revenue Code.  Section 4944 imposes excise taxes on a private foundation that makes a “jeopardizing investment,” as well as on the foundation’s directors, officers, and management who knowingly participate in the making of the investment.  Jeopardizing investments do not include “program-related investments.”  These are investments made without any significant purpose of financial return.  Notice 2015-62 does not address program-related investments; rather, it addresses investments having a charitable as well as financial purpose.

At the end of January, 2013, the IRS Exempt Organizations Group (“EO”) released its annual report, highlighting EO’s 2012 accomplishments and outlining its priorities for 2013.  This year’s report was significantly more detailed and informative than last year’s report and workplan.  Some accomplishments and priorities of interest are described below, with something for nearly everyone in the tax-exempt sector.

2012 Highlights:

  • Exchange of Information with States.  EO continued to see an increase in the number of referrals from state charity regulators and tax agencies regarding potential exempt organization tax law violations.  In FY 2011, EO received 104 referrals from 19 different states.  Some of the most common issues that are referred to the IRS from the charity regulators involve private benefits and inurement, nonfilers, political activities by § 501(c)(3) organizations, employment tax issues and organizations not operated as required by their exempt status.  Conversely, under recently expanded authority, the IRS is allowed to disclose to certain state charity regulators significantly more information about exempt organizations, including proposed and final revocations of tax exemption for § 501(c)(3) organizations, proposed and final notices of deficiency for Chapter 42 excise taxes, § 501(c)(3) exempt organizations applications in process and proposed or final denials of these applications.  At present, only eight state tax and charity agencies in seven states have met the requirements to receive these disclosures; nonetheless, these agencies received approximately 27,000 disclosures in FY 2011.
  • Hospital Community Benefit Reviews.  As we have previously noted, EO is required under the Affordable Care Act to review the community benefit activities of all tax-exempt hospitals every three years.  This work continued in the past year.  EO will use the information from the reviews for research, reporting and compliance purposes, as well as to identify areas where additional guidance, education or Form 990 changes are needed.

The IRS recently issued proposed regulations amending the rules applicable to a private foundation’s good faith determination that that a foreign grantee is the foreign equivalent of a public charity or private operating foundation, grants to which will be “qualifying distributions” and not “taxable expenditures.” Most significantly, the proposed regulations expand the class of practitioners whose opinion may be relied upon by a private foundation for purposes of making a good faith determination that a foreign grantee is the foreign equivalent of a public charity or private operating foundation. A private foundation may rely on the proposed regulations for grants made on or after September 24, 2012.

On March 9, 2010, the IRS issued guidance designating the earthquake that occurred in Chile in February, 2010 as a qualified disaster for federal tax purposes. The guidance allows recipients of qualified disaster relief payments to exclude those payments from income tax. The guidance also allows employer-sponsored private foundations to assist employee victims in areas affected by the earthquake without affecting their tax-exempt status.
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In Announcement 2009-88, set to be published in Internal Revenue Bulletin 2009-52, dated December 28, 2009, the IRS lists organizations that have failed to establish or have been unable to maintain their status as public charities or as private operating foundations.
Continue reading for the full text of the Annoucement.
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