Public v Private

Public Vs. Private Foundations

There are significant differences between a public foundation versus a private foundation. This is a highly technical area of tax law, and this writing is intended only to provide a brief overview. Your own tax and legal advisors should be consulted regarding your specific situation.

A public foundation such as U.S. Family Foundation, Inc. offers the donor significant advantages in three major areas: deductibility of gifts, control of assets, and reporting requirements.

Deductibility of Gifts

Although tax law changes from time to time, the full fair market value of contributions of appreciated assets to public foundations is deductible, whereas deductibility of such gifts to private foundations is limited to their cost basis. The tax deduction can be spread over a maximum of six tax years, with the following amount applied to the donor’s adjusted gross income (AGI):

CONTROL OF ASSETS

1. Private foundations must distribute at least 5% of fair market value of their assets each year. Taxes and penalties range from 15% to 100% for private foundations who fail to comply.
2. A private foundation can not own a closely-held business.
3. A private foundation is prohibited from having any financial transactions with “disqualified persons”. This would prevent such transactions as the gift of a business building followed by arm’s length leaseback by the donor or his company.

Gifts of technology, bargain sales and similar dealings would also be prohibited.

There is a 5% excise tax on such acts of self-dealing, followed by a 200% penalty if not corrected in a timely fashion.

4. A private foundation must pay a 5% excise tax and a 200% penalty on any investment which jeopardizes the charitable purpose. This would include imprudent investments and those showing a lack of reasonable business care. This should not represent a real problem to most donors, but it is uncomfortable to be at the mercy of the IRS definition of prudence.
5. A private foundation pays a 2% excise tax on net investment income (lowered to 1% in some instances). This is certainly minimal, but it establishes a precedent for governmental taxation of charitable funds. This also causes some concern among donors about future levels of taxation of private foundations.

REPORTING REQUIREMENTS

Private foundations have substantially more extensive and invasive reporting requirements than public foundations. This is based on the presumption that private foundations are more susceptible to self-dealing activity and hence requires greater scrutiny. While understandable, the extra scrutiny involves a very real cost for the creator of a private foundation.

Specifically, private foundations are required to provide copies of their annual tax returns to the state Attorney General as well as to the IRS. In some states, the tax returns on the file with the Attorney General become the source of information for publishing a local private foundation directory.

Alternatively, public foundations such as U.S. Family Foundation, Inc., file a single tax return for the umbrella organization and individual Donor Advised Funds are not listed. Thus, privacy is assured to our donors.

Finally, a private foundation must post annual notice in a newspaper having general circulation, that the foundation’s tax return is available for inspection by any citizen who requests it within 180 days after publication. A copy of the notice must go to the IRS.

PUBLIC FOUNDATIONS SUCH AS THE U.S. FAMILY FOUNDATION, INC. ARE NOT BOUND BY THE ABOVE LIMITATIONS.

Therefore, a Donor Advised Fund in a public foundation such as U.S. Family Foundation, Inc. is the flexible answer. Charitable objectives are achieved through more attractive tax treatment, cost effective operation, privacy, donor/successor advisement.