Private Nonoperating Foundations and Supporting Organizations

By Lepkowski, Sonja | The CPA Journal, June 2005 | Go to article overview

Private Nonoperating Foundations and Supporting Organizations


Lepkowski, Sonja, The CPA Journal


Many charitably inclined individuals form private nonoperating foundations (PNOF) funded with long-term qualified appreciated stock (QAS). QAS includes any stock that is capital gain property and for which market quotations are readily available on an established securities market. The donor receives a charitable deduction for the fair market value of the QAS contributed and does not have to pay a capital gains tax on the appreciation. The PNOF will pay a maximum excise tax of 2% on the appreciation upon the sale of the QAS, using the donor's cost.

Donors can also form a supporting organization (SO) to satisfy other charitable intentions. While both PNOFs and SOs are exempt under IRC section 501(c)(3), SOs fall under the public charity guidelines of IRC section 509(a)(3) because of their relationship with other public charities under section 509(a)( 1 ) or (2). As a result, cash contributions made to a PNOF are limited to 30% of the donor's adjusted gross income (AGI), while cash contributions made to an SO are limited to 50% of the donor's AGI. Contributions of QAS made to a PNOF are limited to 20% of the donor's AGI, while contributions of longterm capital gain securities (not just QAS) made to an SO are limited to 30% of the donor's AGI.

To receive the same percentage limitations as contributing to a public charity or an SO, a PNOF can elect pass-through status, which is the same as being treated as a public charity for that year. Private pass-through foundations are described in IRC section 170(b)(1)(E)(ii). They must distribute to public charities all of the contributions they receive during the year-including the current year's distributable amount and the prior year's undistributed amount, if any-no later than two-and-a-half months following their year-end. If the PNOF has excess distributions from prior years, it can use that amount toward the required distribution amount.

Advantages

Why would a donor with an existing PNOF form an SO? Donors to an SO can make a charitable contribution using a higher percentage of AGI, are not subject to the excise tax on net investment income, and do not need to make minimum qualifying distributions of at least 5% of the average investment asset value annually. In addition, an SO is not restricted in holding more than 20% (35% in some circumstances) of a single business enterprise, which is a restriction for PNOFs. Finally, an SO is not subject to self-dealing rules applicable to PNOFs but is subject to intermediate sanctions.

If a donor owns securities other than QAS, the only way to secure a deduction for the fair market value of those securities is to: 1 ) give them to public charities; 2) give them to an SO; or 3) elect pass-through status for the PNOF. An appraisal is required if the security is not tradable on an established securities exchange (such as the donor's personal holding company).

Finally, an SO may be a foreign organization as long as it qualifies as a publicly supported entity. …

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