Philanthropic foundation

A charitable foundation is a legal categorization of nonprofit organizations that either donate funds and support to other organizations, or provide the sole source of funding for their own activities.

Foundations in Civil Law systems

The term "foundation" originates in civil law jurisdictions, where it is used to describe a distinct legal entity.

A foundation has legal personality, and is entered in a public registry like a company. Unlike a company, it has no shareholders, though it may have voting members. It holds assets in its own name for the purposes set out in its consitutive documents, and its administration and operation is carried out in accordance with contractual rather than fiduciary principles. The foundation has a distinct patrimony independent of its founder.

Foundations are often set up for charitable purposes.

The foundation finds its source in institutions of medieval times when a patron would establish a foundation to endow a monastery or other religious institution in perpetuity.

The States of Jersey are considering introducing civil law type foundations into its law. A consultation paper presenting a general discussion on foundations was brought forth to the Jersey government concerning this possibility: Foundations: Proposals for a new law (pdf file).

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Foundations in U.S.A.

In the United States a foundation is a type of philanthropic or charitable organization set up by individuals or institutions as a legal entity (a corporation or trust) with the purpose of distributing grants to support causes in line with the goals of the foundation or as a charitable entity that receives grants in order to support a specific activity or activities of charitable purpose. Wikimedia Foundation, Inc., parent organization of Wikipedia, is an example of the latter.

In the United States, the word "foundation" does not have the same legal restrictions as "incorporated" or "limited;" therefore many foundations do not have the word foundation in their name and many organizations that one would not consider to be a foundation include the word foundation in their name. The status of an organization as a private foundation or public charity is determined by federal tax code as interpreted by the Internal Revenue Service.

In the United States, many philanthropic and charitable organizations are considered to be foundations. However, the Internal Revenue Code distinguishes between private foundations (usually funded by an individual, family, or corporation) and public charities ( community foundations and other nonprofit groups that raise money from the general public). Private foundations have more restrictions and less tax benefits than public charities.

Types of Foundation

The Internal Revenue Code defines many kinds of non-profit organizations which do not pay income tax. However, only charities can receive tax-deductible contributions and avoid paying property and sales tax. For instance, a donor would receive a tax deduction for money given to a local soup kitchen (assuming it has filed the proper 501(c)(3) documents), but not for giving money to the National Basketball Association, even though the NBA is a non-profit association.

Tax-exempt charitable organizations fall into two categories: public charities and private foundations. Private foundations typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. In the United States, "foundation" has no special legal status (unlike "incorporated"), so foundations may not have the word "foundation" in their name, while for-profit and public charities may have "foundation" in their name. For instance, community foundations are public charities, not private foundations.

The core differences between a foundation and a public charity include: (a) foundation must pay out 5% of its assets each year while a public charity does not; (b) donors to a public charity receive greater tax benefits than donors to a foundation; (c) a public charity must collect at least 10% of its annual expenses from the public in order to remain tax-exempt while a foundation does not. Neither a public charity nor a foundation can pay for or participate in partisan political activity, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.

For tax purposes, there are a few variants of private foundation. The material difference is between "operating" foundations and "grant-making" foundations. Operating foundations, like Wikimedia Foundation, Inc., use their endowment to achieve their goals directly. Grant-making foundations, like the Rockefeller Foundation, use their endowment to make grants to other organizations, which indirectly carry out the goals of the foundation. Operating foundations have preferential tax treatment in a few areas including allowing individual donors to contribute more of their income and allowing grant-making foundation contributions to count towards the 5% minimum distribution requirement.

History

The two most famous philanthropists of the Gilded Age pioneered the sort of large-scale private philanthropy of which permanent charitable foundations are a modern pillar: John D. Rockefeller and Andrew Carnegie. The businessmen each accumulated private wealth at a scale previously unknown outside of royalty, and each in their later years decided to give much of it away. Carnegie gave away the bulk of his fortune in the form of one-time gifts to build libraries and museums. Rockefeller followed suit (notably building the University of Chicago), but then gave nearly half of his fortune to create the Rockefeller Foundation. By far the largest private permanent endowment for charitable giving created to that time, the Rockefeller Foundation was the first to became a widely understood example of the species: a standing charitable grant-making entity outside of direct control by any level of government.

Starting at the end of World War II, the United States's high top income tax rates spurred a burst of foundations and trusts being created, of which many were simply tax shelters. President Harry S. Truman publicly raised this issue in 1950, resulting in the passage later that year of a federal law that established new rigor and definition to the practice. The law did not go very far in regulating tax-exempt foundations, however, a fact which was made obvious throughout the rest of that decade as the foundation-as-tax-refuge model continued to be propagated by financial advisors to wealthy families and individuals. Several attempts at passing a more complete type of reform during the 1960s culminated in the Tax Reform Act of 1969, which remains the controlling legislation in the United States. For more details on that legislative history, see [1].

Present Law

The Tax Reform Act of 1969 defined the fundamental social contract offered to private charitable foundations, the core of which has been imitated in law by other nations. In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a charitable foundation must (a) pay out at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits.

Administrative and operating expenses count towards the 5% requirement; they range from trivial at small unstaffed foundations, to more than half a percent of the endowment value at larger staffed ones. Congressional proposals to exclude those costs from the payout requirement typically receive much attention during boom periods when foundation endowments are earning investment returns much greater than 5% (such as the late 1990s); the idea typically fades when foundation endowments are shrinking in a down market (such as 2001-2003).

Foundations in England

In England, the word "foundation" is sometimes used in the title of a charity, as in the British Heart Foundation and the Fairtrade Foundation. Despite this, the term is not generally used in English law, and (unlike in civil law systems) the term has no precise meaning.

Foundations in Canada

Foundations in Canada collectively comprise a very large asset base for philanthropy. As of 2003, there were over 2,000 active grantmaking foundations in Canada, who had total assets of $12.5 billion CAD, with total grants given that year of over $1 billion CAD. Under Canadian law, foundations may be public or private, but both are charities.

In Canada under Canadian law, foundations may be public or private, but both are charities. They collectively comprise a large asset base for philanthropy.

References

ISBN links support NWE through referral fees

• Dwight F. Burlingame, Philanthropy in America: A Comprehensive Historical Encyclopedia, Santa Barbara, Calif. [etc.] : ABC-CLIO, 2004
• Mark Dowie, American Foundations: An Investigative History. Cambridge, Massachusetts: The MIT Press, 2001.
• Lester M. Salamon et al, "Global Civil Society: Dimensions of the Nonprofit Sector," 1999, Johns Hopkins Center for Civil Society Studies.
• David C. Hammack, editor, "Making the Nonprofit Sector in the United States," 1998, Indiana University Press.
• Joan Roelofs, Foundations and Public Policy: The Mask of Pluralism, State University of New York Press, 2003, ISBN 0791456420

Further listening

• Joan Roelofs, The Invisible Hand of Corporate Capitalism, Recorded at Hampshire College, April 18, 2007. [2]

External links

• European Foundation Centre.
• The Foundation Center, a Clearinghouse of Information on the approximately 70,000 U.S. foundations
• Council on Foundations

• Philantrhopic Foundations Canada
• Annual Registered Charity Information Returns from the Canada Revenue Agency
• IRS Guide for Charitable Organizations

Credits

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