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Private Foundations Contributing to Public Charities

October 26, 2018

KSM Charitable Foundation Services

A private foundation can give to most public charities without any concerns. However, if the public charity is a “supporting organization” under section 509(a)(3) of the Internal Revenue Code, the private foundation might need to exercise “expenditure responsibility” to avoid a taxable expenditure, depending on the type of 509(a)(3) organization involved.

Private foundations must not engage in taxable expenditures. If they do, significant penalties are imposed and continue to be imposed each year until the taxable expenditure is “corrected.”

A taxable expenditure is an amount paid or incurred to:

  1. Carry on propaganda or otherwise attempt to influence legislation;
  2. Influence the outcome of any specific public election or carry on any voter registration drive unless certain requirements are satisfied;
  3. Make a grant to an individual for travel, study, or other similar purposes unless certain requirements are satisfied;
  4. Make a grant to an organization (other than certain public charities or an exempt operating foundation) unless the foundation exercises expenditure responsibility with respect to the grant; or
  5. Carry out a noncharitable purpose (subject to certain exceptions).

Grants to organizations are subject to special rules. These will be taxable expenditures unless either (1) the recipients are public charities (with one exception) or (2) the granting foundation exercises expenditure responsibility with respect to the grant. The effect is to ensure that funds granted to organizations other than public charities are used in accordance with the terms of the grant.

If the foundation is required to exercise expenditure responsibility, this means that the foundation must exert all reasonable efforts and establish adequate procedures:

  1. To see that the grant is spent only for the purpose for which it is made;
  2. To obtain full and complete reports from the grantee organization on how the funds are spent; and
  3. To make full and detailed reports on the expenditures to the IRS.

For more information, please contact us.

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