Foundations
Principles & Practices Citation
VIII. B. Principle–Financial Accountability
A charitable organization is accountable to its funders, its constituencies, and the public, both as to the sources and uses of funding.
Practices
3. Unless the gift instrument says otherwise, consider the following when determining accumulation and spending of growth in endowments of nonprofits. The nonprofit must act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and consider such issues as the duration and preservation of the endowment fund; the purposes of the institution and the endowment fund; general economic conditions; the possible effect of inflation or deflation; the expected total return from income and the appreciation of investments; other resources of the institution; and the investment policy of the institution.
Recommended book
Private Foundation Law Made Easy (2008) by Bruce Hopkins.
Suggested online source
Frequently Asked Questions about Foundations
Are there differences between public charities and private foundations beyond the percentage limitations of deduction for donors?
Yes. Private foundations are subject to excise taxes in the Internal Revenue Code (IRC) 4940 to 4946 whereas public charities are not. These taxes are the net investment income taxes under IRC section 4940; the self-dealing acts rules under section IRC 4941; failure to distribute income rules under IRC section 4942; the business enterprise rules under IRC section 4943; jeopardizing investments in IRC section 4944; and taxable expenditures under IRC section 4945. Private foundations file Form 990-PF annually. There are numerous questions related to these excise tax provisions on that form. In certain circumstances if the excise taxes are involved an additional filing of IRS Form 4720 must be made. Section 7.27 of the IRS Tax Exemption Manual has a significant amount of information on these various excise taxes. An index of this information is available in Part 7. Rulings and Agreements.
Are there differences between public charities and private foundations when it comes to gifts from donors?
Yes there are stricter limitations on gifts to private foundations. Gifts to public charities by individuals have an annual limit of fifty percent of the donor's adjusted gross income. Gifts to private foundations however place that limit at thirty percent of the donor's adjusted gross income. The figures are somewhat different for corporate donors who can deduct ten percent of their taxable income. If the contribution is capital gain property rather than cash, the limitation is then thirty percent for public charities and twenty percent for foundations. The Iowa Principles and Practices for Charitable Nonprofit Excellence states that "Charitable nonprofits must be aware of and comply with Internal Revenue Code provisions (see e.g. I.R.C. section 170)" (VIII E 2). This is to make sure inaccurate information about gifts is not passed on to donors. A good source for these rules is IRS Publication 526 Charitable Contributions
Community foundations often state that their goal is to create an endowment. What is an endowment?
An endowment is a fund that is kept in perpetuity. The original contribution is invested and only the investment income and gains from the investment are used to support the charitable grants. The original contribution stays intact and continues to grow and generate charitable collars. -- Fond du Lac Area Foundation
Do community foundations compete with other charitable organizations?
Community foundations are designed to cooperate with other charitable organizations in the area. Community foundations apply their funds to a wide range of community needs. The ability of other nonprofit organizations to improve the quality of life within a community is enhanced by cooperation with community foundations.
See the Charity Navigator article Pros and Cons of Donating to Community Foundations.
Do I need a specific amount of money to establish a fund?
Each community foundation adopts gift and fund acceptance policies that address minimum fund size, types of fund options, types of gift mechanisms, and policies and procedures for accepting various types of assets. A community foundation honors the charitable intentions of its donors consistent with community needs and applicable laws and regulations. Any foundation can forward you their policies upon request. -- Council on Foundations
How do community foundations communicate with donors?
A community foundation informs and educates donors about community issues and grantmaking opportunities. A community foundation widely distributes grant guidelines to ensure the fullest possible participation from the community it serves. -- Council on Foundations
What is a community foundation?
A community foundation is a tax-exempt public charity that can assist a community in maintaining and improving the quality of life enjoyed by its citizens. Contributions from individuals, corporations, government sources, and other organizations are used to create a collection of permanently endowed funds within the foundation. Community foundations distribute income from the endowments throughout the community by making grants to various organizations and projects that will benefit the community and reflect the wishes of the donors. Though the word "foundation" is in the community foundation name, its tax treatment is not that of a private foundation but of a public charity. The Iowa Council of Foundations has information on what community foundations are doing in Iowa.
What is a private foundation?
Every US and foreign charity that qualifies under Internal Revenue Service Code section 501(c)(3) as tax-exempt is a private foundation unless it demonstrates to the IRS that it falls into the public charity category. According to The Foundation Center, a private foundation is a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or director. Generally, a private foundation is a fund of private wealth established for charitable purposes. The principle function of most private foundations is to make grants to other nonprofit organizations, qualified individuals, and government entities. On the Form 1023 application for exemption Part X, you work through factors to determine if the nonprofit can get public charity status. Generally, tax treatment for a private foundation is less favorable than for a public charity.
Who decides how community foundation funds are distributed?
The community foundation’s governing body approves all grants. Contributions to a community foundation represent irrevocable gifts subject to the legal and fiduciary control of the community foundation’s governing body. -- Council on Foundations