2.08.2017

Nonprofit Wednesdays: Keeping Your Family Foundation in Compliance

by Elizabeth Minnigh

The 2016 election cycle made front page news of certain failures in compliance by both the Bill, Hillary & Chelsea Clinton Foundation and The Donald J. Trump Foundation. Every new year brings new goals and, for every family with a family foundation, one goal for 2017 should be ensuring that your foundation is in full compliance with applicable state and federal rules. Many family foundations operate without the benefit of professional staff, and try to minimize administrative expenses by limiting use of outside professionals such as accountants and attorneys. Without professional oversight, however, it is not uncommon for a foundation to fall out of strict compliance with one or more rules over time. Below is a summary of the common steps needed to keep your foundation in compliance.
1. Give Contemporaneous, Written Acknowledgements to All Donors, Including Yourself.
As odd as it may seem, even a charitable contribution of $250 to an individual’s own family foundation must be substantiated by a contemporaneous, written acknowledgment that contains the following information:
  • Name of the organization; 
  • Amount of cash contribution; 
  • Description (but not value) of non-cash contribution; 
  • Statement that no goods or services were provided by the organization, if that is the case; 
  • Description and good faith estimate of the value of goods or services, if any, that the organization provided in return for the contribution; and 
  • Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible benefits, if that was the case.
In order to be considered contemporaneous for 2016 contributions, a written acknowledgment should be prepared and delivered no later than April 15, 2017. In future years, the foundation should set up procedures, such as calendar alerts, to ensure these acknowledgements are provided annually. Most public charities make it a practice to send their written acknowledgements by January 31st of each year. The donor should retain the contemporaneous, written acknowledgment in his or her files until the statute of limitations has run on the return claiming the contribution (generally, three years from date of filing but may be six years in certain circumstances).
2. Review Your Recordkeeping.
Family foundations should consider whether to adopt a document retention policy so that the foundation has consistent record keeping practices. Smaller foundations that elect not to adopt a formal document retention policy should take an inventory of their records and ensure they have the following documents at a minimum:
  • A copy of its Form 1023, Application for Recognition of Exemption Under §501(c)(3) of the Internal Revenue Code, including all attachments thereto; 
  • A copy of the foundation’s IRS determination letter; 
  • Copies of Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, as filed; and 
  • Such permanent books of account or records as are sufficient to establish its items of gross income, receipts and disbursements, and to substantiate the information required for its annual Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, for any years where the statute of limitations has not yet run (generally, three years from date of filing but may be six years in certain circumstances).
3. Maintain List of Foundation Managers and Disqualified Persons.
Section 4941 of the Internal Revenue Code imposes a series of taxes on disqualified persons and foundation managers who engage in certain types of prohibited “self-dealing” transactions with a private foundation. The term “self-dealing” includes:
  • Direct or indirect sale, exchange or leasing of property between the private foundation and disqualified persons; 
  • Lending of money or other extension of credit between a private foundation and a disqualified person; 
  • Furnishing of goods, services or facilities between a private foundation and a disqualified person; 
  • Payment of compensation by a private foundation to a disqualified person, unless such compensation is compensation for personal services and is reasonable and not excessive; 
  • Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and 
  • An agreement by a private foundation to make any payment of money or other property to a government official during the period of his or her government service.
To ensure that the family foundation is able to identify potential self-dealing issues before they happen, the foundation should maintain a list of foundation managers and disqualified persons and review that list annually, making any updates as necessary.
  • “Foundation managers” include any officer, director or trustee of a private foundation (or any individual having powers or responsibilities similar to those of officers, directors or trustees).
  • “Disqualified persons” includes substantial contributors to the foundation and foundation managers, as well as members of the family of disqualified persons and entities in which disqualified person or family members hold a sufficient interest (20% or 35%, depending on the type of entity).
    • A substantial contributor includes any person who contributed or bequeathed a total amount of more than $5,000 to the private foundation if the amount is more than 2% of the total contributions and bequests received by the foundation from its creation up through the close of the tax year of the foundation in which the contribution or bequest is received from that person. For a private foundation formed as a trust, a substantial contributor includes the creator of the trust regardless of the amount he or she contributed. As a general rule, once a person is a substantial contributor to a private foundation that person remains a substantial contributor. 
    • Members of the family are confined to spouses, ancestors, children, grandchildren and great-grandchildren, as well as the spouses of children, grandchildren and great-grandchildren.
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2.06.2017

Business Legal Advice Monday: Tax basis: The key to reducing gain on sale or deducting asset purchases

by Steve Gorin


This article discusses key ideas used in reducing or eliminating gain subject to tax when you sell an interest in your business or when your business sells part or all its assets. These ideas can also possibly help those who buy or inherit a business obtain better tax write-offs.
Suppose you buy stock for $10 and sell it for $50. The sale generates a $40 gain, the excess of the $50 sale price over your $10 purchase price. Your $10 purchase price is referred to as your tax “basis.” However, if you die holding this stock, its basis will increase to the $50 date-of-death value. This increase and other basis increases are referred to as “basis step-up.”
Suppose you pay $25,000 for a piece of equipment. You might be able to write off part to all of the purchase price in the first year. The equipment’s tax basis starts at $25,000, but then is zero when it’s fully written off. Whatever you write off reduces the equipment’s basis, eventually to zero. The reduced basis is referred to as “adjusted basis,” as contrasted with the purchase price, which is the property’s “original basis.” Generally, I will be referring to adjusted basis when I refer to basis.
Suppose you form a corporation. You invest $100,000 in equipment, which is then written off, so that the equipment’s basis is now zero. Your basis in your stock in the corporation is referred to as your “outside basis,” and the corporation’s basis in its equipment is referred to as its “inside basis.” When you sell the stock for $150,000, the buyer’s stock will have a $150,000 basis, but the equipment’s basis will remain zero. Thus, outside basis will be $150,000, and inside basis will be zero.
The buyer would prefer to have a higher basis as the result of the purchase, so that the buyer can write off the equipment. In other words, the buyer wants an inside basis step-up. For this reason and for nontax reasons, a buyer may prefer to buy assets instead of stock. However, a special election may be available to treat the stock sale as an asset sale, followed by the shareholders disposing of the stock in a liquidation. This treatment is available only if at least 80% of the stock is sold.
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