Private Operating Foundations
Private Operating Foundations
In general, a private operating foundation is a private
foundation that devotes most of its resources to the active conduct of its
exempt activities.
A private foundation may qualify for treatment as a private
operating foundation. These foundations generally are still subject to the tax
on net investment income and to the other requirements and restrictions that
generally apply to private foundation activity. However, operating foundations
are not subject to the excise tax on failure to distribute income. Also,
contributions to private operating foundations described in section 4942(j)(3)
are deductible by the donors to the extent of 50% of the donor's adjusted gross
income, whereas contributions to all other private foundations (except those
discussed under Private Passthrough Foundation ) are generally limited to 30%
of the donor's adjusted gross income. In addition, a private operating
foundation may receive qualifying distributions from a private foundation if
the private foundation does not control it.
Definition of Private Operating Foundation
A private operating foundation is any private foundation that
spends at least 85% of its adjusted net income or its minimum investment
return, whichever is less, directly for the active conduct of its exempt
activities (the income test), and that, in addition, meets one of the following
tests: the assets test, the endowment test, or the support test. Certain
private foundations that provide long-term care facilities are treated as
operating foundations only for the purposes of the excise tax on failure to
distribute income.
"Directly for the Conduct of Exempt Activities"
Directly for the active conduct of exempt activities refers
to qualifying distributions a foundation makes that are used to conduct exempt
activities by the foundation itself, rather than by or through grantee
organization(s) that receive the distributions.
Grants to other organizations to help them conduct their
activities are an indirect, rather than direct, means of carrying out the
foundation's exempt purpose of the private foundation, even though the
activities of the grantee organization may further the exempt activities of the
grantor foundation.
Amounts paid to buy or maintain assets used directly in the
conduct of the foundation's exempt activities, such as the operating assets of
a museum, public park, or historic site, are direct expenditures for the active
conduct of the foundation's exempt activities. Likewise, administrative
expenses (such as staff salaries and traveling expenses) and other operating
costs necessary to conduct the foundation's exempt activities (regardless of
whether they are directly for the active conduct of exempt activities) are
treated as qualifying distributions expended directly for the active conduct of
exempt activities if the expenses and costs are reasonable in amount.
However, administrative expenses and operating costs that are
not for exempt activities, such as expenses in connection with the production
of investment income, are not qualifying distributions. Expenses for both
exempt and non-exempt activities will be allocated to each activity on a
reasonable and consistently applied basis.
An amount set aside by a foundation for a specific project, for
example to buy and restore or build additional buildings or facilities that are
to be used by the foundation directly for the active conduct of the
foundation's exempt activities, will be treated as qualifying distributions
expended directly for the active conduct of the foundation's exempt activities
if the set-aside meets the requirements described in Set asides.
Payments to individuals. If a foundation awards grants or
scholarships, or makes other payments to individuals (including program-related
investments) to support active programs to carry out its exempt purpose, the
payments will be treated as qualifying distributions made directly for the
active conduct of exempt activities only if the foundation maintains some
significant involvement in the programs.
A foundation will be considered as maintaining a significant
involvement in grant-making if:
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The foundation operates as follows:
a. An exempt purpose of the foundation is relieving poverty or human distress,
and its exempt activities are designed to improve conditions among the poor or
distressed or in an area subject to poverty or national disaster (such as
providing food or clothing to indigents or residents in a disaster area),
b. The foundation makes grants or other payments directly for the exempt purpose
without the help of an intervening organization or agency, and
c. The foundation has a salaried or voluntary staff of administrators,
researchers, or other personnel who supervise and direct the exempt activities
on a continuing basis, or
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The foundation has developed specialized skills, expertise, or is involved in a
particular discipline (such as scientific or medical research, social work,
education, or the social sciences). It has a salaried staff of administrators,
researchers, or other personnel who supervise or conduct activities that
support the foundation's work in its particular area of interest. As part of
these activities the foundation makes grants, scholarships, or other payments
to individuals to encourage their involvement in the foundation's area of
interest and in a segment of the activities the foundation carries on (such as
grants under which the recipients, in addition to independent study, attend
classes, seminars, or conferences the foundation sponsors or conducts, or
grants for social work or scientific research projects under the foundation's
general direction and supervision).
Whether grants, scholarships, or other payments are qualifying
distributions made directly for the active conduct of the foundation's exempt
activities is determined by the facts and circumstances of each particular
case. The test is a qualitative one. If the foundation maintains a significant
involvement (as defined earlier), it will not fail to qualify just because more
of its funds are devoted to grants, scholarships, or other payments than to the
active programs that such grants, scholarships, or other payments support.
If, however, a foundation does no more than select, screen, and
investigate applicants for grants or scholarships, under which the recipients
perform their work or studies alone or ex¬clusively under the direction of
another organization, the grants or scholarships will not be treated as
qualifying distributions made directly for the active conduct of the
foundation's exempt activities. The administrative expenses of screening and
investigating (as opposed to the grants or scholarships themselves) may be
treated as qualifying distributions made directly for the active conduct of the
foundation's exempt activities.
Only private operating foundations may treat the payment of the
tax on net investment income as a qualifying distribution made directly for the
active conduct of activities constituting the foundation's exempt purpose.
"During the middle of the night Senator Grassleys's cohorts snuck in a rider to
the Pension Protection Act that eliminated many of the Charitable Support
Organization's benefits. However the Private Operating Foundation is a worthy
replacement"
Call Bert at 800.808.4020 for more information
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