Edited by Bruce A. Seaman and Dennis R. Young
Chapter 3: Distribution Policies of Private Foundations
Richard Sansing Introduction: overview of the private foundation sector In 2004, there were over 70 000 non-operating (i.e. grant-making) private foundations in the USA that held over $469 billion in assets and made over $27 billion in grants to public charities. A public charity is a section 501(c)(3) organization whose financial support is provided by the general public (section 509(a)).1 In contrast, a private foundation is a section 501(c)(3) organization whose financial support is provided by a small group of people, usually members of the same family. Private foundations are similar to public charities in that a contribution to a foundation is tax-deductible and endowment income is exempt from the federal income tax. But unlike public charities, most foundations simply make grants instead of engaging in charitable activities directly.2 These private foundations represent a privately controlled endowment whose assets are held for the benefit of current and future public charities. They act as a conduit that transfers private wealth today to charitable beneficiaries in the future in a way that generates current charitable contribution deductions to donors and future virtually tax-exempt investment returns between the time the assets are transferred to the foundation and the time the assets are transferred from the foundation to a public charity. The assets held by these philanthropic institutions are unusual in that public charities in the aggregate have a claim on the returns on the assets because the tax laws governing nonprofit organizations impose the nondistribution constraint (Hansmann,...
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