avoiding form 990-pf errors: identifying self...

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Avoiding Form 990-PF Errors: Identifying Self-Dealing,

Monitoring the Minimum Distribution Requirements,

Calculating Excise TaxesTHURSDAY, JUNE 20, 2019, 1:00-2:50 pm Eastern

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June 20, 2019

Avoiding Form 990-PF Errors: Identifying Self-Dealing, Monitoring the Minimum Distribution Requirements, Calculating Excise Taxes

Thomas F. Blaney, Partner

PKF O'Connor Davies

[email protected]

Christopher D. Petermann, Partner

PKF O'Connor Davies

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

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RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Avoiding Form 990-PF Errors

June 20, 2019

Thomas Blaney, CPA, CFE

Partner

Co-Director of Philanthropic and

Private Foundation Services

Christopher Petermann, CPA

Partner

Co-Director of Philanthropic and

Private Foundation Services

6

1969 Congressional Hearings

▪ February 18, 1969 - First day of Hearing

▪ Wright Patman (D-Tx) – Focused on Foundations

• Starting in 1961 in his role of chair of the House of

Representatives Sub-Committee on Foundations

− Attacked large and small Foundations and in

particular the Ford Foundation

− Against Foundation loopholes

− Critical of IRS’ weak oversight of Foundations

7

Tax Reform Act of 1969 signed by President Nixon on December 30, 1969

Key Private Foundation Elements:

▪ First statutory definition of a Private Foundation

▪ 4% excise tax on Investment Income

▪ Required minimum annual distribution of 6%

▪ Initiating Self Dealing regulations

Not included in final version

▪ 40 year time limit for Private Foundations (Senator

Gore’s Proposal)

8

Types of Private Foundations

▪ Family

▪ Independent

▪ Corporate

▪ Community

▪ Operating

Formation of Private Foundations

▪ Corporate - Bylaws

▪ Trust – Trust document

9

Foundation Excise Tax

▪ The excise tax original purpose was an Audit

Fee

▪ 2% tax on Net Investment Income (1979)

▪ Originally 4% (1969)

▪ Possible reduction to 1% (1986)

▪ Definition of Net Investment Income

▪ Largest Component usually Realized Capital Gains

10

Excise Tax Tidbits

▪ Foundations cannot qualify for a 1% tax in

first year of operations

▪ Net capital losses cannot be deducted

against other investment income

▪ Capital loss carry forwards are not allowed

▪ Watch out – realized gains and losses must

utilize a specific identification method

11

Tax Planning Techniques

▪ Take losses against gains

▪ Move up qualifying distributions

▪ Give appreciated stock as qualifying

distributions

▪ Review allocations between charitable and

investment

▪ Consider program related investments

▪ Set-up a Donor Advised Fund

(See Exhibit 1)

12

5% Minimum Distribution Requirements▪ Originally 6%

▪ Qualifying distributions – grants and grant related expenses

▪ Foundations have one year to distribute

▪ How to calculate the average fair market value

− Marketable Securities

− Alternative Investments

− Real Estate

− Art

(See Exhibit 2)

13

Who you can donate to

501(c)(3) Public Charities◄

▪ Non- 501(c)(3) Exempt Organizations

▪ Individuals

▪ Private Entities

▪ Other Private Foundation

▪ Foreign Entities

▪ Program Related Investments

(See Exhibit 3)

14

Foreign Grants

▪ Three Options▪ Grantee is recognized by the IRS

▪ Expenditure responsibility

▪ Equivalency determination

▪ Opinion of Counsel, CPA’s or Registered Agents

▪ Affidavit prepared by Grantee

▪ Be aware of Terrorist Relationships and International Prohibitions

(See Exhibit 4)

15

Expenditure Responsibilities

▪ Pre-Grant Inquiry

▪ Written Agreement

▪ Reporting

▪ 990-PF Disclosure

▪ Separation of Funds

▪ Penalties

16

Program Related Investments

▪ Primary purpose is to accomplish the Foundation’s exempt purpose

▪ No significant purpose of the investment is for the production of income or the appreciation of property

▪ The investment may not be used for lobbying activities

▪ Can’t be a jeopardizing investment

(See Exhibit 5)

17

Self Dealing and Disqualified Persons at the Foundation

▪ The term “self-dealing” has been in the news more and more in recent months in connection with some high profile state attorney general investigations into various private foundations and other tax-exempt organizations.

▪ Generally speaking, a “disqualified person” is one who is in a position — such as a trustee — to exercise substantial influence over the affairs of a tax-exempt organization. It is an area where a trustee can unknowingly violate rules and regulations pertaining to the oversight of a private foundation. It is irrelevant whether the transaction provides any benefit to the foundation.

(See Exhibits 6 & 7)

18

Self Dealing at the Foundation (…)

▪ Sale or exchange, or leasing, of property between a private foundation and a disqualified person, except when a disqualified person give property to a foundation as a gift or leases property to a foundation at not charge

▪ Furnishing of goods, services, or facilities between a private foundation and a disqualified person, except when goods, services or facilities are provided to a foundation by a disqualified person at no charge and the goods, services or facilities are used exclusively for the foundation’s exempt purpose.

▪ Payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person, except when such compensation or reimbursement is for personal services, which are reasonable and necessary to the carrying out of the foundation’s tax-exempt purposes and the compensation or reimbursement is not excessive.

▪ Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of the private foundation. However, if a disqualified person receives only an incidental or slight benefit from the use of the foundation’s income or assets, such act by itself may not be considered an act of self-dealing.

▪ Agreement by a private foundation to make any payment of money or other property to a government official.

Illustrations of Self-Dealing

19

Self Dealing – Real Life Examples

▪ Compensation (reasonable and necessary)

▪ Independent Compensation Consultant

▪ Tickets to Fundraisers ◄

▪ Credit Cards

▪ Frequent flyer miles

▪ Office Rent

(See Exhibit 8)

20

Direct Charitable Activities (See Exhibit 9)

▪ Significant involvement in a programmatic

activity

▪ Hybrid Foundations

▪ Operating Foundations

21

Sun Setting (Foundation Terminating)

▪ Substantial Contraction Disclosure

▪ Final Return Box on 990-PF

▪ Alert Attorney General

▪ Planning

▪ Obtain multi-year Directors and Liability Insurance

▪ Liquidate Investments 90 days prior

▪ Address Alternative Investment Issues

22

Alternative Investments - Issues to Consider

▪ Unrelated Business Income Issues▪ Buying stocks on margin

▪ K-1’s (Box 20V), Footnotes

▪ Multiple states

▪ Use of Blocker Corps▪ 926

▪ 8865

▪ 5471

23

Artwork in a Portfolio

▪ Charitable use Asset

▪ Investment Asset

▪ Donating Artwork as Grants

▪ Loan of Artwork

▪ Storing, insuring and handling expenses

(See Exhibit 10)

24

Tax Cuts and Jobs Act of 2017Signed by President Trump on December 22, 2017

KEY PRIVATE FOUNDATION ELEMENTS

Qualified Transportation Fringe

(QTF) Eliminated

QTF Benefit Costs treated as

Unrelated Business Income ?

Lower Tax Rates for Foundations

that are Corporations and Trusts

Segmentation of Unrelated Business

Income ?

• Notice 2018-67 (Request for

comments due December 3, 2018)

21% Excise Tax on 5 Highest Paid

Employees over 1 Million

Not Included in Final Version

Flat Excise Tax of 1.4%

No Change to Johnson Amendment

(See Exhibit 11)

25

Bipartisan Budget Act of 2018: Newman’s Own Exception (See Exhibit 12)

▪ Excess Business Holdings Exception

▪ Signed February 9, 2018

▪ Excluded from TCJA

▪ Lobbied by Connecticut Senators

27

IRS Foundation Compliance Audits

▪ Alternative Investments Blocker Corporation

▪ International Grant Making

▪ Grants

▪ Satellite Offices

▪ Compensation

▪ Colleges and Universities – Compliance

Project

28

Fraud in the Foundation Community

▪ Petty Cash

▪ Check Signing

▪ Bogus Employee

▪ Grants

▪ Employee Dishonesty Insurance

▪ Director and Liabilities Insurance

(The Old)

29

Fraud

▪ Moles

▪ Cybersecurity◄

▪ Emails

▪ Social Media Sites

▪ Unauthorized debit memos

▪ Penetration testing

▪ Changing passwords periodically

▪ Laptops

▪ Travel

"Identity is the ultimate digital currency, and it’s being

weaponized at an industrial scale.“

Alisdair Faulkner, Founder of ThreatMetrix (The New)

(See Exhibit 13)

30

Tidbits for Attorneys

▪ Director & Officer Liability Insurance

▪ Obtain a Not-for-Profit policy

▪ Federal unemployment insurance

▪ Obtain a Not-for-Profit policy

▪ Foreign withholding taxes

▪ Service Charges

▪ Investment Policies

▪ Conflict of Interest Statements

▪ 990 PF Return Blunders & Tax Planning

31

Common 990 PF Blunders & Private Foundation Tax Planning Tips

▪ See Exhibits 14 & 15

32

Exhibits – Table of Contents

Exhibit 1 Understanding the Net Investment Income Excise Tax

Exhibit 2 Private Foundations and the 5% Minimum Distribution Rule – A Synopsis

Exhibit 3 IRS Launches New Search Tool to Replace EO Select Check

Exhibit 4 New Guidelines for Good Faith Determinations of Foreign Grantees

Exhibit 5 Program Related Investments & the Entrepreneurial Spirit

Exhibit 6 Disqualified Persons and the Private Foundation – Who are they?

Exhibit 7 Self-Dealing – A Refresher

Exhibit 8 Watch Out for Gala or Benefit Tickets

33

Exhibits – Table of Contents (…)

Exhibit 9 Form 990-PF: Direct Charitable Activities

Exhibit 10 The Private Foundation and Its Art Work

Exhibit 11 Federal Tax Reform: Impact on Foundations as Employers

Exhibit 12 Bipartisan Budget Act of 2-18: Excess Business Holdings [Newman’s

Own Exception]

Exhibit 13 Protecting Your Private Foundation in the Internet Age

An Insider’s Guide to Cyber Security Pitfalls and Best Practices

Exhibit 14 990-PF: Avoiding Some Common Pitfalls

Exhibit 15 2018/2019 Year-End Tax Planning Tips

75

Directors Private Foundation Practice

Thomas Blaney, CPA

[email protected]

Christopher Petermann, CPA

[email protected]

www.pkfod.com

CONTACTS



mailto:www.pkfod.com

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