The Tax Law of Private Foundations

2020 Cumulative Supplement

Bruce R. Hopkins, Jody Blazek

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119759065
• Edition: 5
• Topic: Betriebswirtschaft
• Subtopic: Non-Profit- & gemeinnützige Organisationen

Stay up to date on the most recent regulatory, legislative, and case law developments in the area of private foundations

The Tax Law of Private Foundations: 2020 Cumulative Supplement, 5th Edition delivers regulatory, legislative, and common law updates from 2020 to executives and supporting professionals seeking to navigate the complex web of federal tax law governing the administration and use of private foundations. In the Supplement, readers will find guidance on the most recent iterations of relevant laws, commentary on the most recent cases, and practice advice respecting the most recent regulations in the field of private foundations. This edition of the Supplement is especially crucial given recent amendments and changes to critical legislation.

CHAPTER ONE
Introduction to Private Foundations

1. § 1.1 Private Foundations: Unique Organizations
2. § 1.2 Definition of Private Foundation
3. § 1.7 Operating for Charitable Purposes
4. § 1.9 Private Foundation Sanctions
   1. (a) Sanctions (a Reprise)
   2. (b) Self-Dealing Sanctions as Pigouvian Taxes
   3. (c) Self-Dealing Sanctions: Taxes or Penalties?
   4. (d) Abatement
5. § 1.10 Statistical Profile

§ 1.1 PRIVATE FOUNDATIONS: UNIQUE ORGANIZATIONS

p. 1, first line. Delete millions of and insert:

over 1.5 million¹

p. 1. Delete second paragraph.

p. 2, note 1. Change footnote number to 1.1.

§ 1.2 DEFINITION OF PRIVATE FOUNDATION

p. 5, note 10. Insert before period:

; IRS Revenue Procedure (Rev. Proc.) 2020-5, 2020-1 I.R.B. 241, § 7.03

§ 1.7 OPERATING FOR CHARITABLE PURPOSES

p. 18, carryover paragraph, first line. Insert footnote following period:

^88.1Reg. § 1.501(c)(3)-1(c)(1).

p. 18, carryover paragraph, sixth line. Delete organizational and insert operational.

p. 18, carryover paragraph. Delete fifth complete sentence, including footnote.

p. 18, note 89. Delete text and insert:

A private foundation has its tax-exempt status revoked for failing to engage in any exempt activities over a long period of time (Community Education Foundation v. Commissioner, 112 T.C.M. 637 (2016), appeal denied because of lack of representation (__ F.3d __ (D.C. Cir. 2018))).

p. 18, note 90. Delete text and insert:

In general, Tax-Exempt Organizations § 4.4.

§ 1.9 PRIVATE FOUNDATION SANCTIONS

p. 24. Change heading to read:

PRIVATE FOUNDATION LAW SANCTIONS

pp. 24–26. Delete text following heading on page 24 and through the first complete paragraph on page 26, and insert:

The federal tax rules pertaining to private foundations¹³⁶ are often characterized in summaries as if they are typical laws, in the sense of prescriptions governing human behavior. This is not the case; these rules, comprising portions of the Internal Revenue Code, are tax provisions. Thus, this body of law states that, if a certain course of conduct is engaged in (or, perhaps, not engaged in), imposition of one or more excise taxes will be the (or a) result. For example, there is no rule of federal tax law that states that a private foundation may not engage in an act of self-dealing;¹³⁷ rather, the law is that an act of self-dealing will trigger one or more excise taxes and other sanctions.¹³⁸

(a) Sanctions (a Reprise)

Because of the nature of this statutory tax law structure, a person subject to an excise tax does not merely pay it and continue with the transaction and its consequences, as is the case with nearly all federal tax regimes. This structure weaves a series of spiraling taxes from which the private foundation, and/or disqualified person(s) with respect to it, can emerge only by paying one or more taxes and correcting (undoing) the transaction involved by paying or distributing assets or having the foundation's income and assets confiscated by the IRS.

The private foundation rules collectively stand as sanctions created by Congress for the purpose of curbing what was perceived as a range of abuses being perpetrated through the use of private foundations by those who control or manipulate them. These provisions comprise Chapter 42 of the Internal Revenue Code. Some of these constraints were placed on supporting organizations and donor-advised funds in 2006.¹³⁹

(b) Self-Dealing Sanctions as Pigouvian Taxes

In the self-dealing context, two excise taxes are imposed on self-dealers—the initial tax¹⁴⁰ and the additional tax.¹⁴¹ The first tax has a rate of 10 percent; the second a rate of 200 percent. There are also taxes on foundation managers where there is knowing participation in the self-dealing transaction (a scienter requirement).¹⁴² The foundation self-dealing tax subjects the entire amount involved in a self-dealing transaction to tax. Also, the initial self-dealing tax cannot be abated by the IRS.¹⁴³ There is the correction feature, by which the self-dealer is required to pay the amount involved to the foundation.¹⁴⁴

What has come to be known as the Pigouvian tax is the brainchild of English economist Arthur Cecil Pigou (1879–1959), a contributor to modern welfare economics. He introduced the concept of externality and the belief that externality (social problems) can be corrected by imposition of a tax. A commentator wrote that Pigouvian taxes “aim to regulate behavior by placing a small tax, usually in the form of a uniform excise tax, on the activity to be regulated because of the harm it produces for members of the public.”¹⁴⁵

Does the federal self-dealing tax regime constitute one or more Pigouvian taxes? On the face of it, the answer would seem to be yes.¹⁴⁶ This commentator nicely observed that the self-dealing taxes “have the Pigouvian impulse to protect the public from harm by imposing an excise tax.”¹⁴⁷ Despite this impulse, however, three reasons were posited why the self-dealing taxes are not Pigouvian in nature. One, the additional excise tax rate of 200 percent is not “small.” Two, the initial tax subjects the entire amount involved in a self-dealing transaction to tax, “even if the transaction bene...