Week 5 Flashcards
A supporting organization, in general terms, is set up to support the work of a public charity. The donor who sets one up gives up some of the control associated with a private foundation. For what reason or reasons, then, might a donor consider creating a supporting organization?
I. A supporting organization is treated as a public charity.
II. A supporting organization, unlike a private foundation, can exist in perpetuity.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. The supporting organization is treated as a public charity. So, for example, the donor can gift closely held stock without being subject to the restrictions of foundation rules. The deduction limits, too, are set at the higher limits that a public charity gets. The second statement is correct, insofar as it says the supporting organization can last forever, but it is false, in suggesting that private foundations cannot be perpetual.
Including expenses, what percentage must a private foundation grant out annually?
A) 3%
B) 5%
C) 6%
D) No set percentage is required.
B) 5%
The correct answer is B. Private foundations have a 5% payout requirement. Grants to charities for charitable purposes, salaries, and program-related investments are included in that 5% calculation. Investment management fees incurred in managing the endowment are not included in the calculation.
A private foundation can be set up as which of these?
I. Trust
II. Corporation
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both forms are permitted.
For a gift of appreciated long-term capital gain property other than qualified, appreciated stock to a private nonoperating foundation, what is the deduction limit, as a percentage of AGI?
A) fair market value, up to 20% of AGI
B) basis only (or fair market value if less than basis), up to 20% of AGI
C) 30% of fair market value
D) 30% of basis
B) basis only (or fair market value if less than basis), up to 20% of AGI
The correct answer is B. The deduction is for basis only (or fair market value if less than basis), up to 20% of AGI, with a five-year carryforward for the unused deduction.
Each of these is a “taxable expenditure” for a private foundation, except
A) payments to influence legislation
B) grants to individuals
C) grants to non-exempt entities
D) grants to public charities
D) grants to public charities
The correct answer is D. Generally, a private foundation will make grants to public charities.
All of the following statements concerning tax penalties under the private foundation rules are correct, EXCEPT:
A) There is a tax on self-dealing between disqualified persons and private foundations.
B) There is an excise tax on excess business holdings that limits the portion of an active business interest that can be held.
C) There is an excise tax on excess distributions that restricts the yearly expenditures for charitable purposes.
D) Penalty taxes as high as 200 percent are imposed, if problems are not rectified on a timely basis.
C) There is an excise tax on excess distributions that restricts the yearly expenditures for charitable purposes.
The correct answer is C. All statements except (C) are true. There is no limit to how much a foundation can distribute to charities in a given year.
Which statement or statements about paying family members to serve within a family foundation is (are) true?
I. No compensation is allowed, unless the family member serves full-time.
II. Compensation must be reasonable.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Compensation must be reasonable. What is reasonable? Generally, what a foundation would pay to an outsider for comparable work.
Which of these statements is (are) true, with regard to private foundations?
I. Generally, grants are made to eligible organizations, that is, to public, domestic charities.
II. For those wishing to make gifts to foreign charities or to private individuals special rules apply, imposing additional obligations on the foundation.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Generally, a private foundation will make grants only to eligible nonprofits. In approving those organizations, the IRS has done the due diligence. A foundation can make grants to individuals, but must exercise “expenditure responsibility.” The record-keeping and due diligence requirements deter most foundations from making such grants. Likewise, a foundation in the U.S. may be able to make grants to a foreign charity, but special rules apply.
All of these are prohibited acts of self-dealing between disqualified persons and the foundation, except
A) any sale, exchange, or lease, regardless of price
B) furnishing goods and services or facilities without charge, or under terms no more favorable than those offered to the public
C) payment of more than reasonable compensation
D) transferring income or assets to a disqualified person for that person’s use or benefit
B) furnishing goods and services or facilities without charge, or under terms no more favorable than those offered to the public
The correct answer is B. B is the exception, given that it is done without charge and for the exempt purpose or under terms no more favorable than those offered to the public.
Under which private foundation format does the foundation itself provide the service to the public, rather than make grants to another charity?
A) private operating foundation
B) conduit foundation
C) family foundation
D) supporting organization
A) private operating foundation
The correct answer is A. What is described here is the definition of a private operating foundation.
