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Domestic Private Foundations and Charitable Trusts, 1996-1997.

Data Release

Domestic private foundations contributed $16.4 billion to charitable activities for 1997, a 13-percent increase over 1996. These organizations, which file the information return Form 990-PF, Return of Private Foundation (or Section 4947(a)(1) Charitable Trust Treated as a Private Foundation), represent roughly one-fifth of all tax-exempt entities required to file information returns annually with the Internal Revenue Service. Like other organizations defined as tax-exempt under Internal Revenue Code section 501 (c)(3), private foundations support activities in such areas as health, education, human services, arts and humanities, and environmental preservation. The majority of private foundations are classified as "nonoperating," meaning that their charitable support is generally given in the form of grants or other outlays to organizations that execute charitable programs. "Operating" foundations, which represent a smaller portion of Form 990-PF filers, are more directly involved in the operation of their charitable activities, but may also be involved in grantmaking.

Foundations are distinguished from publicly-supported organizations that file Form 990 by their narrow spheres of support and control [1]. A private foundation is generally controlled by an individual, family, or corporation and is therefore subject to more stringent IRS regulation than other types of 501(c)(3) organizations. For example, most private foundations are required to pay an excise tax on their "net investment income," and nonoperating foundations are subject to a "payout" requirement, which mandates that they annually contribute a minimum amount, based on a percentage of the value of their noncharitable-use assets, for charitable purposes.

Section 4947(a)(1) nonexempt charitable trusts accounted for approximately 5 percent of all Forms 990-PF filed for 1997. These organizations, while not exempt from income tax, also make charitable distributions annually and are subject to the same tax rules as private foundations. Despite a nearly 28-percent increase in total revenue received, charitable trusts reported an 11-percent reduction in contributions, gifts, and grants distributed.

Data for 1997 are based on the returns of domestic private foundations only and do not include information reported by foreign foundations and charitable trusts, also required to file Form 990-PF. These organizations, which are organized abroad but receive certain degrees of support from U.S. sources, usually account for about 1 percent of Forms 990-PF filed. While foreign private foundations and charitable trusts may make charitable distributions within the U.S., they are generally not required to do so. In previous publications, information reported by these organizations has been included in the aggregate statistics and accompanying tables. Beginning with 1997, foreign organizations will no longer be included in aggregate published data. For comparison purposes, aggregate data for 1996, excluding foreign organizations, are also included in this data release. Figure A shows the data previously published for 1996, including foreign foundations and charitable trusts, as well as a 2-year comparison of selected data for domestic private foundations and charitable trusts [2].

[Figure A ILLUSTRATION OMITTED]

Data Sources and Limitations

Tables 1, 2, 5, and 6 provide information for Reporting Years 1996 and 1997 for private foundations, while tables 3, 4, 7, and 8 provide similar data for charitable trusts.

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The statistics in this article are based on a sample of Reporting Year 1997 Forms 990-PF that were filed with the IRS. Organizations having accounting periods beginning in 1997 (and therefore ending between December 1997 and November 1998) were required by IRS to file a 1997 Form 990-PF. Some part-year returns were included in the samples for organizations that changed their accounting periods, or filed initial or final returns. Some 65 percent of the foundations in the sample had accounting periods covering Calendar Year 1997 or, in some cases, part-year periods that ended in December 1997. For charitable trusts, 59 percent filed calendar year returns. The 1997 sample was stratified based on both the size of fair market value of total assets and the type of organization (either a foundation or a 4947(a)(1) charitable trust).

Foundation returns were selected at rates that ranged from approximately 2.7 percent (for the more numerous but very small asset-size returns) to 100 percent (for the relatively few returns with large amounts of assets). Charitable trust returns were selected at rates that ranged from 14.0 percent to 100 percent. The 8,410 returns in the combined sample (7,206 foundations and 1,204 trusts) were drawn from an estimated population of 57,463 foundations and 3,070 trusts. The magnitude of sampling error, measured by coefficients of variation for selected items, is shown in Figure B.

[Figure B ILLUSTRATION OMITTED]

The samples were designed to provide reliable estimates of total assets and total revenue. To accomplish this, 100 percent of foundation returns with fair market asset value of $10 million or more and 100 percent of charitable trust returns with fair market asset value of $1 million or more were included in the samples, since these were the returns that accounted for the majority of financial activity. Efforts were made to verify that organizations that were selected for the sample were properly classified as foundations or trusts. The relatively small number of foundations in the sample that were incorrectly selected as trusts were reclassified as foundations (for the statistics) using identification codes from the IRS Business Master File. However, the weights used for these organizations were based on the original sample selection classification. These same methods were used for the trusts that were incorrectly sampled as foundations.

Approximately 6 percent of all foundations, including those reclassified as foundations, reported $10 million or more in fair market value of total assets for 1997. While these foundations were selected at a rate of 100 percent, the remaining foundation population was randomly selected for the sample at various rates of less than 100 percent depending on asset size: 2.7 percent for returns with assets zero, unreported, or less than $125,000; 3.9 percent for returns with assets of $125,000 to less than $400,000; 7.0 percent for returns with assets of $400,000 to less than $1 million; 9.2 percent for returns with assets of $1 million to less than $2.5 million; and 19.4 percent for returns with assets of $2.5 million to less than $10 million.

Approximately 63 percent of all section 4947(a)(1) charitable trusts in the sample reported $1 million or more in fair market value of total assets for 1997. While these trusts were selected at a rate of 100 percent, the remaining trust population was randomly selected for the sample at various rates of less than 100 percent depending on asset size: 13.8 percent for returns with assets zero, unreported, or less than $100,000; and 22.4 percent for returns with assets of$100,000 to less than $1 million.

The population from which the 1997 sample was drawn consisted of Form 990-PF records posted to the IRS Business Master File during 1997 and 1998. Some of the records designated were for organizations that were deemed inactive or terminated. Inactive and terminated organizations are not reflected in the estimates. For the small number of active, large foundations whose returns were not yet filed or were otherwise unavailable for the statistics, data were estimated using other returns having similar characteristics. For the unavailable active trust returns, which were smaller in size than those for foundations, prior-year data of those trusts were in most instances used as a substitute.

The data presented were obtained from returns as originally filed with IRS. The data were subject to comprehensive testing and correction procedures in order to increase statistical reliability and validity. In most cases, changes made to the original return as a result of administrative processing, audit procedures, or a taxpayer amendment were not incorporated. A general discussion of the reliability of estimates based on samples, methods for evaluating both the magnitude of sampling and non-sampling error, and the precision of sample estimates can be found in the general Appendix to this issue of the SOI Bulletin.

Explanation of Terms

Charitable Trust.--A charitable trust, also referred to as a "nonexempt" charitable trust, is defined in Internal Revenue Code section 4947(a)(1) as an organization (1) that is not considered tax-exempt under section 501(a); (2) that has exclusively charitable interests; and (3) that has amounts in trust for which donors are allowed to claim a tax deduction for charitable contributions. Nonexempt charitable trusts that are not publicly supported are subject to the excise tax provisions that apply to private foundations and are required to file Form 990-PF. (Most "publicly supported" nonexempt charitable trusts are required to file Form 990, Return of Organization Exempt From Income Tax, and are, therefore, not included in these statistics.) Nonexempt charitable trusts that are treated as private foundations must pay an annual tax on income (usually from investments) that is not distributed for charitable purposes, and they must report such income and tax on Form 1041, U.S. Income Tax Return for Estates and Trusts. Data from this form are not included in this article.

Distributable (Payout) Amount.--This is the minimum payout amount that was required to be distributed by nonoperating foundations by the end of the year following the year for which the return was filed. Failure to distribute income within this time period resulted in a 15-percent excise tax on the undistributed portion. The distributable amount was computed as 5 percent of the average monthly value of net investment assets, called the "minimum investment return," minus the excise tax on net investment income and the income tax under Subtitle A, plus or minus other adjustments, either allowed or required.

Excess Distributions Carryover.--This is the amount distributed, after fulfilling the charitable payout requirement, that equaled the excess of qualifying distributions for 1997 over the distributable amount. Excess amounts from the current year may be carried forward to be applied to the distributable amount for the 5 following years. This item was reported on Form 990-PF, Part XIII, line 9.

Minimum Investment Return.--This is 5 percent of the average monthly fair market value of assets not used for charitable purposes, less both the indebtedness incurred to acquire these assets and the cash held for charitable activities. The minimum investment return was used as the base for calculating the "distributable amount." This item was reported on Form 990-PF, Part X, line 6.

Nonoperating Foundations (and Charitable Trusts).--These are organizations that generally carried on their charitable activities in an indirect manner by making grants to other organizations directly engaged in charitable activities, in contrast to operating foundations and trusts that engaged in charitable activities themselves. However, some nonoperating foundations and trusts were actively involved in charitable programs of their own, in addition to making grants. Nonoperating foundations and trusts were subject to an excise tax (and possible additional penalties) for failure to distribute an annual minimum amount for charitable purposes within a required time period. An organization's status as a nonoperating foundation or trust was indicated on Form 990-PF, Part VII, line 9.

Operating Foundations (and Charitable Trusts).--These organizations generally expended their income for direct, active involvement in a tax-exempt activity, such as operating a library or museum, or conducting scientific research. Operating foundations and trusts were excepted from the income distribution requirement and related excise taxes that were applicable to their nonoperating counterparts. To qualify as an operating foundation or trust for 1997, the foundation or trust had to meet both an "income test" and one of three other tests: an "assets test," an "endowment test," or a "support test."

To meet the income test, a foundation or trust had to spend at least 85 percent of the lesser of its "adjusted net income" or "minimum investment return" on the direct, active conduct of tax-exempt, charitable activities (as opposed to the payout of grants in support of such programs). Simply put, to meet the assets test, a foundation or trust had to directly use 65 percent or more of its assets for the active conduct of charitable activities. To meet the endowment test, a foundation or trust had to regularly make distributions for the active conduct of charitable activities in an amount not less than two-thirds of its "minimum investment return." To meet the support test, a foundation or trust had to regularly receive substantially all of its support (other than from gross investment income) from the public or from five or more qualifying exempt organizations, and (a) no more than 25 percent of its support (other than from gross investment income) from any one such qualifying exempt organization; and (b) no more than 50 percent of its support from gross investment income.

Distributions made by a private nonoperating foundation or trust to an operating foundation or trust qualified toward meeting the nonoperating organization's distribution requirement. (Distributions made by one nonoperating foundation or trust to another were subject to a number of conditions and restrictions requiring a "pass-through" of the distribution, whereby the donor organization received credit for a qualifying distribution but the donee organization did not.) Additionally, contributions to operating foundations or trusts, along with contributions to most other charitable organizations, were deductible on the donor's individual income tax return up to 50 percent of the "adjusted gross income" (as opposed to 30 percent for contributions to nonoperating foundations).

While most operating foundations paid the excise tax on net investment income, 17 percent of operating foundations were considered exempt from this tax for 1997 under section 4940(d)(2) of the Internal Revenue Code. In order to be exempt, an operating foundation was required to meet the following requirements in any given year: (1) maintain public support for a minimum of 10 taxable years; (2) maintain a governing body at all times that is broadly representative of the general public and that is comprised of no more than 25 percent disqualified individuals (defined as substantial contributors, foundation managers, persons with more than 20 percent ownership in an enterprise that is itself a substantial contributor, or a family member of one of the above types of disqualified persons); and (3) at no time during the year include a disqualified individual as an officer of the foundation. An organization's status as an operating foundation or trust was indicated on Form 990-PF, Part VII, line 9.

Private Foundation.--A private foundation is defined in Internal Revenue Code section 501(c)(3) as a nonprofit organization with a narrow source of funds that operated or supported educational, scientific, charitable, religious, and other programs dedicated to improving the general welfare of society. A private foundation qualified for tax-exempt status under Code section 501(c)(3) but was not (1) a church, school, hospital, or medical research organization; (2) an organization with broad public support in the form of contributions or income from tax-exempt activities; (3) an organization that was operated by, or in connection with, any of the above described organizations; or (4) an organization that conducted tests for public safety. The primary difference between a private foundation and a public charity was the sources of the organization's funding. A foundation was typically funded primarily by an individual, a family, or a corporation, while a public charity received its funds from a large number of sources within the general public.

Qualifying Distributions.--Qualifying distributions include disbursements for charitable purposes (grants, direct expenditures to accomplish charitable purposes, and charitable-purpose operating and administrative expenses); amounts paid to acquire assets used directly to accomplish tax-exempt functions; charitable program-related investments; and amounts set aside for future charitable projects. Qualifying distributions could be credited against the foundation's or trust's obligation to pay out its "distributable amount." This item was reported on Form 990-PF, Part XII, line 4.

Undistributed Income.--This is the portion of the required "distributable amount" still undistributed after applying against it the sum of current-year qualifying distributions and any excess distributions carried over from prior years. Sanctions were imposed in the form of excise taxes on private foundations that did not pay out an amount equal to the "distributable amount" by the end of the following tax year. This item was reported on Form 990-PF, Part XIII, line 6f, column (d).

Notes and References

[1] For information on charities and other tax-exempt organizations, see Arnsberger, Paul, "Charities and Other Tax-Exempt Organizations, 1997," in this issue.

[2] For detailed information and data sources and limitations statistics on private foundations and charitable trusts, including foreign foundations and charitable trusts, for 1996, see Whitten, Melissa, "Private Foundations and Charitable Trusts, 1996," Statistics of Income Bulletin, Fall 1999, Volume 19, Number 2.

This data release was written by Melissa Whitten, an economist with the Special Studies Special Projects Section, under the direction of Michael Alexander, Chief.
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Author:Whitten, Melissa
Publication:Statistics of Income. SOI Bulletin
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Sep 22, 2000
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