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TexLaw
TexLaw, Attorney
Category: Legal
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Experience:  Lead trial/International commercial attorney licensed 11 yrs
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Assume a 501c3 private foundation receives all of its funding

Resolved Question:

Assume a 501c3 private foundation receives all of its funding from a single corporate donor. The foundation offers the employees of the donor corporation an employee matching program. An employee requests the foundation to match his contribution of $100 to a local charity, but the donor objects. The charity has a lawsuit pending against the donor, and making a gift to the charity would "fund the war chest" and thus be detrimental to the corporate donor's interest.

Is the foundation obligated to conform to the corporate donor's request to match the employee contribution? On what grounds? Acting in a way contrary to donor's best interests? Where is that codified?

Please provide detail.
Submitted: 11 months ago.
Category: Legal
Expert:  TexLaw replied 11 months ago.
Hi,

My name is XXXXX XXXXX I will be assisting you with your legal question.

The first thing I'd like to say is that this law is not going to be the subject of any code or statute, but rather will be the subject of common law of the state in which the donor foundation is located. The 501c3 donor has offered to make a gift, which is conditional upon the employee making a matching gift and picking a charity to where the employee wishes the donation to go.

Where the condition is accepted, the donor becomes bound to make the donation as promised. Barnett v. Franklin College, 10 Ind. app. 103 (1894).

The direct question at issue in your case has never been directly answered by Indiana law. There are indications in the cases that the employee would have actually had to make the donation in full to the charity after notifying the foundation of the employee's election in order to fully trigger the foundation's duty to fulfill their conditional gift promise. Some of the cases indicate that if the employee has not yet paid out the actual donation, the pledge from the foundation can be revoked.

Please let me know if you have any further questions. Please also kindly consider rating my answer positively so that I am credited by the website for my work on your question. Rating positively does not cause an additional charge and does not prevent us from further discussing your questions.

Kind regards,
Zachary
Customer: replied 11 months ago.

Dear Zachary, thank you.

 

However my question was a little different.

 

My question is whether the corporate donor ACME Corp that funds a 501c3 foundation called ACME Foundation can direct the ACME Foundation NOT to give employee matching funds to a specific operating charity, called Books for Kids, which the corporate donor considers to be acting in a way contrary to the corporation's interests, i.e., has a lawsuit pending against ACME Corp.

Expert:  TexLaw replied 11 months ago.

ACME corp has no right to directly order the Foundation, as the Foundation is independent from ACME corp. However, I assume that ACME corp has employees that are sitting on the board of the Foundation. Thus, the directors may act to cause the Foundation to revoke the conditional pledge offer. Nevertheless, if the employee has already made the donation and triggers the Foundation's conditional gift responsibilities, any vote by the directors to not order the Foundation to pay could be seen an an improper conflict of interests (which the directors would need to disclose) and could expose the directors personally to fiduciary breach liability.

 

I will review the statutes on this to see if there is any actual code which is applicable here.

Expert:  TexLaw replied 11 months ago.
The only potential statute I could find here is in http://www.law.cornell.edu/uscode/text/26/509, which is a link to 26 USC 509, which contains the definition of Private Foundation.

It seems under this definition that an act of control over a private foundation by a majority donor could cause the foundation to lose its tax exempt status.

Thus, again the Company should refrain from directing the Foundation to not make the payment.
Customer: replied 11 months ago.

Dear Zachary, I was under the impression however that the donor corporation could direct its private foundation NOT to make grants that in effect would be contrary to its best interests. Can you find anything relevant to this principle?

Thank you.

Expert:  TexLaw replied 11 months ago.
Let me research this issue and see what I can find. Thank you for your patience.
Expert:  TexLaw replied 11 months ago.
Upon closer review of the law in the Internal Revenue Code, it appears my prior response was incorrect.

In fact, it is quite the reverse. A private foundation under 26 USC 509 is in fact allowed to retain control over the direction of its donations and can direct the Foundation to not make the contribution. I still think this might expose the Foundation to some sort of liability.

Nevertheless, the reason for this reversal was that upon further reading, the restrictions stated in Section 509 are further explained in 26 USC 4996, which limits those restrictions to "Donor Advised Funds" which are stated to be separate and apart from a Private Foundation.

26 USC 508 and 509, rather than saying what a Private Foundation can due, define what a Private Foundation cannot do. The main issue here is that a Private foundation cannot issue a payment to another party which would trigger a tax (which is generally explained as a transfer of a substantial amount of its assets). The other main prohibitions are:
1) No self dealing;
2 No retention of any excess business holdings;
3) No making of investments in such manner as to subject the foundation to tax under section 4844; and
4) From making taxable expenditures.

26 USC 4941 allows, through negative prescription, the donor control of any transaction of a private foundation which does not violate the self dealing rules or cause a taxable event.

Customer: replied 11 months ago.

Last question and thank you for your research and opinion.

You wrote:

 

"A private foundation under 26 USC 509 is in fact allowed to retain control over the direction of its donation and can direct the Foundation to not make the contribution."

 

Did you actually mean "A corporate donor to a private foundation under 26 USC 509 is in fact allowed to retain control over the direction of its donation ...." ?

 

I think that is the issue you were addressing and researching - right?

 

Many thanks.

 

 

Expert:  TexLaw replied 11 months ago.
Yes, you're absolutely correct. I apologize for the syntax error there. The Donor to a Private Foundation has the right to control the Foundation and to direct the target of the Foundation's donation.

Thank you for your patience here.
TexLaw, Attorney
Category: Legal
Satisfied Customers: 4071
Experience: Lead trial/International commercial attorney licensed 11 yrs
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