Legitimacy of Philanthropic Foundations: United States and European Perspectives

Chapter 6 Foundation Legitimacy at the Community Level in the United States

Chapter 6 Foundation Legitimacy at the Community Level in the United States Kirsten A. Grønbjerg Community Foundations occupy a strategic place among U.S. foundations . Although they make grants like other nonoperating foundations, they are classified as public charities rather than private foundations because they raise funds on an ongoing basis from many donors rather than just a few (such as a sponsoring corporation or founding family). Although most grant-making foundations have a regional focus, community foundations have so more explicitly. They pursue broader community issues, solicit donors with special connections to one community , pool funds for the benefit of that community, and include community representatives on their boards or fund distribution committees (not just donors as do family or corporate foundations). Community foundations therefore face more explicit challenges to their community legitimacy than other grant makers. Indeed, as I show, they make more deliberate efforts to assess community needs so as to prioritize grant making and to structure their grant making on an open, competitive basis. At the same time, they face growing competition from other fundraising organizations (United Way [UW], women’s, or other special funds) and donor advised funds (DAFs) offered by major investment companies, such as Fidelity or Merrill Lynch (Lenkowsky 2002). Community Foundations—A Special Type of Funder In the United States, community foundations are recognized as public charities under Section 501(c)(3) of the Internal Revenue Code and therefore pay no federal income tax (nor most state or local taxes)1 on their annual surplus.2 They can also receive contributions that are deductible (within limits) from the taxable income of individual or corporate donors. This important tax incentive is not available to exempt entities recognized under other 501(c) subsections (labor unions, social clubs, business groups, fraternal organizations),3 and is justified on the argument that charities benefit the broader community (not just their own members) and relieve the need for government efforts. Community foundations share these tax advantages with other public charities. Some (hospitals, schools, churches, literary societies, prevention of cruelty to children or animals, or testing for public safety) are routinely granted charitable status. Others must meet tests of purpose (community benefit) and public support (not rely primarily on assets or relatively few donors) as community foundations do when they obtain contributions from many donors. While other grantmaking foundations are recognized as tax-exempt charities when they meet the purpose-mission test, most are considered private foundations because they fail to meet the public support test. Thus, family and independent foundations depend primarily on income from assets donated by a few founders,4 whereas corporate foundations receive their revenues (and assets, if any) from a single business or corporation . This legal distinction dates to the Tax Reform Act of 1969, which sought to address concerns about abuses (especially self-dealing) by private foundations (Hammack 1989, 39–41).5 Granting public charities favorable legal treatment—greater tax deductions for donors, no excise tax on investment income, and fewer operational requirements (see table 6.1)—encourages wealthy individuals to channel charitable trusts or endowments to community foundations rather than create family foundations (Hammack 1989, 41; Clontz 2001). Community foundations are less easily distinguished from other public charities that also raise and pool contributions from donors and support other charities financially (UW, Catholic Charities, Jewish Federation, and alternative funds—black UW, Women’s Funds). Although all may focus on a geographic region, community foundations have broader funding priorities and seek endowments,6 not just annual support. On both counts community foundations are becoming less distinctive now that other fundraising organizations also seek endowments and allow donors to designate which charities should receive their contributions. Foundation Legitimacy at the Community Level in the United States 151 Table 6.1 Key Attributes of Private and Community Foundations Attributes Private Foundations Community Foundations Amounts deductible for donor Publicly traded securities Other appreciated property Limits on contributions for donor Cash contributions Gifts of appreciated property Administrative requirements Payment of excise tax Required payout levels Limits on excess business holdings Donor control Anonymity Other features Primary advantages to donors Distinctive structures Source: Adapted from Clontz (2001). Fair market value Limited to cost basis 30 percent of donor’s adjusted gross income 20 percent of donor’s adjusted gross income 1 to 2 percent of investment income 5 percent of assets or more Yes Legal No; must file detailed returns...