The CARES Act, as signed into law on March 27, 2020, sets out a number of provisions to encourage additional charitable giving in 2020. The Act grants a $300 above-the-line charitable deduction for individuals giving cash to public charities and eliminates, for the current year only, the adjusted gross income ("AGI") limit for individuals who itemize for "cash gifts to public charities." Effectively, individuals who itemize can deduct cash contributions up to 100% of AGI, although any carryforwards to subsequent years will be subject to the normal 50% or 60% limit. The limit for corporate donations has been increased from 10% to 25% for cash gifts to public charities this year and there is a special increase for gifts of inventory.
Deduction carryforwards from 2019 and prior years will not be eligible for the new limit and the Act did not extend the increased AGI limit to gifts to donor advised funds ("DAFs") or supporting organizations. Presumably this limitation is intended to encourage current use of cash contributions by operating charities. However, the Act left open the possibility of cash gifts to certain private foundations, namely operating foundations, pooled common funds and pass-through foundations, each of which would qualify as a public charity under the CARES Act. Discussed below are some situations where existing law creates opportunities for foundations fighting COVID-19.
If your foundation is an operating foundation, you would be eligible to take advantage of the 100% deduction this year. Many donors who are in an excess deduction carry forward situation may appreciate the opportunity to fund their foundation with additional cash in 2020. If their carryforward is a 50% carryforward, for example, the donor should be able to donate an additional 50% of AGI to the foundation this year on a deductible basis.
Pooled common funds
Although gifts to supporting organizations do not qualify for the 100% of AGI limit, a donor may want to take the opportunity to create a pooled common fund. A pooled common fund (not to be confused with a pooled income fund) is a private foundation that pays all of its income to public charities each year. Additional amounts of corpus can be paid as well but only to public charities. The foundation must generally wind up after the death of the donor and his or her spouse. In this manner, the foundation can operate very much like a supporting organization but still qualify for the CARES Act exceptions to the normal AGI requirement.
Pass-through foundations may also qualify as public charities under the Act. A foundation which makes "qualifying distributions" (generally distributions to public charities) of 100% of contributions it receives in 2020 no later than two and one half months after the close of its taxable year will be treated as a public charity. For example, suppose the donor creates a private foundation in December of this year which chooses a November 30 fiscal year end. The donor then makes a large cash contribution to the foundation in December of 2020. As long as the foundation distributes the full amount of such donation to public charities on or before February 15, 2022, the cash gift made to the foundation in December of 2020 would qualify for the 100% of AGI limit in 2020.
Grants to individuals
Foundations that make scholarship grants, or make grants to individuals for travel, study and similar purposes, must adopt written procedures in advance of making such grants and such procedures must be approved by the IRS. Normally, this approval is sought by attaching a Schedule H to Form 1023 when applying for exemption or on a supplemental filing. On the other hand, grants to individuals to alleviate human suffering or provide disaster relief, or emergency medical assistance can be made without prior IRS approval. A foundation's governing documents (certificate of incorporation and bylaws or trust agreement) must be reviewed to determine whether the provision of such grants is allowable. The majority of foundations have broad language that allow a foundation to accomplish any goal consistent with Section 501(c)(3) of the Internal Revenue Code including the making of grants. A smaller number of foundations may have very restricted purposes. Nevertheless, such governing documents may be amended to allow for grants for emergency medical and hardship assistance.
The beneficiaries of any such grant program may not be insiders (that is, no disqualified person should be entitled to a grant) and eligible recipients should be members of a broad class, e.g., residents of a certain municipality or restaurant workers. The grants should be awarded pursuant to a written plan. The foundation should take care to maintain records of such grants, especially with regard to the grantee's identity and address, amount given to the grantee, and a description of the purpose, as the information will be reported on the foundation's Form 990-PF, annual information return.
Grants, expenditure responsibility grants and program related investments
Of course, foundations can make grants to public charities including food banks, shelters and medical institutions. Those are often the easiest grants to make inasmuch as they do not require foundations to exercise expenditure responsibility. A foundation would normally issue a check to the public charity with a short letter describing the purpose of the grant.
Grants to other foundations or organizations that do not have an exemption letter from the IRS can also be made but, for these grants, the foundation will have to exercise "expenditure responsibility". This involves a pre-grant inquiry to determine whether the prospective grantee organization has legitimate charitable purposes. The foundation will then be required to enter into a grant agreement with the grantee organization specifying the use to which the funds must be applied and the foundation will be required to obtain follow up reports from the grantee to assure that funds were indeed spent for a proper purpose described in the grant agreement.
Program related investments ("PRIs") are essentially debt or equity investments by a foundation where there is no expectation of profit and where there is an underlying charitable purpose. PRIs are usually made in connection with a for profit entity which will achieve a charitable purpose. For example, a foundation can make a loan at a low or zero rate of interest to a clothing manufacturer to make masks for first responders. PRIs can also take the form of an equity investment, such as stock in a corporation or interest in a pass-through entity, for example, in an endeavor to research and manufacture pharmaceuticals which may be useful in treating COVID-19. Generally, PRIs are treated as grants so are subject to the normal expenditure responsibility requirements for grants.
Please consult your Withers Bergman attorney if you would like to discuss how you could put this information to use for your charitable planning and foundation activities.