Archive for July, 2013

Earlier this year, I wrote about a very troubling subject in the philanthropic world in my blog, “Who actually owns that private foundation?”  (2/20/2013).  The post generated a fair number of comments from philanthropic advisors who confirmed that it is, indeed, a sensitive topic for donors.  The donors feel that, until the funds held in the private foundation are expended for charitable purposes, they (the donors) retain full control and can do pretty much what they want with them.




The self-dealing rules under IRC §4941 greatly limit the ability of “disqualified persons[1]” to do business with or generallychix benefit from a private foundation.  This includes the sales or leasing of property, lending of money, furnishing of goods, services, or facilities, payment of compensation or expenses, transfer of income or assets of the foundation to the disqualified person, and any payments to government officials.  These limitations seem fair enough and we discussed a couple of them, including the payment of compensation to disqualified persons in the earlier blog.  But, like anything else in the tax law, there are exceptions and there can also be exceptional (read: oddball) results.  For example, consider the “rubber chicken” dinner.  You’ve been there, right?  Because of your unwavering support for your favorite charity, but mainly because your Rolodex reads like a “who’s who” in the rarefied world of generous high net worth donors, the charity offers to honor you at its annual journal dinner dance.  As part of the deal, you agree to pay $5,000 for a table of ten, $1,500 of that would be tax deductible.  What is the best way to handle this financial commitment?

  1. You should use your family’s private foundation to pay for the tickets and invite your relatives to fill the ten spots at the table. (Clue:  Not the right answer)
  2. You should leave the foundation out of it altogether and pay for the table using personal funds.  You will be able to claim a $1,500 tax deduction on your personal tax return (subject to certain limitations). (Clue:  This answer is red hot.)
  3. Bifurcate the transaction.  You pay the non-tax deductible piece ($3,500) and the foundation pays the deductible piece ($1,500) under the theory that it is tax deductible anyway and therefore a proper expenditure for the foundation.  (Clue:  Points for creativeness but alas, this answer is also incorrect.)


As noted, choice B would generally be the correct choice because it avoids any hint of self-dealing.  As incredible as it might sound, choice A would most likely be considered an act of self-dealing because, simply stated, something of value (the rubber chicken dinner) was secured by the foundation for the benefit of disqualified persons.   And choice C, while pretty creative, fails the smell test too because, as the IRS likes to point out, the admission is a fixed price that includes both a fair market value and a charitable element – and one cannot exist without the other.


While these results may seem odd, the rules, themselves, exist to protect the integrity of private foundations.  Donors must accept the limitations as a cost of doing business.


[1] Disqualified persons include substantial contributors to the foundation, foundation managers, a more than 20% owner of an entity that is a substantial contributor, family members of any of these, and certain other entities.

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Warren Buffett, one of the richest people in the world, has decided to transfer his wealth for charitable use to the Bill and Melinda Gates Foundation.  His intentions are practical, well thought out, quite logical and seem devoid of ego.


Warren has always thought that passing on great wealth is not the best thing to do, although passing on comfortable amounts are ok.  His wealth is too massive to transfer to his heirs.  Early on he used his wealth to “teach” his children how to give and to have it done in a way that he could evaluate their actions.  Well, they did a great job.  He is very proud of them and has expanded the amounts he donated to their foundations.  They are supporting some very commendable activities.


The biography written by Alice Schroeder (a member of my profession and a CPA) does a great job explaining his thinking process and reasons.  It is obvious that he thought hard about it over a long period of time and his decisions are clear and spelled out in the book.  Some comments are:


  • He doesn’t care about buildings in his honor.
  • He no longer wants to wait to give the money preferring to see its results.
  • He does not want to create a perpetual never-ending legacy and would rather see his annual contributions expended reasonably quickly after being donated.
  • He sees the importance of a well-ordered leadership, management and administrative team.
  • He values dedication and commitment to causes he deems important and far reaching.
  • And he has no desire to get involved in something where he has to recreate the wheel.


His decision is to start while he is alive and he chose the Gates Foundation because they meet all his criteria.  He also has grown close to Bill and Melinda, values their values, and likes their relative youth.  He’s seen them in action and likes what he sees!


This blog has been guest written by Edward Mendlowitz, Partner at WS+B and author of his own blog at www.partners-network.com

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Today, after a short hiatus, Charitable Nation, WS+B’s blog about all things philanthropic returns with a vengeance!  This week’s post has been written by guest blogger Ed Mendlowitz:

In his day, John D. Rockefeller was the richest man in the world.  He also left a fortune that still provides gifts to humankind and ranks in the top 20 of the largest U.S. Foundations.  His son, John D. Rockefeller, Jr. took the lead from his father  and went into active charity, giving almost on a full-time basis.  John D’s charity reach serves as a strong role model to many of today’s mega wealthy.


Rockefeller’s charity was founded in his Baptist belief in tithing – giving 10% of his earnings to charity. This started when he was not yet a teen and certainly before such contributions became tax deductible.

His early charity favored his church and Baptist organizations.  Because of this he was a very generous supporter of Southern black organizations whose leaders were Baptists.  In his charity giving he was color blind and that certainly was contra to prevailing racial prejudices.

Tithing is a common expression of charity.  Former presidential candidate, Mitt Romney, believes in it and actually surpasses the 10% measure.  I don’t know how Romney dispenses his charity, but for Rockefeller it became an overwhelming task leading to the formation of the precursor of today’s Foundations with dedicated professional managers and a wide range of directors.  The Rockefeller Foundation has made its mark in medicine, disease research, education, the arts and most other activities that make our lives easier and more enjoyable.

Rockefeller’s grappling with giving is common to many of today’s super rich with wealth too great to leave to family without greatly altering life styles and values.  He seems to have developed his own solution with his evolving Foundation type of set up.  Wealthy people, whether charitably minded or not, need to consider how they will leave their wealth and who will be responsible for carrying out plans and implementing changes as future circumstances warrant.  Charitable giving seems to be a method of a grateful expression to the society that enabled them to flourish and succeed beyond what they could have imagined when starting out.

Life, being precarious, tells us that the sooner thoughts of what to do with wealth begins, the better the opportunity for successful implementation.  If you haven’t yet made plans, now is a good time to start considering what you want to accomplish.

This blog has been guest written by Edward Mendlowitz, Partner at WS+B and author of his own blog at www.partners-network.com

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