posted on: Tuesday, April 07, 2009

In Criteria for Philanthropy at Its Best, NCRP makes the case that, in light of the tax exemption that foundations receive, foundation dollars should be viewed as “partially public” dollars.

One interesting response has been to point out that a 401(k) is tax-exempt and we get deductions on mortgages, but that doesn’t mean NCRP gets a say in your retirement portfolio and your wallpaper.

All of this is true. Unfortunately, critics conveniently forget the reasons behind these exemptions and deductions, at which point the argument falls apart. Foundation trustees commit to furthering some sort of charitable purpose when they create a foundation. I do no such thing when I open a 401(k) or purchase a home.

This isn’t the fringe viewpoint of some radical organization. It’s the law. From the IRS’ web site:

"To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual."

401(k) plans and mortgages are created for private benefit. The earnings of foundations, on the other hand, cannot inure to any private shareholder or individual, and we have adopted many rules and regulations over the years in order to insure that the nation’s foundations serve the public purposes for which they’re created.

For example, you don’t have to tell me how your 401(k) did this year, but you do have to tell people how your foundation did this year. Forms 990-PF are filed annually and subject to public inspection. I can’t tell you that your son can’t come back home and live in the room over the garage, but I can tell you that a family reunion can’t be paid for with family foundation dollars. There are rules against self-dealing.

Critics rightly ask, “I take tax deductions all the time. Why is this one any different?”

It’s an argument we hear often, and it’s easily answered: your 401(k) plan and your mortgage aren’t organized for public purposes; foundations are. The public has a say in how that tax exemption is used, and we all have an interest in seeing it used well for the benefit of as many as possible.