Frequently Asked Questions About Company Foundations … · Frequently Asked Questions About Company Foundations and Corporate Giving May 23, ... grow endowments ... Grants above

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Welcome to Our 2006 Seminar Series:

Frequently Asked Questions About Company Foundations and Corporate GivingMay 23, 2006

Speakers:

Victoria BjorklundDavid Shevlin

© 2006 Simpson Thacher & Bartlett LLP. All Rights Reserved.

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Introduction

■ Vocabulary■ “Corporate philanthropy program”: includes both

direct corporate giving and giving through company foundations

■ “Direct corporate giving”: giving directly through the company

■ “Company foundation”: a separate legal entity that is funded by the company

■ Recent statistics on corporate philanthropy■ Statistics and trends

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Introduction

■ Issues to be discussed today:■ Giving through company foundations vs. direct

corporate giving■ Decision-making considerations for a corporate

philanthropy program■ Governing and funding a company foundation■ Self-dealing issues related to a company foundation■ Corporate sponsorship and commercial co-ventures■ Employer-related scholarship programs■ Emergency disaster relief programs■ Your questions

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COMPANY FOUNDATION v. DIRECT CORPORATE GIVING

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What are the Considerations of Company Foundations v. Direct Corporate Giving?

COMPANY FOUNDATION

■ Consistency: “Even out”

giving, grow endowments

tax-efficiently

■ May limit liability

■ Administrative efficiency:

Guidelines and streamlined

processes facilitate quick

responses

■ No lobbying

DIRECT CORPORATE GIVING

■ Fiscal flexibility: Free choice of

when and how to make

donations

■ No liability limitation

■ Administrative costs: Minimized

staff and accounting costs,

although foundations may

minimize costs too

■ May lobby

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What are the Considerations of Company Foundations v. Direct Corporate Giving?

COMPANY FOUNDATION

■ Exposure to excise taxes including

self-dealing

■ Branding: Distinct identity

■ International giving

■ Employer-related Scholarships and

Disaster Assistance Programs: Can

be more tax-efficient if made

through foundation

DIRECT CORPORATE GIVING

■ No excise tax exposure; pay

company’s pledges

■ Corporate sponsorship: charities

may acknowledge company’s

name, logos and product lines

■ Enhanced inventory deductions

(Senate 2020 Bill)

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DECISION-MAKING CONSIDERATIONS FOR THE CORPORATE PHILANTHROPY PROGRAM

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What are the Decision-Making Considerations for a Corporate Philanthropy Program?

■ “Focused giving”■ Ensuring maximum impact of direct giving and

foundation giving, while complying with all legal and regulatory requirements

■ More than one model to achieve this goal■ See Tab A: Articles of Interest

WHAT IS THE GOAL OF THE CORPORATE PHILANTHROPY PROGRAM?

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■ A Committee of Board of Directors, or a Committee of the corporation sets coherent themes and areas of focus/interest

■ Ensures global grant-making consistency for both the direct giving program and the company foundation

HOW SHOULD “MACRO” DECISIONS REGARDING THE CORPORATE PHILANTHROPY PROGRAM BE MADE?

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■ Different companies have different policies regarding the extent of involvement

■ One possible approach:■ Grants above $250,000 must be approved by a

committee■ Grants between $100,000 and $250,000 can be

approved by two officers and then ratified by a committee

■ Grants below $100,000 can be delegated to the staff, and then ratified by a committee

HOW INVOLVED SHOULD BOARDS OF DIRECTORS AND OFFICERS BE IN MAKING THE DAY-TO-DAY DECISIONS?

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■ Centralized decision-making

■ Internal corporate affairs department makes all or most decisions, including whether grants should be made through foundation or through direct corporate giving

■ De-centralized decision-making

■ More practical when decisions impact or involve local communities, and more appropriate for local offices than centralhub to make decisions

■ Combination

■ Decision-making is centralized, but local offices are also allocated budgets for local giving

HOW SHOULD “DAY-TO-DAY” DECISIONS BE MADE INTERNALLY AT THE MANAGEMENT OR STAFF LEVEL?

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■ In any case, company should consider establishing written grant procedures. For example:■ Areas of permissible grant-making■ Dollar thresholds / approval requirements

• E.g. discretionary buckets■ Record-keeping and reporting guidelines■ Standards for public acknowledgment:

consistency of messaging and branding■ See Tab B: “Stewardship Principles for Corporate

Grantmakers”

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STRUCTURING THE GOVERNANCE OF A COMPANY FOUNDATION

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How Should the Governance of the Company Foundation be Structured?

■ A company foundation is a separate legal entity■ Must operate solely in furtherance of exempt

purposes set forth in IRC §501(c)(3). For example:■ Charitable purposes■ Educational purposes■ Religious purposes■ Scientific purposes

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■ To integrate the corporation foundation with the overall corporate philanthropy program, while respecting the foundation’s separate legal identity

■ See Tab C: “Making the Most of Corporate Foundation Boards: Strategies and Practices”

WHAT IS THE GOAL WHEN STRUCTURING GOVERNANCE OF THE FOUNDATION?

WHAT IS THE LEGAL FORM OF THE FOUNDATION?■ Typically a corporation■ See Tab D: “Forming and Operating a Private

Foundation”

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■ Minimum of three directors recommended by the Final Report of the Independent Sectors’ Panel on the Nonprofit Sector

■ Appropriate size depends on various factors, including:■ Size of foundation■ Breadth of foundation’s activities■ Classification under IRC §501(c)(3)

• A “public charity” might merit larger board

WHAT SHOULD THE SIZE OF THE BOARD BE?

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■ There are various options, including:■ A self-perpetuating Board■ Two classes of directors, one elected by the

company, and the other self-perpetuating■ Structuring the foundation as a membership

corporation, and having the company as the sole member with the right to elect directors

HOW SHOULD THE BOARD OF DIRECTORS BE ELECTED?

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■ The Board can include:■ Staff or management of the corporation

• Current or retired■ “Independent” members of the corporation’s

board• Could impact status as “independent”

■ Individuals with no connection to the corporation

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What Has Been the Impact of Sarbanes-Oxley and the Stock Exchange Rules?

■ Sarbanes-Oxley has prompted review of corporate governance in the nonprofit sector and changes in the policies and practices in place for effective oversight

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New York Stock Exchange (Section 303A)■ A majority of the Board of Directors of a listed

company must be independent directors■ Materiality. The board of directors must affirmatively

determine that the director has no material relationship with the company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company)

■ The Board must consider the materiality of charitable relationships (i.e. any relationship between a director and a beneficiary of the listed company’s charitable contributions)

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■ Listed companies must disclose in their annual proxy statements any charitable contributions made by the listed company to any charitable organization in which a director serves as an executive officer, where such contributions exceed the greater of $1 million or 2% of such charitable organization’s consolidated gross revenues.

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NASDAQ (Rules 4200(a)(15) and 4350(c)(1))■ A majority of the Board of Directors of a listed company

must be independent directors■ Interference with Independent Judgment. An independent

director must not have any relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director

■ Per Se Disqualification. A director is not independent if he serves as an executive officer of a charitable organization to which the company made, or from which the company received, payments that exceed 5% of the recipient’s annual gross revenues, or $200,000, whichever is more

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■ In re Oracle Corp.■ In June 2003, the Delaware Chancery Court held

that two directors who were Stanford professors may not qualify as independent for purposes of serving on a special litigation committee

■ The Court looked to their significant social and institutional relationships with the defendant-directors

■ The Court focused on charitable contributions made by the defendant-directors to Stanford

WHO IS AN “INDEPENDENT” DIRECTOR?

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New York Not-for-Profit Corporation Law■ A proposed bill submitted by the attorney general

would generally require an audit committee■ The bill would prohibit members of the audit

committee from: ■ accepting any consulting, advisory, or other

compensatory fee from the corporation; or■ having participated in any interested party

transactions within the previous year

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California’s Nonprofit Integrity Act of 2004■ Requires every charitable corporation registered

with the attorney general and with gross revenues of $2 million or more to establish and maintain an audit committee which:■ may include persons who are not members of

the board of directors (NY bill does not have this)

■ may not include any members of the staff, including the president or CEO and the treasurer or CFO

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■ Pros:■ Could help with potential conflicts of interest

between the company and the foundation (e.g. resource sharing)

■ Audit committee composition■ Cons:

■ Consider impact on director’s status as “independent” director of the company

■ Control

SHOULD A COMPANY FOUNDATION HAVE DIRECTORS “INDEPENDENT” FROM THE COMPANY?

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FUNDING A COMPANY FOUNDATION

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What are the Considerations for Funding a Company Foundation?

■ Endowment■ Requires a large infusion ■ But ensures consistent giving

■ Funding from time to time■ Foundation and the company agree on an annual

budget■ Impacts the ability to plan for a long-term

philanthropic strategy■ Does not necessarily ensure consistent giving

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What are the Considerations for Funding a Company Foundation?

■ Cash■ Stock■ Options to buy the company’s stock■ Alternatives to a company foundation:

■ Donor-advised fund■ Pass-through foundation

HOW CAN THE COMPANY FOUNDATION BE FUNDED?

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SELF-DEALING ISSUES

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What are the Most Common Areas of Self-Dealing Concerns?

■ Certain direct or indirect transactions with disqualified persons constitute self-dealing (IRC §4941)

■ Penalty taxes may be imposed if there is self-dealing (IRC §4941(d))

■ Disqualified persons include directors or officers of, and substantial contributors to, the company foundation

WHAT IS THE DEFINITION OF SELF-DEALING?

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What are the Most Common Areas of Self-Dealing Concerns?■ Examples of self-dealing between the foundation and a

disqualified person:■ Any sale, exchange or leasing of property ■ Lending of money or extension of credit■ Furnishing of goods, services, or facilities■ Payment of compensation or reimbursement of

expenses by the foundation to the disqualified person■ Transfer or use of the assets or income of the

foundation by the disqualified person, for that person’s benefit

■ Major exception: “incidental and tenuous” benefits received by the disqualified person

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■ Funding of a company foundation■ If foundation is funded with company stock, selling that

stock back to the company constitutes self-dealing, except if

• Sale takes place pursuant to corporate reorganization;• Terms of sale are the same as those offered to other

holders of the same class of stock; and• Foundation receives fair market value

■ If foundation is funded with stock options, exercising those options requires careful analysis because there are potential self-dealing implications

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■ Foundation expenditures that benefit the company or its employees■ Charity event tickets, admission discounts, and similar

benefits paid for by the company foundation which benefit the company’s employees constitute self-dealing (Private Letter Ruling (PLR) 8449008)

• Even if payment is bifurcated and the cost of the ticket is partially paid for by the company, it is still self-dealing if the foundation’s funds are used to permit the company’s executives to attend events (PLR 9021066)

■ Public recognition of the company generally is not self-dealing

■ See Tab E: “Who Gets the Credit?”

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■ Recruiting from an education organization to which the foundation makes grants usually does not give rise to self-dealing if the company does not receive any preferential treatment or recruiting rights

• Revenue Ruling 80-310: grants made to an educational organization which the company sought to recruit from was consider to be for broad public benefit. Benefits received by company were only incidental and tenuous because they did not receive any preferential treatment in recruiting

■ Matching gift programs do not give rise to self-dealing, as long as the foundation’s contributions do not fulfill the company’s pledges

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■ Resource-sharing, see Tab F: “Roadmap Ruling” (IRS PLR 9312022)■ Sharing facilities does not constitute self-dealing if

the resources are provided free to the foundation■ Foundation may pay for rent or maintenance costs

directly to third-party landlord■ Sharing is possible if there is proper allocation of

time and costs, with proper documentation and record-keeping

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SELECTED ISSUES: CORPORATE SPONSORSHIP AND COMMERCIAL CO-VENTURE ARRANGEMENTS

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What are the Considerations for Corporate Sponsorship?

■ Companies can make “qualified sponsorship payments”to charities without recognition by the charities of UBTI(IRC §513(i))

■ A qualified sponsorship payment is one made by a sponsor to an exempt organization, without expectation of any “substantial return benefit”

■ A “substantial return benefit” is any benefit other than■ The charity’s use or acknowledgment of the name,

logo or product lines of the company’s trade or business

■ Any goods or services with an insubstantial value which qualifies as “disregarded benefits”

CORPORATE SPONSORSHIPS

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■ “Bad” advertisements may result in substantial return benefit if the advertising (taken alone or in aggregate with other benefits) has a fair market value exceeding 2% of the sponsorship payment. Examples of bad advertising:■ Broadcasting “stop by today,” stating when and

where the products will be on sale■ Merely acknowledging the sponsor, for example by

hanging banners, is not bad advertising■ See Tab G: Chart on “Good” and “Bad”

Acknowledgements

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■ A qualified sponsorship payment will not result in unrelated business taxable income to the charity, but a “bad” advertisement with substantial return benefit probably will, if advertising is regularly carried on

■ A qualified sponsorship may qualify as a business expense (§162) or charitable (§170) deduction

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What are the Considerations for Commercial Co-Venture Agreements?

■ State charitable solicitation statutes govern “commercial co-venture arrangements”: a for-profit business advertises that the purchase of goods, use of services, etc., will benefit a charitable organization

■ Some states (currently 4) require commercial co-venturers to register with the state attorney general’s office. New York does NOT.

■ New York requires the commercial co-venturer to enter into a contract with the charitable organization (§172 of Executive Law)■ The obligation is on the commercial co-venturer (See

Tab K: New York Times Article)

COMMERCIAL CO-VENTURE AGREEMENTS

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What are the Considerations for Commercial Co-Venture Agreements?

■ The commercial co-venturer must file an accounting with the charity within 90 days of the end of the promotion

■ Charities must include information regarding their commercial co-venture arrangements with their annual filings with the attorney general’s office■ This includes affirmation that accounting was

received■ §174-c of Executive Law requires that any advertising set

forth the portion of the sales prices which the charitable organization will receive■ However, First Amendment issues have limited the

enforcement of this provision

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EMPLOYER-RELATED SCHOLARSHIP PROGRAMS

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What are the Considerations for Running an Employer-Sponsored Scholarship Program?

■ General Rule: IRC §4945 imposes a “taxable expenditure” excise tax penalty on grants to individuals for travel, study or similar purposes

■ If a company foundation expects to make scholarship grants to company employees and/or their family members (also applies to prizes), then the foundation must obtain IRS pre-approval of grant-making procedures

■ Pre-approval is not necessary if the foundation makes grants to another charitable organization who administers the program and chooses recipients from among employees

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■ Significant concern: are the scholarships being used as an inducement to employment or as compensation? If so, then the scholarship is not excludable from gross income under IRC §117(a)

■ Revenue Procedure 76-47 sets forth guidelines for private foundations with employer-related scholarship programs

■ The group of employees, or children of employees, eligible for a scholarship must be sufficiently broad

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■ Seven requirements: ■ No inducement■ Independent Selection Committee■ Minimum Eligibility Requirements■ Objective Basis of Selection■ Non-employment criteria■ Course of study must not be “employer-

focused”■ “Catch-All”

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■ Alternative: Percentage Test or “Facts and Circumstances Test”

■ Purpose of the percentage test is to limit the number of eligible employees who receive scholarships in any given year

■ If the percentage test is not met, then the IRS will consider the facts and circumstances to determine whether the primary purpose of the program is charitable: history of the program, course of study, publicity, independence of the program, numeric factors

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EMERGENCY DISASTER RELIEF PROGRAMS

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What are the Considerations for Providing Disaster-Assistance to Employees?

■ Pre 9/11 – IRS revoked a favorable ruling that had allowed corporate foundations to provide disaster assistance to the corporation’s employees

■ Post 9/11 – IRS liberalized rules regarding disaster assistance payments. See Tab H: IRS Publication 3833

■ Company foundations may make “qualified disaster”payments to employees (or family members) if:■ the class of beneficiaries is large and indefinite■ recipients are selected based on objective determination of

need■ selection is made using independent committee or those in

position not to exercise substantial influence over the affairs of the employer

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■ If these requirements are met, then the payments:■ are treated as made for a charitable purpose■ do not result in self-dealing■ do not result in taxable compensation to the

employee■ Could still be self-dealing if payments are made to

officers, directors or employees or members of the selection committee

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■ Proper documentation is critical:■ Complete description of the assistance■ Purpose for which the aid was given■ Charity’s objective criteria for disbursing the aid■ How recipients were selected■ Name, address and amount distributed to each recipient■ Any relationship between a recipient and officers,

directors, employees of the corporation■ See Tab I: “Disaster Relief by Employer-Controlled

Charities,” and Tab J: “Hurricane Katrina: The Council’s Corporate Members’ Disaster Relief Efforts”

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Questions

YOUR QUESTIONS?

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Frequently Asked Questions About Company Foundations … · Frequently Asked Questions About Company Foundations and Corporate Giving May 23, ... grow endowments ... Grants above