Question: May corporate grantmakers support economic development activities?
Answer: Yes, corporate grantmakers may provide support for economic development activities. The legal rules for providing such support depend on whether the support is provided by a corporate giving program or a corporate foundation. The Council on Foundations’ new publication Economic Development: A Legal Guide for Grantmakers by Jane C. Nober provides guidance on the legal parameters for supporting economic development activities and examples of grantmakers providing such support. An excerpt from this new publication follows.
Corporate Giving Programs.
Unlike private foundations and public charities, corporations that make donations through their corporate giving programs may seek charitable income tax deductions for their gifts. For a gift from a corporation to qualify for a charitable income tax deduction, it must be made to a “corporation, trust, or community chest, fund, or foundation” that is created and organized in the United States. These are organizations that are recognized as tax-exempt, charitable organizations under Section 501(c)(3) of the Tax Code. Gifts to a governmental unit for a public purpose will also qualify for a charitable deduction.
This restriction means that if a corporation wishes to take an income tax charitable deduction, then it must make its donation to a 501(c)(3) organization. Chambers of commerce (usually recognized as tax-exempt under Section 501(c)(6) of the Tax Code) and social welfare organizations (usually recognized as tax-exempt under Section 501(c)(4) of the Tax Code) are not eligible recipients of charitable funds. There is no procedure that a charitable giving program can use to turn a gift to a non-501(c)(3) organization into one that qualifies for a charitable income tax deduction, no matter how worthy the cause.
This restriction also means that a corporation may generally secure a charitable income tax deduction for a gift to a municipality or other government entity so long as the transfer serves public rather than private interests. Paying the company’s property tax obligations serves the company’s private interests, but contributing money or a tract of land for a development project that a city is undertaking will likely serve a public interest.
The IRS has long recognized that charitable gifts from corporations often provide a range of benefits to the corporation. Charitable donations can generate goodwill and public recognition of the corporation. They can also inspire loyalty among employees and consumers of the corporation’s good and services. The IRS has generally permitted charitable gifts to yield benefits that are intangible or of minimal value and incidental to the benefits that a charitable donation provides to the public.
An example of an incidental benefit is the naming of a building or facility after a corporate charitable donor. In Revenue Ruling 77-367, 1977-2 C.B. 193, the IRS considered the status of an organization that operated a replica of a 19th Century village. A business corporation provided a substantial portion of the charitable organization’s support. Although the supporting corporation benefited by having the village named after it, its name associated with the village in conjunction with its own advertising program, and its name mentioned in each publication of the charitable organization, the IRS ruled that “such benefits are merely incidental to the benefits flowing to the general public.” Accordingly, the IRS held that the organization that operated the village could retain its charitable tax-exempt status. In the economic development context, a gift to a project that results in a building or facility being named after a corporate donor should generally not raise problems.
Corporations that have structured their corporate giving through a corporate foundation must observe the private foundation rules. They must pay excise tax, make qualifying distributions and avoid taxable expenditures. They must avoid jeopardizing investments and excess business holdings. They must also take special care to avoid self-dealing when they support economic development projects.
The Tax Code defines self-dealing as any one of a number of financial transactions between a private foundation and disqualified persons. In general, disqualified persons are substantial contributors, foundation managers and certain family members of major contributors and managers. In the corporate foundation context, it’s important to remember that “persons” refers not only to living, breathing individuals but also includes corporations, partnerships, trusts and estates. The sponsoring corporate of a private foundation is virtually always a disqualified person in relation to the foundation.
A full discussion of the prohibitions and exceptions found in the self-dealing rules is beyond the scope of this book but can be found in Company Foundations and the Self-Dealing Rules. The major provision that comes into play in the economic development area is the bar on a private foundation’s “transfer to, or use by or for the benefit of, a disqualified person” of any portion of its income or assets. Translated into more comprehensible English, this provision means that no private foundation assets may be transferred to or used for the benefit of disqualified person. A private foundation’s grants may provide incidental or tenuous benefits to a disqualified person, but grants and other expenditures must not be used to provide tangible, economic benefits to disqualified persons.
Here are some examples of expenditures that would likely be considered acts of self-dealing:
- A corporate foundation establishes a program with a local university to provide job training for unemployed and underemployed persons. The corporate foundation supports only those portions of the program that provide training in skills relevant to the sponsoring company’s work. Company employees in need of retraining are permitted to attend classes free of charge. The company is the only employer with the right to recruit program graduates on campus.
- A corporate foundation sponsored by a manufacturer of construction materials makes a grant to a local charity for an economic development project on the condition that the charity will purchase the company’s products for use on the site.
- A corporate foundation makes a grant to an economic development project involving the rehabilitation of an historic building with the understanding that the corporation will have an option to rent office space in the restored building at a reduced rent.
In contrast, some grants only provide incidental benefit to the company and thus are not self-dealing. For example, the IRS found that no self-dealing would occur if a foundation sponsored by an electric company made a grant for the purchase and installation of electric lights in a downtown area partially served by the electric company. The IRS recognized that electricity would be provided for the lights by the sponsoring company and another provider in the ordinary course of business but determined that the incremental increase in the utility’s business from the new lights would be small in comparison to the public benefit. Based upon the specific set of facts, the IRS held that no self-dealing would result from the grant.
Where there is substantial concern about tangible, economic benefits flowing to the corporation from a proposed grant, corporate foundation managers should consider making the grant from non-foundation funds or non-charitable funds. Knowledgeable legal counsel can help guide decisionmaking in this area.