Tax Reform Act of 1969

After a decade of intense government scrutiny of foundations, the Tax Reform Act of 1969 established several regulatory mechanisms for foundations, including an excise tax on investment income, an annual payout requirement, and prohibitions against self-dealing. The minimum payout rate was originally set at the greater of realized income or 6% of investment assets. In 1976, the rate was reduced to 5%; in 1981, the income standard was dropped. Today, a foundation is required to pay out a minimum of 5% of the monthly average of the value of its endowment over the previous year.

Excise Tax

The two-tier system for excise taxes on foundations is considered by some to be a disincentive to flexible payout rates. The tax was first established in 1969 at four percent of investment income. It was reduced to two percent in 1978, and the current two-tier system was established in 1984.

Under these rules, a foundation pays an excise tax of two percent of its net investment income for the year. The tax is lowered to one percent if the foundation meets an arcane test. First, it must calculate the average monthly fair market value of its assets, and multiply this by the average payout percentage for the previous five years. If the current year's payout exceeds this number by at least one percent of the net investment income for the current tax year, it pays 1% instead of 2%. Thus, if a foundation adopts an unusually high payout rate for a year or two, and then returns to the lower rate, it has raised the threshold for its excise taxes in future years. The two-tier system was intended as an incentive to increase charitable giving; ironically, it has had the opposite effect by keeping foundations to a steady level of payout in order to avoid the tax increase.

Number of Foundations

According to data published by the Foundation Center in April 2007, there were 71,000 foundations in the US at the end of 2005, an increase of more than 3,000 in that year; and an increase of more than 77% over a decade. The increase in foundation giving overall was estimated at 11.7% in 2006, thanks to the robust stock market, a higher level of new foundation establishment, and elevated payout rates by greater numbers of "pass-through" foundations, among other factors. Foundation assets grew by 10-12% in 2006. Sara L. Engelhardt, president of The Foundation Center, said that "the new foundations being created today are much bigger, and much more money is moving through them at a faster pace than through older foundations."

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  Resources

• Executive Summary
• Full Report
• Order Print Copies

  Report Contents

• Introduction
• Focus: The Whitaker Foundation and the Helen F. Whitaker Fund
• The Learning Curve: The Beldon Fund
• Retooling for Spend Down: The Atlantic Philanthropies
• Giving While Living: The Richard and Rhoda Goldman Fund and the Lewis B. and Dorothy Cullman Foundation
• Quick Spend Down: The Haigh-Scatena Foundation
• Raising the Payout: Evelyn and Walter Haas, Jr. Fund
• Giving 5.5%: The Lynde and Harry Bradley Foundation
• More than Investment Returns: The Needmor Fund
• Ramping Up: The HKH Foundation
• Using All the Models: Endswell Foundation / Renewal Partners
• A Different Strategy: Omidyar Network
• Conclusion
• Selected Bibliography
• Resources
• List of Profiled Foundations
• Acknowledgements

  Upcoming Events

• November 29
  10am - Noon
  NCG Family Philanthropy Exchange and the Stanford Center on Philanthropy and Civil Society are hosting a discussion of Beyond Five Percent: The New Foundation Pay out Menu. This funders only event is free for members.
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• French American Charitable Trust (FACT)
• Quixote Foundation

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