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Signed into law in August 2006, the Pension Protection Act of 2006 (PPA) made substantial changes to federal tax law governing charitable organizations and also reformed pension and retirement plans. This legislation imposed the most sweeping changes since the Tax Reform Act of 1969, which defined many rules that govern today’s nonprofits and donor contributions.
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The California Community Foundation (CCF) initiated a review of its 1,500 charitable funds to identify potential issues and assure compliance with these legal requirements. We are committed to keeping donors and advisors informed of these changes through outreach and resource materials. The foundation has also worked with the Council on Foundations, a national association of philanthropic institutions, to advocate for changes to the PPA legislation that would improve the philanthropic sector’s ability to address the needs of the communities served.
Following is a summary of key provisions that are most relevant to community foundations. The provisions were effective July 1, 2007 unless noted otherwise. CCF is in full compliance.
We encourage you to contact us to receive updated information regarding on-going compliance and advocacy efforts as well as legislative revisions.
View a list of frequently asked questions related to the Pension Protection Act of 2006.
Donor Advised and Scholarship Funds
The PPA provided the first legislative definition of donor advised funds. Donor advised funds are:
- Separately identified with reference to a donor(s)’s contributions
- Owned and controlled by a sponsoring organization (i.e., CCF)
- Managed by a donor or person appointed by the donor to advise on investments or distributions relating to the fund
The law enacted a range of specifically permitted grants and prohibited activities, including the following notable changes:
- Distributions from donor advised funds that provide anything more than an incidental benefit to the donor or related parties (i.e., making loans to the donor or reimbursing the donor for expenses) are prohibited.
- Charitable funds that make grants to individuals, such as scholarship funds, that were previously structured as donor advised funds must be reformed to have a governance structure that the donor does not control (i.e., a scholarship selection committee on which the donor and related parties represent a minority).
- Contributions of closely-held business interests to donor advised funds are now limited by the same rules that apply to such gifts made to private foundations (known as the “excess business holdings rule”). Gifts that meet the definition must now be sold within a specific period after the donor’s contribution.
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Substantiation and Disclosure
Organizations that sponsor donor advised funds are required to include a statement indicating that they have legal control over affiliated funds when contributions are given to these funds. For example, CCF now includes the statement, “Contributions to the California Community Foundation represent irrevocable gifts subject to the legal and fiduciary control of the foundation's Board of Directors,” on all affected funds’ pages on our Web site as well as on its contribution acknowledgments.
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Supporting Organizations
A supporting organization is a 501(c)(3) organization that qualifies as a public charity because of its close relationship with another publicly-supported 501(c)(3) organization. The PPA outlined requirements for the three types of supporting organizations (known as Types I, II and III). Supporting organizations are frequently used as a private foundation alternative by individual donors and families and by nonprofit organizations to house particular charitable activities or programs (much like subsidiaries).
The PPA modified the statutory scheme applicable to supporting organizations to address concerns that some supporting organizations were being used to inappropriately benefit private interests.
Under the PPA rules, all supporting organizations:
- Cannot distribute grants, loans, compensation or make expense reimbursements or similar payments to contributors and related parties
- Must complete a Form-990 and include a list of supported organizations, indicate the type of supporting organization it is and certify that qualified persons directly or indirectly control the supporting organization
Types I & II. These supporting organizations are typically controlled by one or more supported organizations that are public charities. Many of these organizations will have a donor or family members representing a minority of the directors on a supporting organization’s board. Others have boards that are entirely chosen by the supported organization (such as a hospital or university).
- Supporting organizations that accept contributions from a person who controls the supported organization (i.e., the foundation) will be reclassified as a private foundation. CCF generally creates Type I supporting organizations in collaboration with its donors and controls each supporting organization through its board appointments – meaning that our existing supporting organizations will remain classified as public charities rather than private foundations.
Type III. These supporting organizations are the most independent and attenuated in their relationship with their supported organizations and have been a particular focus of recent Congressional and IRS investigation. These organizations:
- May not support a foreign organization, with a three-year transition rule for existing organizations
- Must distribute a percentage of either income or assets that is determined as a “significant amount” by the Treasury Secretary to supported organizations
Update: On March 13, 2008, the IRS issued a memorandum that transmits guidelines for processing applications for private foundation status classification under IRC 509(a)(3) for Type I, II, and III Supporting Organizations.
Read the memo and guidelines on the IRS website.
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Additional Resources
Frequently Asked Questions: Pension Protection Act and CCF Donor Advised Grantmaking
Chronicle of Philanthropy
Foundation Center’s Philanthropy News Digest
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