The director of a foundation came to us with a great idea. She wanted to use her private foundation to purchase mittens, gloves, and scarves for underprivileged schoolchildren and distribute them directly, without the aid of a charitable organization other than her own. She wanted to leverage her own relationships, labor, and funding to carry out this task, but did she need to rely on a grantee partner?
We explained that because private foundations are legally empowered to undertake their own charitable activities, she didn’t need to work through an outside organization. There is a misconception that foundations must support good works only through grants to 501(c)(3) public charities. The truth is that the foundation itself can play a central role in running its own programs.
There’s a second misconception: If you want to run your own programs, it is best to establish an “operating” foundation. This is not true. A private foundation does not need to be classified as operating in order to carry out its own hands-on programs, commonly called direct charitable activities (DCAs). In fact, the IRS gives non-operating foundations wide latitude to directly fund or actively participate in running their own programs. And non-operating foundations offer greater flexibility, since they are permitted to make grants as well as run programs. Moreover, there is no strict limit on the number of DCAs that a non-operating foundation may undertake.
Operating foundations may make sense for those who want to solely operate their own programs; however, donors would be well advised to think carefully about their objectives before opting to establish this less versatile charitable vehicle. Operating foundations are subject to a series of annual tests to ensure that the bulk of their resources go toward running their own programs. Moreover, grants to public charities do not count toward an operating foundation’s minimum distribution requirement.
What Is a Direct Charitable Activity?
When a private foundation runs a program or activity by itself rather than supporting a nonprofit to carry it out, it is called a DCA. Private foundations sometimes choose to engage in DCAs because they have identified an important need they wish to address, and, in conducting research, find that there is no nonprofit currently addressing the issue. In other cases, a foundation may decide it is better positioned to run a particular program than a nonprofit grantee. And sometimes, by “road testing” a new idea and proving its efficacy, the foundation can inspire other funders to lend support to an important program.
Examples of successful DCAs we’ve seen include:
- Repurposing used lockers from a country club for use by a public school.
- Opening a mathematics museum to illustrate to children the importance of math in everyday life.
- Purchasing business attire for low-income jobseekers.
- Removing gang tattoos from paroled prisoners so they can more easily return to the workforce.
Delivering Indestructible Fun
The Sager Family Traveling Foundation and Roadshow wanted to create and distribute an “indestructible” soccer ball that would enable impoverished children around the world to play in rough areas where other balls might go flat. The Sagers were aware that children in developing countries, lacking access to decent soccer balls, often fashion their own from bundles of garbage, which can be dangerous—and certainly keeps many young players from bending it like Beckham.
Working with a Canadian design company, the foundation created indestructible soccer balls and gave them away at venues such as the 2010 World Cup in Cape Town, South Africa, to encourage athletics and cooperation among children from different backgrounds all over the globe.
When to Be Cautious
Foundations can be penalized for supporting activities that are not deemed charitable, so how does one know if a given activity will be viewed by the IRS as charitable in nature? As there is no centralized list of approved DCAs, one good rule of thumb is to see if there are nonprofits already addressing the cause you have identified. If so, you can be reasonably confident that your DCA will be viewed by the IRS as charitable. If your proposed activity is less clear-cut, you may need to convince the IRS that your proposed DCA is charitable and/or seek permission to proceed in the form of a Private Letter Ruling.
Though DCAs often seem straightforward, we recommend that you undertake them with experienced legal guidance in order to validate the charitable intent of your cause. For example, imagine that your foundation chose to self-publish and sell a book on environmental conservation. While this activity sounds charitable on the surface, you may need to justify how the foundation’s approach differs from a commercial publisher: Does the foundation plan to distribute the book broadly at little or no cost? Is the topic so arcane that no commercial publisher would consider publishing this text?
If the IRS determined that the foundation published the book in a manner indistinguishable from that of a commercial publisher, it may be deemed an “unrelated business activity.” A foundation that engages in an unrelated trade or business as a substantial part of its activities is in danger of losing its tax exempt status (although the IRS will generally consider all facts and circumstances before taking this ultimate step).
Directors and trustees typically find DCAs to be especially rewarding. By taking a hands-on approach to running a program, our clients see their impact directly, rather than just reading about results in a grant report. Though DCAs often seem straightforward, we recommend that you undertake them with experienced legal guidance.
Necessity, the Mother of Invention
Dr. Richard Boas of The Carl Marks Foundation saw the potential to use DCAs to carry out a charitable vision that had gone unnoticed by others. After adopting a child from South Korea, he wanted to help other American families of limited means enjoy the same experience. He had no idea what was in store for him.
“I returned to Korea and got completely turned around by what I saw,” said Dr. Boas. He soon realized that the real need was not for more affordable adoptions. Instead, he saw that unwed Korean mothers were stigmatized by society and therefore pressured to give their children away. Boas recognized his true calling was to address this root cause by preventing these single mothers from being marginalized in the first place.
In looking around, he found out that there were no Korean organizations targeting this issue, which increased his desire to find a viable solution. Guided by knowledgeable local consultants, he launched the Korean Unwed Mothers Support Network (KUMSN), a staffed, foreign charitable organization functioning as a DCA to carry out his vision. Today, KUMSN offers information and support to empower single mothers to make informed decisions about their children’s future regardless of whether they choose to offer them for adoption. KUMSN also works to raise awareness of this social stigma in Korea, encouraging policy changes and reaching out to the other party in the equation: the children’s fathers.
