I was in a meeting yesterday with a foundation officer who shall remain nameless (unless he comments on the blog). And he talked about the idea that the biggest asset base which has not been tapped in this economic crisis is the foundation asset base. It is a brilliant idea that should be explored.
As part of the stimulus plan, the administration should shift the IRS rule that minimum payout must exceed 10% for the next 3 to 5 years. The money in foundations is money that our society has set aside without taxation to improve our common good. The pool of funding is enormous. The payout from the pool of funding (is) can be regulated by the IRS. The IRS has a 5% rule that forces money out the door of these foundations.
Our society and the nonprofit sector need the influx of that cash now. Government is going to up taxes on everyone to pay for the stimulus eventually.
Today..without raising taxes, or impacting our deficits, the new administration could stimulate massive amount of activity by forcing the hands of these foundations.
Many progressive and good foundations are already spending down. They are stepping up to help in this economic crisis well above the minimum IRS allocation. However, for those that wish to sit out (and sit on assets) at such a time when our society and the nonprofit sector need them so much seems unacceptable. A small change in a regulatory rule effecting so few and benefiting so many scenes in order.
For progressives, who have a very favorable rate with regulatory and legislative climate, this forced move would inject real horsepower into nonprofit organizations at a time when they could create the most change.
It is an interesting idea. I would love to see the pros and cons fully debated.
What is the 5 percent payout requirement? The purpose behind the minimum payout requirement is to prevent foundations from simply receiving gifts, investing the assets and never spending any funds on charitable purposes. The basic rule can be stated simply, but its calculation is complex: Each year every private foundation must make eligible charitable expenditures that equal or exceed approximately 5 percent of the value of its endowment. The word "payout" while convenient is somewhat misleading and is not used in the Tax Code section that creates the rule. The word "payout" suggests grants or contributions paid out to other charities. Although these grants normally make up more than 93 percent of the expenditures of most foundations, many other expenses can also qualify in meeting the minimum payout requirement. In short, the 5 percent payout rule need not be satisfied solely with grants.