1. What are the requirements for a 501(c)3 charitable organization to be classified as a private foundation?
a) The organization must be funded by a single person, family, or corporation
b) The organization must make grants rather than directly running a charitable activity
c) The organization's expenditures must be funded by investment income
d) All of the above
e) All 501(c)3 charitable organizations are classified as private foundations unless they meet the tests for a public charity or supporting organization
2. What circumstances would cause a 501(c)3 nonprofit organization to be classified as a public charity?
a) The organization is a traditional charity, e.g., operating a church, school, or hospital
b) The organization receives at least 1/3 of its support from the combination of donors giving 2% or less of total support and from government grants
c) The organization receives at least 1/10 of its support from the combination of donors giving 2% or less of total support and from government grants + it is operated to attract new public or government support + "facts and circumstances" indicate that it is a public charity
d) At least 1/3 of total support comes from the combination of memberships, charitable operations, donors giving 2% or less of total support, and government grants + no more than 1/3 of total support comes from investment income
e) Any of the above
f) All four of the above must be simultaneously fulfilled
3. Requirements to create a private foundation include which of the following steps
1. Forming a nonprofit corporation under state law
2. Forming a charitable trust under state law
3. Filing an initial application with the IRS using Form 1023
4. Filing an annual form 990-PF with the IRS
a) 1 or 2, then 3 then 4
b) 1 then 2 then 3 then 4
c) 4 then 3 then 2 then 1
d) 4 then 3 then 2 or 1
e) Any one of these in any order
It is better to create a private foundation as a nonprofit corporation than to create it as a wholly charitable trust when:
4. True or False: It is important to be able to change the purposes and programs of the foundation to meet changing conditions in the future.
5. True or False: The founders want to lay down strict limits that future generations must follow.
6. True or False: It is anticipated that the foundation will realize income classified as unrelated business taxable income.
7. True or False: The foundation will perform its functions by actively conducting charitable operations, rather than as a passive grant-making entity.
8. True or False: The foundation will seek contribution from corporate donors and the foundation will make grants to overseas programs.
9. In Chapter 42 of the Internal Revenue Code, private foundations can be subject to five specific sets of excise taxes for five types of prohibited activities. Which of the following is not a prohibited activity?
a) Self-Dealing
b) Failure to Distribute Income
c) Excess Business Holding
d) Investments That Jeopardize Charitable Purpose
e) Taxable Expenditures
f) Family Controlled Governance
10. Which of the following is not a penalty available to the IRS in the event that a private foundation violates the rules on excess business holdings?
a) Initial tax for the violation
b) Additional tax against the foundation if the violation is not corrected within the correction period
c) Additional tax against foundation managers who do not correct their participation in a violation
d) Permanent removal of tax exempt status of the private foundation
e) Reclassification as a supporting organization
1/ Answer: E. Explanation: The default classification for all 501(c)3 nonprofit organizations is as a private foundation. Thus, the 501(c)3 organization need not meet any tests to be classified as a private foundation. It is only by meeting the tests for a public charity or supporting organization that the classification can be changed from the default presumption of a private foundation.
2/ Answer: E. Explanation: Each of the four options is an available method for a 501(c)3 organization to change its classification to a public charity instead of the default classification of a private foundation
3/ Answer: A. Explanation: An organization can be either a non-profit corporation or a charitable trust, but not both.
4/ Answer: True. Explanation: Nonprofit corporations generally have more flexibility than trusts in allowing for future changes in the focus and purposes of the organization.
5/ Answer: False. Explanation: Nonprofit corporations generally have more flexibility than trusts in allowing for future changes in the focus and purposes of the organization.
6/ Answer: True. Explanation: Trusts can be subject to a higher rate of taxation on Unrelated Business Income than a non-profit corporation
7/ Answer: True. Explanation: Corporations are the more common structure for regular operating entities.
8/ Answer: True. Explanation: If a trust conducts foreign operations, this eliminates the deductibility of contributions made to it by corporations.
9/ Answer: F. Explanation: Family controlled governance is not prohibited (and, in fact, is quite common).
10/ Answer: E. Explanation: Classification as a supporting organization is not an available penalty.