A private foundation is a charitable trust or nonprofit corporation which must be organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. The foundation’s charitable purpose may be as broad or as specific as the founder wishes. Generally, the foundation will fund the charitable activities of other organizations through a program of annual grants. However, in some cases, the foundation may engage in charitable activities directly, thus qualifying for special tax treatment as a private operating foundation.

For many families, establishing a private foundation offers a number of significant advantages which cannot be realized by the more common method of making irrevocable gifts to charitable organizations that control how contributions will be utilized. However, in exchange for these benefits, foundations must strictly adhere to a variety of rules and requirements. Although these rules do not pose serious problems for most donors, it is important that you be aware of them. As we work with you to establish your foundation, we want to ensure that you have an understanding of the advantages of private foundations, the rules that affect them and the key aspects of creating and operating a foundation.

I. ADVANTAGES OF CHARITABLE GIVING THROUGH PRIVATE FOUNDATIONS.

A. Structure and Control.

Unlike many other charitable vehicles, establishing a private foundation permits you to exercise substantial control over your foundation’s activities. For example, you can appoint and control the board of directors, thereby developing and implementing a systematic plan for charitable giving by targeting specific areas of personal interest. In addition, you should prepare a succession plan to govern your foundation’s future charitable activities by establishing an appointment and removal process for both family and non-family board members.

B. Family Involvement.

You may choose to appoint family members, such as children and/or grandchildren, to your foundation’s board. As a result, the foundation provides an excellent opportunity for your family to be involved in the operations and oversight of the foundation’s activities. In addition, continuity of management can be ensured by involving younger family members in your foundation’s activities and by cultivating their desire to support its charitable goals. Greater family support will likely increase the number and amount of family contributions which consolidates and enhances the effectiveness of your foundation’s charitable activities. Lastly, the family members may also appreciate the prestige and community recognition that often comes with the establishment of a foundation.

C. Flexibility.

A private foundation allows for enormous flexibility and creativity in determining how to carry out its charitable mission. By making a series of annual grants, rather than a one-time lump-sum donation, your foundation will have the flexibility to change the focus of its charitable giving as your interests change. As the family’s charitable interests evolve and the charitable recipients’ needs and effectiveness change, the foundation’s grant-making program can be (and should be) adjusted accordingly.

D. Optimization of Charitable Effect.

Foundation contributions are used to establish an endowment which can grow in a tax-protected environment allowing for greater investment returns. Because the endowment continues to grow over time, the amount of charitable donations will far exceed what would have been possible had a one-time lump-sum donation been made.

E. Determination of Appropriate Grant Recipients.

Through its grant-making program, your foundation will request grant proposals from applicants who are required to provide detailed information about their programs and their management. A proper evaluation of these proposals will permit your foundation to allocate its charitable funds in an efficient and productive manner. As an added benefit of this process, family members are able to take an active and rewarding role in the management of the foundation’s grant-making program.

F. Managing Charitable Solicitations.

Upon the occurrence of a publicized liquidity event, such as the sale of your company, you may be besieged by solicitations for charity. Creating a private foundation enables your family to refer such solicitations to your foundation. The foundation can then systematically review and evaluate the solicitations.

II. CREATING A PRIVATE FOUNDATION.

A. Formation.

Your family foundation will be established as a corporation. To incorporate, we must file articles (or a certificate) of incorporation with the state. In addition, there may also be requirements to maintain and comply with state law.

B. Jurisdiction.

The state your foundation will be established in is another important consideration. Many foundations are established in Delaware because it has accumulated a long and favorable history in the fields of trust and corporate law. Its corporate laws allow you more flexibility in crafting important operational procedures, such as the appointment and removal of board members. In addition, different states’ laws may provide different limitations on liability for board members, volunteers, and third parties and should be considered when selecting your foundation’s jurisdiction.

C. Appointing a Board.

The initial board members are named in the Articles of Incorporation. However, they may be changed after the foundation is incorporated and bylaws are adopted. The foundation’s by-laws will provide a road map for the board’s responsibilities, structure, appointment and removal process, meeting requirements, and other important functions.

Generally, the board will include family members. It may also include trusted advisors (such as the family attorney), and/or outside directors who can provide expertise and perspective, and can help ensure compliance with foundation restrictions. It is advisable to appoint board members with overlapping terms, so the foundation will benefit from experience and will have some continuity in its operations.

D. Liability.

Three major liability concerns exist in operating a foundation. First, there is the personal liability of creators and board members. Second, there is the liability of foundation assets. Third, there are liability concerns as to individuals working for the foundation, whether as staff or volunteers.

It is important for you to recognize that the public has the right to sue the foundation based on an act, or failure to act, and it is possible for things to go awry. For example, if a program funded by or an entity associated with the foundation is responsible for the death or injury of a participant or employee, there may be liability.

A number of insurance policies can provide liability protection. For example, worker’s compensation, property, casualty, general liability, directors and officers’ liability, board members’ liability are all important insurance products for a foundation to consider.

State law may provide limitations on liability for board members, volunteers, and third parties. However, the best way for board members to protect themselves from general liability is to self-police the foundation’s activity. You should institute policies and procedures that create a process for reaching informed decisions on important matters, such as grant distribution, acceptance of gifts, and any distribution of funds. Each board member should maintain an active presence in the foundation, stay involved and abreast of decisions, and hire professional assistance when necessary.

We will send you under separate cover the memorandum regarding the selection of the foundation’s initial board members, as well as draft bylaws. Please note that the board members named in the Articles of Incorporation are named for the purpose of creating your foundation and may be changed.

III. APPLYING FOR TAX-EXEMPT STATUS.

A. Why Apply for Tax-Exempt Status?

Private foundations that have 501(c)(3) status are exempt from federal income tax and are eligible to receive tax-deductible charitable contributions. To qualify for these benefits, foundations must file a Form 1023 application with the IRS. Individual and corporate donors are more likely to support organizations with 501(c)(3) status because their donations are tax deductible.

B. Who is Eligible for Tax-Exempt Status?

An organization may qualify for federal tax exemption if it is organized and operated exclusively for one or more of the following purposes (called “exempt purposes”):

• Charitable.
• Religious.
• Educational.
• Scientific.
• Literary.
• Testing for public safety.
• Fostering national or international amateur sports competition.
• The prevention of cruelty to children or animals.

C. Initial Steps Before Filing Application.

The foundation must complete two steps before filing Form 1023. First, the foundation must obtain an employer identification number (EIN), which is a nine digit federal tax number issued by the IRS to identify a business entity. We will obtain an EIN for your foundation. Next, the foundation must file Articles of Incorporation with the state in which it is formed. We will complete articles of incorporation for your foundation and file the articles with the appropriate state agency. [In Virginia, articles of incorporation must be filed with the Virginia State Corporations Commission. A $75 filing fee is required.] [In Maryland, articles of incorporation must be filed with the Maryland State Department of Assessments and Taxation. A $120 filing fee is required.] [In the District of Columbia, articles of incorporation must be filed with the District of Columbia Department of Consumer and Regulatory Affairs. A $80 filing fee is required.] [In Delaware, articles of incorporation must be filed with the Delaware Division of Corporations. A filing fee of $89 is required, plus $9 for each additional page if the articles are more than one page.]

In order to obtain tax exempt status, the Articles must contain two key provisions. First, they must limit the organization’s purposes to a qualified exempt purpose (e.g., charitable, literary, educational, scientific, etc.) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further that exempt purpose. This organization test may be met if the purposes stated in the articles are limited in some way by reference to section 501(c)(3). Second, the Articles must ensure that the foundation’s assets will be permanently dedicated to an exempt purpose. This means that should your foundation dissolve, its assets must be distributed for an exempt purpose. If the assets could be distributed to foundation members, private individuals or for any other purpose, then this organizational test is not met.

D. Application Procedures/Requirements.

As we work with you to complete your foundation’s Form 1023 and accompanying statements, please keep in mind that Form 1023 must show that all of the following are true:

• The foundation is organized and operated exclusively for charitable purposes.
• No part of the foundation’s net earnings will inure to the benefit of private shareholders or individuals.
• The foundation will not be organized or operated for the benefit of a private interest.
• The foundation will not, as a substantial part of its activities, attempt to influence legislation or participate to any extent in a political campaign for or against any candidate for public office.

In addition, the application must include a conformed copy (i.e., a copy that agrees with the original and all amendments to it) of the foundation’s Articles of Incorporation (and the Certificate of Incorporation, if available).

If your foundation does not have articles of incorporation or other organizing document or it fails to meet the two provisions described above, it will not qualify for exempt status. Bylaws alone are not organizing documents. However, if your foundation has adopted bylaws, it should include a current copy.

The application must also include a full description of the foundation’s purposes and activities. When describing the organization’s expected activities, the standards, criteria, procedures, or other means the foundation adopted or planned for carrying out those activities must be included.

Existing foundations are required to provide financial statements showing receipts and expenditures for the current year and the 3 preceding years (or for the number of years the organization was in existence, if less than 4 years). The sources of receipts and the nature of expenditures must be described. A balance sheet for the current year must also be included. For foundations that have not yet begun operations, or have operated for less than 1 year, a proposed budget for 2 full accounting periods and a statement of assets and liabilities will be acceptable.

If the foundation’s average annual gross receipts have exceeded or will exceed $10,000 annually over a 4-year period, a $750 user fee must be submitted with your application. If gross receipts have not exceeded or will not exceed $10,000 annually over a 4-year period, the required user fee payment is $300.

E. How Long Does it Take for the IRS to Classify a Foundation as a Section 501(c)(3) Organization?

If the IRS concludes from your application that your foundation meets the requirements for tax-exempt status, it will issue a determination letter. The determination letter certifies that your foundation is exempt from tax under Section 501(c)(3) and is considered a private foundation. Obtaining a formal IRS determination letter can take as long as 6 months from the date of filing the tax exemption application (in some cases, even longer) because the IRS has a substantial backlog of applications.

F. When is the IRS Determination Letter Effective?

A ruling or determination letter recognizing exemption is usually effective as of the date of formation of an organization (i.e., when the Articles of Incorporation are filed) if, during the period before the date of the ruling or determination letter, its purposes and activities were those required by law (i.e., organized and operated exclusively for charitable purposes). Upon receiving IRS recognition for exemption, the foundation may file a claim for refund of income taxes paid for the period prior to which its exempt status is recognized.

G. What if the IRS Does Not Issue a Determination Letter?

The IRS may refuse to issue a determination letter (called an “adverse determination”) if your foundation is unable to describe fully its purposes and activities or if your foundation does not meet the requirement for exempt status. Your foundation may appeal the adverse determination within 30 days from the date of the adverse determination letter. The appeals process is quite complex and it is recommended that the foundation consult with legal counsel before filing an appeal.

IV. RULES APPLICABLE TO PRIVATE FOUNDATIONS.

A. Limitations on Charitable Income Tax Deduction.

Donors receive an immediate deduction for the fair market value of their gift to a private foundation, subject to certain percentage ceilings. For example, a cash gift to a public charity is deductible for income tax purposes up to 50 percent of the donor’s adjusted gross income (“AGI”), while a cash gift to a private foundation is deductible up to 30 percent of AGI. Similarly, the income tax deduction for lifetime gifts of appreciated property to a public charity are generally subject to a 30 percent limitation, while identical gifts to a private foundation are subject to a 20 percent limitation. In the case of testamentary gifts, however, an unlimited charitable deduction is available for estate tax purposes regardless of whether the recipient is a public charity or a private foundation.

B. Unrelated Business Taxable Income.

Although foundations are exempt from federal income taxes in general, an otherwise tax-exempt organization may have “unrelated business taxable income.” Usually, unrelated business taxable income will arise from (i) investments as either a sole proprietorship or a partnership that is engaged in an active trade or business (as opposed to merely receiving passive investment income); (ii) income passing from ownership of stock in an S corporation; or (iii) income related to property either acquired with borrowed money or received subject to indebtedness.Receipt of unrelated business taxable income will not necessarily jeopardize the foundation’s tax-exempt status. However, if revenues or expenses in connection with an unrelated trade or business reach significant levels (we generally apply a 10 percent threshold), the organization’s exempt status may be threatened.

Trade or business income arising from an exempt activity will not create unrelated business taxable income. For example, tuition for a school or revenues earned from training programs for persons with disabilities by an organization engaged in such training may not constitute unrelated business taxable income. If your foundation has unrelated business taxable income, it will be required to file additional federal and state income tax returns and to pay tax as a corporation on such amounts.

C. Federal Foundation Excise Taxes.

As a “private foundation,” the foundation will be subject to certain general rules which are enforced through the imposition of excise taxes. In general, the first excise tax described below, on net investment income, applies to all private foundations that earn “net investment income” and cannot be avoided. The remaining excise taxes discussed below are in the nature of penalties designed either to encourage or to prohibit certain types of activities or transactions by the foundation.

1. Net Investment Income.

The foundation will be subject to a 2 percent tax (1 percent under certain circumstances)P0F1P of its net investment income for each tax year. The foundation’s net investment income includes interest,dividends, rents, payments with respect to securities loans, and royalties, UlessU the expenses attributable to such income (e.g., investment advisor fees). Net investment income also includes gains and losses from the sale or other disposition of property, such as stock or bonds, used for the production of interest, dividends, rents or royalties.

If the tax on net investment income will exceed $500 for a tax year, the foundation may be liable for quarterly payment of estimated taxes. Please note that it will take a substantial amount of net investment income to generate any estimated tax liability. Assuming a 10 percent net return on its investments, a foundation would need to have over $250,000 of investment assets to trigger liability for quarterly estimated tax payments ($250,000 X .10 X .02 = $500).

2. Minimum Distribution Requirement.

Every year, the foundation will be required to distribute 5 percent of the average fair market value of its non-charitable assets for charitable purposes.P1F2P The amount to be distributed with respect to a particular tax year (i.e., the “distributable amount”) must be dispersed before the close of the succeeding tax year. For example, if the foundation’s assets were valued at $1 million in 2017, it must distribute $50,000 ($1,000,000 X .05) by the end of 2018. The foundation can contribute an amount in excess of the distributable amount. Any excess contributions will be credited against the distributable amount for the next year.

The distributable amount may, of course, vary each year. We recommend that, when the foundation’s Form 990-PF is prepared for the prior fiscal tax year, you receive written verification from your accountant of the distributable amount which must be dispersed by the next December 31st. If the foundation fails to distribute the entire distributable amount in a timely fashion, it may be subject to a 30 percent excise tax on the amount not distributed and, potentially, a 100 percent tax on the amount not distributed (if not distributed during the “correction period”). In some cases (for “special projects”), it may be possible to delay distribution of the 5 percent distributable amount if the foundation can show that the failure to distribute was due to reasonable cause and not a result of willful neglect. To do so, it must distribute within the correction period cash or its equivalent in an amount not less that the difference between the 5 percent distributable amount for the tax year and the amount actually distributed during that tax year. For purposes of meeting the cash distribution test, the additional distribution is treated as though it was made in the year in which it originally should have been made. To the extent earnings are not required to be distributed, they may be accumulated as part of the foundation’s corpus.

In most circumstances, grants to public charities qualify as distributions that meet the 5 percent requirement. However, the foundation must verify that the donee has been granted public charity status by the Internal Revenue Service (“IRS”). The easiest way to do this is to receive a copy of the donee’s IRS determination letter stating that the prospective donee is not a private foundation. The foundation’s process for selecting appropriate recipients should include steps to document and verify that any distributions to a potential grantee are “qualified.”

3. Self-Dealing.

The rule against self-dealing was implemented to curb perceived abuses of the special tax benefits accorded a private foundation by persons or entities who have close relationships with the foundation as a result of their positions of authority or their financial relationship with the foundation. Such individuals or entities are known as “disqualified persons.” A foundation is severely restricted in its ability to transact business with “disqualified persons.”

a. Disqualified Persons.

In order to avoid prohibited forms of self-dealing, foundations must determine whether any parties to the transaction are disqualified persons. Generally, a disqualified person will include all officers and directors of the foundation, as well as “substantial contributors.” A person or entity is considered to be a substantial contributor if it contributes more than $5,000 (if that amount exceeds 2 percent of the foundation’s cumulative contributions), or if the person or entity owns more than 20 percent of a business or trust which is a substantial contributor. For stock owners who exceed the 20 percent threshold, certain family members of major shareholders (spouses, ancestors, linear descendants and spouses of those descendants) would also be disqualified persons. Additionally, rules of attribution apply, so ownership holdings within the family will be combined to determine if the threshold level is met. Also, any corporation of which more than 35 percent of the total combined voting power is owned by a substantial contributor, a foundation manager, a major shareholder of a substantial contributor, or certain family members will be a disqualified person. If a person or entity is or becomes a disqualified person, it will remain a disqualified person for at least ten years, even if it ceases to make any further contributions.

b. Self-Dealing Transactions.

The following transactions are generally considered acts of self-dealing between a private foundation and a disqualified person:

• Sales, leases and exchanges of property;
• Loans and other extensions of credit;
• Furnishing of goods, services or facilities (to the foundation by disqualified persons or to disqualified persons by the foundation);
• Payment of compensation and reimbursement of expenses (other than for personal services that are reasonable and necessary to carry out the exempt purposes of the foundation);
• Transfer or use of the income or assets of the foundation by a disqualified person; and
• Certain agreements to make payments of money or property to government officials.

In addition, indirect self-dealing in which persons or entities related to disqualified persons engage in transactions that may also affect the foundation are also prohibited. Alternatively, the general rule is that where a disqualified person receives an incidental or tenuous benefit from the use by the foundation of its income or assets, the use is not considered self-dealing. For example, where a disqualified person contributes real estate to the foundation for the purpose of building a recreation center on the condition that the center be named after the contributor, the transaction does not constitute self-dealing.

c. Taxes and Penalties for Self-Dealing.

Any foundation officer or director and any disqualified person who willingly participate in self-dealing are subject to severe penalties and fines for acts of self-dealing. Initially, the disqualified person involved is subject to a 10 percent excise tax. In addition, the foundation director may be subject to a 5 percent tax if he or she knowingly participated in an act of self-dealing, unless participation is not willful and is due to reasonable cause. If the transaction is not corrected or rescinded, (which can be difficult to do and may inadvertently involve additional self-dealing) a second tax is imposed on the disqualified person of up to 200 percent. Further, the foundation director may be subject to a 50 percent tax of the amount involved if he or she does not agree to correct the transaction.

The maximum initial tax imposed on the foundation director is $20,000 and the maximum additional tax is $20,000 for any one act. There is no maximum on the tax liability of the self-dealer, including one who is a foundation director. If more than one person is liable for the initial and additional taxes imposed for any act of self-dealing, all parties will be jointly and severally liable for those taxes.Because the self-dealing rules are complex and the penalties severe, your foundation should keep a list of all entities and individuals who are disqualified persons in relation to the foundation. Any transactions of any kind involving these persons must be carefully reviewed prior to engaging in them.

4. Excess Business Holdings.

Foundations are prohibited from retaining certain excess business holdings (generally, any interest in a corporation, partnership or other business entity which, when aggregated with the interests of “disqualified persons,” exceeds 20 percent of the interests in such entity). A private foundation that has excess business holdings in a business enterprise may become liable for an excise tax of 10 percent of the value of the excess holdings. This tax may increase to 200 percent if the excess holdings are not disposed of by the end of the taxable period.

5. Jeopardy Investments.

Foundation managers must not invest assets in a manner that jeopardizes the foundation’s exempt purposes, such investments are referred to as “jeopardy investments.” Generally, jeopardy investments are investments that show a lack of reasonable business care and prudence in providing for the foundation’s financial needs thereby risking the foundation’s ability to carry out its exempt purposes. The initial penalty is 10 percent of the jeopardy investment, and this amount can increase if the investment is not timely removed from jeopardy status.

No single factor determines what may be classified as a jeopardy investment. A “prudent trustee” standard applies in determining whether the foundation has made a jeopardy investment. For example, investing in federally insured certificates of deposit, AAA-rated bonds, and blue-chip stocks, will ordinarily satisfy the prudent trustee standard. In contrast, trading commodity futures or writing naked stock option puts or calls, which could result in immediate and substantial portfolio losses, will be subject to “close scrutiny” and may be found to constitute a jeopardy investment. No investment is, however, specifically designated a jeopardy investment.

Please be advised that risky investments acquired by gift or inheritance are not considered jeopardy investments. However, private foundations are wise to consider disposing of any excessively risky investment within a reasonable time after receipt. In order to reduce the foundation’s risk of incurring an excise tax for jeopardy investments, its investment portfolio should be diversified, any leverage used in the purchase of foundation investments should be carefully scrutinized, and situations where the foundation and any disqualified person purchase large blocks of the same security should be avoided.

6. Taxable Expenditures.

The “taxable expenditure” rules prohibit foundations from engaging in the following types of activities unless approved in advance by the IRS as part of the foundation’s exempt purposes:

• Participation in political and legislative matters (Ui.e.U, lobbying);
• Certain grants to individuals for travel, study, or scholarships without prior IRS approval of the grant procedures;
• Grants to organizations other than public charities or private operating foundations unless the grantor exercises “expenditure responsibility” (explained briefly below); and
• Grants for non-charitable purposes.

The rules governing taxable expenditures are technical and complex. Because of their complexity, many private foundations prefer to restrict their grants to public charities in order to avoid these rules. In general, a 20 percent tax can be imposed on a private foundation if it engages in a prohibited taxable expenditure. An additional tax of 100 percent of the amount expended is imposed if the expenditure is not corrected with the taxable period.

If a grant is made to an organization that is not a public charity or private operating foundation, the foundation must exercise expenditure responsibility. The expenditure responsibility rules require a private foundation to “exert all reasonable efforts” and to “establish adequate procedures” to see that any grant paid to an organization (other than a public charity or private operating foundation) is spent solely for the purposes for which it was made; to obtain full and complete reports from the grantee concerning how the funds are spent; and to make full and detailed reports with respect to such expenditures to the IRS. More specifically:

• The grantor private foundation should conduct a pre-grant inquiry;
• Each grant must be made subject to a written agreement between the grantor private foundation and grantee that specifically addresses certain requirements in the regulations;
• The grantor private foundation must obtain annual reports and a final written report from the grantee organization concerning how the grant was spent;
• The grantor private foundation must provide information concerning such grants on its annual information return; and
• In the case of grantees which are not the equivalent of U.S. private foundations, require the grantee to maintain the grant funds in a separate account dedicated to one or more charitable purposes.

Strict compliance with the expenditure responsibility requirements is crucial to avoid imposition of tax on grant amounts. Note that amounts paid subject to the expenditure responsibility requirements are not credited toward the minimum distribution requirement.

V. OPERATING A PRIVATE FOUNDATION.

A. Solicitation Rules and Contribution Reporting.

Private foundations usually derive funds from a single source, such as an individual, family, or corporation. A private foundation does not generally solicit funds from the public. However, please be aware that public solicitation of funds will likely require registration with the relevant states where the foundation plans to solicit.

The foundation must report certain information to its donors. For example, any donor contribution in excess of $250 must be evidenced by a written receipt in order for the contributor to claim a tax deduction for the contribution. In addition, if the foundation provides goods or services to donors who contribute more than $75, they must be provided a written acknowledgement.

Prior to obtaining recognition as a tax-exempt entity, foundations should exercise great care when encouraging contributions in exchange for a charitable deduction. Individuals who have established private foundations should seek legal advice regarding compliance with proper reporting, substantiation and documentation requirements anytime they wish to have other individuals or corporations contribute to their foundation.

B. Political Activity and Lobbying.

As a Section 501(c)(3) organization, your foundation will be prohibited from engaging in any political activity. Any actions that suggest support for a candidate for public office may result in the loss of tax-exempt status. In recent years, the IRS has applied this rule strictly (e.g., publication or distribution of statements may be deemed to be prohibited intervention in a campaign). The IRS will impose an excise tax on any foundation expenditure for any political activity.

C. Annual Reporting Requirements.

The foundation will be required to file an annual informational tax return (i.e., Form 990-PF) with the IRS. It may be liable for quarterly payment of estimated taxes if the tax on its net investment income will exceed $500 for a tax year.

D. International Grant-Making.

One of the best ways to limit exposure in the international grant-making area is to have your foundation contribute its funds either to “friends of” charities or to U.S. charities operating abroad. “Friends of” organizations are U.S. based charities that support non-U.S. organizations, which means that the U.S. charity will be responsible for all controls and safeguards.

Short of using the approach described above, your foundation must be assured that its funds are being used for appropriate charitable purposes. The key principle of international philanthropy is “know your grantee.”

In the aftermath of September 11, 2001, certain practices should be implemented to ensure that grants are not diverted to support terrorism or other non-charitable activities, because U.S. charities and their international activities are affected by the USA Patriot Act (the “Act”) and Executive Order 13224 (the “Order”). The two primary post-9/11 changes are the addition of a list-checking function to the normal pre-grant due diligence inquiry, and the adoption of more stringent grant agreement language. When the foundation becomes aware of its legal obligation to avoid transactions with persons or organizations identified, the foundation should comply with the rules by adding the list checking step to their grant-making procedures. Many foreign government agencies and vendors maintain such lists, although the lists are not always accurate.

VI. CONCLUSION.

This memorandum is intended only to be a brief explanation of the advantages of the private foundation and the key aspects of creating and operating a foundation. We recommend that you retain this memorandum with your foundation’s files.

As discussed above, the first step in establishing your foundation is to incorporate by filing Articles of Incorporation. Draft Articles are enclosed for your review. After your foundation is incorporated, we will prepare by-laws and discuss, in greater detail, the selection of the foundation’s board of directors.