Frequently Asked Questions About Company Foundations and Corporate Giving

Welcome to Our 2006 Seminar Series: Frequently Asked Questions About Company Foundations and Corporate Giving May 23, 2006 1

Speakers: Victoria Bjorklund David Shevlin 2006 Simpson Thacher & Bartlett LLP. All Rights Reserved.

Introduction Vocabulary Corporate philanthropy program : includes both direct corporate giving and giving through company foundations Direct corporate giving : giving directly through the company Company foundation : a separate legal entity that is funded by the company Recent statistics on corporate philanthropy Statistics and trends 3

Introduction Issues to be discussed today: Giving through company foundations vs. direct corporate giving Decision-making considerations for a corporate philanthropy program Governing and funding a company foundation Self-dealing issues related to a company foundation Corporate sponsorship and commercial co-ventures Employer-related scholarship programs Emergency disaster relief programs Your questions 4

COMPANY FOUNDATION v. DIRECT CORPORATE GIVING 5

What are the Considerations of Company Foundations v. Direct Corporate Giving? COMPANY FOUNDATION Consistency: Even out giving, grow endowments tax-efficiently May limit liability Administrative efficiency: Guidelines and streamlined processes facilitate quick responses No lobbying DIRECT CORPORATE GIVING Fiscal flexibility: Free choice of when and how to make donations No liability limitation Administrative costs: Minimized staff and accounting costs, although foundations may minimize costs too May lobby 6

What are the Considerations of Company Foundations v. Direct Corporate Giving? COMPANY FOUNDATION Exposure to excise taxes including self-dealing Branding: Distinct identity International giving Employer-related Scholarships and Disaster Assistance Programs: Can be more tax-efficient if made DIRECT CORPORATE GIVING No excise tax exposure; pay company s pledges Corporate sponsorship: charities may acknowledge company s name, logos and product lines Enhanced inventory deductions (Senate 2020 Bill) through foundation 7

DECISION-MAKING CONSIDERATIONS FOR THE CORPORATE PHILANTHROPY PROGRAM 8

What are the Decision-Making Considerations for a Corporate Philanthropy Program? WHAT IS THE GOAL OF THE CORPORATE PHILANTHROPY PROGRAM? Focused giving Ensuring maximum impact of direct giving and foundation giving, while complying with all legal and regulatory requirements More than one model to achieve this goal See Tab A: Articles of Interest 9

What are the Decision-Making Considerations for a Corporate Philanthropy Program? HOW SHOULD MACRO DECISIONS REGARDING THE CORPORATE PHILANTHROPY PROGRAM BE MADE? A Committee of Board of Directors, or a Committee of the corporation sets coherent themes and areas of focus/interest Ensures global grant-making consistency for both the direct giving program and the company foundation 10

What are the Decision-Making Considerations for a Corporate Philanthropy Program? HOW INVOLVED SHOULD BOARDS OF DIRECTORS AND OFFICERS BE IN MAKING THE DAY-TO-DAY DECISIONS? Different companies have different policies regarding the extent of involvement One possible approach: Grants above $250,000 must be approved by a committee Grants between $100,000 and $250,000 can be approved by two officers and then ratified by a committee Grants below $100,000 can be delegated to the staff, and then ratified by a committee 11

What are the Decision-Making Considerations for a Corporate Philanthropy Program? HOW SHOULD DAY-TO-DAY DECISIONS BE MADE INTERNALLY AT THE MANAGEMENT OR STAFF LEVEL? Centralized decision-making Internal corporate affairs department makes all or most decisions, including whether grants should be made through foundation or through direct corporate giving De-centralized decision-making More practical when decisions impact or involve local communities, and more appropriate for local offices than central hub to make decisions Combination Decision-making is centralized, but local offices are also allocated budgets for local giving 12

What are the Decision-Making Considerations for a Corporate Philanthropy Program? In any case, company should consider establishing written grant procedures. For example: Areas of permissible grant-making Dollar thresholds / approval requirements E.g. discretionary buckets Record-keeping and reporting guidelines Standards for public acknowledgment: consistency of messaging and branding See Tab B: Stewardship Principles for Corporate Grantmakers 13

STRUCTURING THE GOVERNANCE OF A COMPANY FOUNDATION 14

How Should the Governance of the Company Foundation be Structured? A company foundation is a separate legal entity Must operate solely in furtherance of exempt purposes set forth in IRC 501(c)(3). For example: Charitable purposes Educational purposes Religious purposes Scientific purposes 15

How Should the Governance of the Company Foundation be Structured? WHAT IS THE GOAL WHEN STRUCTURING GOVERNANCE OF THE FOUNDATION? To integrate the corporation foundation with the overall corporate philanthropy program, while respecting the foundation s separate legal identity See Tab C: Making the Most of Corporate Foundation Boards: Strategies and Practices WHAT IS THE LEGAL FORM OF THE FOUNDATION? Typically a corporation See Tab D: Forming and Operating a Private Foundation 16

How Should the Governance of the Company Foundation be Structured? WHAT SHOULD THE SIZE OF THE BOARD BE? Minimum of three directors recommended by the Final Report of the Independent Sectors Panel on the Nonprofit Sector Appropriate size depends on various factors, including: Size of foundation Breadth of foundation s activities Classification under IRC 501(c)(3) A public charity might merit larger board 17

How Should the Governance of the Company Foundation be Structured? HOW SHOULD THE BOARD OF DIRECTORS BE ELECTED? There are various options, including: A self-perpetuating Board Two classes of directors, one elected by the company, and the other self-perpetuating Structuring the foundation as a membership corporation, and having the company as the sole member with the right to elect directors 18

How Should the Governance of the Company Foundation be Structured? The Board can include: Staff or management of the corporation Current or retired Independent members of the corporation s board Could impact status as independent Individuals with no connection to the corporation 19

How Should the Governance of the Company Foundation be Structured? What Has Been the Impact of Sarbanes-Oxley and the Stock Exchange Rules? Sarbanes-Oxley has prompted review of corporate governance in the nonprofit sector and changes in the policies and practices in place for effective oversight 20

How Should the Governance of the Company Foundation be Structured? New York Stock Exchange (Section 303A) A majority of the Board of Directors of a listed company must be independent directors Materiality. The board of directors must affirmatively determine that the director has no material relationship with the company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company) The Board must consider the materiality of charitable relationships (i.e. any relationship between a director and a beneficiary of the listed company s charitable contributions) 21

How Should the Governance of the Company Foundation be Structured? Listed companies must disclose in their annual proxy statements any charitable contributions made by the listed company to any charitable organization in which a director serves as an executive officer, where such contributions exceed the greater of $1 million or 2% of such charitable organization s consolidated gross revenues. 22

How Should the Governance of the Company Foundation be Structured? NASDAQ (Rules 4200(a)(15) and 4350(c)(1)) A majority of the Board of Directors of a listed company must be independent directors Interference with Independent Judgment. An independent director must not have any relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director Per Se Disqualification. A director is not independent if he serves as an executive officer of a charitable organization to which the company made, or from which the company received, payments that exceed 5% of the recipient s annual gross revenues, or $200,000, whichever is more 23

How Should the Governance of the Company Foundation be Structured? WHO IS AN INDEPENDENT DIRECTOR? In re Oracle Corp. In June 2003, the Delaware Chancery Court held that two directors who were Stanford professors may not qualify as independent for purposes of serving on a special litigation committee The Court looked to their significant social and institutional relationships with the defendantdirectors The Court focused on charitable contributions made by the defendant-directors to Stanford 24

How Should the Governance of the Company Foundation be Structured? New York Not-for-Profit Corporation Law A proposed bill submitted by the attorney general would generally require an audit committee The bill would prohibit members of the audit committee from: accepting any consulting, advisory, or other compensatory fee from the corporation; or having participated in any interested party transactions within the previous year 25

How Should the Governance of the Company Foundation be Structured? California s Nonprofit Integrity Act of 2004 Requires every charitable corporation registered with the attorney general and with gross revenues of $2 million or more to establish and maintain an audit committee which: may include persons who are not members of the board of directors (NY bill does not have this) may not include any members of the staff, including the president or CEO and the treasurer or CFO 26

How Should the Governance of the Company Foundation be Structured? SHOULD A COMPANY FOUNDATION HAVE DIRECTORS INDEPENDENT FROM THE COMPANY? Pros: Could help with potential conflicts of interest between the company and the foundation (e.g. resource sharing) Audit committee composition Cons: Consider impact on director s status as independent director of the company Control 27

28 FUNDING A COMPANY FOUNDATION

What are the Considerations for Funding a Company Foundation? Endowment Requires a large infusion But ensures consistent giving Funding from time to time Foundation and the company agree on an annual budget Impacts the ability to plan for a long-term philanthropic strategy Does not necessarily ensure consistent giving 29

What are the Considerations for Funding a Company Foundation? HOW CAN THE COMPANY FOUNDATION BE FUNDED? Cash Stock Options to buy the company s stock Alternatives to a company foundation: Donor-advised fund Pass-through foundation 30

31 SELF-DEALING ISSUES

What are the Most Common Areas of Self- Dealing Concerns? WHAT IS THE DEFINITION OF SELF-DEALING? Certain direct or indirect transactions with disqualified persons constitute self-dealing (IRC 4941) Penalty taxes may be imposed if there is selfdealing (IRC 4941(d)) Disqualified persons include directors or officers of, and substantial contributors to, the company foundation 32

What are the Most Common Areas of Self- Dealing Concerns? Examples of self-dealing between the foundation and a disqualified person: Any sale, exchange or leasing of property Lending of money or extension of credit Furnishing of goods, services, or facilities Payment of compensation or reimbursement of expenses by the foundation to the disqualified person Transfer or use of the assets or income of the foundation by the disqualified person, for that person s benefit Major exception: incidental and tenuous benefits received by the disqualified person 33

What are the Most Common Areas of Self- Dealing Concerns? Funding of a company foundation If foundation is funded with company stock, selling that stock back to the company constitutes self-dealing, except if Sale takes place pursuant to corporate reorganization; Terms of sale are the same as those offered to other holders of the same class of stock; and Foundation receives fair market value If foundation is funded with stock options, exercising those options requires careful analysis because there are potential self-dealing implications 34

What are the Most Common Areas of Self- Dealing Concerns? Foundation expenditures that benefit the company or its employees Charity event tickets, admission discounts, and similar benefits paid for by the company foundation which benefit the company s employees constitute self-dealing (Private Letter Ruling (PLR) 8449008) Even if payment is bifurcated and the cost of the ticket is partially paid for by the company, it is still selfdealing if the foundation s funds are used to permit the company s executives to attend events (PLR 9021066) Public recognition of the company generally is not selfdealing See Tab E: Who Gets the Credit? 35

What are the Most Common Areas of Self- Dealing Concerns? Recruiting from an education organization to which the foundation makes grants usually does not give rise to self-dealing if the company does not receive any preferential treatment or recruiting rights Revenue Ruling 80-310: grants made to an educational organization which the company sought to recruit from was consider to be for broad public benefit. Benefits received by company were only incidental and tenuous because they did not receive any preferential treatment in recruiting Matching gift programs do not give rise to selfdealing, as long as the foundation s contributions do not fulfill the company s pledges 36

What are the Most Common Areas of Self- Dealing Concerns? Resource-sharing, see Tab F: Roadmap Ruling (IRS PLR 9312022) Sharing facilities does not constitute self-dealing if the resources are provided free to the foundation Foundation may pay for rent or maintenance costs directly to third-party landlord Sharing is possible if there is proper allocation of time and costs, with proper documentation and record-keeping 37

SELECTED ISSUES: CORPORATE SPONSORSHIP AND COMMERCIAL CO-VENTURE ARRANGEMENTS 38

What are the Considerations for Corporate Sponsorship? Companies can make qualified sponsorship payments to charities without recognition by the charities of UBTI (IRC 513(i)) A qualified sponsorship payment is one made by a sponsor to an exempt organization, without expectation of any substantial return benefit A substantial return benefit is any benefit other than 39 CORPORATE SPONSORSHIPS The charity s use or acknowledgment of the name, logo or product lines of the company s trade or business Any goods or services with an insubstantial value which qualifies as disregarded benefits

What are the Considerations for Corporate Sponsorship? Bad advertisements may result in substantial return benefit if the advertising (taken alone or in aggregate with other benefits) has a fair market value exceeding 2% of the sponsorship payment. Examples of bad advertising: Broadcasting stop by today, stating when and where the products will be on sale Merely acknowledging the sponsor, for example by hanging banners, is not bad advertising See Tab G: Chart on Good and Bad Acknowledgements 40

What are the Considerations for Corporate Sponsorship? A qualified sponsorship payment will not result in unrelated business taxable income to the charity, but a bad advertisement with substantial return benefit probably will, if advertising is regularly carried on A qualified sponsorship may qualify as a business expense ( 162) or charitable ( 170) deduction 41

What are the Considerations for Commercial Co-Venture Agreements? State charitable solicitation statutes govern commercial co-venture arrangements : a for-profit business advertises that the purchase of goods, use of services, etc., will benefit a charitable organization Some states (currently 4) require commercial coventurers to register with the state attorney general s office. New York does NOT. New York requires the commercial co-venturer to enter into a contract with the charitable organization ( 172 of Executive Law) 42 COMMERCIAL CO-VENTURE AGREEMENTS The obligation is on the commercial co-venturer (See Tab K: New York Times Article)

What are the Considerations for Commercial Co-Venture Agreements? The commercial co-venturer must file an accounting with the charity within 90 days of the end of the promotion Charities must include information regarding their commercial co-venture arrangements with their annual filings with the attorney general s office This includes affirmation that accounting was received 174-c of Executive Law requires that any advertising set forth the portion of the sales prices which the charitable organization will receive 43 However, First Amendment issues have limited the enforcement of this provision

EMPLOYER-RELATED SCHOLARSHIP PROGRAMS 44

What are the Considerations for Running an Employer-Sponsored Scholarship Program? General Rule: IRC 4945 imposes a taxable expenditure excise tax penalty on grants to individuals for travel, study or similar purposes If a company foundation expects to make scholarship grants to company employees and/or their family members (also applies to prizes), then the foundation must obtain IRS pre-approval of grant-making procedures Pre-approval is not necessary if the foundation makes grants to another charitable organization who administers the program and chooses recipients from among employees 45

What are the Considerations for Running an Employer-Sponsored Scholarship Program? Significant concern: are the scholarships being used as an inducement to employment or as compensation? If so, then the scholarship is not excludable from gross income under IRC 117(a) Revenue Procedure 76-47 sets forth guidelines for private foundations with employer-related scholarship programs The group of employees, or children of employees, eligible for a scholarship must be sufficiently broad 46

What are the Considerations for Running an Employer-Sponsored Scholarship Program? Seven requirements: No inducement Independent Selection Committee Minimum Eligibility Requirements Objective Basis of Selection Non-employment criteria Course of study must not be employerfocused Catch-All 47

What are the Considerations for Running an Employer-Sponsored Scholarship Program? Alternative: Percentage Test or Facts and Circumstances Test Purpose of the percentage test is to limit the number of eligible employees who receive scholarships in any given year If the percentage test is not met, then the IRS will consider the facts and circumstances to determine whether the primary purpose of the program is charitable: history of the program, course of study, publicity, independence of the program, numeric factors 48

EMERGENCY DISASTER RELIEF PROGRAMS 49

What are the Considerations for Providing Disaster-Assistance to Employees? Pre 9/11 IRS revoked a favorable ruling that had allowed corporate foundations to provide disaster assistance to the corporation s employees Post 9/11 IRS liberalized rules regarding disaster assistance payments. See Tab H: IRS Publication 3833 Company foundations may make qualified disaster payments to employees (or family members) if: the class of beneficiaries is large and indefinite recipients are selected based on objective determination of need selection is made using independent committee or those in position not to exercise substantial influence over the affairs of the employer 50

What are the Considerations for Providing Disaster-Assistance to Employees? If these requirements are met, then the payments: are treated as made for a charitable purpose do not result in self-dealing do not result in taxable compensation to the employee Could still be self-dealing if payments are made to officers, directors or employees or members of the selection committee 51

What are the Considerations for Providing Disaster-Assistance to Employees? Proper documentation is critical: Complete description of the assistance Purpose for which the aid was given Charity s objective criteria for disbursing the aid How recipients were selected Name, address and amount distributed to each recipient Any relationship between a recipient and officers, directors, employees of the corporation See Tab I: Disaster Relief by Employer-Controlled Charities, and Tab J: Hurricane Katrina: The Council s Corporate Members Disaster Relief Efforts 52

Questions YOUR QUESTIONS? 53

NEW YORK LOS ANGELES PALO ALTO WASHINGTON, D.C. HONG KONG LONDON TOKYO 54