Statement of Stewart Mott Foundation

On behalf of the Charles Stewart Mott Foundation, these comments are submitted in response to the Advisory from the Committee on Ways and Means Subcommittee on Oversight, dated June 12, 2007, requesting comments from the public on the provisions relating to tax-exempt organizations contained in the Pension Protection Act of 2006 (PPA) (P.L. 109-280).  We wish to comment on one provision of the PPA that affects the Charles Stewart Mott Foundation directly:  the provision amending sections 4942(g) and 4945(d)(4)(A) of the Internal Revenue Code, restricting grants to supporting organizations by private foundations.

The Charles Stewart Mott Foundation is a private grant making foundation established in 1926 in Flint, Michigan.  The Foundation’s mission is “to support efforts that promote a just, equitable and sustainable society.”  The Foundation’s grant making activity is organized into four major programs:  Civil Society, Environment, Flint area and Pathways Out of Poverty.  Other grant making opportunities, which do not match the major programs, are investigated through the Foundation’s Exploratory and Special Projects program.  In 2006, the Foundation’s grant actions totaled 545, and total grant payments were $122 million.  The Foundation has assets in excess of $2.5 billion.

The PPA requires private foundations to exercise expenditure responsibility when making grants to Type III supporting organizations that are not functionally integrated.  It also prohibits private foundations from counting such grants toward their annual minimum distribution requirement.  Unfortunately, prior to the enactment of the PPA, the Internal Revenue Service (IRS) had never classified supporting organizations by type.  The IRS also did not make determinations with respect to whether Type III supporting organizations are or are not functionally integrated.  Private foundations are generally permitted to rely on IRS Publication 78 in determining when a grant requires the exercise of expenditure responsibility under section 4945 because the grantee is not a public charity.  However, the IRS did not publish information about whether an organization’s public charity status was based on section 509(a)(1), section 509(a)(2), or section 509(a)(3) in Publication 78, so the Publication is not helpful to a foundation seeking to comply with this provision of the PPA.

The IRS Business Master File (BMF) is also available to download directly from the IRS Web site.  Alternatively, on March 27, 2007, in the 2007-8 issue of EO Update, the IRS provided that a grantor may use a third party to obtain the BMF information.  In this circumstance, the third party must provide the grantor the BMF information in a report that includes:  (i) the grantee’s name, Employer Identification Number, and public charity status under section 509(a)(1), (2), or (3); (ii) a statement that the information is from the most currently available IRS monthly update to the BMF, along with the IRS BMF revision date; and (iii) the date and time of the grantor’s research.  The report must also be in a form which the grantor can store in hard copy or electronically.  GuideStar’s[1] Charity Check subscription service includes IRS Publication 78 information and has recently been enhanced to include information from the IRS BMF.

However, this information is still incomplete.  The BMF includes the Code section under which an organization was classified as a public charity [that is, section 509(a)(1), (2), or (3)], but does not include the type of supporting organization or whether it is functionally integrated.  As a result, a private foundation cannot rely on even this more detailed information when making a grant to a supporting organization.

In recognition of the difficulties faced by foundations when making grants to supporting organizations after passage of the PPA, the IRS issued interim guidance in Notice 2006-109, Section 3.01.  The guidance in the Notice, while helpful in the absence of legislation correcting the problems created by this provision of the PPA, requires a foundation to follow a cumbersome process to determine whether a grantee is a Type I, Type II, or functionally integrated Type III supporting organization.  This process requires a grantor to collect and review specified documents and a written representation signed by an officer, director, or trustee of a supporting organization grantee and to make its own determination, acting in good faith, as to the status of the grantee.  (As an alternative, a grantor may rely on a reasoned written opinion of counsel of either the grantor or the grantee concluding that the grantee is a Type I, Type II, or functionally integrated Type III supporting organization.)  

We have found that the collection and review of the specified documents, including copies of governing documents of the grantee and, if relevant, of the supported organization(s), is a time-consuming and burdensome process for both the grantor and grantee.  Even for a larger foundation like the Charles Stewart Mott Foundation, which has the resources to try to follow the guidance in the Notice, the process increases substantially the cost of making a grant to a supporting organization and the time required to process the grant.  It also means that many smaller grants (including grants under matching gift programs) are cost-prohibitive and simply will not be made.  And it means that many smaller foundations, without the resources to apply the guidance in the Notice, may just stop making grants to supporting organizations.

Other commenters have reached similar conclusions.  On June 4, 2007, the American Bar Association Section of Taxation submitted comments to the IRS on Notice 2006-109.  As the Section notes on p. 59 of its comments:

“While the procedures of Notice 2006-109 are helpful in that they set out safe harbors, the procedures are often impractical, time-consuming and expensive.  The result is that many donors will simply forego making contributions to [supporting organizations].

In its comments, the Section makes a number of recommendations to address the problems posed by this section of the PPA.  In all, the Section’s recommendations and discussion on this provision of the PPA run to over six single-spaced pages.  Key to the recommendations is the proposal that the IRS expand its existing determination letter program to further classify supporting organizations as Type I, II, or III (and whether a Type III is functionally-related) and that the IRS embark on a program to so reclassify all existing supporting organizations.  We wonder whether an already overburdened IRS can even consider such a proposal.  Indeed, the extent and nature of the Section’s comments suggest to us that the problems posed by the provision cannot be fixed administratively.

We acknowledge there have been instances in which individuals have misused supporting organizations for their personal benefit.  We also believe that many of the changes made by the PPA effectively address these abuses.  However, we think the changes made by the provision we are discussing here go too far.  They may have some corrective effect on the abuses noted by Congress (although we believe those abuses are adequately addressed elsewhere in the PPA).  But they impede legitimate, routine grant making by private foundations to supporting organizations to such an extent that whatever corrective effect they have is far outweighed by the restrictions they impose on foundation philanthropy.

For that reason, we recommend that Congress repeal this provision of the PPA.  If repeal is not possible, we join in the call from Steve Gunderson, President and CEO of the Council on Foundations, in testimony before the Subcommittee on July 24, that Congress temporarily suspend the penalties for making grants to certain supporting organizations until the IRS can reliably identify those organizations.

We appreciate the Committee’s attention to this important issue, and we thank you for the opportunity to provide these comments.

Respectfully submitted,

Phillip H. Peters

Group Vice President-Administration and Secretary/Treasurer

^[1] GuideStar is the operating name and registered trademark of Philanthropic Research, Inc., a 501(c)(3) public charity.  GuideStar is a third party database of information on all IRS-recognized 501(c)(3) nonprofit organizations eligible to receive tax-deductible contributions.