Dan Weil
08/01/06
Barbara and Al Siemer, of Columbus, Ohio, launched a family foundation two decades ago with only $170,000. Five years after forming the nonprofit, they converted their traditional Siemer Family Foundation into a supporting organization for a local community charity. Today, thanks to the benefits and incentives inherent in this type of nonprofit structure, their family foundation boasts a $10 million endowment.
Barbara Siemer says the idea of setting up an organization to support the local Columbus Foundation appealed to her primarily because working with an established community charity gave the family access to the research, administrative assistance and publicity that are important components of a sophisticated giving plan. "It becomes more public doing it through the Columbus Foundation, and that can make it more of an inspiration for others to give," she explains. "Before, it was just me and my checkbook."The tax advantages of a supporting organization also proved valuable. Most of the Siemers’ endowment was funded by two liquidity events: Al, who owns several manufacturing companies, donated one of his businesses to the Siemer Family Foundation, which then sold it for $4 million; the couple also donated property that the foundation sold for another $4 million. Tax incentives allow donors to deduct the market value of such assets, up to 30 percent of their adjusted gross income (AGI). Donors to a private or family foundation, on the other hand, are limited to deductions of only 20 percent of AGI, and the amount is determined by the cost of the asset rather than its market value.
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These benefits have prompted a growing number of philanthropists to consider this structure. They are willing to trade the comprehensive control over assets they enjoy with a private foundation for a supporting organization’s looser financial restrictions and greater tax incentives. The IRS now recognizes about 32,500 of these entities, up from about 30,500 in 2003, according to the National Center for Charitable Statistics. By comparison, there are approximately 78,000 private foundations in the United States.
But just as donor interest in supporting organizations is rising, so, apparently, are the suspicions of the federal government. Some funders are even beginning to wonder if these philanthropic vehicles are worth the potential risk.
Flim Philanthropists
Iowa Senator Charles Grassley’s Finance Committee has been investigating alleged abuses involving supporting organizations, worrying their funders. Supporting organizations are not required to disburse at least 5 percent of their endowments each year, as private foundations are, nor are the funders of supporting organization prohibited from raising money for their foundations, as funders of traditional family foundations are. The Senate Finance Committee has been scrutinizing these provisions. Last year, IRS Commissioner Mark Everson cited some blatant abuses in a letter to Grassley. "A common theme," Everson wrote, "is a ‘charitable’ donation of an amount to the supporting organization, and a return of the donated amount to the donor, often in the form of a purported loan that may never be repaid." In February 2004, the Chronicle of Philanthropy reported that a study of tax returns discovered 18 supporting organizations had issued loans of $100,000 or more to their officers and directors between 1998 and 2001.
With Grassley leading the charge, the Senate approved a series of reforms for supporting organizations as part of the Tax Relief Act of 2005. The plan on Capitol Hill is to examine the reforms later this year as part of a charity reform package now attached to a more all-encompassing bill in the hands of the House Ways & Means Committee. The reforms apply mainly to Type III supporting organizations. (See "Supporting Cast") The bill would prohibit these nonprofits from making loans or grants to donors. The organizations would also have to notify, in writing, any charity they plan to support. This stipulation addresses a concern that some supporting organizations have almost no relationship with the charities they purport to back and are set up primarily as tax dodges.
Despite the increasing government scrutiny, many donors continue to reap the benefits of supporting organizations. The Siemers say any legal changes will not sway them from running their foundation as such; their motivation for doing so is predicated on the assistance they provide their charity of choice, as well as the higher profile they enjoy, rather than any spend-down advantages or tax inducements. Also, the Senate’s reform package will not affect the higher deductions for donations to a supporting organization that currently apply to the Siemers and other funders.
Iowa Senator Charles Grassley’s Finance Committee has been investigating alleged abuses involving supporting organizations, worrying their funders. |
"If it’s about getting the greatest tax break, and if a family is not sure it has the passion required to foster a private foundation for generations, then a supporting organization is probably a better way to go," he says. For his family, however, the private foundation creates bonds among the 18 relatives who are spread out across the country. All of them are active in the foundation. "The whole excitement is the family leadership that we bring to the charities we help," explains Gibney, adding that a supporting organization tied to an entity with a specific geographic location "would tear our family apart."
The Siemers, however, seem to have successfully struck the delicate balance between the specific requirements of a supporting organization and the desire to create a familial mission; their daughter is president of their foundation. "This kind of pushes our kids into a philanthropy mode," Barbara Siemer says.
Dan Weil is a freelance journalist based in Florida.
Illustration by Jim Frasier.
Additional Information
Biting the Hand
Supporting Cast