Congress Considers Easing Rules on Foundation Stock Holdings

In a move that has received little attention, Congress is considering whether to require some foundations to distribute as much as 12 percent of their assets annually. In exchange for giving considerably more than the 5 percent that foundations are now required to award, the foundations would be allowed to follow less-stringent rules on holding publicly traded stock than other grant makers.

The action comes as members of the House of Representatives have proposed a measure that would, in effect, force many foundations to give more to charity than they do now under the 5-percent rule.

Tinkering with private-foundation rules can be controversial. In 1969, Congress felt that many foundations were being misused and passed sweeping changes in tax laws, including the imposition of strict rules intended to prevent insiders — for example, donors and their relatives or associates — from using foundations for private gain.

Members of the Walton Family Foundation — relatives of Wal-Mart founder Sam Walton — and other representatives of the private foundation community have been key supporters of making new changes in tax law that would encourage them to donate more publicly traded stock to their foundations and thus increase grant making to nonprofit groups.

The Walton Family Foundation is the nation’s 45th biggest grant maker in terms of assets, with $948.7-million reported in its most recent tax returns.

Most of the assets of the Walton Family Foundation are invested in the family-run Walton Enterprises, a limited partnership that held about 38 percent of Wal-Mart stock worth approximately $91-billion, the Arkansas Democrat-Gazette reported last fall.

Different Strategies

The Senate and House are taking different approaches to the stock issue. The Senate passed a bill last month that would give certain private foundations extra time to divest themselves of large gifts of publicly traded stock, a move aimed at encouraging such donations. The House is considering a measure that would allow some foundations to hold larger amounts of publicly traded stock than is now permitted.

Federal law says that private foundations can hold up to 20 percent of a business enterprise. But in certain instances where a private foundation is founded and managed by the same people who started a business — such as the Walton Family Foundation, which was created by Sam Walton, who died in 1992, and is now run by his family — foundations cannot hold more than 2 percent of the voting stock in a corporation or they face a tax on “excess business holdings.”

Congress wrote those rules in part to prevent people who owned controlling interests in businesses from transferring the interests to a foundation that they also controlled and then continuing to run the business through the foundation.

The law lets a foundation avoid the tax if, within five years, it disposes of publicly traded stock gifts that exceed the 2 percent threshold.

Current statutes put a brake on the charitable efforts of many philanthropists, said Aubrey Rothrock, a Washington lobbyist who represents the Walton Family Foundation, in Bentonville, Ark., and others whom he declined to identify.

Many donors now hesitate to give large quantities of stock to foundations because they believe five years is not enough time for the funds to divest themselves of shares to maximize their value, said Mr. Rothrock.

“This five-year divestiture period not only serves as a disincentive to prospective donors, but presents serious difficulties to foundation managers, who need additional time and flexibility to ensure that large gifts of stock are allocated efficiently and in a manner that will maximize the value of the gift to charity,” he said.

“Moreover,” he added, “recent fluctuations in the stock market also present challenges to foundation managers who want to ensure that a required divestiture period does not force a sale of the asset at a less-than-favorable return.”

More Time

Last month, the Senate approved an increase in the time period that such foundations could sell excess stock from five to 10 years. The provision — promoted by Sen. Blanche Lincoln, an Arkansas Democrat, and Sen. Trent Lott, a Mississippi Republican — is part of the Charity Aid, Recovery and Empowerment (Care) Act.

But the Senate bill requires that a foundation could only qualify for the extra five years if its excess holdings were the result of a gift or bequest of stock of at least $1-billion; if the foundation agreed to pay out to charity each year 12 percent of its assets, rather than the 5 percent now required; and if the foundation did not count operating expenses, such as rent and salaries, when it calculated how much money it must distribute each year to charities.

The House bill, called the Charitable Giving Act, or HR 7, does not increase the period in which a foundation could dispose of excess stock. Instead, the legislation would allow foundations to hold up to 5 percent of a company’s stock, rather than 2 percent, if certain conditions were met, including:

• The stock is publicly traded.
• A majority of the stock is held by individuals who are in no way related to the foundation or the management of the corporation.
• A majority of the board of directors of the corporation comprises individuals who are in no way related to the private foundation.

The conditions were included in part to head off critics who questioned whether individuals might try to enhance their control of a publicly traded company by donating voting stock to a foundation that they controlled (while taking a charitable tax deduction).