Reference Guide: What Is a Foundation?

Carnegie Corporation of New York, the Chicago Community Trust, the Duke Endowment, Rockefeller Brothers Fund-what's in a name? The answer is: not much, if you're looking for a grantmaking foundation. These four institutions are among the nation's top grantmaking foundations, but none has the word "foundation" in its name. Conversely, many nonprofit organizations that make no grants, such as the Heritage Foundation, do call themselves "foundations." The difficulty of identifying grantmaking foundations by name alone creates confusion and produces misunderstanding about the scope and activities of the foundation field.

Definitions

The Foundation Center defines a foundation as an entity that is established as a nonprofit corporation or a charitable trust under state law, with a principal purpose of making grants to unrelated organizations or institutions or to individuals for scientific, educational, cultural, religious, or other charitable purposes. This broad definition encompasses two foundation types: private foundations and public foundations, the latter being a type of public charity. The most common distinguishing characteristic of a private foundation is that its funds come from one source, whether an individual, a family, or a corporation. The term "public foundation" has come into common usage only recently to describe public charities that have a primary purpose of making grants. Like all public charities, public foundations generally receive their assets from multiple sources, which may include private foundations, individuals, government agencies, and fees for service. Moreover, a public foundation must continue to seek money from diverse sources in order to retain its status as a public charity.

IRS Criteria

One way to identify private foundations is to refer to the formal determination made by the Internal Revenue Service. A nonprofit that has been legally established in one of the 50 states must obtain recognition as a charitable organization from the IRS in order for contributions to it to be tax deductible. Section 501(c)(3) of the Internal Revenue Code (IRC) covers those tax-exempt organizations that are "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes . . ." and are eligible to receive tax-deductible contributions. An organization that meets the definition of Section 501(c)(3) is then measured against Section 509(a) of the IRC, which declares that a 501(c)(3) organization is presumed to be a private foundation unless it can demonstrate that it falls into one of four categories of organizations:

• Organizations described in Section 170(b)(1)(A), which covers churches; schools, colleges, etc.; hospitals, medical research institutes, etc.; support organizations to educational institutions; governmental units; and publicly supported organizations (including community foundations);

• Organizations that normally receive more than one-third of their support from gifts, grants, fees, and gross receipts from admissions, sales, etc., and normally receive not more than one-third of their support from investment income;

• Supporting organizations, which, although not publicly supported, are controlled by and operated in close association with a public charity;

• Organizations operated exclusively for testing for public safety.

When organizations receive their determination, those that do not meet the requirements for classification as "not a private foundation" are, by default, private foundations. Thus, the IRS defines a private foundation by exclusion. Since the IRS does not have a separate classification for public foundations other than community foundations, grantmaking public charities can be difficult to identify using IRS definitions and resources.

Public Information Returns

Although they are complex, the definitions of foundations contained in the IRC determine not only the way a foundation must operate but also the information it must make publicly available. All private foundations must file the Form 990-PF, which is a valuable source of information about their finances, board members, and grants. Public foundations file the Form 990, as do other public charities. Copies of Forms 990-PF and Form 990 can be found by using the 990 Finder look-up tool on the Foundation Center's Web site. Filings can also be requested from the foundations themselves, the IRS, or the state attorney general's office where the foundation is located.

Foundation Type and Status

The IRS publishes the Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986 as a three-volume annual set with quarterly supplements and as a searchable database at its Web site). Publication 78, as it is also known, is useful in determining whether an organization is a private foundation and thus files Form 990-PF, but it does not distinguish public foundations from other public charities. Foundation Finder at the Center's Web site is a database of more than 73,000 private and community foundations, searchable by foundation name, and each entry indicates the foundation's type and includes a link to its Form 990-PF or 990.

For more details about the different types of foundations, the historical context in which they operate, and a thorough overview of the funding research process as it relates to foundation giving, see the Foundation Center's publication, Foundation Fundamentals, available in all Center libraries and Cooperating Collections. The revised 7th edition was released in Fall 2004.

The Foundation Center's Youth in Philanthropy page also has a section that describes "What is a foundation?" in plain language.

Lastly, get a detailed overview of the world of private foundations by taking the online tutorial Foundations and Their Role in Philanthropy.