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Lucky Lucy finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now manages her own large personal portfolio. Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market.
Lucy invested $1,000,000 in stock in a Canadian AI startup with the name Northern Long Shot, Inc. This company has been building creative new AI applications. Recently, the stock rose from the $1 per share that she paid to over $5 per share. After this success, Northern Long Shot, Inc. continued with creative application developments. Lucy decided to give the Northern Long Shot stock to a private charitable foundation to help those in need.
Lucy has many friends who are active in businesses in her area. Some of these businesses have used Northern Long Shot’s AI applications to identify vacant land that could be purchased and redeveloped. Lucy discussed several options with her attorney about the ability of her private foundation to help in the lobbying effort to open up the undeveloped land for housing and other development. After all, she thought, if the lobbying efforts were successful, the foundation could do more to help the needy. Her attorney noted that private foundations are subject to various rules on self-dealing, minimum distributions, excess business holdings and taxable distributions. Private foundations distributions are prohibited from being used for lobbying.
Lucy said, “Wow! There are a lot of rules for private foundations. Why would my private foundation have to avoid spending money on lobbying? After all, it could benefit those in need in the far north.”
Her attorney explained that money spent by a private foundation that is inconsistent with the foundation's charitable purposes is called a "taxable expenditure." Taxable expenditures include the following: lobbying, most voter registration drives, grants to individuals (unless grantmaking procedures are approved) or grants to any organization not classified as a public charity (unless expenditure responsibility is exercised).
If a private foundation engages in lobbying, there may be a 20% excise tax on the private foundation. As a foundation manager, if Lucy knowingly participates in the taxable expenditure, she may be subject to a 5% excise tax (with a $10,000 cap). If the private foundation does not correct the taxable expenditure by recovering the taxable expenditure or taking other corrective action prescribed by the Internal Revenue Service, an additional 100% excise tax on the taxable expenditure is imposed on the foundation. Sec. 4945.
Lucy thought about these rules and decided that using her private foundation to lobby was not the right choice. Lucy did not make gifts from her foundation to the lobbying effort. Instead, she decided that her private foundation is better suited for making grants to charities that focus on helping the needy.
Lucky Lucy's "Northern Long Shot" Charity Diversifies
Lucky Lucy's "Northern Long Shot" Charity
Lucky Lucy's "Hurricane Grants" Charity
