Case:

Lucky Lucy Lindstrom 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 only 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 renewable energy company with the name Northern Long Shot, Inc. This company designs and manufactures energy solutions for companies across the far north. Recently, the stock rose from the $1 per share that she paid to over $5 per share. After this success, Northern Long Shot decided to "spin off" a smaller company with a portion of their energy systems. Lucy exchanged her $5 million in stock for 60% of the stock in Northern Long Shot II, Inc. After the exchange, Lucy decided to give the Northern Long Shot II stock to a charitable private foundation to help those in need.

Lucy has many friends who are active in the renewable energy business. They would like to establish energy systems in another state and it is possible that their success would also benefit Northern Long Shot II, Inc. Lucy discussed several options with her attorney. She asked her attorney about the ability of her private foundation to help in the lobbying effort to open designated locations for energy systems. After all, she thought, her private foundation would benefit if the lobbying efforts were successful and 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. Lobbying by private foundations is not a permitted distribution.

Question:

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 from designated locations for energy systems in other states."

Solution:

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: 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).

Lobbying is clearly prohibited by the taxable expenditure rule. If there is 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 as 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. As a result, she 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.