# Private Foundations and Charitable Trusts: A Decade of Charitable > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A45dab2bdfff4aaa0 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 by Alicia Meckstroth and Paul Amsberger rivate foundations, over 42,400 for 1992, contribute billions of dollars each year to charities and communities to support causes in such areas as education, health, human services, community development, the arts and humanities, and the environment. Private foundations represent over one-quarter of all Internal Revenue Code section 501(c)(3) nonprofit charitable organizations that file information returns with the Internal Revenue Service. For 1992, foundations made contributions, gifts, and grants totaling over $10.9 billion [1]. This represents a two-year current-dollar increase of 23 percent over the contributions, gifts, and grants given for 1990. During the two-year period the number of foundations increased by 6 percent. Foundations rely largely on asset growth, earned income on investments, and contributions received to support their charitable giving. In terms of gains in assets and revenues, foundations experienced a relatively strong two-year period from 1990 to 1992, with the vast majority of the gains realized over the 1990 to 1991 period. Total foundation assets grew by 17 percent over the two-year period, to $192.2 billion. Investment assets of $181.2 billion represented the majority of foundation assets. Gains of 20 percent in the value of investments in corporate stock and 30 percent in the value of corporate bonds largely explain the 17 percent two-year increase. Total foundation revenue increased by 21 percent from 1990 to 1992, to $23.6 billion, despite a decrease of 4 percent from 1991 to 1992. A significant increase of 70 percent in net gains from sales of assets and a smaller increase of 16 percent in the amount of contributions received by foundations, helps to explain the increased revenues. Additionally, the decrease in foundation revenues from 1991 to 1992 and the only minimal growth in assets from 1991 to 1992 was largely due to one organization's sale of some of its assets in 1991 [2]. Figure A shows the total amount and percentage changes for various private foundation revenue, asset, and expense items for the period 1990 to 1992 [3,41. For 1992, over 2,900 nonexempt charitable trusts described in Internal Revenue Code section 4947(a)(1) held $3.1 billion in total assets, realized $346.8 million in total revenues, and distributed $154.6 million in contributions, gifts, and grants. The amount of grants given by these charitable trusts increased by only 2 percent from 1990 to 1992 despite a 29 percent increase in revenues P Alicia Meckstroth is a private consultant and Paul Arnsberger is an economist with the Special Studies Special Projects Section. This article was prepared under the direction of Michael Alexander, Chief and a 13 percent increase in assets during this same period. These trusts are discussed in detail beginning with the section, Section 4947(a)(1) Nonexempt Charitable Trusts. Statistics of Income Studies The statistics presented in this article on both private foundations and charitable trusts are based on sample data from Form 990-PF, Return of Private Foundation (or Section 4947(a)(1) Charitable Trust Treated as a Private Foundation), the annual information return filed by these organizations [5]. The 1992 Reporting Year represents the fourth consecutive year that Statistics of Income has collected data on the 4947(a)(1) charitable trusts that are treated as private foundations. Statistical studies on private foundations have previously been conducted for Reporting Years 1974, 1979, 1982, 1983, and 1985 through 1991 [6]. Private foundations and charitable trusts are treated separately in both the statistical and descriptive analyses. In the analyses that follow a number of key topic areas on foundations are discussed, including: • Overview of revenue, assets, and grants paid • Organizational definition and legislative background • Top ten domestic foundations • Sources of foundation revenue • Excise tax on investment income • Foundation assets and investments • Investment behavior by size of foundation • Income yields and rates of total return • Charitable distribution (or payout) requirement • Charitable grants and other qualifying distributions • Payout rates • Asset growth and distribution goals Following these is a similar, but shorter, discussion of charitable trusts and a summary of both types of organizations. The report ends with a discussion of the data sources and limitations and an explanation of key terms. vate iFoundations Overview of Revenue, Assets, and Grants Paid During the decade from 1982 to 1992, foundation assets and charitable grants paid increased steadily each year with 65 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 Figure A Private Foundations: Selected Financial.. Items, 1990-1992 I [Money amounts are in billions of dollars.] . 1990 1991 1992 Percentage increase, 1990-1992 (1) .(2) .(3) (4) 164. 161.7 8 13.9 126.2 32.5 79.3 14.4 21.6 189.6 184.6 12.5 139.4 31.1 90.9 17.4 32.7 192.2 181.2 12.7 144.4 30.5 95.2 18.7 30.4 16.6 Total revenue ................................................................................... 19.5 24.6 23.6 21.0 Contributions, gifts, and grants received........................................ Net gain (or loss) from sales.of assets ........................ ................. --6.-8 8.5 -7.9 6.7 16.271.8 -6.7 6.6 Item Total assets (fair market value) ................................ . ................. Investments, total .................................... ... ........ Savings and temporary cash investments..................................... Investments in securities, total ..................................................... U.S. and State Government obligations.. ............................. ..... Corporate stock.... ..................................................................... Corporate bohds...................................L ................................... Other investments' ............................ : ....... ...... Dividends and interest from securities ................................. ....... 3.9 6.4 Total expenses ........... ................................................:..................... . Contributions,gifts, and grants~ paid ............................................... 11.7 8.9 13.2 .10.1 14.5 .10.9 -Excess of revenue (less loss) over expenses .............................. -7.8- 111A 9.11 12.1 -8.6 14.4 -6.2 20.1 29.9 40.7 22.5 Sum of "Investments in land, buildings, and equipment (less accumulated depreciation)," "Investments in mortgage loans,* and *Other investnnents,* as reported on the Form 990-PF. 'Other investments" includes items such as advances; certificates of investment; and investments in art. coins, gold, and gems. 66- overall real growth of .1 12 percent and 71 percent, respectively.- Foundation-revenue-grew by 79 percent from-1982.. to 1992, with steady annual increases from 198,2 to 1986 and fluctuating.year-7to-year changes ftom 1986 to 1992.Substantial real increases, in contributions received and net gains from sales of assets from 1982 to 1992, 104 percent and 162 percent,'respectively, help to explain the overall increases in revenue. The overall growth in foundation assets and revenues markedly exceeds the 32 percent real ,growth of Gross Domestic Product from 1982 to 1992.[7]. The number of foundations increased by nearly' 50 percent, from 28,468 in 1982 to 42A28 in 1992. Figure B.graphically di.splays the growth, in real assets, revenue,.and grants from 1982 to 1992. The asset growth of foundations during the 1982 to 1992 decade helped to increase total grants paid over the same period. Th~'&aritable payout requirem ient'fot. certain types of foundations (explained in detail in the sectiorf Charitable Distribution (or Payout) Requirement) is based on-the value of foundation investment assets; that is, as investment assets grow, so does.the amount that foundations are requited to distribute. Total investment., assets, equal to $181.2 billion* for .1992, increased by 116' _percent from 1982 to 1992. Investm.ent assets for the . "large" foundations, those holding $50 million or more in . real terms by 163 fair market value of.assets, grew in , percent oVer the decade, to- $12 1. 8 billion. The real amount of charitable grants d,istributed by the large foundations grew-by--1165 percent.ove r. the same time-period,. to $5.7. billion. The large foundations accounted for, the majority of foundation assets, 66 percent in 1992. The number of these large foundations increased from 165 in 1982'to 476 in: 1992 as a few new. large organization's wer8 formed and as existing foundations increased past $50 million in assets size. Comparisons of the different size class'es of foundations are discussed -throughout this article. The following classifications apply throughout unless-otherwise indicated: the-"smallest foundations refers to.the group holding less than $100,000 in fair market value of total assets (excluding foundations that either do not report assets or that report assets equal to zero); "small fourdations" refers to the group holding less than $1 million in assets (excluding foundations that either do not report assets or that report assets equal to zero); "mediurfi-size foundations" refer,s-to the group holding from $1 million to less than $50 million in assets; "large foundations" refe'rs to the group holding $50 million or more in assets; and, the, "largest foundations" refers to the. group holding $100 million or more in assets. Organizational Definition and Legislative Background A private foundation is a nonprofit, tax-exempt cqrporation, association, or trust which is narrowly supported and Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 Figure B Private Foundations: Real Growth in Revenue, Assets, and Grants, 1982-1992, in 1987 Dollars Billions of dollars ISO 161.2 111- 159.0 -2 .5 139.8 M_ Total assets I 120 1028 116.8 01- % 75.0 ~111 60 Total revenue 17.4 ------- 20.7 5.6 A- 6.4 6.8 AL-1 I I 1983 1985 1986 1987 10.9 13.9 5.3 0 1 1982 Total grants paid I Fair market value. NOTE: Data for 1984 are not available. \4 17 1 18.4 0 _7~_10~~-7.5 15.7 1988 1989 20.9 19.5 17.2 ------- ~9_, -0 9.0 8.6 7.8 1990 1991 1992 Tax Year controlled, usually by an individual, family, or corporation. It is this narrow base of support and control which differentiates a private foundation from a publicly supported tax-exempt charitable organization, although both receive tax exemption under section 501(c)(3) [8]. The other 501(c)(3) organizations, those filing the Form 990, Return of Organization Exempt From Income Tax, generally receive broad support from a large number of sources within the general public. Because of their centralized support and control, private foundations are more strictly regulated than the other section 501(c)(3) organizations. Private foundations held less than 16 percent of the book value of total assets and earned less than 5 percent of the total revenue of all section 501 (c)(3) nonprofit charitable organizations that filed information returns for 1992 with the Internal Revenue Service [9]. The nonexempt charitable trusts included in this article are described in section 4947(a)(1). Charitable trusts represented only 6 percent of the total number of Form 990-PF filers for 1992. Unless otherwise noted, the same background information and requirements apply to both types of Form 990-PF filers [10]. A detailed discussion and analyses of the characteristics and behavior of the charitable trusts can be found beginning with the section, Section 4947(a)(1) Nonexempt Charitable Trusts. The two types of private foundations or trusts, "operating" and "nonoperating," are distinguished by the type of charitable support they provide. Nonoperating foundations generally provide indirect charitable support by making grants to other nonprofit organizations that conduct charitable programs of their own [ I 11. Nonoperating foundations are annually required to distribute (typically through grants or related expenses) a minimum amount for charitable purposes, the "distributable amount." If they do not distribute the required amount in the current year, they have until the end of the following year to fulfill the charitable distribution requirement without penalty. The minimum required amount is based on 5 percent of the value of their "noncharitable-use (or net investment) assets" [12]. If an organization is sufficiently involved in the direct operation of its charitable activities, then it can qualify as an operating foundation and is exempted from the charitable distribution requirement that applies to nonoperating foundations. Although operating foundations are not subject to the annual distribution requirement, many choose to make grants in addition to carrying on charitable programs of their own. For a further explanation of the 67 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and * 1992 . regu.irements , of operating foundations, see operating nonoperating foundations that had*no "distributable foundations and section 4947(a)(1) charitable trusts in the amount" and, therefore, were not required to make a Explanation of Selected Terms section. minimum distribution (see the Explanation of Selected Individual income tax deductions for contributions to. Terms section for a definition of the'required distributable nonoperating foundations are generally more restrictive amount); 29 percent were nonoperating foundations that than deductions for contributions made to operating made other types of disbursements in order to satisfy the, foundations or other section 501(c)(3) organizations. charitable distribution requirement; and the remaining 26 Contributions that either establish or support a percent were nonoperating foundations that did not fully nonoperating foundation qualify for a Federal tax deducmake the required distribution for 1992and legally had until the end of their 1993 accounting period to do so tion of up to 30 percent of the donor's "adjusted gross without tax penalty. The types of disbursements, other income" (AGI). This compares to a deduction limit of So-than grants, made by foundations to fulfill the charitable percent of AGI for donations to operating foundations and distribution requirement include the following: operating to othef 501 (c)(3) nonprofit charitable organizations (Form 990 filers).. and administrative expenses used in the conduct of chariPassage of the Tax Reform Act of 1969 (TRA69)~ table programs. or activities; amounts paid to acquire '-subjetted-foundations to-an-excise-tax-on-"net-invdstment- - - charitable-use -assets -,- charitable '-set-asides' -for-future income":for the first time. While most foundations pay time periods;. and program-related investments. All of the excise tax, some operating foundations are exempt .these expenditures counted towards a foundation's charifrom the tax. For a further explanation of exempt operattable distribution requirement. Some of the nongrantmaking foundations described above were "failed ing foundations refer to operating foundations in the -publicc-charities" that had been iecldssifiedby the Intem *al -Explanation. of Selected Term.s-section..-TRA69-alsoR&venu6S6rvicea*snonoperating'foundati(ins. These imposed a series of excise taxes on foundations that engaged in "prohibited activities," which were deemed not organizations could no longer qualify for thdfavored public charity status of a Form 990 filer because they to be in the public interest.. These'activities applied to any foundationthatattempted. to influence legislation by failed to maintain the required minimum support, from contacting. legislators, -cncouraged thep~~Iijq.to-contact_ _public sources. Many, however, continued to operate legislators, or participated in- the campaign of a candidate direc.t.charitable programs rather than make grants to,other for public office; any foundation that engaged in 'certain .nonprofit organizations: Some of these organizations may financial transactions (ofacts of "self-dealing") with have qualified as operating foundations, but did not "disqualified persons" having"a relatioftship with the request such status from the Internal Revenue Service. foundation, such as substantial donors or officers, direcForeign foundations (those foundations organized abroad) comprise less than 0:1 percent of the foundation tors, or trustees of thefoundation-'any foundation Which .popu .--A foreign foundation was required to'file owned holdings, in'a.b6siness enterprise'deemed'to be excessive or which made investments deemed to jeoparForm 990-PF when it received'a cei-tain degree of'support dize the charitable purpose of the foundation; and any from either U.S. citizens or corporations. These foiindanonoperaiing foundation that failed to distribute the tions may ormay not have chosen to distribute charitable-. required minimum payout after a 1. -year grace period. grants within the United States. the IRS required that taxes on these prohibited activities are' reported on Form foreign foundations, like domestic -foundations, pay an 4720, Return oi Certain Excise Taxes on Charities and excise tax.on investment income.. While the excise tax.' Other Persons. Under Chapters 41 and 42 of the Internal equaled 2 percent of worldwide "net" investment income Revenue Code, and are not included in this article. for the majority of domestic foundations', the tax oii Of the estimated 42,400 private foundations filing Form foreign foundati'oris,equaled 4 percent of their "gr6ss" 990-PF information returns f6r 1992, 91 percent were noninvestment income*derived from U.S. sources. The operating foundations and the remaining 9 percent were investment income on which these taxe's are based does operating foundations, virtually the same percentages a: s not include any income included'in figuring ihe tax on' prior years. Nearly 35,200 foundations, or 83 percent of all unrelated business income, as reported on Form 990-T, foundations, made grants for 1992. Nearly 87 percent of the Exempt Organization Businesi Income Tax Return. nonoperating foundations and 47 percent of the operating, Ton Largest Domestic Foundations foundation's made grants. (Unless otherwise noted, data are the non-grantmaking foundations, 28 Three-quarters of all foundations held less than $1.million for 1992.) [131 Of percent were operating foundations; 17 percent were in total as Sets. 'The - largest-f6unddti6n-s, those holding. 68 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 $100 million or more in total assets, comprised less than I percent of all foundations, but held 58 percent of total foundation assets, realized 46 percent of total revenue, and distributed nearly 44 percent of total grants for 1992. In contrast, the small foundations, those holding less than $1 million in assets, held only 3 percent of total assets, realize d 7 percent of total revenue, and distributed I I percent of total grants. These foundations accounted for 72 percent of all foundations. The ten largest domestic foundations, displayed by asset size in Figure C, held over 18 percent of total foundation assets and distributed close to 12 percent of total foundation grants for 1992, $35.3 billion and $1.3 billion, respectively [14]. From 1990 to 1992 this represents only a 7 percent increase in assets of the largest ten foundations, but a 33 percent increase in grants. The increase in assets was much lower than the overall foundation asset increase of 17 percent for 1990 to 1992. However, the increase in top ten foundation grants was much higher than the increase of 23 percent in all foundation grants for 1990 to 1992. The huge Ford Foundation alone accounted for 3.6 percent of all foundation assets and 2.6 percent of all foundation grants for 1992. The ten largest foundations in terms of assets for 1992 are the same as for 1990, with the top three foundations assuming the same positions. While the Annenberg Foundation was the tenth largest foundation in terms of assets for 1992, its $137 million of grants were third only to the Ford Foundation's $282 million of grants and the combined W.K. Kellogg Foundations' $227 million 'of grants. The Robert Wood Johnson and Annenberg Foundations both realized gains in assets over the two-year period from 1990 to 1992 that were well above the overall 17 percent gain in all foundation assets, 28 percent and 27 percent, respectively. The Robert Wood Johnson Foundation realized all of its gains from 1990 to 1991 and actually realized a 9 percent loss from 1991 to 1992. The Annenberg Foundation, in contrast, realized comparable gains for both years. These two foundations also distributed grants over this same period at a rate well above the overall 23 percent increase in all foundation grants, 56 percent and 149 percent, respectively. A number of the ten largest foundations experienced overall losses in assets over the period from 1990 to 1992. The Lilly Endowment, MacArthur Foundation, and the combined W.K. Kellogg Foundations experienced two-year losses of 18 percent, 8 percent, and 7 percent, respectively. These three foundations realized all of their asset losses during the 1991 to 1992 period [15]. Soumes of Foundation Revenue Over the decade from 1982 to 1992, foundation revenues fluctuated from year to year, but realized an overall real increase of 79 percent. The two-year period from 1990 to 1992 was no exception, as foundation revenues increased in nominal terms a dramatic 26 percent from 1990 to 1991, only to decrease by 4 percent from 1991 to 1992, to $23.6 billion. When the Wellcome Trust, a British foundation, is excluded from this calculation, revenues would have increased by 12 percent from 1991 to 1992. Figure C Top Ten Domestic Private Foundations, by Size of Fair Market Value of Total Assets, 1992 [Money amounts are in millions of dollars.] Name 1. Ford Foundation .............................................................................................................. 2. J. Paul Getty Trust I ........................................................................................................ 3. W.K. Kellogg Foundation Trust / W.K. Kellogg Foundation 2.......................................... 4. Robert Wood Johnson Foundation ................................................................................. 5. John D. and Catherine T. MacArthur Foundation ........................................................... 6. Lilly Endowment, Inc ....................................................................................................... 7. Pew Memorial Trust ........................................................................................................ 8. Andrew W. Mellon Foundation........................................................................................ 9. Rockefeller Foundation ................................................................................................... 10. Annenberg Foundation .................................................................................................. Total............................................................................................... State Total assets (1) NY (2) (3) (4) 6,956 798 282 CA NY/Ml NJ IL 6,184 4,675 . 10 227 3,735 2.946 426 579 177 225 IN PA NY NY 2,608 2,218 2,185 2,139 1,654 109 183 222 213 128 119 97 96 93 137 PA Total revenue Total qrants paid 103 127 I The J. Paul Getty Trust is an operating foundation. All other foundations listed are nonoperating foundations. 2 The W.K. Kellogg Foundation Trust (classified as a private foundation and not as a section 4947(a)(1) charitable trust) is located in New York and has a *pass-through" relationship with the W.K. Kellogg Foundation, located in Michigan. Typically, the entire amount of the annual qualifying (charitable) distributions of the W.K. Kellogg Foundation Trust is made in the form of a grant to the W.K. Kellogg Foundation, which then redistributes the grant forchantable purposes (and does not count the redistribution as a qualifying distribution of its own). The combined total assets of the lwo organizations are shown in the 'Total assets* column, but in order to avoid duplication, only the grants paid by the W.K. Kellogg Foundation are shown in the *Total grants paid' column. 3 Fair market value. 69 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 The overall revenue increase over the two-year period is largely explained by a huge increase in net gains from sales of assets from 1990 to, 199 1. Over the two-year" period, total foundation net gains from sales of assets increased by 70 percent, to $6.7 billion for 1992. Overall gains of 116 percent were realized from 1990 to 1991, while an overall loss of 21percent occurred from 1991 to 1992. This pattern can be larg~ly explained by the Wellcome Trust's sale of some of its assets for Mt. The Wellcome Trust, alone, realized net gains from,,sales of assets of $3.8 billion for 1991. These gains dropped to $0.2 billion for 1992. Once again, by excluding~the' Wellcome Trust from the data for 1990-through 00,.net gains from'sales of assets would have increased by-only ---21-percent-from-1990-to-1991-and-by-36-percent from 1991 to 1992. The large foundations, which earn over half of foundation revenues, realized both the greatest gains:and the greatest losses when compared to the smaller foundations;, From 1990 to 1991, large foundation revenues increased by 45 percent, but from- 1991-to-1992,-tFeii~-r~ve-nu-e-sdeclin~d by 12 percent. Excluding the Wellcome Trust from the calculations, large foundation revenues would have increased by 6 percent from 1991 to 1992 and by l6i foundation percent the - following year. In contrast, small revenues in&ri~s6d by-.25'Oercent',for the 1990-199r- . period, but then decreased by 9 percent for the next y ear. Medium-sized foundations achieVed moderate increases of 4 percent and 10 percent for each of the time periods, 1990 to 1991 and 1991 to 1992, respectively. Figure Q Aisplays the sources of foundation revenue for 1992 for all foiindations and forthree different size.groups: "small,". "medium," and "large." The year-to-year changes in revenue among the different size groups of foundations is better understood through an examination of the different sources of revenue upon which the different groups - rely. The.figure for total foundation revenue reveals that for 1992 over a third of total revenue came from contributions received by foundations; and well over a quarter each came from both net gains from sales of assets and dividends and interest from securities, 29 percent and'28 percent, respectively. Smaller amounts were earned.frorn interest on savings and temporary cash investments and "ot~eC sources. While the small foundations earned nearly three-quarters, or 72 percent, of their revenue from contributions, the large foundations earned only a fifth, or 21 percent, in this manner. Similarly, while the large foundations earned 71 percent of revenue from the combination of net gains from sales of assets and dividends and interest from securities, the small foundations-. earned only 19 percent of revenue 70 from these two'inves'tmefit sources. As in past years, the data show that as the size of the foundation increases, the proportion of revenue from contributions declines and the proportion from investment income rises. An examination of the actual number of small and large foundations receiving contributions and earning investment income shows that the large foundations may~be a somewhat more homogeneous group relative to the small .foundations. Of the large foundations, nearly all, or 98 percent, earned dividends and interest from securities for. 1992; 94~percent realized net gains from sales of assets; and-only 41 percent re~eived contributions. In contrast, 57 percent of the small foundations earned dividends and interest from securities for thatyear; only 31 percent realized net gains- from sales- of assets;- and fewer than half, or 47 percent, received contributions. These percentages were relatively comparable for 1991. In terms of contributions received, small foundations received an amount for 1992, $1.3 billion, that was' 18 percent over the amount received for 1990. In contrast, the ed-ntributidn~~--giVe-ri-to-ffeditfm--size foundations- ~ remained stagnant over the two-year period, at about $3.8 billion; The large foundations, in contrast, realized notable increases in contributi ons received. From 1990 to 1992, these contributions increased by, 49 percent, to $2.7 billion-. Thelarge increase in net gains-from sales of assets between 1990 and 1992 was widespread. among foundation§. Small foundation net gains from those sales increased 130 percent over the two years, to $12T9 million. A similar pattern was true for the, miedium-size foundations, which realized increases in net gains of 139 percent, amounting to $1.8 billion for 1992. Net gains from sales of assets also increased notably for the'la.rge foundations, t o $4.8 billion, a 53 percent increase o~er the same period. In terms of dividends and interest from securities" overall foundation earnings increased by only 4 percent. from 1990 to 1992. Small foundations realized 9 percent less dividends and interest from securities for 1.992. as compared to 1990; medium foundations earned virtually the same amount from this type of revenue for 1992 as-for 1990;.and large'foundations J achieved a modest increase of in dividends andinterest from securities from 6 percent 1990 to 1992. Reporting Year 1992 represented only the fourth.year for which information on the "unrelated business" activities of private foundations was available from the Form 990-PF. Only 3.1 percent of foundations reported ajotal of $72.7 million . in "unrelated business income" (UBI) for 1992. For 199 I these figures* were 3.5 percent and $65.5, million, respectively. For 1992, the amount of UK- Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 Figure D Sources of Private Foundation Revenue, by Size of Foundation, 1992 Small Foundations2 Medium FoundatlonS3 I Large Foundations ' I 4% Contributions, gifts, and grants received Dividends and Interest from securities Net gain (or loss) from sales of assets 4% M Other Income * Other Interest' Includes foundations with assets unreported or equal to zero, which are not sho%wr separately. Srnall ~undations are those holding trom$1 to less than $1,0D0,000 In fair market value of total assets. Medium foundations are those holding from $1,000,000 to less than $50,000,000 in fair market value of total assets. .Large foundations are those holding $50,000,000 or more in fair market value of total assets. Represents "Interest on savings and temporary cash investments." Includes 'Gross rents and royalties' and 'Gross profit (or loss) from business activities,' as well as items such as imputed interest on deferred payments and programrelated investment income. NOTE: Detail may not add to total because of rounding. represented only 0.5 percent of total revenue as reported on the "Analysis of Income-Producing Activities" schedule on the Form 990-PF. A tax was levied on the unrelated business income of foundations as it was reported on the Form 990-T, Exempt Organization Business Income Tax Return [ 161. The section on the "Analysis of Income-Producing Activities" categorizes total foundation revenue (with the exception of contributions) as either "unrelated business income... ..excluded income," or "related or exempt function income." Unrelated business income is that income from a trade or business that was regularly carried on by the organization and that was not substantially related to the performance of the organization's exempt 71 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 . purpo~e -or function' (other than that the orgahizat ion needed the'profits derived from the unrelated activity). Excluded income repres6its income which was not directly ' related to the tax-exempt, charitable function of the' foundation and which was excluded or exempted from the tax on unrelated business income by Code sections 512, , 513, or 514. Generally, dividends, interest, rental inconie, and gains from sales of investment assets were all considered excluded income. Related or exempt function income generally represents any income eamed,that.is related to the organ*ization's purpose or function. constitut-: ing the basis for the organization's tax exemption. The'vast niaJority of revenue reported in the."Afialysis of Income Producing Activitie.s" section (which exclud6s contributions received) was reported as excluded income, regardles§ of whether-or not they are considered "exempt foreign foundations." Additionally, domestic -ope'rating foundations, by ineeting several requirements that show extensive public support and control, can be exempted from the excise tax on net investment income. ' Twenty-six percent of all operating foundations were exempted from the-excise tax for 1992. For a complete discussion.of the requirements for exempt operating foundations, see operating foundations* in the Explanation of Selected TeTrns section. One provision of the Deficit Reduction Act of 1984. allowed any domestic nonoperating foundation to'reduce the annual 2 percent excise tax to I percent, if, simply stated, the foundation showed improvement in the rate at which it, paid out charitable dollars. Specifically,. y if cur---rent-"qualifyirfg-disttibutions"-exceeded-a~5--year avera-ge of qualifying distributions plus 1' percent of current net (directly) related to the foundation's exempt, charitable investment income., a foundation qualified for therdduced purpose and only one-half of I percent reported as UBJ tax.. Qualifying for the reduced tax was not affected by ,[17]. In termsI of the type of foundation, operating foundawhether a foundation's charitable payout rate exceeded to r eport a, much higher proportion of income as tions tend ---exempt fun.ction-income compared-to-nonoperating-foun-- - --the.required 5,-percent;-it was-affected, however, by thelevel of increase- in a foundation's payout, rate. dations, 33 percentI compared,to 8 percent,, respectively. . Investment income, on which the excise tax- is based, types of fou n da~iibnsreportone-half of I percent or Both ~leIssincreased by 19, percent from 1990 to 1992, to $143 'as UBL"SindlIfoundati.ons tend to report a higher.., I . billion. This rate of increase-is cbmpdiable to the.overall pro portion of inconie-as UBI and'exempt function income, increase-in foundation revenue. -Small foundations --Iessthan 2 ~ercdntand 29-percent,.resppctively, dnda--' however, experienceddeclining investment income,from smaller percentage as excluded income, 69 percent.' In: 1990 to 1992, 6 percent,, w'hile* both r~e"diurii-;si,ze -and," contrast, the large foundations reported less than'one-ten'ih large foundations realized increases of 2~.Ferc~n,t and 19 of one percentage point as UBI, 6 percent as exempt. . . ., percent re.spectively. An increase of f9. percent in capital function incorrid, and 94 percent as excluded inc6 -in e-. gain income explains much of the overalf gain J6 investExcise,Tax on Investment income ment income. (For a complete definition of'-fiet investment The excise tax on the investmenrinco.me of private income and a furtherexplanation of capital gain net foundations was enacted as part of TRA69. Originally, it income and how. it, differs. from net gain (or loss) from was levied in order. to provide funds for Internal Revenue. , sales of'assets,,~see the:appropriate entries in the ExplanaService oversight of foundation activities and enforcement tion of Selected Terms'se6tion.) For 1992,'foun-dations of laws governing their exempt status. Domestic foundareported excise tax. on investment income of $ f94,2 tions generally are liable for -a tax equal to-2 percent of million.. This amount. was A 25 percent increase over that I their net investment income and foreign foundations for an for 1990., Figure E displays selected statistics o0h,.e ,excise tax equal to,4 percent, of their gross investment excise tax of foundations by size of foundation'.. Thirtyincome. Domestic organizations compute the excise tax two* percent of all foundations. increased the rate at which based on investment income from.all sources, while they'paid out charitable dollars forIM, iher6by~qualify]-- foreign organizations compute the tax based on investment ing for the reduced I-percent 6xcise'tdx. 'A greater per-income from U.S. sources only. Some foreign fou.ndacentage of the large foundations qualified for the reduced tions, classified as "exempt foreign* foundations," are not, tax compared to the small foundations, 46 percent versus subject to'the charitab.I& payout requirement, but still are. 29 percent. required to pay the. excise tax on investment income, Foundation Assets and Investments These exempt foreign foundations are those that from the least 85 percent of Total foundation assets continued to grow steadily"to date of their creation have received at , $1,92.2 billion for 1.992. This represents an overall, sources outside bf the United States.. their support from increase of 17 percent from .1 990to 1992. Assefs'f6Ceach D u_:e~ to'sp~ ecal-t i reaty provisions with the United Staies, all of the three size groups increased as Well, the sniall foundations are exempted from the" excise tax, Canadian* 72, Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 Figure E Private Foundations Reporting Excise Tax on Investment Income, by Size of Foundation, 1992 [Money amounts are in millions of dollars.) Item Number of foundations ......................................................... Percentage of all foundations ............................................ 5 Net investment income (Nil) ................................................. Excise tax ............................................................................. Percentage of all foundations reporting: 1 percentlax ...................................................................... 2 percent tax ...................................................................... 4 percent tax ....................................... ;.............................. Total Small foundations 2 Medium foundations 3 Large foundations 4 (1) (2) (3) (4) 35,083 83 14,252.2 194.2 24,611 80 463.7 7.2 9,689 96 4,587.7 68.3 448 94 9,192.2 118.6 36 64 34 66 42 58 (6) - (6) 49 49 2 I Includes 337 foundations with assets unreported or equal to zero, which are not shown separately. These foundations income and paid excise tax of $0.1 million. 2 Small foundations are those holding from $1 to less than $1,000,000 in fair market value of total assets. 3 Medium foundations are those holding from $1,000,000 to less than $50,000,000 in fair market value of total assets. 4 Large foundations are those holding $50,000,000 or more in fair market value of total assets. Includes $170 million in gross investment income from 30 foreign foundations. Less than 0.5 percent. foundations by 6 percent, and both the medium and large foundations by 17 percent. Excluding the Wellcome Trust, the assets of all foundations would have grown by 20 percent from 1990 to 1992. Investment assets of $181.2 billion represent the vast majority of foundation assets, 94 percent. These investments increased by a twoyear total of 16 percent. Investment assets include savings and temporary cash investments; U.S. and State Government obligations; corporate stock; corporate bonds; land, buildings, and equipment held for investment purposes; mortgage loans; and "other" investments. Non-investment assets include non-interest bearing cash; land, buildings, and equipment used in the direct operation of a foundation's charitable activities; various receivables; inventories held for sale or use; prepaid expenses and deferred charges; and "other" assets, which include items such as escrow deposits, interest-free or low-interest loans made for charitable purposes, and program-related investments. Holdings of investments in securities (including investments in U.S. and State Government obligations, corporate stocks, and corporate bonds), increased by over 14 percent from 1990 to 1992. These securities, valued at $144.4 billion for 1992, represented 80 percent of total investment assets. Nearly two-thirds of all securities, or $95.2 billion, were held in the form of corporate stock, with more than one-fifth and one-tenth of securities held in the form of U.S. and State Government obligations and corporate bonds, respectively. Reporting Year 1992 represents only the third consecutive year since 1979 for which the IRS required foundations to report separately the value of each of these types of securities on the Form arned $8.7 million in net investment 990-PF. Over the 1990 to 1992 period, foundations experienced considerable increases in investments in corporate stock, 20 percent, and investments in corporate bonds, 30 percent, and decreases in investments in government obligations, 6 percent. Foundations also experienced overall decreases in holdings of other types of investment assets, including savings and temporary cash investments and investments in land, buildings, and equipment, each of which declined by 8 percent from 1990 to 1992. While this same pattern was generally true for each of the three size groups of foundations, each group experienced increases and decreases of varying magnitudes [18]. As foundations grow in size they tend to engage in more sophisticated investment practices and hold greater proportions of investment assets, particularly corporate stock. While the large foundations held 96 percent of all their assets as investments for 1992, the small foundations held 83 percent as investments. Figure F displays the composition of investment assets for small, medium, and large-sized foundations. While the large foundations held 80 percent of all investments as a combination of corporate stocks, corporate bonds, and government obligations, the small foundations held only 64 percent in this manner. Holdings of corporate stock, 53 percent of total investments, were the dominant investment for all foundation size groups, but particularly for the large foundations. While large foundations held 56 percent of investment assets as corporate stock, the small foundations held 38 percent in this manner. Small and medium-size foundations tend to hold somewhat more of their investments in U.S. and State Government obligations and corporate 73 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 Figure F Composition of Private Foundation Investment Assets, by Size of Foundation, 1992 TOW Small Foundations Large Fou Medium FoundationS3 I Corporate stock " Corporate bonds. El Government obligations Other investments Savings and temporary cash investments I lwiudet;'fo~ndafict a Win assets u nreported a equal to zero, which are not shown separately. Small foundatiorx% we those holding it= $I to less than $1,000,000 in fair market value of total assets. - Medlum foundations .,a those holding from $11,C)(10,000 to less than $50,000,000 in fair market value of total asset Largeoffoundations Sum "Irwainnenst are those holding $50,000,000 or more in fair market ~alue of total assets. in land, buildings, and equipment (less acotanulated depreciation),' 'l-stments, in mortgage loans,' and *Other inwstrnwts,' as reported on ~)e Fort, 99D-PF. 'Other imtestments" includes items such as advances; certificates of investment; and investments in art, coins, gold, and gems. NOTE: Percentages my not add to 1~0% because of rounding. 74 bonds compared to thelarger foundations. , As foundations,grow in size they also tend to hold a smaller percentage of their assets in the form of.savings and temporary cash investments. For 1992, the small foundations held,25 percent of their investment assets as savings and tempgrary.cash, investments, compared.to 9 percent for the medium size foundations and only 5 percent for the large foundations. -Large foundations, also. tend to hold. less non'interest bearing cash compared to the, small foundations. For. 1992, small foundations held 6 percent of total assets as non-interest bearing cash,compared to less than for the large foundations. The distribution of, ' I percent ' assets by the different size groups may generally indicate that many of the small foundations have less of.a preference for risky investments and more of a preference for . asset liquidity compared to the large foundations. 'While holdings of cash for the small foundations remained relatively constant-over. the -199.0 to 1992 period, the largefoundation holdings of cash actually increased by over 300 percent from 1990 to 1992. This can be largely Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 explained by the huge holdings of cash held by the Wellcome Trust for both 1991 and 1992. Investment Behavior by Size of Foundation In general, the larger the asset size of a foundation, the more it tends to ' emphasize the growth of its assets (or endowments) as a means by which to fund charitable giving, both now and in the future. Unlike other nonprofit charitable organizations, nonoperating foundations of all sizes most often distribute grants in order to fulfill their charitable purpose. Although foundations have relative freedom in the way that they choose to invest their taxexempt endowments, they are also subject to a minimum distribution or charitable payout requirement. Allowing for certain exceptions, nonoperating foundations must annually distribute for charitable purposes an amount that equals 5-percent of the average value of their net investment assets. (For an explanation and discussion of the payout requirement, see the sections beginning with The Charitable Distribution (or Payout) Requirement.) In order to fund charitable activity without reducing the value of their endowment, a foundation must earn an average "rate of total return on assets" (defined below) that equals at least 5 percent plus the costs of investment and the rate of inflation. To the extent that foundations wish to maintain or increase the value of their endowments to fund charitable giving into the future, this represents an important goal. Different sizes of foundations tend to have different charitable and investment objectives. For instance, larger foundations may tend to operate with more of a long-term focus. They may invest and manage their assets in order to maintain or increase the size of their endowments by earning income and realizing a return on assets which will allow them both to meet the annual 5-percent payout requirement and to use any remainder to increase their investment portfolio [191. Many of the larger foundations pay out close to the required 5-percent of their net investment assets to charitable causes each year. The larger foundations hold a greater proportion of assets as investments in securities, including a greater proportion as corporate stock. Holdings of corporate stock tend to have greater risk but also higher returns compared to other investment holdings. Larger foundations may also tend to possess the resources necessary to use sophisticated investment management services. For these reasons, the larger foundations typically earn higher rates of total return on investments than do the smaller foundations. Many of the smaller foundations do not possess the resources necessary to use sophisticated investment management techniques and may not have the same incentives to perpetuate their endowments. They tend to hold lower risk and lower-return assets than the larger foundations [201. Moreover, they may operate with more of a short-term focus in order to distribute large contributions currently, so as to direct their resources to present concerns and immediate needs [21]. The smaller foundations rely much more on contributions as a source of revenue compared to other foundations. Given this, many may act as conduits or "pass-through" organizations, receiving contributions one year and then distributing them in the same year or the next. To note, the larger foundations, which typically benefit from professional investment management services, realized the greatest rates of total return on their investments and "paid out" the smallest percentage of their assets as charitable distributions between 1990 to 1992. Income Yields and Rates of Total Return An income yield measures the realized investment income earned by a foundation on its investment assets. Figure G shows median "net investment income yields" for nonoperating foundations for 1988 through 1992. The median yield is calculated, rather than the mean, since it minimizes the influence of large outliers in the data, and therefore, may be a better representation of the typical foundation. The net investment income, or NII, yield was calculated by dividing net investment income by the endof-year fair market value of investment assets [22]. Only nonoperating foundations were analyzed since only they are subject to the charitable payout requirement, discussed below. The use of only nonoperating foundations in the analysis here and in the sections that follow allows for comparisons of the NII yields, rates of total return, and payout rates, all discussed below. During the period from 1988 to 1990 the median NII yields remained relatively constant between 7.1 and 7.7 percent. The total foundation NII yield declined from 7.1 percent for 1990 to 6.5 percent for 1991 and then to 5.6 percent for 1992. However, an examination of the yields for the different size groups reveals that the large foundations' median yield increased slightly during both 1991 and 1992. The largest foundations realized a median yield of 7.1 percent for 1992, up from 6.6 percent for 1990 and 6.8 percent for 199 1. In contrast the median rate of the small foundations declined somewhat in both years. The smallest foundations realized an NII yield of 4.2 percent for 1992, down from a 6.4 percent yield for 1990. The large foundations typically earn somewhat higher NII yields than the smaller foundations. Since large foundations, compared to small foundations, rely more on investment income as a source of revenue and may use more sophisticated investment management techniques, it is not surprising that they typically realize higher NII yields. 75 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 Figure G Nonoperating Private Foundation Net Investment Income (Nil) Yields, by Size of Fair Market Value of Total Assets, 1988-1992 Size of fair market value of total assets Median Nil yields (percentages) 1988 1989 '1990 1991 1992 (1) (2) (3) (4) (5) 7.2 7.7 7.1: 6.5 5.6 6.6 73 6.8 8.0 6.4 7.3 6.5 4.2 5.6 7.6 7.6 8.0 8.2 7.1 6.9 6.9 6.6 7.0 7.3 72--. 7.1 All -nonoperating foundations' ......................................... Small foundations $1 under if 00,000 ............................................................... $100,000 unde~ $1,000,000 ................................................. Medium foundations $1,000,000 under $10,000,000............................................ $10,000,000 under $50,000,000............................... .......... 7..2 Large foundations 8.6- 8.1 --$50,000,000 under-$1 00,000,000... .. ................... ...... $100,000,000 or more ......................................................... 7.3 'Excludes nonoperating foundations vath assets unreported or equal to zero. The rate of total return, a measurement of, the total -capital-apprecia.tion-o,f ffid-endowment-of-a foundationjsa more comprehensive measure of investment performance than the N11 yield. An exami nation of rates of total return on.assets helps to show. differences among the differerif sizes of nonop'erating foundations. Figure H - shows median rates of total return-,on- nofioperating-foun-dation.assets*f6r 1988 to 19 92. A comparison with the charitable payout rates, discussed below, helps to further. the understanding of the different sizes of foundations. Consistently strong rates of total return tend to lead to ,increased long-rungiving power. The rate of total return 6.6 6.8 formula bsed here measures the change in the. value of the entire-asset-base-.with- considerations foOnflows-andoutflows, of money [231. The formula adjusts for inflation and measures* the realized income from assets, investments and otherwise, a's well as the unrealized appreciation or depreciation in the fair market value of assets. -- Median-foundation- rates of total-return-on assets for 1991 and 1992 re bounded from the very, low 1990 rates: For 1990, the total nonoperating foundation median rate was 2.4 percent. This, increased to 6.7 percent for 1991, butfell again to, 3.6 percent- for 1992. - An examination of the different size "groups shows a- similar trend, but at. a Figure H Nonoperating Private Foundation Rates of Total Return on Assets, by Size of Fair Market ---Value of Total Asiets,'; ---Size of. fair market value of total assets All nonoperating foundations' ...................... Median rates of total return (percentages) 1988 1989 1990 1991 1992 (1) (2) (3) (4). (5) n.a. 4.3 2.4 6.7 3. 6~ n.a. n.a. 2.0 5.3 2.5 7.6 0.9. 4.2 6.8 7.9 7.7 10.9 10.0 -12.2 5.1 5.2 12.9 14.9 6.3 6.2 Small foundations . $1 under s.1 00,ooo................. : ......................... $100,000 under $1,000,ODO ............................. Medium foundations .$1,000,000 under $10,000,000........................ $10,000,000 under $50,000,000 ...................... 3.4 2.3 Large foundations 76 $50,000,000 under $100,000,000 ..................... 8.3 $100,000,000 or more ......................... : .............. 9.0 n.a. . Not available., 'Excludes nonop~rating.foundations %vith assets unreported or equal to zero. 11.6 12.7 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 much different magnitude. Large foundations typically earn much higher rates of total return than do smaller foundations. Generally, as the holdings of investment assets increase; so do the total returns on assets. Median rates for the largest nonoperating foundations increased from a rate of only 1.3 percent for 1990 to 14.9 percent for 1991, the largest median rate of return realized by foundations in recent years. The year-to-year fluctuations in the returns of foundations, particularly the larger ones, tend to coincide with fluctuations in the stock market. The rate of total return for these foundations then dropped to 6.2 percent for 1992. The median return of the smallest nonoperating foundations, in contrast, increased from 1.4 percent for 1990 to 2.5 percent for 1991, only to fall to 0.9 percent for 1992. Charitable Distribution (or Payout) Requirement The following discussion of the charitable distribution requirement and the payout rate excludes operating foundations since they are not subject to the distribution requirement. Therefore, all references to foundations in this section and in the sections that follow are to nonoperating foundations, unless otherwise indicated. For reasons of comparability, the operating foundations were also excluded from median net investment income yields and rates of total return, discussed previously. The Federal Government first began to grant taxexempt status to charitable foundations in the early 1900's. Legislative changes and discussions prior to 1969 focused on the regulation of foundation activities. However, beginning with TRA69, private nonoperating foundations were required to meet a charitable giving or , 11payout requirement." The 1969 legislation provided guidelines for foundation minimum giving levels. The original payout requirement, which was based on the greater of (adjusted) net income or a fixed percentage of net investment assets, was designed to prevent potential abusive foundation activity and ensure that a minimum amount was charitably distributed. Later, the Economic Recovery Tax Act of 1981 (ERTA) modified the payout requirement by basing the required amount only on net investment assets and not on income. Generally, the data indicate that, after ERTA, large foundations altered their giving patterns more noticeably than small foundations [24]. From 1982 to 1992 the large foundations realized the greatest percentage increase in both assets and distributions. The number of large foundations, not adjusting for those that moved to the large size group due to an inflationary inc rease in their assets, also increased at a much faster rate than the other size groups. (For a more detailed discussion, see the section, Asset Growth and Distribution Goals.) Under the guidelines of ERTA, each year nonoperating foundations must calculate a "distributable amount," which is the minimum amount that the organizations must distribute for charitable purposes by the end of the next full reporting year in order to avoid a penalty tax on undistributed charitable dollars. The distributable amount, or required payout amount, equals 5 percent of the fair market value of net investment assets (the "minimum investment return"), plus or minus certain adjustments, either allowed or required [251. See distributable (payout) amount, net investment assets, minimum investment return, and net adjustments to distributable amount in the Explanation of Selected Terms section. Charitable Grants and Other Qualifying Distributions To fulfill the charitable payout requirement, nonoperating foundations can apply "qualifying distributions" from the current year, as well as any carryovers (distributions paid in excess of the minimum required amount) from the 5 previous years. The requirement can be met in either the current year or the following year. Qualifying distributions for 1992 for these nonoperating foundations are comprised primarily of contributions and grants, 88 percent; with smaller proportions for operating and administrative expenses, 8 percent; "set-asides" for future charitable distributions, 2 percent; program-related investments (e.g., loans made to public charities at below market or zero rates of interest), I percent; and amounts paid to acquire charitable-use assets (e.g., buildings, equipment, or supplies), less than I percent. As mentioned previously, nonoperating foundations fulfill their exempt purpose in an indirect manner, primarily by making grants to other charitable organizations, while operating foundations generally expend their income for direct involvement in charitable activities and programs. Operating foundations are not subject to the same charitable payout requirement, but they must still expend a minimum amount each year on direct charitable .support, usually through conducting their own charitable programs. These expenditures count as "qualifying distributions" in meeting the operating foundation requirements. For a discussion of the operating foundation requirements, see operating foundations and section 4947(a)(1) charitable trusts in the Explanation of Selected Terms section. For 1992, nonoperating foundations paid out $11.3 billion in qualifying distributions against a required payout (or distributable) amount of $7.6 billion. As in years past, qualifying distributions increased at a relatively constant rate, 17 percent over the period from 19901992. The different size groups increased qualifying distributions at different rates between these years. The 77 Private Foundations and Charitable Trusts: A Decade of CharitableGiving and Growth, with Highlights of 1991 and 1992 small foundations paid out 18 percent more qualifying distributions for 1992 than for 1990, while the medium foundations paid out I I percent more and the large f6undations, 22 percent more. When the Wellcome Trust's qualifying distributions are excluded, the large foundations qualifying distributions increased by 26 percent from 1990 to 1992. Foundation gi ving generally increases faster than the rate of inflation. ' Over 79 percent of foundations with a charitable payout requirement either met or exceeded the required amount for 1992 in that same year. Those that did not had until the end of the following reporting year W fulfill the requirement. While 17 percent of the small foundations did not meet the 1992 requirement during 1992, thereby amassing "undistributed income," nearly 46 percent . of ttie -large'foundations chbs~e-to- wait'6nti I- the followirfg-report:: ing year to distribUte their required amount for 1992 [26]. Given that the annual payout amount is not calculated until the end of t he reporting year and that it is based on the monthly average * of investment assets, many founda-tions C'hoose.t*o-take-advantage-of the_l~year_tax- and-penalty-free "grace period" for making required distributions. This lag time gives them an opportunity to consider their investment returns, payout rates, and contributions received, among other factors, when preparing their grantmaking budgets for the, following year or-years.--In contrast, while some foundations chose to wait until 1993 to disperse 1992 qualifying distributions, many gave in excess of the 1992 required amount during the 1992 Reporting Year. Small foundations typically distribute much more than their required amount. For 1992, the small foundations as- a group distributed an amount of qualifying distributions that was over 325 percent more than their combined required distributable amount. In contrast, the large. foundations for 1992 distributed an amount of qualifying distributions that was 18 percent more than their combined required distributable amount. Contributions, gifts, and grants distributed by nonoperating foundations equaled $10.7 billion for 1992. According to the Foundation Center's Foundation Giving, thelargest proportions of total foundation grants for 1992 went to the areas of education, health, human services, and arts and culture [27]. The contributions and grants given by foundations accounted for less than one-tenth of total philanthropic giving, with the vast majority of giving coming from individual gifts [28]. - Payout- Rates -- Since the small foundations tend to distribute more charitable dollars relative to the required amount, they also tend to have higher charitable payout rates. Figure I displays median foundation payout rates by size of loundation for -1988 throula h 19 92. To calculate the payout rate, the amount of (adjusted) qualifying distributions was divided by the amount of the monthly average of net'investment assets [29]. The 1991 and 1992 median payout rates declined slightly over past years. Foundation payout -rates are genera.11v ex,tremely steady,~ but from 1990 to 1992.: they declined by half of a percentage point for the median foundation, from 7.0 percent for 1990 to 6.5 percent for 1992. The median payout rates for 1991' and 1992 for the smallest foundations, 12.0 percent and 11.7 percent, respectively, increased-over the 1990 payout rate, 10.6 percent. In contrast, the median payout, rate of Figure I Nonoperating Private.Foundation Payout Rates, by Size of Fair Market Value of Total Assets; 1988-1992 Median payout rates (percentages) Size of fair market value of total assets All nonoperating foundations' ............... ; ........... .. 1988 , 1989 1990 1991 (1) (2) '(3). 7.2. 7.1 (4) .. 6 7' 10.7 6.6 10.9 6.8 10.6 6.7 12.0 6.3 5.9 5.5. 5.8 5.4 5.8 5.4 5.6 6.2 5.3, 5.3 5.4 5.0 5.4 5.0 Small foundabons $1:under $100,006 ................................................ $100,000 under $1,000,000.................................. Medium foundations $1,000,000 under $10,000,000 ............................. $10,000,000 under $50,000,000 ........................... Large foundations $50,000,000 under $100,000,000 .................... . - ...; ... . -$100,000,000 or more................ ..................... Includes'nonoperating foundations with assets unreported or equal to zero, which are not shown separately. 78. .5.5 5.3 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 the largest foundations remained very constant and equaled the required 5.0 percent for 1992. Overall, Figure I shows that foundation payout rates for all size groups remained relatively constant over the entire 5-year period. The payout rates for the large and medium-sized foundations were very close to the required 5 percent. Those of the smaller foundations, which tend to emphasize current, rather than future, charitable giving, were much higher than the required rate. The smaller foundations seem to focus more on distributing charitable dollars currently, rather than on long-term endowment growth. The larger foundations, on the other hand, tend to reinvest a greater portion of their return on investments, perhaps to ensure endowment growth for future charitable giving. The trend of the large foundations to give consistently at a payout rate of 5.0 percent seems to demonstrate their use of long-range planning in setting grantmaking budgets. Salamon, in a survey of the payout policies of foundations, found that smaller foundations, as a group, tend to use their investment yields to help to structure their charitable payout rates, while the larger foundations, as a group, tend to structure their investment decisions in order to reduce the effect of the payout requirement on their assets [30]. Asset Growth and Distribution Goals Over the decade from 1982 to 1992, total nonoperating foundation assets increased in real terms by 115 percent, This growth in nonoperating foundation assets is explained both by the growth in the value of assets and by the 52 percent increase in the number of foundations. The increasing assets helped to fund a real increase of 61 percent in the amount of qualifying charitable distributions made by foundations during that decade. The overall growth in foundation assets and charitable distributions exceeds the 32 percent real growth rate of the Gross Domestic Product from 1982 to 1992 [31]. The growing assets of foundations during the 1982 to 1992 decade helped to increase total grants over the same period. Foundation statistics suggest that a growing endowment may help to fund charitable giving at the same or at an increased amount in the future. During much of the 1980's and into the early 1990's, many foundations benefited from favorable stock market conditions that allowed them to realize rates of return and income yields high enough to easily meet the 5-percent charitable payout requirement. As foundation assets increased, so did the required distributable amounts, thereby leading to an increased amount of charitable distributions made by many foundations. Large foundations historically have realized greater rates of total return on assets than have small foundations. The large foundations typically rely heavily on the growth of their endowments to fund charitable programs and, therefore, have distributed dollars at consistent rates and in such a way as to further long-run asset growth. From 1982 to 1992, the significant real asset growth of the large foundations allowed them to increase charitable distributions at a faster rate than either of the other size groups, despite paying out charitable dollars at rates hovering at the minimum 5.0 percent. Figure J displays revenue, assets, and qualifying charitable distributions for the different size groups of foundations for the period 1982 to 1992. During that 10-year period, the large foundations increased real assets by 164 Figure J Nonoperating Private Foundations: Changes in Number of Foundations and Real Growth in Revenue, Assets, and Charitable Distributions, by Size of Foundation, 1982-1992 [Money amounts are in billions of 1987 dollars.) Percentage Item Total number of nonoperating foundations' .................................... Total revenue ................................ Total assetS2................................. Total charitable distributionS3 ........ Number of small nonoperating foundations ................................... Total revenue................................ Total assets2 ................................ Total charitable distributionS3 ....... Number of medium nonoperating 5 found tions.. .................................. Totalarevenue................................ Total assetS2 ................................. Total charitable distributionS3....... Number of larg? nonoperating foundations .................................... Total revenue ................................ Total assetS2 ................................. Total charitable distributionS3........ 1 1982 1992 increase, 1982-1992 (1) (2) (3) 25,363 9.6 67.1 5.8 38,620 17.7 144.3 9.3 52 83 115 61 19,752 1.0 4.1 27,824 1.3 4.9 41 28 21 1.0 1.0 (1) 3,948 3.9 27.1 2.6 9,331 6.5 44.5 3.5 136 65 64 31 148 4.7 35.9 2.1 1 438 9.8 94.9 4.8 1 196 110 164 128 I The total number of foundations includes 1,027 foundations for 1992 and 1,515 foundations for 1982 that had assets unreported or equal to zero. These foundations are not shown separately. 2 Total assets represent 'fair market value of total assets" from Form 990-PF. 3 Total charitable distributions represent 'qualifying distributions" from Form990-PF. 4 Small foundations are those holding from $1 to less than $1,000,000 in fair market value total assets. 5 Medium foundations of are those holding from $1,000,000 to less than $50,000,000 in fair market value of total assets. I Large foundations are those holding $50,000,000 or more in fair market value of total assets. 7 Less than 0.5 percent. NOTE: Constant dollar arrounts were calculated using the Gross Domestic Product (GDP) price deflator. 79 Private Foundations and Charitable Trusts: A Decade of Charitable -Giving and Growth, with Highlights of 1991 and 1992 percent, while increasing charitable distributions by 128 percent. In contrast, the small foundations, which7typically pay out charitable dollars at more generous rates than the large foundations but.realize lower rates of total return and income yields, increased real assets and distri-, butions by 21 percent and less than one-half of I percent, respectively. It is-important to note, however, that the number of large foundations increased at a rate nearly 5 times that of the small foundations during this decade. The number of large foundations increased by 290, or 196 percent, while the number of small foundations increased by over 8,000, or 41 percent. 80 Section 4947(a)(1) Nonexempt Charitable Trusts Overview of Revenue, Assets, and Grants Paid Charitable- tru sts~ddscribed in-liternal Revenue-Code, section 4947(a)(1) are organizations Which have exc'lusively charitable interests but Which are not exempt from 'federal income tax as Section 501 (c)(3) organizations are. Charitable trusts that are not publicly supported are. :, -subjeci-to-tfie same requi rements as foundations, inclu ding the exc.ise tax provisions and the charitable payout requirement. Charitable trusts are typically supported and controlled by' an individual or family andlike f6undations, they file the Form .990-PF. The 49~7(a)(I) charitable trusts that file the Form 990-PF, hereafter referred to as "charitable trusts" are unlike'-foundations in that they are not required to be formally recognized as taxexempt organizations. by IRS, Most were originally. formed as 4947(a)(2)'split-interiest trusts that at one time had one or more noncharitable beneficiaries. Addition. ally, the 4947(a)(1) trusts must pay an annual tax on. their income.(usually from investments).that is not distributed . for 'charitable purposes. ' Trusts must report such itico -me and tax (under Subtitle A of the IR.Q on Form 1041, U.S. Fiducia*ry Income Tax Return. Statistics for charitable trusts contained in this article are based. on Forms 990-PF, but not on -Forms 104 f. Two other types of section 4947(a)(1) charitable *trusts file different returns with the Internal Revenue Service and are not covered in this article. First, certain charitable trusts, those that receive the majority of their support from, public, rather than private, sources, file the Form 990. These trusts typically operate in'con.nec'tion' with, and provide support to, one' or more public , charities. Second, split-interest trusts, which have both charitable and. noncharitable beneficiaries, file.the Form 5227, SplitL Interest Trust Information Return. Over 2,900 section 4947(a)(1) trusts filed Forms 9902 PF for 1992. For thisyear, charitable trusts represented, 2 percent or less of the total assets held, total revenue earned, and total grants distributed by all of the Form.990- PF filers. The number of Form.990-PF filers classified as trusts increased by' 12 percent from 1990. Nearly 99 percent of these organizations"were classified as nonope'rating trusts. The vast majority of trusts, 92 per~ cent, made, charitable grants for'1992. This compares to 83 percent, for pfivate foundations'. From 1990 to 1992, total trust revenues increased at a faster rate than the revenues of foundations, ~9 percent.(compared to 21 percent), from $269.7 million to $346.8~million. Large increases in both net gains from sales of assets,,219 percent, and contributions received, 63 percent, help explain the overall increase in revenues. Total trust assets, eqqal.to $3. 1. billion for 1992, also increased;from 1990 to 092, but a smaller'percentage increase than the assets of foundations, 13 percent for tru~t assets compared to,17 -percent-for foundation assets- -Increases-of-25-percent in---.-investments in corporate stock and 17 percent in invest-, ments in corporate bonds help explain the overall increase in trust.assets. Despite large increases in both assets and revenues, the amount of.grants distributed.by tr.ust,s in- . creased-by-Qnly-2-pe,rcent-hetwe-e,n-I 990 -and 1-992-to $154.6 million. Figure K.shows total amount and percentage changes for various charitable trust revenue, asset, and expense items for the period 1990 to 1992: 'The following classifications apply, unless otherwise indi_cat d, to the discussion 6f c'haritable trusts through ut the remainder of this article: "small charitable trusts" refers to the group holding less than $ I. million in assets (excluding trusts that either do not report assets or that report assets equal to zero); "medium-siize dharitable trusts" refers to the'group, holding from $ 1: million to lesg than $10 million in assets; and" "large charitable trusts' I refers to the group holding $,10 million or more in assets. It'sho Id.be nofed that the medium and ldrge-'siz'ed trusts are much smaller on average than.the medibm and. largesized foundations. Sources of Charitable-Trust Revenue With large increases in net gains from sales of assets and in the amount of contributions~ received'during- the 1990 to 1992 period, the -composition oftrust rev~nue for 1992 changed somewhat from 1990. Trusts cam the majority ~of their revenue from net gain'from th.e sales of assets, 36 percent, and dividends and. interest. from securities,- 35. percent. A smaller proportion.of totaf r~eve'nues,'18 ,percent, come from cdntributi ons received., Compared to foundations, which received over a third of their revenue from contributions, trusts relied much less on contributions as a'.source of revenue.dnd much~more on investment income. The overall trust revenue compositioil most resembles-the large foundation revenue composition. Along with increases-in overall revenue, charitable trust Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 Figure K IRIC Section 4947(a)(1) Charitable Trusts: Selected Financial Items, 1990-1992 [Money amounts are in rnillions of dollars.] Percentage Item 1990 1991 1992 increase, 1990-1992 (1) (2) (3) (4) Total assets (fair market value) ....................................................................... Investments, total ................................................................................................ Savings and temporary cash investments........................................................ Investments in securities, total ......................................................................... U.S. and State Government obligations......................................................... Corporate stock.............................................................................................. Corporate bonds ............................................................................................. Other investments I .......................................................................................... 2,772.4 2,475.6 225.8 1,876.5 449.0 1,101.4 326.1 343.3 2,991.0 2,714.4 212.5 2,023.8 415.1 1,287.0 321.8 478.1 3130.0 2:831.3 193.7 2,174.5 413.9 1,379.2 381.5 463.1 12.9 14.4 (14.2) 15.9 (7.8) 25.2 17.0 34.9 Total revenue...................................................................................................... Contributions, gifts, and grants received ............................................................ Net gain (or loss) from sales of assets............................................................... Dividends and interest from securities ................................................................ 269.7 38.9 39.5 120.0 280.4 39.3 73.7 117.0 346.8 63.3 126.1 120.1 28.6 62.7 219.2 0.1 Total expenses .................................................................................................... Contributions, gifts, and grants paid ................................................................... 192.2 151.8 197.0 158.2 191.2 154.6 (0.5) 1.8 Excess of revenue (less loss) over expenses.................................................. 77.5 83.3 155.6 100.8 1 1 1 1 Sum of "Investments in land, buildings, and equipment (less accumulated depreciation)," "Investments in mortgage loans,' and "Other investments," as reported on the Form 990-PF. "Other investments" includes items such as advances; certificates of investment; and investments in art, coins, gold, and gerns. net investment income, on which the excise tax is based, increased by 27 percent from 1990 to 1992, to $252.8 million, while the amount of excise tax reported increased by 36 percent, to $4.3 million. Less than I percent of charitable trusts reported "unrelated business income" for 1992, totalling only $117,200, or less than one-tenth of one percentage point of the total revenue reported on the "Analysis of Income Producing Activities" schedule of the Form 990-PF. Like foundations, the majority of trust revenue reported on the aforementioned schedule was reported as excluded income, 87 percent, with the remaining amount reported as income that was (directly) related to the trust's charitable purpose, 13 percent [32]. Like the foundations, the operating trusts, compared to the nonoperating trusts, tend to report a much higher proportion of income on this schedule as exempt function income. Charitable Trust Assets and Investments Like foundations, charitable trusts hold the majority of their assets as investments, 90 percent, which is somewhat less than the proportion of investment assets held by foundations. Over three-quarters of trust investment assets, or 77 percent, were held in the form of securities. The amount of investments in securities increased by 16 percent from 1990 to 1992, to $2.2 billion. This increase was greater than the 13 percent overall increase in trust assets over this period. Figure L depicts the composition of investment assets for all trusts and for each of the different size groups. Investment assets include savings and temporary cash investments; government obligations; corporate stock; corporate bonds; land, buildings, and equipment; mortgage loans; and "other" investments. Over three-quarters of all trust investment assets were held as either government obligations, corporate stock, or corporate bonds. Compared to foundations, trusts held a somewhat smaller proportion of investment assets in corporate stock, 49 percent, and government obligations, 15 percent, and a somewhat larger proportion in corporate bonds, 13 percent. The remainder of investment assets was comprised of savings and short-term cash investments, 7 percent; and land, buildings, equipment, mortgage loans, and other investments, 16 percent. Like foundations, as trusts grow in size they tend to hold somewhat more of their investment portfolio as investments in securities, particularly corporate stock. Charitable Trust Income Yields and Rates of Total Return As in the case of foundations, the median net investment income (NII) yields and rates of total return on assets were calculated only for nonoperating trusts. Figure M displays the median NII yields for the different sizes of charitable trusts for 1989 through 1992. The trusts realized somewhat higher NII yields for 1991 and 1992 compared to foundations. For instance, for 1992 the median trust realized a 7.5 percent NII yield, while the median foundation realized only a 5.6 percent yield. For all of the years displayed in Figure M, the small trusts realized higher NII yields than either the medium or large-sized trusts. This trend is the opposite of that of foundations. Compared to 81 Private Foundations and Charitable Trusts: A Decade of Charitable Giving. and Growth, with Highlights of 1991 and 1992 Figure L Composition of Charitable Trust Investment Assets,'by Size of7rust, 1992 Total' -- Large-Charitable Trusts Medium Chafl~= bl-Trusts- Sihall-Charitable'Trusts Corporate stock' El Government obligations I I Corporate bonds Other investments Savings and temporary cash n-men Includes chaAtable trusts with assets unreported or equal to zero, which are not shown separately. . Small charitable trusts are those holding from $1 to less than $1,000,000 in fair market value of total assets. .3 lVedum charitable trusts are those holding from $1,000,000 to less than $10,000,000 In faii market value of total assets. 4 Large charitable trusts are those holding $10,000.DDO or more in fair market value of total assets. 'Sum of'Investments In Iand, buildings. and equipment (less accumulated depreciation).' "Investments in mortgage loans,* and 'Other investments,' investments' includes iterns such as advances: certificates of investment: and investments in art, coins, gold, and gerqs. NOTE: Percentages may not add to 100% because of rounding. foundations, there is little difference among the different trust size groups in terms of the extent towhich they rely on investment.income as a,source of revenue. Figure N displays the median rates of total return on assets for the different sizes of trusts for the years, 1990 to 1992. For both 1991 and 1992, the median trustrate of total return exceeded the median foundation rate of total as reponed on the Form 990-PF. "Other j return, 10.5 percent to 6.7 percent for 1991 and, 6.4 percent to 5.6 percent for 1992. In ten.Ti.s.of both the NII yield and rate of total return data', it seem s that the small trusts outperformed their small foundation counterparts. The large trusts, however,. did not outperform foundations of the same size for either year. Unlike foundations" few notable differences existed arriong the different size groups of.trusts. Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 199 1 and 1992 Figure M Nonoperating Charitable Trust Net Investment Income (Nil) Yields, by Size of Fair Market Value of Total Assets, 1989-1992 Median Nil yields Size of fair market value of total assets (percentages) All nonoperating trusts...................................... Small trusts $1 under $100,000 ................................................ $100,000 under $1,000,000.................................. Medium and large trusts $1,000,000 under $10,000,000 ................... . ...... $10,000,000 or more................................... . ......... 1989 1990 (1) (2) 8.9 7.4 8.5 9.3 7.3 7.5 8 2 8.2 , 7.2 6.6 Median Nil yields Size of fair market value of total assets (percen tages)-conti nued 1991 All nonoperating trusts...................................... Small trusts $1 under $100,000 ................................................ $100,000 under $1,000,000.................................. Medium and large trusts $1,000,000 under $10,000,000............................. $10.OW,000 or more ............................................ 1992 (3) (4) 7.3 7.5 7.3 7.4 7.28.0 7.0 6.9 6.9 7.1 or 21 percent more than the required distributable amount. As in the case of foundations, the discussion of the distribution requirement and payout rates excludes operating trusts because they are not subject to the same payout requirements as nonoperating trusts. The small trusts as a group distributed 28 percent more for charitable purposes than the required amount, while the medium trusts distributed 10 percent more than the required amount and the large foundations 27 percent more. Much less variation in the payout rate is evident among the different size groups of trusts, as compared with foundations. Approximately 72 percent of trusts either met or exceeded the required payout amount for 1992. This is somewhat less than the 79 percent of foundations that met or exceeded the required payout amount in that same year. The remaining 28 percent of trusts amassed undistributed income and had until the end of the following reporting year to fulfill the requirement. Figure 0 presents median payout rates for charitable trdsts for 1989 to 1992. The median payout rate for all trusts for 1992 was 5.0 percent, which,was below the 6.5 percent median payout rate for foundations for that same year. While the smallest foundations paid out distributions at a rate of 11.7 percent for 1992, trusts of the same 'Excludes nonoperating trusts with assets unreported or equal to zero. Figure 0 Nonoperating Charitable Trust Payout Rates, by Size of Fair Market Value of Total Assets, 1989-1992 Figure N Nonoperating Charitable Trust Rates of Total Return on Assets, by Size of Fair Market Value of Total Assets, 1990-1992 Size of fair market value of total assets retu 1990 (percent 1991 as 1992 (percc tages) 1989 1990 (1) (2) All nonoperating trusts' ......................... 5.9 5.8 6.4 5.9 6.0 5.7 55 5:8 5.6 5.5 Median rates of total Size of fair market value of total assets Median payout rates (1 (2) (3) All nonoperating trusts' .................... 3. 4 10 S 94 Small trusts $1 under $100,000 .................................... $100,000 under $1,000,000 ...................... Small trusts $1 under $100,000 .............................. $100,000 under $1,000,000................ 3.2 3.5 10.3 10.5 5.7 6.4 Medium and large trusts $1,000,000 under $10,000,000 . $10,000,000 or more ....................... ....... Medium and large trusts $ 1,000,000 under $10,000,000 ........... $10,000,000 or more.......................... :. 3.5 3.5 10.1 11.1 6.5 4.7 Size of fair market value of total assets Median pdyout rates 'Excludes nonoperating trusts with assets unreported or equal to zero. Charitable Trust Distributions and Payout Rates The section 4947(a)(1) charitable trusts distributed $154.6 million as contributions, gifts, and grants paid for 1992, an increase of only 2 percent over 1990. The grants distributed by the trusts represented 93 percent of the total amount of qualifying distributions. The nonoperating trusts paid out $163.8 million in qualifying distributions (percentages)continued 1991 1992 (3) (4) All nonoperating trusts' ......................... 5.5 5.0 Small trusts $1 under $100,000 .................................... $100,000 under $1,000,000...................... 6.0 5.5 5.5 5.0 Medium and large trusts $1,000,000 under $10,000,000 ................. $10,000,000 or more........................ ........ 5.1 5.0 5.0 5.0 I Includes nonoperating trusts with assets unreported or equal to zero, which are not shown separately. 83 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with. Highlights of 1991 and 1992 size paid out distributions at a rate of only 5.5 percent.-' The charitable trusts generally distributed charitable dollars at a lower rate than didfoundations.- Aside from the smallest trusts, those holding assets from $1 to less than $100,000, trusts paid out charitable dollars at a median rate equal to the required -5.0 percent for 1992; which is comparable to the payout rate of the large f9undations. Summary Pflvate Foundations 84 Over 42,4.00,private foundations, representing over onequarter of all Internal ReVehue Code 501(c)(3) nonprofit charitable organizations that filed information returns with the-Internal-Re-venu-e-,Seivici~, distributed oXqr billion in charitable contributions and.grants for 1992.. Foundations increased the amount of contributions and. grants given by 23 percent from 1990 to 1992. During . this same time period, total foundation revenues an&assets both realized relatively strong increases of 21 percentand 17-pe-rcen-t, _ res`p&ctively-. Total foundation revenue increased to $23.6 billion from 1990 to 1992. All of the gain occurred from 1990 to 199 1, as foundations actually realized a 4, percent loss in revenues from 1991 to 1992. A significant two-year . 'in-crease-o-f 76-p-'erce-tit-ifn ni-e-t-g-ains7from sales-of assets.-and-.a smaller increase of 16 *percent in the amount of co.ntributions received by foundatio ns, help to explain the increased total revenues from 1990 to 1992. Overall trends by size of foundation. continue to show that as the size of a foundation increases, the proportion of revenue from I contributions declines, while the proportion from net investment income rises. Like total revenue, net investment income, on which the excis& tax is b,ased,'increalsed by 19 percent from 1990 to 1992, to $14.3 billion. Foundations reported a total of $194.2 million for the excise tax paid on investment in Orne, an increase of 25 percent compared to the tax paid for 19.90.. Total foundation assets grew to-$192.2-billi6h.for 1992; an increase of 17 percent from 1990. Nearly allo.f the ,gains were'realized for the 1990 to 1991 period, As foundation assets only increased by I percent- from 1991 to -Foundations held the majority of their assets as -192. investments, 94 percent, with investments in.securiti.es, alone, comprising 80 percent of total investment assets. Foundations held well'over half of their investment assets, $95.2 billion,. as investments in corporate stock; followed . by investments in Government obligation§, 17 percent; -As-the and ifivestmenfsih corporate -bonds . 10 percent. . size of a foundation increased, the proportio n of 'assets held as corporate stock tended to increase, while the proportion held As savingsand temporary cash invest-, i ments tended to.decrease. Along with the increases ih assets, particularly. from 1990 to 1991, foundations, especia.11y the large~ foundations, realized Very high rates of t~tal return On assets for 1991. For this year, the median foundation achieved a return of 6.7. percent,.'while the largest, foundations achieved a median return of 14.9 percent. For 1992, along with the srhall gains in total foundation as~ets, median' foindation rates of total returns were more moderate. The median found.ation,achiev8d a return of 3.6.percent for 1992, w' hile, the. largest foundations Achieved a median return.of 6.2 percent. The large foundations typ ically achieve higher rates of return than their small counterpAq~. Asin 0 - past years,'this was also tru e for.b'th'1991 and 1992. For instance, for I §41,T1w ~ilest foundationsrealized.a rate,of total return of only 2.5 percent, compared *to the, 14.19 percent median, return for the largest foundations.'- In terms of the income yield on, net invest. ment as sets, or the."het investment. income'(NII) yield," .. -the -median-foundlation-realized4 slightly-lower yield-for-, 1 . 199 I and 1992,,6.5 'percent arid 5.6 percent,, respecboth. tively, comparedtolhe 7. i. percent median yield for 1990. . Foundations t ypically rely largely on asset growth, earned income on investments,, and contributions received to- support their charitable-giving-.' Charitable di§tributions____ continued to. increase at a relatively consistent rate for i991 and 1992 as .foundations continued to make contri'butions to areas su~h as edti6ati6fi, health, human *ser~,i6es, community development,-th.e arts and humanities,- and the environment. In order to fulfill. the charitable, payout requirement, nonoperating foundations paid.out $113 billion in qualifying distributions against a required, payout'amount of $7.6 billion: The arhouilt of-,qualifying distributions made by the onoperating foundations increased by 17 percent from 1990 to 1992. 'However,-as a measure of rate of charitable giving, the median charitable payout rat.e decreased by half a percentage point from 1990 to 1992, from 7.0.pp'r~Pnt to 6.5 percent.. As in past years, the.-smailler foundations tended to pay out charitable dollars at higher rates than the larger.foundations. . The smallest, foundations distributed 6aritabie dollars at a median payo6t r.ate. of .1 2.0 percent for 199 1 and.1 1.3 percent for 1991 In contrast, the largest foundations distributed charitable dollars at a median payout rate of only 5. 1 percent for 199 1, and 5.0'percent for 1.991.,-, . The rate 4 5.0 percent was~ equal to the minimum required payout rate. . During the d~caae fr6m 198~ to 1992, foundation assets . and charitable grants, increased in real terms by 1 12 percent -and 71 percent, respectively. Real foundation revenue grew by 79. percent during the same decade, with Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 steady annual increases from 1982 to 1986 and fluctuating year-to-year changes from 1986 to 1992. The overall growth in foundation assets and revenues markedly exceeds the'32 percent growth of the Gross Domestic Product from 1982 to 1992 [33]. Section 4947(a)(1) Charitable Trusts Over 2,900 rionexempt charitable trusts defined under Internal Revenue Code 4947(a)(1) represented 6 percent of the total number of Form 990-PF filers for 1992, which includes both private foundations and 4947(a)(1) charitable trusts. Charitable trusts are subject to the same charitable distribution requirement as foundations and operate in a relatively similar manner. For 1992, these charitable trusts represented less than 2 percent of the total assets held, total revenue earned, and total grants distributed of all of the Form 990-PF filers. Charitable trusts distributed $154.6 million in charitable contributions and grants for 1992 an increase of only 2 percent from 1990 to 1991. During' this same period, trusts realized increases in both revenues and assets, 29 percent and 13 percent, respectively. Total trust revenues increased to $346.8 million for 1992. Large increases in both net gains from sales of assets, 2 10 percent, and contributions received, 63 percent, help explain the overall increase in revenues. Compared to foundations, trusts relied much less on contributions as a source of revenue and, instead, relied more on investment income. In this respect, they behaved most like the large foundations. Total charitable trust assets grew to $3.1 billion for 1992, an increase of 13 percent over 1990. Two-year increases of 25 percent in investments in corporate stock and l7percent in investments in corporate bonds help explain the overall increase in trust assets. Like foundations, trusts held the majority of their assets as investments, 90 percent, with investments in securities alone comprising 77 percent of total investment assets. For both 1991 and 1992, the median trust rate of total return exceeded the median foundation rate of total return. For 1992, the median trust earned a total return on assets of 6.4 percent, and for 1991, 10.5 percent. The trusts realized somewhat higher NII yields for 1991 and 1992, compared to foundations. For 1992, the median trust realized a 7.5 percent NII yield and for 1991, 7.3 percent. For both years the small trusts realized higher NII yields than either the medium or large-sized trusts. Unlike foundations, there were few notable differences in NII yields and rates of total return on assets among the different size groups of trusts. In terms of charitable giving, in order to fulfill the charitable payout requirement, the nonoperating trusts pAid out $163.8 million in total qualifying distributions against a required distributable amount of $134.9 million. The amount of qualifying distributions made by the nonoperating trusts increased by less than 2 percent from 1990 to 1992. The median payout rate for all trusts was 5.0 percent for 1992, which was below the 6.5 percent median payout rate for foundations. There was little variation in the rate at which trusts of different sizes paid out charitable dollars. For instance, for 1992, the smallest trusts paid out distributions at a rate of 5.5 percent, while the largest trusts paid out distributions at a rate equal to the required 5.0 percent. Data Sources and Limitations The statistics in this article are based on a sample of Reporting Years 1991 and 1992 Forms 990-PF that were filed with the IRS. For 1992, for example, IRS required organizations having accounting periods beginning in 1992 (and therefore ending between December 1992 and November 1993) to file a Form 990-PF. Some part-year returns were included in the samples for organizations that changed their accounting periods, or filed initial or final returns. More than 61 percent of the foundations in the sample had accounting periods covering Calendar Year 1992 or, in some cases, part-year periods that ended in December 1992. The same was true for Reporting Year 199 1. For charitable trusts, 58 percent filed calendar year returns for 1992 and over 55 percent did so for 1991. The 1992 and 1991 samples were stratified based on both the size of book value of total assets and the type of organization (either a foundation or a 4947(a)(1) charitable trust) [341. Foundation returns were selected at rates that ranged from approximately 5 percent (for the more numerous but very small asset-size returns) to 100 percent (for the relatively few returns with large amounts of assets). Charitable trust returns were selected at rates that ranged from 31 to 100 percent. The 5,761 returns in the 1992 sample (4,929 foundations and 832 trusts) were drawn from an estimated population of 42,428 foundations and 2,932 trusts. Similarly, 5,574 returns in the 1991 sample (4,381 foundations and 1,193 trusts) were drawn from an estimated population of 41,348 foundations and 2,662 trusts. The magnitude of sampling error, measured by coefficients of variation for selected items for Reporting Year 1992 is shown in Figure P. The samples were designed to provide reliable estimates of total assets and total revenue. For both 1991 and 1992, to accomplish this, 100 percent of foundation returns with book value of assets of $10 million or more and 100 percent of charitable trust returns with book value of assets of $1 million or more were included in the sample, since these were the returns that, in dollar terms, 85 Private Foundations and Charitable Trusts: A Decade of Charitable Giving and. Growth, with Highlights of 1991 and 1992 Figure P Coefficients of Variation for Selected Items, by Type of Organization, 1992 Item Private foundations Charitable trusts Total assets (fair market value)...................... Total revenue .................................................. Total expenses ............................................... Contributions~ gifts, and grants paid ......................... ............. ............ 0.39. 1.87 2.06 0.57 1.24 2.06 2.25 2.61 accounted for the majority of activity. Efforts were made, to verify that organizations -selected as foundations were, in fact, foundations*; and that oTgahizations selected as trusts were, in fact, trusts. The relatively small number of foundafions in the sample that were incorrectly selected.as trust s,were ultimately re-classified as foundations'(for the statistics) ' usin9: identification codes from the IRS Exempt Organization Master File. However, the weights used for 86 these organizations were based on the original sample selection-classification., The-~e-§a-iiie--Fn&th-o-d§-~vdr-e-us-ed-~~ for. the trusts that were incorrectly sampled as foundations. Approximately 34 percent of all foundations, including those reclassified as foundations, reported $10 million or more in book value of total assets for. 1992. These foun-ddti6tfsFre15bftdd 80~pCi~cent of-thd -Cstimated-book-val(lt of assets of all foundations. While these foundations, were sele.cted.at a rate of 100 percent, the remaining foundation' population was *,rdndomly selected for the sample at various rates of less than 100 percent depending.on asset size: 4.9 percent for returns with assets zero, unreported, or less than $100,000; 5.9 percent for returns with assets.of $ 100,000 to, less than $4 million; and .14.4 perdent for returns with assets of $1 . million to less than $10 million. Approximately 37 percent of all 4947(a)(1) charitable trusts in the sample reported $1 million or more in book value of 4otal assets, for 199 1. These trusts reported 79. percent ' of the book value of assets of all trusts. While these trusts were selected at a rate'of 10.0. percent, the, remaining trust populati on was randomly selected for the sample at various rates of less than 100 percent depending on asset size: 3 1. 1 percent for returns. with assets zero, , unreported, or less than $100,600; and 27.9 percent for returns with assets of $100,000,to less than $1 million. Samplirig, rate's for both foundations andtrusts Were similar for 1991 data. The popplat ion from which the 19,91'and 1992 samples of Form 990-PF records posted to.'., were drawn consisted ' .the IRS Business Master File during 1991 and 1992 for. the 1991 sample and 'during 1992-and--1993 for the 1992 sample. Some of the records designated were for organi- zations that were deemed inactive or terminated. Inactive and terminated organizations are not reflected in the estimates. For the small number of activ large foundations whose returns for the 1991 and 1992 Reporting Years were not yet filed or were otherwise -unavailable for the statistics (approximately 5 returns in each year), data. were estimated using other returns having, similar chaiacteristics. For the unavailable active trust returns, which 1 were smaller in size than those, for foundations*, pnor-year data of those trusts were in most instances used as a substitute, approximately 5 returns in each year. The data presented were obtained from returns as originally filed 'with IRS. The.data were subjdct-to comprehensive testing and correction procedures in order to ensure statisticat reliability and validity. - In most cases, -changes-made-to-the original-return-as a result. of-ad-miriistrative processing, audit proceduresi or a tax payer-amend7 ment were.not, incorporated into the data base. A general discussion.of the reliability of estimates'based on'samples, methods for evaluating both the magnitude of sampling and non-sampling error, and the precisi6wof sample' . -esiin-lates-can b-e f-o-und'in the-ie_-ner~ al Appe-n~ dix~to this report. Explanatioi.i of Selected Terms The following explanations describe terms as they applied, -to-both-priy4te foundations-and-chari table- trusts for-1991 'and, 1992,' Unless 6therwisle indicated, all,references to foundations also' apply to trusts Adjusted Net Income..--In general, this was the amount by Which a private foundation's gross income exceeded., the expenses associated with earning the income. In. cluded were all amounts derived fr6m'or co nnected withproperty held by the foundation, such as net'short-term . , capi6l gain, ordina'ry,investment income (dividends, interes.i, rents, and royalties), and income from amounts. set aside for future charitable use, from all charitable functions,:or from unrelated trade or business activities. Excluded were contributions received and long-term capital gains. -Long-term capital,losses could be reported as "other expenses" for the calculation of adju.sted,net income. This item is primarily used to determine if an operating foundation met the required "income test.',' This test demonstrates if the,operating. foundation spent the '. ~a'st rl~pjority of its investment income on t he direct, active conduct of tax-exempt charitable activities. See opFrating foundation-and section 4947(a)(I)..charitable trusts in this section. This item was reported on' Form 990-PF,, Part J, line 27c, column (c). Assets Zero or Unreported --Included in this asset size category. were: (1) final returns of-liquidating or dissolvingfoundatio'ns that had disposed of all assets; (2)'returns Private Foundations and Charitable Trusts: A Decade of Charitable Giving and. Growth, with Highlights of 1991 and 1992 of those foundations reporting zero end-of-year assets that had apparently distributed (or disposed of) all assets and income received during the year; and (3) returns of those foundations that did not report assets. A liquidating or dissolving foundation usually passes its assets on to another foundation or to a public charity. Capital Gain Net Income. --This was the amount of net gains from sales or dispositions of property used for investment purposes (property used for charitable purposes was excluded). Capital losses from the sale or other disposition of property could be subtracted from capital gains only to the extent of such gains. Capital gain net income was used in the computation of "net investment income" (on which an excise tax generally had to be paid). In contrast, the net gain (or loss) per the books from the sale of all assets (other than inventory), including those used for both investment and charitable purposes, was reported as "net gain (or loss) from the sale of assets" on Form 990-PF, Part 1, line 6, column (a). This item, capital gain net income, was reported on Form 990-PF, Part L line 7, column (b). Charitable Trust.--A charitable trust, also referred to as a "nonexempt" charitable trust, was defined in Internal Revenue Code section 4947(a)(1) as an organization (1) that is not considered tax-exempt under section 501(a); (2) that has exclusively charitable interests; and (3) that has amounts in trust for which donors are allowed to claim a tax deduction for charitable contributions. Nonexempt charitable trusts that are not publicly supported are subject to the excise tax provisions that apply to private foundations and are required to file the same Form 990-PF. ("Publicly supported" nonexempt charitable trusts are required to file Form 990, Return of Organization Exempt From Income Tax, and are, therefore, not included in the statistics.) Nonexempt charitable trusts that are treated as private foundations must pay an annual tax on income (usually from investments) that is not distributed for charitable purposes, and they must report such income and tax on Form 1041, U.S. Fiduciary Income Tax Return. Data from this form are not included in the statistics of this article. Disbursements for Exempt Purposes.--These deductions comprised the largest component of "qualifying distributions" and included grants paid, operating expenses, and necessary and reasonable administrative expenditures for activities that were directly related to the tax-exempt purposes of the foundation. These amounts were determined solely on the basis of the cash receipts and disbursements method of accounting, as required by law and regulations. This item was reported on Form 990-PF, Part 1, line 26, column (d). Disqualified Persons.--With respect to engaging in prohibited transactions with a private foundation, such as 11self-dealing," the following were considered disqualified persons: (1) all substantial contributors to the foundation (generally, those who contributed an amount over $5,000 that was also more than 2 percent of total contributions received by the foundation); (2) foundation officers, directors, trustees, or managers; (3) an owner of more than a 20-percent interest (based on voting power, profits interest, or beneficial interest) in an organization that was a substantial contributor to the foundation; (4) a member of the family of any individual described above (including spouses, ancestors, children, grandchildren, great-grandchildren, and spouses of children, grandchildren and great-grandchildren; but not including brothers or sisters); (5) organizations in which persons described above held a total beneficial interest of more than 35, percent; (6) another private foundation, for purposes of the tax on excess business holdings, that was effectively controlled by a person or persons in control of the foundation in question or to which substantially all of the contributions were made by a disqualified person; and (7) certain government officials, for purposes of the tax on "self-dealing." Distributable (Payout) Amount.--This was the minimum payout amount that was required to be distributed by nonoperating foundations by the end of the year following the year for which the return was filed. Failure to distribute income within this time period resulted in a 15-percent excise tax on the undistributed portion. The distributable amount was computed as 5 percent of net investment assets, called the "minimum investment return," minus the excise tax on net investment income and the income tax under subtitle A, plus or minus other adjustments, either allowed or required (see "Net Adjustments to Distributable Amount"). The tax under subtitle A is levied on charitable trust and taxable private foundation income (usually from investments) that is not distributed for charitable purposes. The tax reported on Form 1041 for trusts and Form 11 20, U.S. Corporation Income Tax Return for taxable private foundations. Taxable private foundations are those entities that may operate as taxable entities but will continue to be treated as private foundations until their tax status as such is terminated. The distributable amount item was reported on Form 990-PF, Part XI, line 7. Excess Distributions Carryover. --This was the amount distributed, after fulfilling the charitable payout requirement, that equaled the excess of qualifying distributions for 1992 over the distributable amount. If necessary, excess amounts from the current year could be carried forward to be applied to the distributable amount for the 5 87 Private Foundations and Charitable Trusts: A Decade of Charitable Givin& and. Growth, with Highlights of 1991 and 1992 following years. This item was reported on Form 990-PF, Part XHI, line 9. Inventories. --Included was the value of materials, goods and supplies purchased or manufactured by the organization and held for sale or use in some future period. This item was reported on Form 990-PF, Part 11, line 8; columns (a) (beginning-of-year book value), (b) (end-of-year book value), and (c) (end-of-year fair market value). Land, Buildings, and.Equipment, Charitable-use. --This. represented either thd book value (less aiccumulated. depreciation) or fair market value of allI land, buildings, and equipment not held'for investment purposes and Used by the organization in conducting its charitable activities. This item was reported on Form 990-PF, Part 11, line 14, columns (a) (beginn'hg7of-y6ar book value), (b),. (end-of-year book valud),. and (c) (end-of-y'ear fair. market, value). Land, Buildings, -and Equipment, Investment-use. -7This represented either the book:valu6 (less accumulated depreciation) -or fair market-va.10e,of all Iand-,buildings,- and equipment held for. investrrient. purposes., such as . rental- properties. This item was reported on Form 990-PF, Part -IIJine 11, columns (a). (beginning-ofryear book value), (b) (end-of-year book value), and (c) --(end:-o&year fair market value).- - - - '- 7Minimum. Investment Return. --This was the aggregate fair market value of assets. not used- for charitable putposes, less both the indebtedness incurred, to acquire these assets and the-cash held for charitable activities, multiplied by. 5 percent. The minimum investment return was used as -the base for calculating the '.'distributable amount." This item,was reported on Form 990-PF, Part X, line 6. Net Adjustments to Distributable Amount. --Adjustments that increased the "di stributable Amount" consisted of increases attributable to the income portion (as distinct from the principal portion) of distributions from split-interest trusts on amourits~placed in trust after May 26, 1969. (A split-interest.trust is a trust that is not,exempt from tax. and not all of whose interests. are devoted to and like purposes, but charitable, religious, educational, * that has amounts in trust for which a charitable contribu7 tion deduction was allowed.) These organizations file. Form .5,227, Split-Interest Trust Information Return. Recoveries of amounts previously treated ;is qualifying distributions also had to be added back to the distributable amount.. Adjustments that decreasedthe distributable amount were the result of incomerequired to be accumulated by-the terms of an organization's governing instrument. These adjustments were allowed only for founda88 tions or trusts organized before May 27, 1969 whose governing instrument continued to require such accurndla-' the organization tion, since State Courts. would not allow . to change its governing instrumenc These items were reported on Form 990-PF, Part'XI" lines 4a, 4b,, and 6..Net Gain (or Loss)from Sales of Assets. --Included were profits and losses from sales of items such-as securities, land, buildings, or equipment.' Gain or loss reflected the amount. shown on the books of the foundation and inclu&d any amount from the sale of property used foreither investment,or tax-exempt charitable purposes..,Most of the gain oi loss was from sales. of stocks and, bonds. Profit. or. loss from the sale of inventory itemsmas included in gross profit (loss) from business. activities.. This item Was reported on Form 990-PF, Part L line 6, column-(a). Net Investment Assets .(Nonchariteible-use Assets).--Foi purposes of calculating "minimum* investment reium il only the average, -rather than end-of7yearl'_fair~.Tnarket value of assets that were not used or held for.,'Pse for.': -.1ax-exempt-purposes entered -into-the computdtion.--Anasset was considered an investment'asset if Jt Was not used in, carrying out'a,charitable, educational, or.oiher similar functibn.which gave rise to the tax-exemp! status of the foundation. Examples include the fair ri4rket value of securities and rental prpperty-owned by -the-foundation- for investment purposes. The asset amounts.included,on the balance sheet in Part 11 of the .,Form 9§o-*PF in'cluded both .investment and~charitable-use assets. Tfiis,item, which was reported on Form 990-PF, Part X, lin&.5Js, not shown separately in the tables of this article., However, .'mini- mum'investment return," Which is based on! net investment assets, is shown in.the tables. Net Investment Income. ~-This was'the amount by which the sum of gross investment income plus capital gain net income exceeded allowable'deductions. Included in investment incomeweie interest, dividends, capitaJI'gAin net income, rents, payments with respect to. securities loans, and royalties. Exc.luded'Were.tax.-ex6mpt interest on state And local' government obligation's and dny~ inVestmerit income derived from un.related trade or business activities that were subject to the "unrelated busihess . income" tax reported on Form 990-T, Exempt ftanization Business Income. Tax Return. , This item was reported' on Form 990-PF, Part I, line 27b, column (b). Nonoperating Foundations (andSectloh 4947(a)(1) Charitable Trusts).-Jhese were'organ izations that gener-', 411y carried on their charitabl e activities' in,an indirect manner by making.grants to other organizations directly engaged in charitable activities,-in contrast to those (operating) foundations and trusts that engaged in charit4ble Private Foundations and Charitable Trusts: A Decade of Charitable Giving and Growth, with Highlights of 1991 and 1992 activities themselves. However, some nonoperating foundations and trusts were actively involved in charitable programs of their own, in addition to making grants. Nonoperating foundations and trusts were subject to an excise tax (and possible additional penalties) for failure to distribute an annual minimum amount for charitable purposes within a required time period. An organization's status as a nonoperating foundation or trust was indicated on Form 990-PF, Part VII, line 9. Operating Foundations (and Section 4947(a)(1) Charitable Trusts)-These organizations generally expended their income for direct, active involvement in a tax-exempt activity, such as operating a library or museum, or conducting scientific research. Operating foundations and trusts were excepted from the income distribution requirement and related excise taxes that were applicable to their nonoperating counterparts. To qualify as an operating foundation or trust for a particular taxable year, the foundation or trust had to meet both an "income test" and one of three other tests: an "assets test," an "endowment test," or a "support test." To meet the income test, a foundation or trust had to spend at least 85 percent of the lesser of its "adjusted net income" or "minimum investment return" on the direct, active conduct of tax-exempt, charitable activities (as opposed to the payout of grants in support of such programs). Simply put, to meet the assets test, a foundation or trust had to directly use 65 percent or more of its assets for the active conduct of charitable activities. To meet the endowment test, a foundation or trust had to regularly make distributions for the active conduct of charitable activities in an amount not less than two-thirds of its "minimum investment return." To meet the support test, a foundation or trust had to regularly receive substantially all of its support (other than from gross investment income) from the public or from five or more qualifying exempt or [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A45dab2bdfff4aaa0. Public record. Not legal advice.