While the IRS released new rules this week to help victims of Bernard Madoff’s Ponzi scheme recoup some of their losses with a tax break, private foundations will not be able to benefit.
While the IRS released new rules this week to help victims of Bernard Madoff’s Ponzi scheme recoup some of their losses with a tax break, private foundations will not be able to benefit.
The
Internal Revenue Service announced tax relief and refunds for investors who paid taxes on earnings from their investments with Mr. Madoff.
Private foundations generally do not file income tax returns and cannot benefit from the tax break. At least half a dozen foundations were victimized by Mr. Madoff.
Foundations do pay a small excise tax on investment income.
“But it’s unlikely that the theft losses referred to in the new rules would be allowed, as they calculate their investment income for this tax,” said Judith Edington, counsel with Sullivan & Worcester LLP of Boston.
In addition, private foundations use an average asset value to calculate their distribution rate.
“It is not clear that there is a current mechanism for private foundations to recalculate the distribution that they have to make each year,” she said. “This may make it difficult for charities that are basing their distribution on asset values that may have been in part fictitious. They may have made artificially high distributions.”
To add to the injury, the IRS penalizes foundations if the agency determines they were not prudent in making investments.
“The IRS has the ability to impose a penalty on foundations that have made investments that jeopardize their ability to carry out their charitable program,” Ms. Edington said. “The IRS is considering in some cases the possibility of imposing these penalties.
For the manager, the penalty is 10% of the amount invested up to $10,000, and for the institution, it’s 10% of the amount invested, she said. A second tier of excise taxes may be imposed on the foundation and its management if the jeopardizing investment is not corrected, she added.
The burden of fiduciary responsibility may fuel a trend among private foundations to turn their money over to a local community foundation to manage, said Heather Gee, vice president for development and donor services at the 90-year-old, $280 million Philadelphia Foundation.
“It may become a trend as both private foundations and non-profits are looking closely at their fiduciary role,” she said, adding she has received a number of inquiries on this issue.
Community foundations pool funds from private foundations, nonprofit organizations and individuals, and provide investment management. The foundations generally have investment experts, transparency and are subject to a high level of scrutiny, Ms. Gee said.
Smaller non-profits or private foundations may not have access to financial investment expertise.
