Many philanthropically minded clients have established their own private foundations to support charitable causes they believe in now, and to serve as a vehicle for giving for future generations of their family. While many family foundations flourish for multiple generations, many others struggle to survive for a single generation after the founders are gone. In the latter cases, the governing body (e.g., Board of Directors, Trustees, etc.) of the organization may start to consider terminating its status as a private foundation under Section 507. Clients currently serving as directors or trustees should be aware that termination does not necessarily mean shutting down their organization, as one of the ways to terminate a private foundation is to convert to a public charity.
In order to convert from a private foundation to a public charity, the private foundation must operate as a public charity as described in 509(a)(1), (2), or (3) for a continuous 60-month period, commencing on the first day of the tax year after it notifies the Internal Revenue Service (“IRS”) of its intent to terminate as a private foundation (the “Termination Period”). In general, in order to qualify as a public charity, an organization must fall into one of the following three categories: (1) “per se public charities,” such as churches, schools, and hospitals, that qualify by virtue of the nature of their activities; (2) “publicly supported public charities” that qualify because they receive a substantial amount of their support from the public; or (3) “supporting organizations” that qualify as public charities because they support one or more of the organizations described in (1) and (2).