Deploying company foundations in battle for tech talent: managing compliance issues, planning opportunities for tax departments are key concerns.

• Author: Chang, Victor
• Position: CORPORATE TAX

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With top companies in Silicon Valley and elsewhere engaged in heated competition to fill the increasing number of open job positions requiring technical skills, initiatives to expand the country's pipeline of science, engineering, and technology talent is becoming a renewed priority for corporate philanthropy. Corporate tax departments have an important role to play in guiding these efforts, particularly to the extent they involve a company-sponsored charitable foundation.

While a company foundation's expenditures are typically driven by the company's marketing, public affairs, or corporate social responsibility departments, corporate tax managers who are responsible for the foundation's annual Form 990-PF tax return also have a vital interest in its effective and tax-compliant operation. Efforts to use company foundations to address the nation's tech talent shortage pose opportunities for the tax department to help maximize these philanthropic investments while also aligning them more closely with the company's own business imperatives in attracting and retaining a diverse and high quality tech workforce.

The private foundation self-dealing restriction is usually the main tax compliance challenge for companies seeking to employ foundations in innovative ways that meld both philanthropic and business objectives. IRC section 4941 imposes punitive excise taxes that effectively prohibit most transactions between a private foundation and its "disqualified persons," a term that encompasses the foundation's directors, officers, and substantial contributors. The broad scope of this self-dealing prohibition, along with its narrow and mechanically applied exceptions, potentially complicates a foundation's involvement in any transaction where its sponsoring company stands to derive an economic benefit--either directly or indirectly.

To avoid self-dealing problems, any benefit that a company receives as a result of its foundations activities will usually need to fall within the exception carved out by the regulations for benefits that are "incidental and tenuous" in nature. (1) The prototypical example of such a benefit is the public recognition and goodwill that a foundations sponsoring company can receive as a result of a charitable grant that it makes in the community where the company does business. The parameters of this incidental and tenuous exception--though not always clearly defined--can be the key to creatively leveraging company foundations to tackle dual social and business challenges, such as the technical skills gap facing American companies.

Tailoring Scholarship Programs To Cultivate Tech Talent

One of the more direct ways that companies can use foundation resources to cultivate the technical skills of current and potential future employees is through foundation-funded scholarship programs. Indeed, scholarship programs for employees and their children are among the most common traditional uses of company foundations, and they are explicitly recognized as conferring only incidental and tenuous benefits on their sponsoring company, provided that the scholarships comply with other applicable private foundation expenditure rules. (2) Targeting these programs so that the scholarships help address a company's tech staffing needs, however, requires careful navigation of the relevant tax constraints.

Several overlapping sets of tax rules in addition to the private foundation self-dealing prohibition need to be considered in designing a compliant foundation-funded scholarship program, the full details of which are beyond the scope of this article. Under the rules governing "taxable expenditures" by...