I understand that a foundation cannot make a grant to a nonprofit, where the grant is more than half of the agency's budget. For example, if a nonprofit's annual operating budget is $100,000, a foundation cannot make a grant of $51,000, the theory being that it may be able to exert undue influence and "tip" the agency to do the foundation's bidding. Is this true?
This is a piece of urban legend with a little basis in reality, but it is not true. The “tipping” that foundations worried about was not getting the grantee to do their bidding (there are lots of ways to do that), but “tipping” the recipient into private foundation status because the recipient did not meet the public support test for a public charity. To qualify as a public charity as a matter of right, an organization which is not a church, school, or hospital (or related entity) must receive at least one third of its support from qualified public sources. It is possible to qualify with as little as 10% public support. (See Ready References Pages: “Calculating Public Support Percentage.”)
Foundations were concerned that if they gave too large a portion of an agency’s budget, they might “tip” the organization out of public charity status and into private foundation status, in which case the grantor would have to exercise expenditure responsibility over any grant. (See Ready Reference Page: “Foreign Grants Require Special Considerations” for information on expenditure responsibility.) The IRS has lessened the requirements for foundation scrutiny of this issue, and it is almost never a realistic a problem today. Some foundations, as a matter of policy, limit the percentage of a budget that they will fund, but it is not based on tipping concept.
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