Modernizing the 990-PF to Advance the Accountability and Performance of Foundations: Part 1

(John Craig is executive vice-president and COO of The Commonwealth Fund. Craig is chair of the Nonprofit Coordinating Committee of New York, and a former chair of The Investment Fund for Foundations (TIFF). He serves on the boards of the TIFF Education Fund, the Greenwall Foundation, the International Women's Health Coalition, and the National Center for Law and Philanthropy, and on the investment committee of the Social Science Research Council.)

The full essay on which this post is based appears in The Commonwealth Fund's 2010 Annual Report.

To obtain the information needed to exercise its regulatory responsibilities, the IRS relies principally on an annual filing by private foundations—the Form 990-PF tax return. If the 990-PF is a necessary requirement of private foundations, it is also a costly one: estimated total filing costs in 2008 for all foundations was $675 million—more than the average annual $552 million in excise taxes generated by the return over the 1999-2008 period.

To their enormous credit, the 1969 regulations on foundations and the 990-PF that resulted in 1974, along with strong self-regulatory activities by the foundation community, have eliminated most of the abuses targeted by those actions. But the 990-PF has failed to keep up with the evolution of the foundation sector over the last four decades. As both an instrument of basic regulation and tax collection and a tool for promoting strong performance among private foundations, the return is seriously flawed.

It misstates foundations' administrative expenses. The information requested in Part I, "Operating and Administrative Expenses," is particularly problematic for foundations that make grants, conduct their own research programs and communications activities, and are extensively involved in developing, monitoring, and disseminating the results of grant-funded work. Most of the intramural expenses of such foundations are mislabeled as "administrative."

It misses opportunities to shed light on endowment performance. Information on investment performance is not solicited in the 990-PF. Since their endowments are the only source of income for most foundations and effective endowment management is a challenge for many foundations, this is an egregious omission—equivalent to not requiring for-profit corporations to report their earnings on tax returns and financial statements.

The format is unwieldy and its content poorly targeted. The 990-PF is unnecessarily long, complicated, and poorly organized; little attention is paid to users' needs and priorities. For example, the determination of the all-important required annual payout, comparison with actual payout, and calculation of any necessary catch-up payout that must be made in the following year are spread over four sections and two pages. Additionally, the Part II requirement that foundations attach schedules showing individual securities in their endowment portfolios at fiscal year-end serves little purpose, as most portfolios are actively traded.

E-filing is cumbersome and costly. Because of the potential efficiencies in submitting data and creating researchable databases on foundations' tax returns, electronic filing of the 990-PF is desirable. But realizing this goal is greatly hampered by the complexity of the existing form. Foundations currently e-filing report substantial extra costs, as special software must be used to provide non-financial information like that requested on grants.

As a database, it has poor functionality. Efforts to use the information collected by the 990-PF for research purposes reveal its deep flaws: too often, the information requested is of little current relevance; major gaps limit its utility; and the return's complexity make it a researcher's nightmare.

It has misleading or indecipherable terms. Because of its reliance on tax code terminology, much of the language in the form is unintelligible to the many lay readers, including trustees and journalists, who use it—leading to harmful misinterpretations.

It is time to consider modernizing the 990-PF. In Part 2 of this post, I'll present some guidelines to consider for doing so.

— John Craig