Do Private Foundations Increase Current Distributions to Qualify for a 50 Percent Tax Rate Reduction?

Private foundations choose distribution policies that involve trade-offs between current and future distributions. Our study investigates the willingness of private foundations to increase current distributions to qualify for a reduced excise tax rate on net investment income. We provide consistent evidence that foundations prefer policies focused on future distributions. We find foundations sometimes choose to pay a higher tax rate on net investment income rather than pay higher amounts of current distributions, particularly when their investment assets increase and when they must increase their annual distribution rate above that paid in the prior year. As in prior research (Sansing and Yetman 2006; Yoder et al. 2011), we find that larger foundations are more likely to qualify for the reduced tax rate. However, we find that larger foundations are also less willing to increase current distributions in response to a necessary increase in their annual distribution rate. We believe this provides evidence that larger foundations have sticky distribution policies - they focus on maintaining stable distribution rates. Finally, we find that foundations with insufficient current resources to make necessary rate increases as well as older foundations that have increased investment assets are both less willing to increase their current distributions to qualify for the reduced tax rate