in the United States of America ("U.S.A") is a type of philanthropic or charitable organization set up by individuals or institutions as a legal entity (a corporation or trust) with the purpose of distributing grants to support causes in line with the goals of the foundation or as a charitable entity that receives grants in order to support a specific activity or activities of charitable purpose. Wikimedia Foundation, Inc., parent organization of Wikipedia, is an example of the latter.
A charitable foundation is a nonprofit corporation or trust with a principal purpose of making grants to unrelated organizations or institutions or to individuals for scientific, educational, cultural, religious, or other charitable purposes. They have assets contributed to them, which are then invested and grow over time. Most such foundations issue grants from the investment proceeds of a permanent endowment, like a university's permanent endowment; a minority of foundations are set up to "spend down" the endowment itself, meaning they cease to exist after a certain number of years of grantmaking. There are several types of foundations, including family foundations, corporate foundations and community foundations.
In the United States, the word "foundation" does not have the same legal restrictions as "incorporated" or "limited;" therefore many foundations do not have the word foundation in their name and many organizations that one would not consider to be a foundation include the word foundation in their name. The status of an organization as a private foundation or public charity is determined by federal tax code as interpreted by the Internal Revenue Service.
The two most famous philanthropists of the Gilded Age pioneered the sort of large-scale private philanthropy of which permanent charitable foundations are a modern pillar: John D. Rockefeller and Andrew Carnegie. The businessmen each accumulated private wealth at a scale previously unknown outside of royalty, and each in their later years decided to give much of it away. Carnegie gave away the bulk of his fortune in the form of one-time gifts to build libraries and museums. Rockefeller followed suit (notably building the University of Chicago), but then gave nearly half of his fortune to create the Rockefeller Foundation
. By far the largest private permanent endowment for charitable giving created to that time, the Rockefeller Foundation was the first to became a widely understood example of the species: a standing charitable grant-making entity outside of direct control by any level of government.
Types of U.S. foundations
- Main articles Community foundation, Private foundation, Donor advised funds
While several types of foundations exist, the two most common are private foundations and community foundations. Both are independent nonprofit corporations governed by a board of directors, and both types make grants from a permanent invested endowment. Community foundations are focused on specific geographic areas most often a given city and may create several different funds with the most popular constituting the donor-advised funds.
U.S. foundation reforms
Starting at the end of World War II, the United States's high top income tax rates spurred a burst of foundations and trusts being created, of which many were simply tax shelters. President Harry S. Truman publicly raised this issue in 1950, resulting in the passage later that year of a federal law that established new rigor and definition to the practice. The law did not go very far in regulating tax-exempt foundations, however, a fact which was made obvious throughout the rest of that decade as the foundation-as-tax-refuge model continued to be propagated by financial advisors to wealthy families and individuals. Several attempts at passing a more complete type of reform during the 1960s culminated in the Tax Reform Act of 1969, which remains the controlling legislation in the United States. For more details on that legislative history, see 
The 1969 law clearly defined the fundamental social contract offered to private charitable foundations, the core of which has been imitated in law by other nations. In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a charitable foundation must (a) pay out at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits.
Administrative and operating expenses count towards the 5% requirement; they range from trivial at small unstaffed foundations, to more than half a percent of the endowment value at larger staffed ones. Congressional proposals to exclude those costs from the payout requirement typically receive much attention during boom periods when foundation endowments are earning investment returns much greater than 5% (such as the late 1990s); the idea typically fades when foundation endowments are shrinking in a down market (such as 2001-2003).
While most of a foundation's payout is typically grants to nonprofits, some foundations also carry out projects as a nonprofit organization themselves. (Adding to the confusion, some operating nonprofits use the term "foundation" in their names.) The core differences between a foundation and an operating charitable group are (a) foundation must pay out 5% of its assets each year while a charitable group does not; (b) donors to a charitable group receive greater tax benefits than donors to a foundation; (c) a charitable group must collect at least 10% of its annual expenses from the public in order to remain tax-exempt while a foundation does not. Neither an operating charitable group nor a foundation can pay for or participate in partisan political activity, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.