GRANT PAYMENTS USING APPRECIATED STOCKS

As you know, contributions with the use of appreciated stock can be advantageous to individual taxpayers. Dusty Rhodes raised the question as to whether or not a similar benefit is available to foundations.

A similar benefit is available to foundations; however, compared to individual taxpayers the relative benefit is far less. Foundations are required to pay an excise tax of 1% or 2% on interest, dividends and realized gains. The Bradley Foundation is currently paying the reduced 1% excise tax since the Foundation's qualifying distributions have exceeded the threshold to qualify for the reduced excise tax rate. It is expected that the Foundation will return to the 2% excise tax rate in 1999 or 2000. Even at the 1% rate the Foundation's excise tax for 1997 approximated $875,000.

Foundation's can avoid the excise tax applicable to the unrealized gain of appreciated stock if such stock is used to fund grants. An example follows:

Grant amount	$1,500,000

Stock value:

Market value	$1,500,000

Cost	(500,000)

Unrealized gain	$1,000,000

Potential excise tax savings:

@ 1% rate:	1,000,000 x 1% = $10,000

@ 2% rate:	1,000,000 x 2% = $20,000

The Foundation has approximately $110,000,000 of unrealized gains in the current investment portfolio. Using a 1% excise tax rate, the future potential excise tax liability when these gains are realized approximates $1,100,000. It would not be feasible to achieve this magnitude of savings, but clearly there is the potential to avoid a portion of the excise tax liability.

While there is an opportunity to achieve an excise tax reduction, the following factors must be considered:

1.	Disruption of investment manager investment strategy by selective disposition of stocks throughout the year.

2.	Additional administrative time to analyze and select grants to be funded by stock transfers and coordinate the transfer of the stocks with the investment managers.

V-1

3.	Transaction costs shifted from Foundation to grantee upon actual sale of stock.

4.	Potential disruption of asset allocation strategy if grant payment strategy supersedes investment strategy.

It is recommended that selected grants be funded with appreciated stock to better evaluate the pros and cons of this strategy from both the perspective of the Foundation and the recipient grantee. Suggested grants for the pilot program are:

EXPECTED

GRANTEE	AMOUNT	PAYMENT DATE

Milwaukee Art Museum	$1,500,000	March 10, 1998

PAVE	$500,000	March 20, 1998

Using actual grants for the pilot program will provide more accurate information as to actual transaction costs, highlight unanticipated problems and define additional administrative costs associated with this strategy.

This strategy is now more applicable since the Foundation is exceeding the target equity allocation and reduction of the equity portfolio is necessary to fund a portion of the Foundation's 1998 cash needs (See Tab 2).

V-2