Simple Transactions That Cause Big Problems for Your Private Foundation
By Ashley Cooper, CPA, HoganTaylor Tax Manager
There are several types of transactions that seemed to be routine and simple transactions that could also cause issues for your private foundations. One of the biggest areas of prohibited transactions deals with self-dealing. Self-dealing is the conduct of any disqualified person that consists of taking advantage of his or her position in a transaction and acting for his or her own interests rather than for the interests of the private foundation. A disqualified person is typically an officer, a trustee, a significant contributor, or a relative of one of those persons.
There are six types of transactions that general considered acts of self-dealing:
- Sale, exchange, or leasing of property
- Lending money or other extensions of credit
- Providing goods, services, or facilities
- Paying compensation or reimbursing expenses to a disqualified person
- Transferring foundation income or assets to, or for the use or benefit of, a disqualified person
- Certain agreements to make payments of money or property to government officials
The above listed transactions are highly scrutinized and very strictly interpreted by the Internal Revenue Service. Involvement in the transactions above can have unfavorable consequences such as a large amount of excise taxes and often reversal of the transaction which can be costly to private foundations.
With such an encompassing list of transactions that are considered self-dealing, it can be easy to get involved with self-dealing before you even know the transaction is prohibited. Below is a list of common self-dealing transactions that are key for private foundation to avoid:
- Grants should not satisfy personal pledges of the founder or another disqualified person. This would be considered payment of debt of that disqualified person.
- Document any operating agreements the foundation may have with a family office or business office to ensure there are no direct or indirect benefits to disqualified persons.
- The private foundation and a disqualified person should not jointly pay for a benefit event. A disqualified person should only attend as a representative of the foundation if necessary for their role. If the disqualified person is attending the event for any other reason, they should pay their own way.
- The disqualified person’s spouse should also pay their own way unless there is a business reason for him or her to attend.
- Properly vet vendors paid by the foundation to avoid any indirect self-dealing
- Government officials are considered disqualified persons and the foundation should avoid any payments to those officials unless the payment meets one of the few exceptions.
- Expense payments for use of a disqualified person’s property should be made directly to the third party vendor if at all possible.
- Verify there is no mortgage or lien against any non-cash property donated, as this could be considered a sale from a disqualified person.
- The foundation should not advance a disqualified person more than $500 for the foundation expenses
Along with taking prevented measures to avoid the transactions listed above, it is recommended that private foundations managers and disqualified persons become well-versed in the prohibited transactions of self-dealing. The foundation should carefully vet any proposed transactions involving disqualified persons and seek additional recourses if the answer is not clear on whether or not the transaction is allowable by these self-dealing rules.