Section 4941 of the Internal Revenue Code imposes an excise tax on certain transactions (acts of self-dealing) between a private foundation and disqualified persons.
Acts of self-dealing. The following transactions are generally considered acts of self-dealing between a private foundation and a disqualified person:
Sale, exchange, or leasing of property,
Leases
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, and
Certain agreements to make payments of money or property to government officials.
Exceptions. The following transactions between a private foundation and a disqualified person are not considered self-dealing:
Providing goods, services, or facilities by a private foundation to a disqualified person is not self-dealing if the goods, services, or facilities are made available to the general public on at least as favorable a basis as they are made available to the disqualified person and the goods, services, or facilities are functionally related to the exercise or performance by a private foundation of its exempt purpose.
The term general public includes those persons who reasonably would be expected to use the foundation's goods, services, or facilities. This does not apply, however, unless a substantial number of persons other than disqualified persons actually use the goods, services, or facilities.
A private foundation that provides recreational or park facilities to the general public may provide those facilities to a disqualified person if they are provided to that person on a basis no more favorable than that on which they are provided to the general public. Similarly, the sale of a book or magazine
to disqualified persons is not an act of self-dealing if publishing the book or magazine is functionally related to a charitable or educational activity of the foundation. The publication must be made available to disqualified persons and the general public at the same price. Moreover, if the terms of the
book or magazine sale require, for example, payment within 60 days of delivery, and payment is made during the 60—day period, the transaction will not be treated as a loan or extension of credit if these terms are consistent with normal commercial practices.
Payment of compensation or reimbursement of expenses by a private foundation to a disqualified person (except for a government official) for personal services that are reasonable and necessary to carry out the exempt purpose of the private foundation is not considered an act of self-dealing if the
compensation or reimbursement is not excessive.
Personal services include the services of a broker serving as the foundation's agent, but not the services of a dealer buying from the foundation as a principal and reselling to a third party.
Furthermore, if a foundation makes a cash advance to a foundation manager or employee to cover anticipated out-of-pocket expenses, it is not an act of self-dealing if the advance is reasonable in relation to the duties and expense requirements of the foundation manager. An advance ordinarily is
considered reasonable if it is not more than $500.
For example, if a foundation makes an advance to a foundation manager to cover anticipated out-of-pocket current expenses for a reasonable period (such as a month) and the manager accounts to the foundation under a periodic reimbursement program for actual expenses incurred, the foundation
is not considered to have engaged in an act of self-dealing:
When it makes the advance,
When it replenishes the fund upon receipt of supporting vouchers from the manager, or
If it temporarily adds to the advance to cover unusual expenses expected to be incurred in carrying out a special assignment.
Any transaction between a private foundation and a corporation that is a disqualified person is not an act of self-dealing if the transaction is engaged in under a liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization, as long as all the securities
of the same class as those held before the transaction by the foundation are subject to the same terms and the terms provide for receipt by the foundation of at least fair market value.
For the securities to be considered subject to the same terms, the corporation must, in connection with the transaction, make a bona fide offer on a uniform basis to the foundation and every other security holder. The fact that a foundation receives property, such as debentures, while all other persons
holding securities of the same class receive cash for their interests, will be evidence that the offer was not made on a uniform basis.
If no other persons hold securities of the same class as the private foundation, the consideration received by holders of other classes of securities, or the interests retained by the holders of other classes, when considered in relation to the consideration received by the foundation, must indicate that
the foundation received at least as favorable treatment in relation to its interests as the holders of any other class of securities. In addition, the foundation must receive at least the fair market value of its interests.
Government officials. Certain payments to government officials are not considered acts of self-dealing. These payments are:
A prize or award that does not have to be included in gross income if the official receiving the prize or award is selected from the general public (for this purpose, the recipient may keep the prize or award, and need not authorize the foundation to transfer the prize or award to a governmental unit or to another charity),
A scholarship or a fellowship grant that is to be used for study at a recognized educational organization. (For this purpose, there is no requirement that the grant recipients be limited to degree candidates, nor must the grant be limited to tuition, fees and course-required books, supplies
or equipment. It is permissible for a recipient to use grant funds for room, board, travel, research, clerical help, or equipment, that are incidental to the purposes of the grant.),
Any annuity or other payment (forming part of a stock-bonus, pension, or profit-sharing plan) from a qualified trust,
Any annuity or other payment under an employees' annuity plan,
Any contribution or gift (other than money), or services or facilities made available, if the total value is not more than $25 during any calendar year,
Any payment made under a government employees' training program,
Any payment or reimbursement of travel expenses, including meals and lodging, for travel only from one point in the United States to another in connection with charitable purposes, but only if the payment or reimbursement is not more than the actual cost of transportation plus an amount
for all other traveling expenses not greater than 125% of the maximum payable for similar travel by U.S. government employees (without regard to any higher rates allowed in designated geographical areas),
A payment under any agreement to employ or make a grant to a government official for any period after the termination of government service if the agreement is entered into within 90 days before termination, or
The cost of a government official's attendance or participation in a conference sponsored by the foundation in furtherance of its exempt purposes, including—
The official's share of the cost of the conference,
Professional and other non-monetary benefits of an intellectual or psychological nature received by the official from attending or participating in the conference,
Benefits to the official resulting from publication or distribution of the conference record to conference participants, and Payments, reimbursements, or reasonable advances made to the official for expenses in attending the conference.
Leases. The leasing of property by a disqualified person to a private foundation is not an act of self-dealing if the lease is without charge. The lease will be considered without charge even though the foundation agrees to pay for janitorial expenses, utilities, or other maintenance costs it
incurs as long as payment is not made directly or indirectly to a disqualified person.
The leasing of office space by a disqualified person to a private foundation in a building with other tenants who are not disqualified persons is not an act of self-dealing if:
The lease is pursuant to a binding contract in effect on October 9, 1969 (or renewals thereof),
The lease was not a prohibited transaction under §503(b) or any corresponding provision of prior law at the time of execution, and
The terms of the lease (or any renewal) reflect an arm's length transaction.
Initial tax. An excise tax of 5% of the amount involved in the act of self-dealing is imposed on the disqualified person, other than a foundation manager acting only as a manager, for each year or part of a year in the taxable period.
An excise tax of 2-1/2% of the amount involved is imposed on a foundation manager who knowingly participates in an act of self-dealing, unless participation is not willful and is due to reasonable cause, for each year or part of a year in the taxable period.
Additional tax. An excise tax of 200% of the amount involved is imposed on the disqualified person, other than a foundation manager acting only as a manager, who participated in the act of self-dealing, if the act of self-dealing is not corrected within the taxable period. The additional tax
will not be assessed, or if assessed will be abated, if the act of self-dealing is corrected during the correction period .
If the additional tax described above is imposed on the disqualified person, an excise tax of 50% of the amount involved is imposed on any foundation manager who refuses to agree to part or all of the correction of the self-dealing act.
Limits on liability for management. The maximum initial tax imposed on the foundation manager is $10,000 and the maximum additional tax is $10,000 for any one act.
There is no maximum on the liability of the self-dealer, including one who is a foundation manager.
If more than one person is liable for the initial and additional taxes imposed for any act of self-dealing, all parties will be jointly and severally liable for those taxes.
[Source: Internal Revenue Service, U.S. Dept. Of Treasury (IRS), http://www.irs.gov/]
