A disqualified person is:

1. All substantial contributors to the foundation,

2. All foundation managers of the foundation,

3. An owner of more than 20% of--

   1. The total combined voting power of a corporation,

   2. The profits interest of a partnership, or

   3. The beneficial interest of a trust or unincorporated enterprise, which is, during the ownership) a substantial contributor to the foundation,

4. A member of the family of any of the individuals described in (1), (2), or (3),

5. A corporation of which more than 35% of the total combined voting power is owned by persons described in (1), (2), (3), or (4),

6. A partnership of which more than 35% of the profits interest is owned by persons described in (1), (2), (3), or (4),

7. A trust, estate, or unincorporated enterprise of which more than 35% of the beneficial interest is owned by persons described in (1), (2), (3), or (4),

8. For purposes of the tax on excess business holdings only, another private foundation that either:

   1. is effectively controlled, directly or indirectly, by the same person or persons who control the private foundation in question, or

   2. receives substantially all of its contributions, directly or indirectly, from the same persons described in (1), (2), or (3), or members of their families, who made, directly or indirectly, substantially all the contributions to the private foundation in question, and

   3. For purposes of the tax on self-dealing only, a government official.

A substantial contributor includes any person who contributed or bequeathed a total amount of more than $5,000 to the private foundation if the amount is more than 2% of the total contributions and bequests received by the foundation from its creation up through the close of the tax year of the foundation in which the contribution or bequest is received from that person. For a trust, a substantial contributor includes the creator of the trust. However, in no case does the term include a governmental unit.

In determining whether the total contributions and bequests from a person are more than 2% of the total contributions and bequests received by a private foundation, both the total of the amounts received by the foundation, and the total of the amounts contributed and bequeathed by the person, are determined as of the last day of each tax year. Although the determination is made on the last day of the foundation's tax year, a donor is a substantial contributor as of the first day the foundation receives a gift large enough to make the donor a substantial contributor. Each contribution or bequest is valued at its fair market value on the date it is received by the foundation. Gifts by an individual include all contributions and bequests made by that individual and his or her spouse.

A determination is to be made as to whether a person is a substantial contributor as of the end of each of the foundation's tax years, based on the respective totals of all contributions received and the total amount received from a particular person by that date. Status as a substantial contributor will date from the time the donor first met the $5,000—2% test. Once a person is a substantial contributor to a private foundation, generally that person remains a substantial contributor even though the individual might not be so classified if a determination were first made at some later date. For instance, even though the total contributions and bequests of a person become less than 2% of the total received by a private foundation, generally the person remains a substantial contributor to the foundation.

However, a person ceases to be a substantial contributor as of the end of a private foundation's tax year if:

1. That person (and all related persons) have not made any contributions to the foundation during the 10-year period ending with that tax year, and

2. That person (or any related person) was not a foundation manager of the foundation at any time during that 10-year period, and

3. The total contributions made by that person (and related persons) are determined by the IRS to be insignificant compared to the total contributions to the foundation by one other person. For the purpose of this comparison, appreciation on contributions while held by the foundation is taken into account.

A person is related to a substantial contributor, for this rule, if that person's relationship to the contributor would make that other person a disqualified person with respect to the contributor, as discussed in this chapter. If the contributor is a corporation, the term related person also includes any officer or director of the corporation.

Special rules. A substantial contributor does not include an entity that is described in §509(a)(1), (2), or (3) or any organization wholly owned by such an entity. In addition, only for purposes of §4941 excise taxes on self-dealing, a substantial contributor does not include any other organization described in §501 (c)(3) (other than an organization with §509(a)(4) status).

The term contribution includes gifts, and grants to the foundation, as well as bequests, devises, legacies, or transfers as outlined in the rules relating to estate and gift tax.

Entities excluded from the definition of substantial contributor are also excluded from the definition of disqualified person.

A foundation manager means:

1. An officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation), or

2. For any act or failure to act, any employee of the foundation having final authority or responsibility (either officially or effectively) for the act or failure to act.

A person who is specifically designated as an officer under the incorporation certificate, bylaws, or other documents of the foundation, or who regularly exercises general authority to make administrative and policy decisions for a foundation is considered an officer of the foundation.

For any act or failure to act, any foundation employee who has authority merely to recommend particular administrative or policy decisions, but not to implement them without approval of a superior, is not an officer. Independent contractors, such as accountants, lawyers, and investment managers or advisors, acting in their capacity as such, are not considered officers of the foundation.

A member of the family includes a spouse, ancestors, children, grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren. A brother or sister of an individual is not a member of the family for this purpose. A legally adopted child of an individual will be treated as a child by blood.

The term government official means an individual who at the time of the act of self-dealing holds any of the following offices or positions:

1. An elective public office in the executive or legislative branch of the United States Government,

2. An office in the executive or judicial branch of the U.S. Government, appointment to which was made by the President,

3. A position in the executive, legislative, or judicial branch of the U.S. Government—

   1. Which is listed in Schedule C of Rule VI of the Civil Service Rules, or

   2. The compensation for which is at least equal to the lowest rate prescribed for GS-16 of the General Schedule under 5 U.S.C. 5332,

4. A position under either the U.S. House of Representatives or the U.S. Senate, held by an individual who receives gross annual pay of at least $15,000 (including expense allowances for which no accounting need be made),

5. An elective or appointive public office in any branch of the government of any state, possession of the United States, or any subdivision of the foregoing, or the District of Columbia, held by an individual who receives gross annual pay of at least $20,000, or

6. A position as personal or executive assistant or secretary to any individual already described.

Public office. For the purpose of (5), a holder of public office must be distinguished from a public employee. Although the determination depends on the facts and circumstances of each case, the essential element is whether a significant part of the activities of the individual is the independent performance of policymaking functions. Among the factors to be considered are that the office is created by the Congress, a state constitution, or state legislature, or by a municipality or other governmental body under powers created in it, and the duties to be discharged by the office are defined either directly or indirectly by the body that created it or through legislative authority.

Examples. The following are illustrations of positions of public employment that do not involve policymaking functions and are not a public office:

1. The chancellor, president, provost, dean, and other officers of a state university who are appointed, elected, or otherwise hired by a State Board of Regents or equivalent public body and who are subject to the direction and supervision of that body,

2. The superintendent of public schools and other public school officials who are appointed, elected, or otherwise hired by a Board of Education or equivalent public body and who are subject to the direction and supervision of that body, or

3. Members of police and fire departments, except for department heads who, under the facts and circumstances of the case, independently perform policymaking functions as a significant part of their activities.

Indirect ownership of stock in a corporation, profits interest in a partnership, or beneficial interest in a trust, estate, or unincorporated enterprise is taken into account for determining whether:

1. The stockholdings, or profits or beneficial interest, amount to more than 20% of the total combined voting power of the corporation or more than 20% of the profits or beneficial interests, or

2. More than 35% of the total combined voting power of the corporation or more than 35% of the profits or beneficial interests are owned by persons described in categories (1), (2), (3), or (4).

Indirect ownership of stock in a corporation, profits interest in a partnership, or beneficial interest in a trust, estate, or unincorporated enterprise is taken into account for determining whether:

1. The stockholdings, or profits or beneficial interest, amount to more than 20% of the total combined voting power of the corporation or more than 20% of the profits or beneficial interests, or

2. More than 35% of the total combined voting power of the corporation or more than 35% of the profits or beneficial interests are owned by persons described in categories (1), (2), (3), or (4) under Disqualified persons .

The following rules apply for determining the ownership of stock or profits or beneficial interests:

1. Stock (or profits or beneficial interests) owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries,

2. or indirectly, by or for his or her family members. An exception to this rule is that, for the more than 35% ownership described in categories (5), (6), and (7), stock (or profits or beneficial interests) is not treated as constructively owned by an individual solely because that individual is a member of the family of another disqualified person. For purposes of these 35% ownership rules, an individual will be treated as a constructive owner only if that individual himself or herself is a substantial contributor, a foundation manager, or a 20% owner of the combined voting power, profits interest, or beneficial interest, of a substantial contributor.

3. An individual's family includes only those persons described in A member of the family, later, and

4. Any stock holdings, profits interest, or beneficial interest, that have been counted once (whether because of actual or constructive ownership) in applying categories (5), (6), and (7) may not be counted a second time.

Combined voting power includes voting power represented by actual or constructive holdings of voting stock, but does not include voting rights held only as a director or trustee.

Voting power includes outstanding voting power and does not include voting power obtainable, but not obtained, such as voting power obtainable by converting securities or nonvoting stock into voting stock, by exercising warrants or options to obtain voting stock, and voting power available to preferred shareholders if dividends on preferred stock are in arrears.

The profits interest of a partner is the partner's distributive share of partnership income.

The beneficial interest in an unincorporated enterprise, other than a trust or estate, includes any right to receive a share of distributions from the profits of the enterprise, or if there is no profit-sharing agreement, the right to receive a share of the assets on liquidation of the enterprise, except as a creditor or employee. When no agreement fixing the rights of the participants in the enterprise exists, the fraction of the respective interests of each participant in the enterprise will be determined by dividing the total investment or contributions to capital made or obligated to be made by the participant by the amount of all investments and capital contributions made by all participants.

The beneficial interest in a trust will be determined in proportion to the person's actuarial interest in the trust.

[Source: Internal Revenue Service, U.S. Dept. Of Treasury (IRS), http://www.irs.gov/]