Those involved in governance of private foundations need to be careful about certain types of transactions, or they can find themselves facing substantial excise taxes that are required to be paid directly by the individuals involved.
The IRS defines certain types of transactions as “self-dealing” when they are carried out between the foundation and “disqualified persons”. Disqualified persons include substantial contributors, foundation managers (includes board members), and an owner of a company where the company is a substantial contributor. Disqualified persons also include family members of these individuals and companies that are owned (>35%) by any of these individuals, as well as any controlled/related foundations.
Following are some examples that may be self-dealing transactions that a private foundation should avoid:
(1) A board member leases office space to a foundation (even if it’s at fair value).
(2) A company that is 50% owned by a board member sells land to a foundation at the appraised value.
(3) A company that is 40% owned by an officer of the foundation sells construction materials to the foundation.
(4) A substantial contributor transfers a building to a foundation at no charge, but the foundation assumes the existing mortgage on the building.
(5) A board member leases office space to a foundation at no charge, but the foundation pays for leasehold improvements that increase the value of the property.
(6) A substantial contributor provides a loan to the foundation at the going interest rate.
Following are some examples that are generally not self-dealing transactions:
(1) A board member leases office space to a foundation at no charge and utilities and maintenance fees are paid by the foundation directly to third parties.
(2) A company that is 20% owned by a foundation manager sells office supplies to the foundation.
(3) A board member who is an attorney provides legal services to the foundation and charges rates at fair market value.
(4) A foundation manager provides an interest-free loan to the foundation.
The above examples are by no means all inclusive. It’s very important for private foundations and their officers to have an awareness of the general types of transactions that could be self-dealing, and to consult with an advisor before entering into these types of transactions.
By Colette Kamps, CPA