November 2013 Bar Bulletin
 
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November 2013 Bar Bulletin

Self-Dealing: Classic Trouble for Private Foundations

By Lisa E. Schaures

 

Congress has enacted numerous laws to guide and govern private foundations, including those that require such organizations to further their charitable, educational, scientific or other tax-exempt purposes in order to attain and maintain their tax-exempt status.

Several of these laws are designed to ensure that these organizations do not operate to benefit insiders, and it is these laws against self-dealing and private benefit that are often the focus of enforcement efforts in this area today.

The closely controlled nature of many private foundations can easily open the door to potential self-dealing. It is important that legal counselors have a firm understanding of the relevant laws under the Internal Revenue Code and the behavior they regulate in order to head off any trouble before it starts.

Traps of Self-Dealing

It may seem like a win-win situation. A private foundation's trustee has space available in an office building she owns and leases it to the foundation at a below-market rate. Certainly the trustee enjoys no direct gains; if anything, she loses money in the transaction. And the foundation retains much-needed funds to further its mission.

The rules against self-dealing are plain and clear: Any transaction between the foundation and "disqualified persons" (those persons who are substantial contributors or foundation managers and their family members in addition to certain affiliates and government officials) is prohibited, with few exceptions.1

This somewhat rigid definition applies even if the transaction doesn't provide a significant financial or economic benefit to the disqualified person. Many private foundations fall into traps such as the foregoing example because of the seemingly reasonableness of the transaction from the foundation's perspective.

Another example that has been the subject of several self-dealing cases involves the placement of artwork on the grounds or in the home of a disqualified person where public viewing is limited. Examples of self-dealing that may not be as easily identified include the loan of facilities or goods to a disqualified person, a loan (with interest or other charges required) from a disqualified person to a private foundation, or excessive compensation paid to a disqualified person.


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