How Private Foundations Can Avoid Accusations of Self-Dealing

IRS rules governing private foundations are complex and include many exceptions, which is why your foundation needs to write and follow a detailed conflict-of-interest policy. Taking this proactive step can help you avoid potentially costly public and IRS attention.

Casting a wide net

Conflict-of-interest policies are critical for all nonprofits. But foundations are subject to stricter rules and must go the extra mile to avoid anything that might be perceived as self-dealing. Specifically, transactions between private foundations and disqualified persons are prohibited.

The IRS casts a wide net when defining “disqualified persons,” including substantial contributors, managers, officers, directors, trustees and people with large ownership interests in corporations or partnerships that make substantial contributions to the foundation. Their family members are disqualified, too. In addition, when a disqualified person owns more than 35% of a corporation or partnership, that business is considered disqualified.

Avoiding dangerous transactions

Prohibited transactions can be hard to identify because there are many exceptions. But your foundation should generally prohibit disqualified persons from:

  • Selling, exchanging or leasing property to or from your foundation,
  • Making or receiving loans or extending credit,
  • Providing or receiving goods, services or facilities,
  • Receiving compensation or reimbursed expenses, and
  • Agreeing to pay money or property to government officials on your behalf.

Note that payment and reimbursement for services provided by disqualified persons isn’t considered self-dealing if such payments are reasonable and necessary.

You also must be careful to prevent indirect self dealing. This refers to a transaction involving a disqualified person and third-party organization controlled by your foundation.

Facing the consequences

What happens if you violate the rules? Your foundation’s manager and the disqualified person may initially be subject to an excise tax (5% or 10%, respectively) of the amount involved and an additional tax of up to 200% of the amount, if the transaction isn’t corrected quickly. Although liability is limited for foundation managers ($40,000 for any one act), self-dealing individuals enjoy no such limits. In some cases, private foundations that engage in self-dealing lose their tax-exempt status.

Private foundations that run afoul of the IRS usually have good intentions. You may assume, for example, that transactions with insiders are acceptable so long as they’re fair or benefit your foundation. Unfortunately, this isn’t the case. Most activities defined by the IRS as self-dealing — regardless of whom or what they reward — are off limits.

Asking the experts

Given the far-reaching nature of self-dealing prohibitions, expert advice is essential. If you’re unsure about whether a transaction might violate IRS rules, please contact us.

© 2017


Information provided on this web site “Site” by Thompson Greenspon is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Thompson Greenspon has made every reasonable effort to ensure that the information provided is accurate, Thompson Greenspon, and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. Thompson Greenspon also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Information contained on this Site is protected by copyright and may not be reproduced in any form without the expressed, written consent of Thompson Greenspon. All rights are reserved.

Share: