Private foundation do’s and don’ts: Common self-dealing issues

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Private foundations generally may not engage in transactions with disqualified persons (DPs), even under terms that are favorable to the private foundation. These restrictions apply to transactions in any amount that either directly or indirectly benefit a DP. Consequences of engaging in a prohibited self-dealing transaction include unwinding the transaction, reporting it to the IRS, and paying an excise tax.

Disqualified persons (DPs): “Insiders” with respect to the private foundation and include:

• Officers, directors, and trustees
• Substantial contributors (i.e., generally persons that have contributed at least 2% of the private foundation’s total support)
• More than 20% owner of a substantial contributor
• Linear family members (i.e., ancestors and descendants), including spouses
• Corporations, partnerships, and trusts or estates owned more than 35% by the above

Rents

• DO rent property for free from a disqualified person.
• DO NOT rent property to a disqualified person regardless of amount charged.

Payments to employees of related companies

• DO make grants to employees of a related company for federally declared disaster relief.
• DO NOT make grants to employees of a related company for personal emergencies or hardships encountered.

Pledges

• DO make and fulfill pledges.
• DO NOT satisfy pledges made by disqualified persons.

Loans

• DO borrow money from a disqualified person with zero interest.
• DO NOT lend money to a disqualified person regardless of interest charged.

Payments for services

• DO pay reasonable compensation and reimbursements to disqualified persons for services that require specialized training and are necessary to carrying out the foundation’s charitable purposes (e.g., director fees, officer salaries, investment management fees).
• DO NOT pay disqualified persons for general or overhead expenses (e.g., utilities, allocation of administrative expenses, janitorial fees).

Tickets and Tables

• DO make grants and attend events that are reasonable and necessary to oversee, evaluate, and monitor grantees.
• DO NOT make grants to charities where a disqualified person receives a benefit (e.g., a ticket to the charity’s fundraising gala).
• DO NOT bifurcate payments (e.g., DP pays the ticket fee, and the foundation pays the charitable contribution portion)

This article was written by Alexandra O. Mitchell, Morgan Souza and originally appeared on 2023-08-01.
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