Private Foundations: Self-Dealing
Posted on Wednesday, July 01, 2015
Private foundations are normally controlled and funded by a small group of individuals, even by related parties. Because of this, private foundations must meet stricter regulations than public charities to ensure that their charitable purposes are met. The IRS imposes excise taxes on private foundations for engaging in prohibited activities or failing to meet certain requirements. One such prohibited activity is self-dealing. Self-dealing is a prohibited transaction between the private foundation and a disqualified individual (founders, significant funders, board members). The concern is that these individuals may try to use the foundation for their personal benefit and thus the IRS has limited the transactions allowed between private foundations and disqualified individuals.
The following transactions are generally considered acts of self-dealing between a private foundation and a disqualified individual.
1. Sale, exchange or leasing of property.
3. Lending money or other extensions of credit.
4. Providing goods, services or facilities.
5. Paying compensation or reimbursing expenses.
6. Transferring foundation income or assets to, or for the use or benefit of, a disqualified person.
7. Certain agreements to make payments of money or property to government officials.
It is not uncommon for private foundations to make payments to board members. From time to time a private foundation may need to reimburse a board member for business related expenses. However, in order to not be considered an act of self-dealing, any payment to a board member must be for a reasonable expense and necessary to carry out the exempt purpose of the private foundation and not be excessive in amount.
Acts of self-dealing carry an initial excise tax of 10% of the amount involved imposed on the disqualified individual, not the foundation. This initial 10% cannot be abated, even if it is determined that the transaction was due to reasonable cause and corrected. An additional tax of 200% of the amount involved may be imposed on the individual, if the transaction is not corrected within a specified time frame. There is no maximum liability for the disqualified individual. There are also additional excise taxes that may be imposed on foundation managers, as well.
To prevent self-dealing from occurring, private foundations should maintain an updated list of disqualified individuals and have a policy in place for making payments to any such individual(s).
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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