The recent presidential election had brought the issue of private foundation governance into focus. Both candidates had established private foundations decades prior through which their philanthropic activities were supported. As the campaigns continued their efforts to build support throughout the country, questions began to arise as to any improper transactions to which either foundation may have been a party. While the accusations continued to fly, the term “self-dealing” was introduced to the public through media outlets covering the presidential race. A clear understanding of “self-dealing” is in order to help foundations and their founders avoid similar accusations.

Private Foundations
Image source: Wikimedia Commons
Private Foundations

For those who have or are considering the establishment of a private foundation it is very important that they understand the potentially complex rules to prevent self-dealing. Self-dealing is simply defined as a transaction between a foundation and an individual or entity referred to as a “disqualified person.” A disqualified person is commonly a substantial contributor (and their family members), a foundation manager, certain government officials, and potentially related trusts, estates, and corporations. Understanding who may be classified as a disqualified person is the first step in keeping a foundation from running afoul of the self-dealing rules.

Once a disqualified person can be accurately identified we then have to turn our attention to the types of transactions with those disqualified persons that the IRS deems to be self-dealing. Fortunately the IRS publishes the following list of transactions to be generally considered an act of self-dealing between a disqualified person and a foundation:

  1. Sale, exchange, or leasing of property
  2. Leases
  3. Lending money or other extensions of credit
  4. Providing goods, services, or facilities
  5. Paying compensation or reimbursing expenses to a disqualified person
  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.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

By Gavin Morrissey, JD, LLM, AIF®, read the full article here.