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Self-Dealing Risk Overview

December 12, 2016
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’Self-dealing’ between donors and their private foundations has been garnering a lot of interest by the media in recent news cycles.  So, what is ‘self-dealing’ and why does it matter?

Private foundations have a preferential tax status, meaning transactions between the foundation and disqualified persons, such as a major contributor or executive, are not allowed. The reasoning behind this is to avoid the misuse of the assets for non-charitable purposes. 

What you should know:

Who is a disqualified person? Substantial contributors, foundation managers, and owners of corporations who are contributors (or any members of their families).  Bottom line, if the person is even remotely related to the foundation or a major contributor, take a closer look at these rules.

What is prohibited?  Examples of prohibited transactions are the sale or lease of property; lending money; providing goods or services; paying compensation or transferring assets of the foundation to, or for the use or benefit of, a disqualified person.  You should look carefully at transactions where it could be deemed that the person is receiving a direct or indirect benefit.

What is the penalty?  The initial penalty is an excise tax imposed on the disqualified person of 10% of the amount involved for each year until it is corrected.   The foundation manager who knowingly participates in an act of self-dealing is also assessed a 5% penalty for each year.  Finally, there is an additional excise tax of 200% of the amount involved imposed on the disqualified person if the act is not corrected within the time prescribed by the regulations.

The takeaway?
To be safe, you should scrutinize transactions between the foundation and disqualified persons carefully and try to correct them on a timely basis if one does occur.