Private Foundations should be aware of the self-dealing rules and how they apply to supporting non-profit community events that include tangible goods or services provided to or for the benefit of a disqualified person.
The self-dealing rules were established to limit perceived abuses in transactions between private foundations and closely associated private individuals. The IRS intended to discourage financial transactions between these two parties by imposing an excise tax on such transactions. The self-dealing rules include sale, exchange or leasing of property; loans or extensions of credit; furnishing of goods, services or facilities and transfer or use of income or assets.
The first-tier excise tax is 10% of the amount involved and is assessed on the disqualified person who engaged in the act of self-dealing. In addition, a 5% excise tax is charged on the amount involved, assessed on the foundation manager, if they knew the transaction involved self-dealing. The first-tier taxes are intended for foundations to avoid transactions which could be construed to be self-dealing.
There is also a second-tier tax of 200% of the amount determined to be self-dealing, assessed to the disqualified person if the first-tier excise tax has been assessed and not corrected within the correction period. There is also a second-tier tax of 50% assessed on the foundation manager if they refused to agree to the correction of the self-dealing act. The second-tier tax is designed to encourage the foundation and disqualified person to unwind the self-dealing transaction and put the foundation in at least as beneficial position as it started.
Most Private Foundations are aware of the basic rules of self-dealing, but there are some less egregious transactions that could be overlooked. For example, donations to non-profits that hold fundraising events. Tangible goods or services would include tickets to a gala or show, entrance to an event, meals, greens fees…this is not an exhaustive list, but I think you get the picture. A disqualified person would include the Private Foundations substantial contributors, directors, trustees, and their family members. If the Private Foundation was established by a corporation, the employees of the corporation would also be considered disqualified persons.
If the Private Foundation wants to continue to fund these types of events, we highly recommend that they establish a policy that they do not accept any tickets related to fundraisers. A Private Foundation that pays for a ticket to a fundraising event that a disqualified person attends would be subject to the self-dealing rules. The reimbursement of the ticket price by the disqualified person to the Private Foundation would not eliminate the self-dealing exposure if a premium is required to purchase the ticket.
As an alternative, the Private Foundation could donate the tickets back to the organization that could use them, perhaps for give aways in advertising to increase attendance at the event. The Private Foundation can still be listed as a sponsor of the event. If the Private Foundation was set up by a corporation, the corporation can make donations without the restrictions of the self-dealing rules.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
