Is This Self-Dealing? Three Quick Questions To Ask - Exponent Philanthropy
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Is This Self-Dealing? Three Quick Questions To Ask

Photo by Vanessa Garcia

Self-dealing rules are sometimes confusing. In any event, a small foundation has to determine whether a potential transaction constitutes self-dealing. For this reason, we’ve come up with three straightforward questions that lean funders can apply to any situation.

1. Does the transaction involve a disqualified person?

The Internal Revenue Service defines a disqualified person as one of the following:

  • Officers, directors, trustees, and others with similar authority at the foundation
  • Substantial contributors to the foundation (who have given $5,000 or more, and 2% or more of the foundation’s income over the life of the foundation)
  • Family members of those previously listed, including spouses, ancestors, and descendants and their spouses—but not siblings
  • Entities controlled by disqualified persons (with a share or interest of 35% or more)
  • Certain government officials

To determine whether self-dealing is in play, always start by asking whether the transaction involves a disqualified person. That is, if the answer is yes, you may be facing an act of self-dealing.

2. Is the transaction on the list of self-dealing transactions?

On the whole, this is the list of prohibited self-dealing transactions:

  • Sale, exchange, or lease of property
  • Furnishing goods, services, or facilities for money
  • Lending money or extending credit
  • Payment to, compensation of, or reimbursement of a disqualified person
  • Transfer to or use of the foundation’s income or assets by a disqualified person
  • Payment of money or property to a government official

3. Does an exception apply?

As shown above, the list of prohibited transactions is sweeping. Thus, there are several recognized exceptions:

Prohibition: Sale, exchange, or lease of property between a foundation and a disqualified person

  • Exception: If offered at no charge

Prohibition: Furnishing goods, services, or facilities between a foundation and a disqualified person

  • Exceptions: If offered at no charge and for a charitable purpose; or if offered on a basis equal to that offered to the public and related to the foundation’s charitable purpose

Prohibition: Lending money or extending credit to a disqualified person

  • Exception: If credit flows from the disqualified person to the foundation, no fees or interest are charged, and proceeds are used for a charitable purpose

Prohibition: Payment to, compensation of, or reimbursement of a disqualified person

  • Exceptions:
    • Purchasing D&O liability insurance for trustees
    • Providing reasonable and necessary trustee compensation
    • Reimbursing disqualified persons for reasonable and necessary expenses related to foundation work
    • Compensating disqualified persons for personal services, which include certain professional services related to the foundation’s mission

Prohibition: Transfer to or use of the foundation’s income or assets by a disqualified person

  • Exceptions: If benefits are incidental and tenuous (e.g., having one’s name on a building or scholarship fund), or if fundraiser tickets are used by those with foundation duties but not by spouses or other guests

Prohibition: Payment of money or property to a government official

Learn more valuable legal basics at this year’s Annual Conference

Minneapolis, MN
We’re thrilled to return to in-person gatherings this year. Above all, our top priority is to provide a safe environment where lean funders can learn and connect.
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Comment

  1. Don S. Doering

    Great post! Two other questions to ask might be: Would we want to read about this transaction in the newspaper or to post it on our website? Sometimes the gut-check regarding perceptions of self-dealing may be as valuable to guide staff and Trustee decisions as the legal litmus tests.

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