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
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.