Is This Self-Dealing? Three Quick Questions To Ask

No topic within private foundation rules raises as many questions and concerns as self-dealing. To ensure that foundation assets are used for charitable purposes rather than private benefit, the self-dealing rules prohibit a range of transactions between private foundations and their insiders, called disqualified persons.

The self-dealing rules are broad and absolute. There are no exceptions for seemingly minor transactions entered at arm’s length. The rules even can prohibit transactions beneficial to the foundation. The IRS imposes significant penalties on the disqualified person involved, even if he or she acted unknowingly or without malice. Foundation managers who approved the transaction also can be subject to penalties.

Common acts of self-dealing include:

• Rent—Any payment of rent to a disqualified person, even at below market rates, is self-dealing.
• Attending fundraisers—Although trustees or staff may attend fundraisers to assess a potential grantee or the results of a grant, spouses or other disqualified persons may attend only if they directly pay the nonprofit the full ticket price.
• Fulfilling a personal pledge—You cannot fulfill foundation insiders’ legally binding individual pledges with foundation funds.

So, how can a small foundation determine whether a potential transaction constitutes self-dealing? Here are three straightforward questions that lean funders can apply to any situation.

3 Quick Self-Dealing Questions To Ask

Question #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.

Question #2. Is the transaction on the list?

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.

Question #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.
  • Exception: See Exponent Philanthropy’s publication How to Avoid Self-Dealing, or consult your attorney for details.

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All Foundation Managers Should Read This Primer

How to Avoid Self-Dealing
The primer will benefit board members, officers, and key staff with authority to make decisions on policy, finances, or administration, as well as legal advisors not immersed in these issues. Learn how to develop and strengthen your self-dealing radar so that you and your foundation avoid any violations. Get your copy >>

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