Self-Dealing – Frequently Asked Questions
Acts of self-dealing come in many forms, and it is vital that foundation managers and board members are mindful of the different types of self-dealing prohibitions and the potential consequences to the foundation and the individuals involved in the act. While it would be impractical to predict every potential self-dealing act, as there are always new arrangements or transactions that require careful attention when it comes to these rules, we include in this bulletin some of the most frequently asked questions that we receive throughout the year on self-dealing.
Self-Dealing Refresher
Simply stated, a foundation is prohibited, subject to certain exceptions, from entering into any direct or indirect financial transaction (act of self-dealing) with certain related parties defined in the Internal Revenue Service (IRS) Regulations as “disqualified persons.” For a detailed explanation of disqualified persons, and who they are in relation to the foundation, please reference our prior Private Foundations Bulletin: Defining Disqualified Persons of Private Foundations.
To help navigate self-dealing, the IRS delineates acts of self-dealing into the following types of financial transactions:
- Sale, exchange, or leasing of property;
- Leases;
- Lending money or other extensions of credit;
- Providing goods, services, or facilities;
- Paying compensation to or reimbursing expenses of a disqualified person;
- Transferring foundation income or assets to, or for the use or benefit of, a disqualified person; and
- Certain agreements to make payments of money or property to government officials.
It is important to remember that prohibitions apply even if the transaction is considered by those involved to be “fair and reasonable” or even if it ultimately benefits the foundation.
Frequently Asked Questions
Below are some of the most common questions, along with our responses, that are asked by foundation board members and managers alike regarding acts of self-dealing:
Consequences of Self-Dealing
While some self-dealing acts may be allowed, subject to an exception, those that violate the rules are subject to steep penalties payable by not only the disqualified person(s) involved in the act but may also include any foundation manager who knowingly participates in the act. In addition, the reputational damage that an act of self-dealing may inflict on a foundation should also be taken into consideration.
Seek Outside Counsel
If there are any additional questions as to whether or not a potential relationship or future transaction could lead to self-dealing, we recommend that the foundation contact their legal counsel or tax preparers to ensure that all considerations have been made in the determination process.
Contact Us
We welcome the opportunity to answer any questions you may have related to this topic or any other accounting, audit, tax or advisory matters relative to private foundations. Please call 212.286.2600 or email any of the Private Foundation Services team members below:
- Thomas F. Blaney, CPA, CFE
Partner, Co-Director of Foundation Services
tblaney@pkfod.com - Joseph Ali, CPA
Partner
jali@pkfod.com
Anan Samara, EA
Raymond Jones, Sr., CPA
Partner
rjones@pkfod.com
Principal
asamara@pkfod.com - Christopher D. Petermann, CPA
Partner, Co-Director of Foundation Services
cpetermann@pkfod.com - Scott Brown, CPA
Partner
sbrown@pkfod.com
Barbara Van Bergen, CPA
Partner
bvanbergen@pkfod.com