The self-dealing rules are very complicated and can be quite frustrating for private foundation managers, as self-dealing can arise in many seemingly innocuous situations. Because of the complexity of these rules, foundation managers should consult counsel any time they are contemplating a transaction with a disqualified person.
Read on for some of the most common self-dealing trouble spots, and learn more about self-dealing and its exceptions in our publication How to Avoid Self-Dealing:
- Property—A foundation pays rent to a disqualified person. (Any payment of rent to a disqualified person, even at below market rates, is a form of self-dealing.)
- Paying a spouse’s expenses—The foundation has an annual 3-day retreat to evaluate the past year and set direction for the foundation. Spouses are invited to attend the dinners hosted by the foundation. (The foundation may pay the board members’ expenses, but not the spouses’ expenses unless this amount is considered trustee compensation and reported on Form 1099.)
- Attending fundraisers—A family foundation buys a table at a charity’s annual fundraiser and invites the trustees and their spouses (who are not themselves trustees) to fill the table. (Although the trustees may attend to “evaluate” the results of a grant, the spouses of trustees are receiving a benefit and it is therefore an act of self-dealing.)
- Compensation—Amounts paid to staff and trustees need to be necessary and reasonable for the duties performed. Although a fee may not seem outrageous in total, it may be excessive if minimal hours are spent to accomplish the work. You can determine what is reasonable by gathering survey data for the foundation field for comparable organizations and workload.
- Loans—A trustee uses a foundation credit card for personal expenses and later reimburses the expenditure. (Even if the foundation is reimbursed immediately following the transaction, the charge is still considered a loan and is self-dealing.)
- Non-charitable expenditures—A foundation claims business expenses for upkeep of property that is a component of a donor’s future bequest. (This is a non-exempt expenditure as it is not currently an asset of the foundation.)
- Soft money investment fees—Self-dealing arises if padded hidden fees are paid to a family member who is managing the foundation’s investments.
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