7.27.15  Taxes on Self-Dealing

7.27.15.1  (04-26-1999)
Introduction

  1. This section deals with taxes on self-dealing under IRC 4941. The taxes imposed under IRC 4941 are applicable to "private foundations" and to certain charitable trusts described in IRC 4947(a)(1) as well as certain split interest trusts described in IRC 4947(a)(2).

    1. For a discussion of the IRC 4947 trusts, see IRM 7.26.15.

    2. For a definition of "private foundation" under IRC 509(a), see IRM 7.26.5.

7.27.15.1.1  (04-26-1999)
Background

  1. The Revenue Act of 1950 specified a number of prohibited types of self-dealing transactions applicable to certain categories of exempt organizations and to certain nonexempt charitable trusts. The prohibited transaction rules imposed arm’s length standards with regard to certain specified types of transactions between an organization and its creators or substantial donors.

  2. Under the Tax Reform Act of 1969, prior law regarding the prohibited transaction rules was revised. IRC 4941 was added to the Code to impose, in lieu of the former prohibited transactions rules, excise taxes on self-dealing transactions between "disqualified persons" and IRC 501(c)(3) organizations that are private foundations. The self-dealing rules under IRC 4941 are also imposed on trusts described in IRC 4947.

  3. The general reasons for the change from prohibited transaction rules to excise taxes on self-dealing are set out in General Explanation of The Tax Reform Act of 1969 (December 3, 1970), prepared by the Staff of the Joint Committee on Internal Revenue Taxation. Paraphrasing the Explanation, arm’s-length standards have proved to require disproportionately greater enforcement efforts, resulting in sporadic and uncertain effectiveness of the provisions. On occasion the sanctions were ineffective and tended to discourage the expenditure of enforcement effort. On the other hand, in many cases the sanctions were so great in comparison to the offense involved, that they caused reluctance in enforcement, especially in view of the element of subjectivity in applying arm’s-length standards. Where the Service did seek to apply sanctions in such circumstances, the same factors encouraged extensive litigation and a noticeable reluctance by the courts to uphold severe sanctions.

  4. Consequently, as a practical matter, prior law did not preserve the integrity of private foundations. To minimize the need to apply subjective arm’s-length standards, to avoid the temptation to misuse private foundations for noncharitable purposes, to provide a more rational relationship between sanctions and improper acts, and to make it more practical to properly enforce the law, the Act generally prohibits self-dealing transactions and provides a variety and graduation of sanctions. This is based on the belief by the Congress that the highest fiduciary standards require complete elimination of all self-dealing rather than arm’s-length standards.

7.27.15.1.2  (04-26-1999)
Statute

  1. IRC 4941 imposes an excise tax on any direct or indirect act of self-dealing between a private foundation and a disqualified person. Self-dealing transactions described under IRC 4941(d) are:

    1. the sale, exchange, or leasing of property:

    2. the lending of money or other extension of credit;

    3. the furnishing of goods, services, or facilities;

    4. the payment of compensation or expenses by the foundation to a disqualified person;

    5. the transfer or use of the foundation’s income or assets by or for the benefit of a disqualified person; and

    6. payments to government officials.

  2. The self-dealing transactions listed in (1) above are qualified by a number of special rules and exceptions described later.

  3. The excise taxes of IRC 4941 for engaging in one or more of the enumerated acts of self-dealing are assessed against the self-dealer and, in appropriate cases, the foundation managers.

  4. More than one Chapter 42 tax can be assessed on the same act.

    • For example, on act of self-dealing could also have implications under IRC 4942, qualifying distributions, and IRC 4943, excess business holdings, as well as being a jeopardizing investment under IRC 4944 and a taxable expenditure under IRC 4945. See Kermit Fischer Foundation v. Commissioner, T.C. Memo 1990–300 (1990).

7.27.15.2  (04-26-1999)
Disqualified Person

  1. The term "disqualified person" as defined in IRC 4946 for purposes of IRC 4941 means:

    1. A substantial contributor to the foundation (as defined in IRC 507(d)(2));

    2. A foundation manager;

    3. An owner of more than 20 percent of the voting power of a corporation, or of the profits interest of a partnership or unincorporated enterprise, which is a substantial contributor to the foundation;

    4. Certain members of the family of any individual described in a., b. or c. above;

    5. A corporation in which persons described in a., b., c. or d. above own more than 35 percent of the voting power;

    6. A partnership in which persons described in a., b., c. or d. above own more than 35 percent of the profits interest;

    7. A trust or estate in which persons described in a., b., c., or d. above hold more than 35 percent of the beneficial interest; and

    8. Certain government officials.

  2. See IRC 4946, applicable regulations, and related materials in IRM 7.27.20 for detailed treatment of the term "disqualified persons."

7.27.15.3  (04-26-1999)
Taxes Imposed

  1. IRC 4941 imposes four separate and distinct taxes for self-dealing:

    • an initial tax on self-dealing

    • an initial tax on the foundation manager

    • an additional tax on an act of self-dealing not corrected under IRC 4941(a)(1)

    • an additional tax on a foundation manager not corrected under IRC 4941(a)(2)

7.27.15.3.1  (04-26-1999)
Tax on Self-dealer

  1. An IRC 4941(a) excise tax is imposed on a disqualified person, who is the self-dealer, for each act of self-dealing with a private foundation. The tax imposed on the self-dealer is 5 percent of the amount involved in the act of self-dealing for each year or partial year in the taxable period. A disqualified person who engages in an act of self-dealing with a private foundation computes the initial tax on self-dealing based on his/her own tax year if it is different from the foundation’s tax year. Rev. Rul. 75–391, 1975–2 C.B. 446.

  2. Knowledge of self-dealing. With the exception of government officials, the initial tax is imposed on a disqualified person who participates in an act of self-dealing even though that person may not have been aware that the act constituted self-dealing.

    1. For the tax to be imposed on a government official, that person must know that the act constitutes self-dealing. For a definition of "knowing" , see IRM 7.27.15.7.7.

    2. A disqualified person is considered to have participated in an act of self-dealing if that person engages or takes part in the transaction alone or with others, or directs any person to do so.

7.27.15.3.2  (04-26-1999)
Tax on Foundation Manager

  1. Under the law, when an initial tax is imposed on a self-dealer, it will also be imposed on the foundation manager who participates, knowing the act constitutes self-dealing. See Rev. Rul. 78–76, 1978–1 C.B. 377. Also Madden v. Commissioner, T.C. Memo 1997–395. An exception to this general rule applies where participation by the foundation manager is not willful and is due to reasonable cause. A foundation manager participating in a self-dealing transaction may be liable for tax as a self-dealer (IRC 4941(a)(1)) as well as for tax as a participating foundation manager (IRC 4941(a)(2)). The initial tax on a foundation manager is 2 1/2 percent of the amount involved for each year or partial year in the taxable period. For the definitions of key terms such as "knowing," "willful," and "due to reasonable cause" , see IRM 7.27.15.7.7; IRM 7.27.15.7.8; and IRM 7.27.15.7.9.

  2. Participation by the foundation manager includes silence or inaction on the manager’s part where there is a duty to speak or act, as well as any affirmative action by such manager. However, a foundation manager will not be considered to have participated in an act of self-dealing where that person has opposed the act in fulfilling responsibilities to the foundation.

    1. For provisions relating to the burden of proof in cases involving the issue whether a foundation manager or a government official has knowingly participated in an act of self-dealing, see IRC 7454(b).

  3. Advice of counsel. If a foundation manager, after fully disclosing the facts of a transaction to legal counsel (including house counsel), relies on the advice of such counsel expressed in a "reasoned written legal opinion" that the transaction is not an act of self-dealing, the foundation manager will not ordinarily be liable for the tax imposed by IRC 4941(a)(2) even though the transaction is subsequently determined to be an act of self-dealing. The rationale for this provision is that reliance on such advice will not ordinarily result in "knowing" or "willful" participation in an act of self-dealing and such participation will ordinarily be considered "due to reasonable cause." To be safely relied upon as "reasoned," the written legal opinion must contain a rationale and conclusion based on the actual facts and the applicable law. An opinion that does nothing more than recite the facts and express a conclusion will not be considered "reasoned" and could not be relied upon to prevent the imposition of tax on the foundation manager. See Thorne v. Commissioner, 99 T.C. 67 (1992) for a case where the tax under IRC 4945(a)(2) was imposed on the foundation manager for failure to exercise expenditure responsibility with respect to certain grant recipients despite the assertion of reliance on the advice of counsel by the foundation manager.

7.27.15.3.3  (04-26-1999)
Additional Taxes

  1. IRC 4941(b) imposes additional taxes on self-dealers and participating foundation managers, if an act of self-dealing is not corrected. A tax of 200 percent of the amount involved is imposed on the self-dealer. Likewise, a tax of 50 percent of the amount involved is imposed on any foundation manager who refused to agree to part or all of the correction of the self-dealing act. In accordance with the opinion of the Tax Court in Thorne v. Commissioner, supra, it is necessary that the Service make a formal request in writing to the taxpayer that the correction be made. Otherwise, the taxpayer cannot be considered as having refused to make the correction. The written request for correction must be made within a reasonable period of time prior to the issuance of a statutory notice of deficiency for the second tier tax.

  2. If more than one self-dealer or foundation manager is liable for the initial or additional taxes, then all such persons are jointly and severally liable. With regard to foundation managers, there is a $10,000 limit on the amount of initial tax and another $10,000 limit on any additional tax collectible with respect to any one act of self-dealing. Reg. 53.4941(c)–1(b).

7.27.15.3.4  (04-26-1999)
Enforcement of the Two-Tier Tax Scheme

  1. Under the excise tax scheme enacted in 1969, IRC 4941(a) imposed an initial (first-tier) tax of five percent of the amount involved for each act of self-dealing for each taxable year that ends during the "taxable period." If the act of self-dealing remains uncorrected during the statutory "correction period," IRC 4941(b) imposed an additional (second-tier) tax on the self-dealer. The definition of "correction period" in the 1969 statutory language created a peculiar timing problem that the Tax Court found barred judicial review of the IRC 4941(b) second-tier tax and made the scheme unworkable. Adams v. Commissioner, 72 T.C. 81 (1979). Public Law 96–596 (December 24, 1980) was enacted to correct the statutory defect and permit enforcement of the two-tier tax scheme under IRC 4941 as well as other Chapter 42 and 43 provisions that have the Adams problem.

  2. The second-tier taxes are "imposed" at the end of the taxable period (with respect to the initial or first-tier tax), rather than after the correction period. See IRC 4941(b).

  3. The term "taxable period" as redefined in IRC 4941(e) and Reg 53.4941(e)–1, with respect to any act of self-dealing, means the period beginning with the date on which the act of self-dealing occurs and ending on the earliest of—

    1. the date of mailing a notice of deficiency with respect no tax imposed by subsection (a)(1) under IRC 6212,

    2. the date on which the tax imposed by subsection (a)(1) is assessed, or

    3. the date on which correction of the act of self-dealing is "completed."

  4. These changes allow the Service to determine a deficiency for the second-tier tax at the end of the taxable period (for the initial or first-tier tax), because the second-tier tax is imposed at that time. This gives rise to a deficiency with respect to the second-tier taxes over which the Tax Court can assume jurisdiction under IRC 6214. While ruling on a second-tier tax deficiency before it, the Tax Court may also determine whether the taxable event has been corrected; IRC 6214(c) has been amended to give the court this jurisdiction.

  5. Subchapter C, Abatement of Second Tier Taxes Where There Is Correction During Correction Period, was added to Chapter 42 to provide that any liability for the second-tier tax deficiency determined by the Commissioner will be abated if timely correction occurs. IRC 4961 sets out this abatement rule and gives the Tax Court jurisdiction to conduct a supplemental proceeding (if sought by taxpayer within 90 days of the end of the correction period) to determine whether correction was timely. IRC 4961(c) also suspends for period of collection (and the statute of limitations) for second-tier taxes, if an action for refund on the first-tier tax is commenced not later than 90 days after the day on which the second-tier tax is assessed. In addition, IRC 4962 sets out definitions of the crucial terms in the revised two-tier tax scheme.

  6. IRC 6684(2) imposes a penalty upon a person who becomes liable for a tax under IRC 4941 for actions that are willful and flagrant, and not due to reasonable cause. The penalty is equal to the amount of the tax imposed under IRC 4941. See Shearn Moody v. Commissioner, T.C. Memo 1995–195 (1995).

7.27.15.4  (04-26-1999)
Definition of Self-Dealing

  1. Self-dealing means any direct or indirect transaction described in IRC 4941(d)(1). It is immaterial whether the transaction benefits or injures the foundation.

  2. Self-dealing presupposes a transaction between a private foundation and a disqualified person. However, self-dealing does not include a transaction between a private foundation and a disqualified person where the disqualified person status arises only as a result of such transaction. For example, in this "first bite" rule, the bargain sale of property to a private foundation is not a direct act of self-dealing if the seller becomes a disqualified person only by reason of his or her becoming a substantial contributor as a result of the bargain element of the sale. Reg. 53.4941(d)–1(a). The transaction will not be considered self-dealing since the person was not a disqualified person prior to the transaction. However, the first bite rule would not be applicable after disqualified person status was established such as in the case with an extension of credit with an outstanding balance. See PLR 9530032, which is not precedential guidance, but may be illustrative of the point at issue.

  3. To get a balanced view of the character of transactions proscribed by IRC 4941, read IRM 7.27.15.4.1, Specific Acts of Self-dealing, in conjunction with IRM 7.27.15.4.2, Exceptions to Self-dealing.

7.27.15.4.1  (04-26-1999)
Specific Acts of Self-Dealing

  1. Under IRC 4941(d), the following acts of self-dealing are described:

    • Sale or exchange or leasing of property

    • Lending of money or other extension of credit

    • Furnishing of goods, services or facilities

    • Payment or compensation

    • Transfer to, or use by or for the benefit of a disqualified person of the asset of a foundation

    • Certain payments to government officials

7.27.15.4.1.1  (04-26-1999)
Sale or Exchange

  1. Sale or exchange of property. Generally, any sale or exchange of property between a private foundation and a disqualified person is an act of self-dealing. Reg. 1.4941(d)–2(a).

    1. See Rev. Rul. 76–18, 1976–1 C.B. 355.

    2. See Rev. Rul. 77–379, 1977–2 C.B. 387.

    3. See Rev. Rul . 76–448, 1976–2 C.B. 368, where an exchange of property between a private foundation and a corporation was not an act of self-dealing because the corporation had long before ceased its disqualified person status and other factors. See IRM 7.27.15.9(17).

  2. This includes even the sale to a private foundation of incidental supplies, such as stationery, regardless of the amount paid. It also includes bargain sales of property to a private foundation by a disqualified person. Reg. 53.4941(d)–(2)(a)(1). Note the distinction with Reg. 53.4941(d)–1(a)’s "first bite" rule cited above.

  3. The transfer of real or personal property by a disqualified person to a private foundation is treated as a sale or exchange if the foundation:

    1. assumes a mortgage or similar lien which was placed on the property prior to the transfer, or

    2. takes the property subject to a mortgage or similar lien placed on it by the disqualified person within the 10-year period ending on the date of transfer. IRC 4941(d)(2)(A). The term "similar lien" includes, but is not limited to, deeds of trust and vendor’s liens. It does not include any lien which is insignificant in relation to the fair market value of the property transferred. Reg. 53.4941(d)–2(a)(2). In Harold and Julia Gersham Family Foundation v. Commissioner, 83 T.C. 217 (1984), the court held that a transfer by a disqualified person to a private foundation of a promissory note secured by an all-inclusive trust deed on property that is subject to senior notes was an act of self-dealing. The court concluded that the statutory language "subject to a mortgage or similar lien" should be broadly construed to apply to transfers in which an individual may improperly benefit from a transaction even though there is no clear and immediate detriment to or relinquishment by, the foundation. See also Rev. Rul. 78–395, 1978–2 C.B. 270; Rev. Rul. 80–132, 1980–1 C.B. 255.

  4. Leasing of property. The leasing of property between a disqualified person and a private foundation is considered self-dealing except when a disqualified person leases property to a foundation without charge. A lease is considered to be without charge even if the foundation is required to pay for utilities or maintenance costs incurred for use of the property, so long as the payment is not made to a disqualified party. Reg. 53.4941(d)–2(b)(2).

7.27.15.4.1.2  (04-26-1999)
Lending of Money

  1. With certain exceptions noted below, the lending of money or other extension of credit between a private foundation and a disqualified person constitutes self-dealing. The rule is equally applicable where the disqualified person is a successor in interest rather than an original party to the loan or extension of credit. Reg. 53.4941(d)–2(c)(1).

  2. The transfer of mortgage notes by an estate to a private foundation, when the obligor is a disqualified person with respect to such private foundation, constitutes an act of self-dealing under 4941(d)(1)(B), even though there was no intention that the notes be transferred to the private foundation when originally issued. GCM 37731, October 26, 1978.

  3. The exceptions to the general rule are:

    1. loans or other extensions of credit by a disqualified person to a private foundation without interest or other charge;

    2. pledges of money or property to a private foundation by a disqualified person;

    3. the performance of certain general banking services (the maintenance of checking and savings accounts and safe deposit boxes (but not certificates of deposit)) for a private foundation by a bank or trust company which is a disqualified person. The services must be reasonable and necessary to carrying out the exempt purposes of the private foundation and the compensation paid to the bank or trust company must not be excessive considering the fair interest rate for the use of the foundation’s funds. The foundation must not be charged any interest on overdrafts of checking accounts. However the imposition of a service charge for the actual cost of processing an overdraft is permissible. Rev. Rul. 73–546, 1973–2 C.B. 384. Also, the foundation must be able to withdraw its funds from a savings account on no more than 30 days notice without subjecting itself to a loss of interest on its money for the time during which the money was on deposit. Rev. Rul. 73–595, 1973–2 C.B. 384; and

    4. Certain transactions during the administration of an estate or revocable trust specifically involving options binding on the estate (or trust). Reg. 53.4941(d)–1(b)(3)(v)(c).

  4. It has been asserted that the redemption of stock held by a private foundation by a corporation which is a disqualified party with respect to such private foundation, where the redemption price is paid in installments pursuant to a promissory note over a period of time, is not an act of self-dealing by virtue of the exception provided by IRC 4941(d)(2)(F). Based on example 2 of Reg. 53.4941(d)–3(d)(2), it is the Service's position that the installment purchase is an extension of credit within the meaning of IRC 4941(d)(1)(B), so that such extension of credit is an act of self-dealing if the corporate installment obligation is not fully satisfied within the year of the initial redemption of stock. See IRM 7.27.15.4.2.3 as to the exception provided by IRC 4941(d)(2)(F).

  5. Under the Regulations, if a self-dealing transaction involves the lending of money, the leasing of property and other enumerated transactions, the transaction will generally be treated as giving rise to an act of self-dealing on the day the transaction occurs plus additional acts of self-dealing on the first day of each taxable year or portion of a taxable year which begins after the taxable year in which the transaction occurs. See Reg. 53.4941(e)–1(e)(1)(i). Also Reg. 53.4941(d)–3(d)(2), example 2, cited in the preceding paragraph. See IRM 7.27.15.7.

7.27.15.4.1.3  (04-26-1999)
Goods, Services or Facilities

  1. Furnishing of goods and services or facilities. Generally, the furnishing of goods, services, or facilities between a private foundation and disqualified person is considered an act of self-dealing. Reg. 53.4941(d)–2(d).

    Example:

    If a foundation furnishes an automobile to a disqualified person (other than a foundation manager for purposes that are reasonable and necessary) without charge, it is engaging in an act of self-dealing. Similarly, the rental of aircraft by a disqualified person to a private foundation constitutes self-dealing. See Rev. Rul. 73–363, 1973–2 C.B. 383.

  2. In the following instances, however, the furnishing of goods, services, or facilities is not considered self-dealing:

    1. furnishing goods, etc. in a reasonable amount to a foundation manager in consideration for services performed in the capacity of foundation manager. The goods, etc., which are furnished must be reasonable and necessary to the performance of the manager’s tasks in carrying out the exempt purposes of the foundation. For example, a foundation manager may be provided meals and lodging as caretaker of a historical site operated by a private foundation. If the value of the meals and lodging is reasonable in light of the duties, the activity is not considered self-dealing. PLR 9646002, which has no precedential weight but provides and illustration of the principle.

    2. furnishing of goods, etc., to a private foundation by a disqualified person without charge. The furnishing of goods is considered "without charge" even though the foundation pays for transportation, insurance, or maintenance costs it incurs in obtaining or using the property, so long as the payment is not made directly or indirectly to the disqualified person.

  3. The exception under IRC 4941(d)(2)(D) provides that the furnishing of goods, services, or facilities by a private foundation to a disqualified person is not an act of self-dealing if the furnishing is made on a basis no more favorable than that on which made available to the general public. In order for the exception to apply, the furnishing of goods, services or facilities by the foundation must be functionally related to its exempt purposes. See Rev. Rul. 76–459, 1976–2 C.B. 369. Contrast Rev. Rul. 79–374, 1979–2 C.B. 387 where there was not a functional relationship to the exempt purpose. See IRM 7.27.15.4.2 for the exception provided by IRC 4941(d)(2)(D).

7.27.15.4.1.4  (04-26-1999)
Payment of Compensation

  1. Payment of compensation and expenses. The payment of compensation or the reimbursement of expenses by a private foundation to a disqualified person constitutes self-dealing. However, an exception to this rule is made for the payment of compensation by a foundation to or reimbursement of expenses of a disqualified party for the performance of personal services reasonable and necessary to carrying out the exempt purposes of the foundation, if the payment is not excessive. See IRM 7.27.15.4.2.2 and Reg. 53.4941(d)–2(e).

  2. In Rev. Rul. 74–591, 1974–2 C.B. 385, it was held that the payment of a pension for past services to one of the directors of a private foundation was not an act of self-dealing since the total compensation paid to the director, including the pension, was not excessive.

  3. The scope of personal services exception is defined by the Regulations and published rulings, as follows:

    1. The exception for the performance of certain banking functions described above under the preceding topic IRM 7.27.15.4.1.2, is described as coming under the personal services exception of IRC 4941(d)(2)(E).

    2. Under Reg. 53.4941(d)–3(c), the personal services exception includes brokering, legal, investment, and banking services are permitted. Also the services of an accountant would generally be deemed to come within this exception. The excepted service categories are narrowly construed. See Madden v. Commissioner, supra, and PLR 9433027 (PLR's carry no precedential value).

    3. Under Rev. Rul. 73–613, 1973–2 C.B. 385, the payment of legal fees on behalf of a director-manager of a private foundation relating to the filing of a lawsuit arising out of his duties as a director did not constitute an act of self-dealing by virtue of the exception provided by IRC 4941(d)(2)(E).

7.27.15.4.1.5  (04-26-1999)
Use of Income or Assets

  1. If a foundation’s income or assets are transferred to or used by or for the benefit of a disqualified person, it is an act of self-dealing, whether or not the use costs the foundation anything. Examples of this are the:

    1. payment by a private foundation of any Chapter 42 tax imposed on a disqualified person;

    2. the payment by a private foundation of the premiums on an insurance policy providing liability insurance to a foundation manager for Chapter 42 taxes (unless such payment is treated as compensation);

    3. the purchase or sale of stock or other securities in an attempt to manipulate the price to the advantage of a disqualified person;

    4. the making of a grant by a private foundation which satisfies a legal obligation of a disqualified person (Reg. 53.4941(d)–2(f)(1));

    5. the making of a scholarship grant to the descendant of a bank employee with fiduciary responsibilities over the foundation;

    6. the guarantee by a private foundation of a bank loan to a disqualified person;

    7. and the placing of paintings owned by a private foundation in the residence of a substantial contributor, a disqualified person. Such constitutes an act of self-dealing under IRC 4941(d)(1)(E) since the disqualified person has the direct use and benefit of an asset of the private foundation. See Rev. Rul. 74–600, 1974–2 C.B. 385.

  2. Certain pledges. It is not an act of self-dealing for a private foundation to make a grant or payment that satisfies a disqualified person’s pledge, enforceable under local law, to an IRC 501(c)(3) organization, unless such pledge was made on or before April 16, 1973, and the disqualified person obtains no substantial benefit, other than the satisfaction of an obligation. Reg. 53.4941(d)–2(f)(1).

  3. Incidental benefit. An act of self-dealing does not occur when the use of a foundation’s income or assets results in an incidental or tenuous benefit to a disqualified person. Reg. 53.4941(d)–2(f)(2). This exception is limited to situations where the public benefit far outweighs the benefit to the disqualified person. For example:

    1. If a substantial contributor to a foundation received public recognition because of the foundation’s charitable activities, this is considered an incidental or tenuous benefit. See Rev. Rul. 73–407, 1973–2 C.B. 383.

    2. A grant by one private foundation to another private foundation, where both foundations have the same bank trustee as its sole trustee, does not constitute an act of self-dealing because the benefit to the trustee is incidental. See Rev. Rul. 82–136, 1982–2 C.B. 300.

    3. See Rev. Rul. 77–160, 1977–1 C.B. 351, where the benefit conferred on a disqualified person was held not to be incidental or tenuous.

    4. In Rev. Rul. 85–162, 1985–2 C.B. 275, no act of self-dealing was committed when a private foundation lent money to a public charity which was paid to contractors who had ordinary banking relationships with a bank that was a disqualified person. Such benefit would be incidental or tenuous.

    5. An act of self-dealing will be committed when a foundation makes a loan to an individual who has substantial dealings with the foundation manager in his capacity as the individual’s attorney. See G.C.M. 39632.

  4. A scholarship or fellowship grant made by a private foundation in accordance with a charitable program to award scholarships to the children of employees of a substantial contributor would not be considered self-dealing where the grant is paid to a person other than a disqualified person and is made by the private foundation in accordance with a program which is consistent with:

    1. the requirements of the foundation’s exempt status under IRC 501(c)(3);

    2. the requirements for the allowance of deductions under IRC 170 for contributions made to the foundation; and

    3. the requirements of IRC 4945(g)(1).

  5. Reg. 53.4941(d)–2(f)(4), example (2). Indemnification of foundation manager. With certain conditions, a private foundation may indemnify a foundation manager for expenses incurred in contesting Chapter 42 taxes and State charitable law proceedings proposed against that person. Reg. 53.4941(d)–2(f)(3). The expenses that may be paid by the foundation include attorney’s fees but not taxes, penalties, or expenses of correction. A foundation manager settled a state mismanagement suit by agreeing to reimburse the foundation for the assets lost. The foundation would commit an act of self-dealing if it indemnified the foundation manager for that amount because of the personal nature of the liability. See Rev. Rul. 82–223, 1982–2 C.B. 301. The conditions are that the expenses be reasonably incurred in connection with the contest proceedings, and that the foundation manager be successful in the defense or the proceedings be terminated by settlement. The foundation manager must also not have acted willfully and without reasonable cause with respect to the act or failure to act which led to liability for Chapter 42 tax or penalty for a violation of State law.

    Example:

    A foundation manager might successfully contest the liability for Chapter 42 tax on the basis of the expiration of the statute of limitations, but, if, in fact, the manager acted willfully and without reasonable cause, the indemnification for expenses would be an act of self-dealing.

  6. Notice 94–78, 1994–2 C.B. 555 described a type of accelerated charitable remainder trust used to avoid income tax. These trusts are characterized by a very high noncharitable payout amount (e.g. 75 per cent per annum), a short term (e.g. a two year trust), and the realization of substantial capital gain income. Notice 94–78 stated that depending on the facts of each particular case, the Service will challenge trusts of this type based on one or more legal doctrines including self-dealing under IRC 4941(d)(1)(E). These accelerated charitable remainder trusts are subject to an amended IRC 664(d)(1)(A) enacted with the Taxpayer Relief Act of 1997 limiting income payout to no more than 50 percent. Thus, where a purported charitable remainder trust fails to actually qualify under IRC 664 by virtue of the new IRC 664(d)(1)(A), the taxes imposed on self-dealing will also not apply since IRC 4947(a)(2) is limited to trusts qualifying under IRC 664 and certain charitable lead trusts.

    1. A Trust containing, for example, a 49 percent noncharitable payout amount per annum, and having the other characteristics described of an accelerated charitable remainder trust (described above) may be examined to determine if the remedy provided by Notice 94–78 should be applied.

  7. A tax planning technique not uncommon to some charitable remainder unitrusts having a net income with makeup provision described in IRC 664(d)(3) is to defer the amount of income to the noncharitable income recipient for some period beyond the initiation of the trust. In TAM 9825001, June 19, 1998, with respect to the deferral of income from the trust by virtue of the purchase of a deferred annuity, the Service concluded that the deferral of income did not constitute an act of self-dealing under IRC 4941(d)(1)(E), at least where there is an absence of any unreasonable effect on the charitable remainder interest.

7.27.15.4.1.6  (04-26-1999)
Government Official

  1. IRC 4941(d)(1)(F) generally provides, with exceptions, that an act of self-dealing occurs if private foundation makes any payment of money or other property to a governmental official. Reg. 53.4941(d)–2(g).

7.27.15.4.2  (04-26-1999)
Exceptions to Self-Dealing

  1. Certain of the acts described above do not constitute self-dealing when the benefits received by the disqualified parties are no more than those that would be received by the general public or persons who are not disqualified parties. The exceptions removing these acts from the definition of self-dealing are set out generally in IRC 4941(d)(2)(D), (E), (F), and (G). Below are explanations of these exceptions.

7.27.15.4.2.1  (04-26-1999)
Furnishing Functionally Related Goods

  1. When a private foundation furnishes functionally related (as defined in IRC 4942(j)(4)) goods, services, or facilities to a disqualified person, this is not an act of self-dealing if the same goods, etc., are made available to the general public on at least as favorable a basis. Reg. 53.4941(d)–3(b).

  2. For purposes of this provision, there must be a substantial number of persons other than disqualified ones, who could reasonably be expected to utilize the foundations goods, services, or facilities. For example, a private foundation which furnishes recreational or park facilities to the general public (who actually use the facilities) may furnish such facilities to a disqualified person provided they are furnished on a basis that is not more favorable than the basis on which the facilities are furnished to the general public.

7.27.15.4.2.2  (04-26-1999)
Reasonable Compensation

  1. IRC 4941(d)(2)(E). The payment of compensation (or reimbursement for expenses) by a private foundation to a disqualified person (other than a government official, but including a corporation or a partnership) for performing personal services reasonable and necessary to carrying out the foundation’s exempt purposes is not an act of self-dealing if such compensation is not excessive (as defined in Regs. 1.162–7). Reg. 53.4941(d)–3(c).

    Example:

    Payment by a private foundation of legal fees awarded by a court to the counsel for its director-manager, a disqualified person who had filed suit against the remaining directors to require them to carry on the foundation’s charitable program, does not constitute an act of self-dealing. Rev. Rul 73–613, 1973–2 C.B. 385.

  2. The payment of expenses includes reasonable advances for expenses anticipated in the immediate future, including cash advances (usually not more than $500) to a foundation manager or employee for expenses on behalf of the foundation. In the latter instance, where the recipient periodically accounts for advances, the foundation will not be regarded as having engaged in an act of self-dealing—

    1. when it makes the advance,

    2. when it replenishes the funds upon receipt of supporting vouchers from the foundation manager, or

    3. if it temporarily adds to the advance to cover extraordinary expenses anticipated to be incurred in fulfillment of a special assignment (such as long distance travel). In such case, the advance may exceed $500.

  3. The term "personal services" includes the services of a broker serving as agent for the private foundation, but not the services of a dealer who buys from the private foundation as principal and resells to third parties. The portion of any payment which represents payment for property is not treated as payment of compensation or payment or reimbursement of expenses. The payment of a pension under certain circumstances, to a disqualified person for past services, would not constitute an act of self-dealing under IRC 4941. (See also: Rev. Rul. 73–126, 1973–1 C.B. 220, and Rev. Rul. 74–591, 1974–2 C.B. 385). See also IRM 7.27.15.4.1.4.

  4. In Kermit Fischer Foundation v. Commissioner, supra, the court held that the foundation was liable for tax under IRC 4941(a) for receipt of excessive compensation. The annual compensation the manager received was disproportionately large in comparison to the total assets of the foundation.

7.27.15.4.2.3  (04-26-1999)
Corporate Transactions

  1. Corporate reorganization. Under certain conditions, a transaction between a private foundation and a corporation which is a disqualified party is not considered self-dealing if the transaction takes place pursuant to a liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization. Reg. 53.4941(d)–3(d). The foundation must be afforded at least as favorable treatment as other holders of securities in the corporation in order for the transaction not to be considered self-dealing. Compensating the foundation with property, such as debentures, for its stock when other holders of identical stock receive cash would not be considered treating the foundation on a uniform basis.

  2. One case where a redemption was approved by the court was Deluxe Corp. v. United States, 885 F.2d 848 (Fed. Cir. 1989). The corporation conducted a redemption of the common stock. Some of the stock was owned by a private foundation. The corporation excluded its officers and directors from the redemption. The Court concluded that the redemption met the exception in IRC 4941(d)(2)(F) because Reg. 53.4941(d)–3(d)(1) did not require the shareholders who are officer or directors to be included in the redemption program, and the redemptions were no less than fair market value.

7.27.15.4.2.4  (04-26-1999)
Loans

  1. Under certain conditions, the lending of money by a disqualified person to a private foundation will not be an act of self-dealing if the loan is without interest or other charges (without regard to IRC 7872 which imputes interest in certain situations) and if the proceeds of the loan are used exclusively for purposes specified in IRC 501(c)(3).

7.27.15.4.2.5  (04-26-1999)
Government Officials

  1. Under IRC 4941(d)(2)(G), the following types of payments made by a private foundation to a government official are also not considered self-dealing.

  2. Prior to the Tax Reform Act of 1986:

    1. An act of self-dealing did not occur when a private foundation gave a prize or award to a government official provided it was excludable from gross income under IRC 74. Section 122 of the Tax Reform Act of 1986 amended IRC 74 to provide that a prize or award will be included in the gross income of the recipient unless the recipient was selected without any action on his part, was not required to render future service, and, under IRC 74(b)(3), the prize or award was transferred by the recipient to a governmental unit or organization described in IRC 170(c)(1) or (2). The change in the individual income tax treatment of prizes and awards was not intended to affect the self-dealing provisions so that IRC 4941(d)(2)(G)(i) was amended to provide that a prize or award will not be an act of self-dealing if it complies with the provision of IRC 74(b) without regard to IRC 74(b)(3).

    2. Government officials were able to get scholarship and fellowship grants without risk of self-dealing provided the grants were described in IRC 117(a). This section referred to amounts received as a scholarship at an educational institution described in IRC 170(b)(1)(A)(ii) or a fellowship grant. Also included were amounts to cover expenses for room, board, travel, research, clerical help, or equipment that were incidental to the scholarship or fellowship grant.

  3. Effect of the Tax Reform Act of 1986:

    1. The 1986 Act narrowed IRC 117(a) to refer only to amounts received as a qualified scholarship by a degree candidate. The term "qualified scholarship" included scholarship or fellowship grants to be used for tuition and fees or for course-required books, supplies, and equipment.

    2. Under this narrowed definition, a grant to a government official would be self-dealing if the training at the educational institution were not for a degree or if it were for room, board, clerical support, etc. Since the effects upon IRC 4941 were not intended, the Service published Notice 87–31 which said that, until Congress clarified the situation by legislation, it will interpret IRC 4941(d)(2)(G)(ii) and IRC 4945(g)(1) as if IRC 117 had not been amended.

  4. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) clarifies the situation by amending IRC 4941(d)(2)(G)(ii) and IRC 4945(g)(1) to refer to scholarship or fellowship grants as defined in IRC 117(a) before the changes of the Tax Reform Act of 1986. Thus, grants made under the pre-existing broader definition of scholarships and fellowships are not self-dealing under IRC 4941.

  5. The following payments made to government officials are also not considered acts of self-dealing.

    1. any annuity or other payment (forming part of a stock-bonus, pension, or profit sharing plan) by a trust which is a qualified trust under IRC 401;

    2. any annuity or other payment under a plan which meets the requirements of IRC 404(a)(2);

    3. any contribution or gift of property, services, or facilities (but not money) to or for the benefit of a government official up to and including $25.00 in value for any calendar year;

    4. any payment made under 5 U.S.C. 41 (relating to government employees’ training programs);

    5. any payment or reimbursement for any traveling expenses (including meals and lodging) for travel from one point in the United States to another provided such payment or reimbursement is not greater than the actual cost of transportation plus an amount not in excess of 125 percent of the maximum amount of per diem payable to a U.S. Government employee for like travel;

    6. any agreement to employ or make a grant to a government official for any period after the termination of government employment if the agreement is entered into within 90 days prior to such termination.

7.27.15.4.2.6  (04-26-1999)
Securities Transactions

  1. The purchase or sale of securities by a private foundation is not self-dealing under Reg. 53.4941(a)–1(a)(1) if—

    1. the transaction takes place through a stockbroker where normal trading procedures on a stock exchange or recognized over-the-counter market are followed;

    2. neither the buyer nor the seller nor the agent of either knows the identity of the other party; and

    3. the sale is made in the ordinary course of business and does not involve a block of securities larger than the average daily trading volume of that stock over the previous four weeks.

  2. Rule for securities dealers. The provisions in (1) above do not apply to transactions involving dealers in securities who are disqualified persons acting as principals or to securities transactions involving the lending of money or other extensions of credit between private foundations and disqualified persons. IRC 4941(d)(1)(B).

7.27.15.4.2.7  (04-26-1999)
Indemnity Insurance Exception

  1. The payment of premiums by a private foundation for insurance indemnifying a disqualified person against liability for claims in connection with his/her assistance in preparing a registration statement and prospectus for the foundation’s public offering of stock issued by a corporation of which he/she was a principal officer are treated as part of his/her compensation for such services and do not constitute acts of self-dealing if the compensation is not excessive. See Rev. Rul. 74–405, 1974–2 C.B. 384.

  2. Generally, payments by a private foundation of the premiums for an insurance policy providing liability insurance to a disqualified person for Chapter 42 taxes shall be an act of self-dealing under the provisions of IRC 4941(d)(1)(E) unless such premiums are treated as part of the compensation paid to such disqualified person. See Rev. Rul. 82–223, 1982–2 C.B. 301. (See also: IRC 4941(d)(1)(D) and Reg. 53.4941(d)–2(f)(1) and IRM 7.27.15.4.2.2).

7.27.15.5  (04-26-1999)
Indirect Self-Dealing

  1. The various enumerated acts of self-dealing may be engaged in directly between a disqualified party and a private foundation or indirectly through a third party. However, there are certain transactions involving third parties which are excepted from the self-dealing provisions. These exclusions are explained in the succeeding paragraphs of this Section. See Reg. 53.4941(d)–1. Thus the exclusions from indirect self-dealing are discussed in this text before the discussion of the general rules as to acts of indirect self-dealing.

7.27.15.5.1  (04-26-1999)
Certain Business Transactions

  1. Indirect self-dealing does not include any transaction described in IRC 4941(d)(1) between a disqualified person and an organization controlled by a private foundation if—

    1. the transaction results from a business relationship which was established prior to the effective date of IRC 4941,

    2. the transaction was at least as favorable to the organization controlled by the foundation as an arm’s length transaction with an unrelated person, and

    3. either the organization controlled by the foundation would have suffered severe economic hardship by engaging in the transaction with an unrelated party or the controlled organization provided a unique product or service unavailable elsewhere. Reg. 53.4941(d)–1(b)(1).

7.27.15.5.2  (04-26-1999)
Grants to Intermediaries

  1. Indirect self-dealing does not include a transaction between a government official and an intermediary organization that received a grant from a private foundation and which is not controlled by the foundation (as defined in (2) and (3) above) provided that the private foundation does not earmark the grant for a named government official and does not exercise any control over the selection process. A member of the foundation cannot participate in the government officials selection procedure. See also PLR 9421039 (PLR's are not precedential guidance).

7.27.15.5.3  (04-26-1999)
Estate Administration Exclusion

  1. Administration of estate. Indirect self-dealing does not include the sale to a disqualified person of property held by an estate (or revocable trust, including a trust which has become irrevocable on a grantor’s death) of which a private foundation is a beneficiary if—

    1. the administrator, executor or trustee can sell, is required to sell, or can distribute the property to another beneficiary;

    2. the transaction is approved by the probate court having jurisdiction over the estate (or by another court having jurisdiction over the estate (or trust) or over the private foundation);

    3. the transaction occurs before the estate is terminated for Federal income tax purposes (or, in the case of a revocable trust, before it is considered subject to IRC 4947); and

    4. the estate (or trust) receives an amount at least equal to the fair market value of the foundation’s interest or expectancy in the property at the time of the transaction; and

    5. with respect to transactions occurring after April 16, 1973, the transaction: (i) results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up; (ii) results the foundation receiving an asset related to the active carrying out of its exempt purposes; or (iii) is required under the terms of any option which is binding on the estate (or trust). See Reg. 53.4941(d)–1(b)(3).

  2. See Estate of Bernard J. Reis v. Commissioner, 87 T.C. 1016 (1986), and Rockfeller v. United States, 572 F. Supp. 9 (E.D. Ark. 1982), aff’d 718 F.2d 290 (8th Cir. 1983), cert. den. 466 U.S. 962 (1984).

7.27.15.5.4  (04-26-1999)
Reg. 53.4941(d)–1(b)(4)

  1. Transactions with certain organizations. Transactions between a private foundation and an organization that is not controlled by the foundation and is not a disqualified person with respect to the foundation are not to be considered indirect self-dealing acts between the private foundation and the stockholders or holders of beneficial interest in the organization, even though the stockholders or holders of beneficial interest are disqualified persons with respect to the foundation. See also Rev. Rul. 76–158, 1976–1 C.B. 354.

7.27.15.5.5  (04/26/99)
Transactions with Limited Amounts

  1. Certain transactions involving limited amounts. Indirect self-dealing does not include any transaction between a disqualified person and an organization controlled by a private foundation or between two disqualified persons where the foundation’s assets may be affected by the transaction if—

    1. the transaction arises in the normal and customary course of a retail business engaged in with the general public,

    2. in the case of a transaction between a disqualified person and a controlled organization, the transaction is at least as favorable to the controlled organization as an arm’s-length transaction with an unrelated person, and

    3. the total of the amounts involved in transactions with any one disqualified person does not exceed $5000 in any one taxable year.

7.27.15.5.6  (04-26-1999)
Statutory Exceptions

  1. Applicability of statutory exceptions to indirect self-dealing. The statutory exceptions to self-dealing found in IRC 4941(d)(2) also apply to transactions involving one or more disqualified persons (but not the private foundation) where by reason of IRC 4941(d)(2) the foundation could engage in the transaction.

    Example:

    A corporation controlled by a private foundation could pay reasonable compensation for personal services to a disqualified person (except a government official).

7.27.15.5.7  (04-26-1999)
Indirect Self-Dealing; Control

  1. Transactions involving a private foundation may involve more than two entities, such as multiple corporations, many of which could acquire disqualified person status through the attribution rules provided IRC 4946(a)(1). Even though there may be an entity interposed between private foundation and a disqualified person, IRC 4941(d) prohibits indirect as well as direct acts of self-dealing.

  2. An organization is controlled by a private foundation if the foundation, its managers, or disqualified persons are able, by aggregating their voting power or positions of authority with that of the foundation, to require the organization to act or refrain from acting in a manner which would constitute self-dealing. A controlled organization may be any type of exempt or nonexempt organization including a school, hospital, operating foundation or social welfare organization. Reg. 53.4941(d)–1(b)(5).

  3. For situations involving indirect acts of self-dealing, see G.C.M. 36452 (October 3, 1975); and Adams v. Commissioner, 70 T.C. 446 (1978).

7.27.15.6  (04-26-1999)
Transitional Rules

  1. The self-dealing provisions became effective on January 1, 1970. However, certain transitional rules were adopted to permit the orderly elimination of existing arrangements. Congress did not wish to permit such arrangements to continue indefinitely, but believed that limited exceptions were desirable so that appropriate transition could be made. These transitional rules are explained in Reg. 53.4941(d)–4.

  2. Dispositions pursuant to IRC 4943. Self-dealing does not include the sale, exchange, or other disposition to a disqualified person of property owned by a private foundation on May 26, 1969 (or acquired pursuant to a will or irrevocable trust executed on or before that date), and required to be disposed of to avoid liability for taxes under IRC 4943 (excess business holdings), if the foundation receives at least fair market value at the time of disposition and the transaction would not have constituted a prohibited transaction under IRC 503(b). See Continental Water Company v. U.S., 49 AFTR 2d 82–1070 (Ct. Cl. 1982), in which the Service contended that the taxpayer could not take advantage of the transitional rule because it had not received fair market value in the sale of stock to a disqualified person.

    Example:

    A proposed sale after December 31, 1974, to a disqualified person of a private foundation’s 15 percent interest in a corporation, in which the foundation and all disqualified persons have combined holdings of 45 percent of the voting stock as of May 26, 1969, would be subject to the tax on self-dealing imposed by IRC 4941. In a similar situation in which the total combined holdings of the foundation and disqualified persons are 55 percent, the foundation would have excess business holdings within the meaning of IRC 4943(c)(4), and section 101(1)(2)(B) of the Tax Reform Act of 1969 would except the proposed sale from the provisions of IRC 4941. See: Rev. Rul. 75–25, 1975–1 C.B. 359 and see Rev. Rul. 86–53, 1986–1 C.B. 326, in which the sale to a disqualified person in order to dispose of excess business holdings of property held on May 26, 1969, that was an excess business holding at the time of the sale but was not an excess business holding on May 26, 1969, was also excepted from the provisions of IRC 4941 by section 101(1)(2)(B) of the Tax Reform Act of 1969.

7.27.15.7  (04-26-1999)
Other Definitions

  1. Other definitions are provided on terms relative to self-dealing.

7.27.15.7.1  (04-26-1999)
Amount Involved Reg. 53.4941(e)–1(b)

  1. The taxes imposed by IRC 4941 are on the "amount involved" in the act of self-dealing. In general, this is the greater of the amount of money and/or the fair market value of other property given, or the amount of money and/or the fair market value of other property received. IRC 4941(e)(2). For example, if a foundation pays a personal obligation, such as a Chapter 42 tax liability, of a disqualified person, the "amount involved" is the total amount paid by the foundation. In the case of compensation paid for personal services (to other than government officials), the "amount involved" is the amount paid over the fair value of the services. With regard to the use of money or other property, the amount involved is the greater of the amount paid for such use or the fair market value of the use. For the first level tax, fair market value is determined on the date that the act of self-dealing (the taxable event) occurs. For the second level tax, the amount involved is the highest fair market value during the taxable period which ends on the date a notice of deficiency is mailed or the date the first level tax is assessed.

  2. In transactions which are treated as acts of self-dealing solely because the foundation failed to receive fair market value for property it transferred, the amount involved is the excess of the fair market value over the amount received by the foundation if the parties made a good faith effort to determine fair market value. A "good faith effort" is ordinarily made where—

    1. the person making the valuation is not a disqualified person, is competent to make the valuation, and is not in a position to derive an economic benefit from the value utilized, and

    2. the valuation method is a generally accepted one for valuing comparable property for purposes of arm’s-length business transactions.

7.27.15.7.2  (04-26-1999)
Correction

  1. Generally, under IRC 4941(e)(3), correction is accomplished by undoing the act of self-dealing to the extent possible. If the act of self-dealing cannot be undone, then the private foundation should be restored to a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards. For example, if a disqualified person sells property to a private foundation, correction may be accomplished by the disqualified person returning the cash to the foundation and transforming the transaction into a gift. The following illustrate the minimum standards of correction in certain cases. See Edmund DuPont v. Commissioner, 74 T.C. 498, in which the taxpayer’s intended acts of correction constituted additional acts of self-dealing. These principles apply with respect to other acts of self-dealing. See Reg. 53.4941(e)–1(c) for specific examples.

  2. In the case of a sale of property by a private foundation to a disqualified person for cash, undoing the transaction includes, but is not limited to, rescinding the sale. The amount returned to the disqualified person must not exceed the lesser of the cash received by the foundation or the fair market value of the property received by the disqualified person. The fair market value to be returned is the lesser of the fair market value on the date the act of self-dealing occurred or at the time of rescission of the sale. The disqualified person must also return to the foundation any net income derived from the use of the property to the extent that it exceeds any income derived by the foundation during the correction period from its use of the cash received from the original sale.

  3. If, prior to the end of the correction period, the disqualified person resells the property (originally purchased from a private foundation) in an arm’s-length transaction to a bona fide purchaser other than the foundation or another disqualified person, rescission of the original sale is not required. The disqualified person must pay over to the foundation the excess (if any) of the greater of the fair market value of the property on the date of correction (the date on which the money is paid over to the foundation) or the amount realized by the disqualified party from the arm’s-length sale over the amount which would have been returned to the disqualified person under (a) above. In addition, the disqualified party must pay over to the foundation any net profit realized through the use of the property during the correction period.

  4. As with sales by a foundation, undoing the transaction includes, but is not limited to, rescinding the sale. Correction can be accomplished by returning the purchase price to the foundation and transforming the transaction into a gift. The sale may also be rescinded by returning the property to the disqualified person in exchange for an amount of money equal to the greatest of the cash paid on the original sale, the fair market value of the property at the time of the original sale, or the fair market value at the time of rescission. In addition, the disqualified person must pay over to the foundation any income realized from the use of the proceeds of the sale to the extent that the income exceeds any income earned by the foundation from the use of the property.

  5. If, prior to the end of the correction period, the foundation resells property (originally purchased from a disqualified person) in an arm’s-length transaction to other than a disqualified person, the foundation must be paid by the disqualified person, the excess (if any) of the amount which would have been paid if rescission of the sale was required over the amount realized from the resale of the property. The disqualified person must also pay over any net income realized as provided above.

  6. If a disqualified person uses the property of a private foundation, correction includes, but is not limited to, termination of such use. In addition, the disqualified person must pay to the foundation—

    1. the excess (if any) of the fair market value (greater of the value at time of the act of self-dealing or at the time of correction) for the use of the property over the amount paid for the use until termination, plus

    2. the excess (if any) of the amount that would have beer paid by the disqualified party for the period after termination (if such termination had not occurred) over the fair market value (at the time of correction) of the use for such period.

  7. If a private foundation uses the property of a disqualified person, correction includes, but is not limited to, termination of such use. In addition, the disqualified person must pay to the foundation—

    1. the excess (if any) of the amount he/she received from the foundation over the fair market value (lesser of the value at the time of the act of self-dealing or at the time of correction) for the use of the property until the time of termination plus

    2. the excess (if any) of the fair market value of the use of the property for the period the foundation would have used the property if termination had not occurred, over the amount that would have been paid by the foundation after termination for use in such period.

  8. If a private foundation pays compensation to a disqualified person for the performance of personal services reasonable and necessary to carry out the exempt purposes of the foundation, correction requires paying back to the foundation any amount considered excessive under Reg. 1.162–7. Termination of the employment is not necessary.

  9. A second act of self-dealing occurred when a disqualified person attempted to correct an act of self-dealing by transferring to the foundation real property with a fair market value equal to the amount of the loan which had constituted the first act of self-dealing. See Rev. Rul. 81–40, 1981–1 C.B. 508.

  10. In the case where a transaction is considered self-dealing solely because the foundation did not receive fair market value (see IRM 7.27.15.7.4, below) correction will ordinarily occur if the foundation is paid an amount equal to the "amount involved" plus any additional amounts necessary to compensate it for the loss of the use of the money ( "amount involved" ) or other property during the period from the date of the act of self-dealing to the date of correction.

7.27.15.7.3  (04-26-1999)
Number of Acts of Self-Dealing

  1. Use of money or property. If a transaction between a private foundation and disqualified person is determined to be self-dealing, there is generally one act of self-dealing. However, a continuing transaction like the leasing of property, the lending of money or other extension of credit, other use of money or property, or payment of compensation will generally be treated (for purposes of IRC 4941 only) as giving rise to an act of self-dealing on the day the transaction occurs as well as on the first day of each succeeding taxable year or portion of a taxable year which is within the taxable period. Reg. 53.4941(e)–1(e)(1).

  2. Joint participation by disqualified persons. If two or more disqualified persons jointly participate in a transaction which constitutes self-dealing, the transaction is generally treated as a separate act of self-dealing with respect to each disqualified person for purposes of IRC 4941 only. However, it is treated as only one act of self-dealing with respect to the foundation for purposes of IRC 507 and IRC 6684. For purposes of this provision an individual and the members of his/her family (within the meaning of IRC 4946(d)) are treated as one person, regardless of whether the member of the family is treated as a disqualified person by reason of IRC 4946(a)(1)(D) or another subparagraph of IRC 4946(a)(1). However, joint and several liability is imposed on a disqualified person and members of his/her family for joint participation in an act of self-dealing.

7.27.15.7.4  (04-26-1999)
Fair Market Value

  1. Wherever the term "fair market value" appears in IRC 4941 and applicable regulations, refer to Regs. 53.4942(a)–2(c)(4).

7.27.15.7.5  (04-26-1999)
Taxable Period

  1. IRC 4941(e)(1) defines the "taxable period" as the period beginning with the date on which the act of self-dealing occurs and ending on the earliest of—

    1. the date of mailing a notice of deficiency with respect to the tax imposed by IRC 4941(a)(1) under IRC 6212,

    2. the date on which the tax imposed by IRC 4941(a)(1) is assessed, or

    3. the date on which correction of the act of self-dealing is completed.

  2. An act of self-dealing occurs on the date on which all the terms and conditions of the transaction and the liabilities of the parties have been fixed. Where a notice of deficiency is not mailed because there is a waiver of the restrictions on assessment and collection of a deficiency, or because the deficiency is paid, the date of filing of the waiver or the date of payment of the deficiency is treated as the end of the taxable period. Reg. 53.4941(e)–1(a).

7.27.15.7.6  (04-26-1999)
Correction Period

  1. IRC 4962(e), enacted as a part of P.L. 96–596 to remedy the Adams problem in assessing second-tier taxes (discussed in IRM 7.27.15.3.4(c), above), defines "correction period." In general, it is the period beginning on the date the taxable event occurs and ending 90 days after the date of mailing under IRC 6212 of a notice of deficiency with respect to the second tier tax imposed on such taxable event, extended by—

    1. any period in which a deficiency cannot be assessed under IRC 6213(a) (determined without regard to the last sentence of IRC 4961(b)), and

    2. any other period which the Service determines is reasonable and necessary to bring about correction of the taxable event.

  2. The correction period ordinarily will not be extended under (1)(b) above unless the following factors are present:

    1. the foundation or an appropriate State officer (as defined in IRC 6104(c)(2)) is actively seeking in good faith to correct toe act of self-dealing;

    2. adequate corrective action cannot reasonably be expected to result during the unextended correction period; and

    3. the act of self-dealing appears to have been an isolated occurrence and it appears unlikely that similar acts of self-dealing will occur in the future.

  3. If the first level tax is paid within the unextended, or normal correction period, the normal correction period is automatically extended to end the later of—

    1. 90 days after payment of the tax, or

    2. the last day of the correction period determined without regard to this provision.

  4. If a claim for refund is filed with respect to a tax imposed under IRC 4941(a)(1) or (2) within the unextended correction period, the correction period is extended while the claim is pending plus an additional 90 days. If a suit or proceeding referred to in IRC 7422(g) is filed, the correction period will be extended while the suit or proceeding is pending.

  5. IRC 4962 does not provide for abatement of first tier IRC 4941 taxes.

7.27.15.7.7  (04-26-1999)
Knowing

  1. A person (i.e., a government official or a foundation manager) "knows" that an act constitutes self-dealing, if that person—

    1. has actual knowledge of sufficient facts so that, based solely upon such facts, the transaction would be an act of self-dealing,

    2. is aware that such an act under these circumstances may violate the provisions of federal law governing self-dealing, and

    3. negligently fails to make reasonable attempts to ascertain whether the transaction is an act of self-dealing, or is in fact aware that it is such an act.

  2. "Knowing" does not mean "having reason to know." However, evidence that a person has reason to know of a particular fact or rule is relevant in determining whether he/she had actual knowledge of such fact or rule. See Reg. 53.4941(a)–1(b)(3).

7.27.15.7.8  (04-26-1999)
Willful

  1. Participation in an act of self-dealing by a foundation manager is willful if it is voluntary, conscious, and intentional. There is no need that there be an intention to avoid the restrictions of the law or the liability for tax. However, participation will not be considered willful, if the foundation manager does not know that the act constitutes self-dealing. See Reg. 53.4941(a)–1(b)(4).

7.27.15.7.9  (04-26-1999)
Due to Reasonable Cause

  1. A foundation manager’s participation, in an act of self-dealing, is due to reasonable cause if the manager has exercised his responsibility on behalf of the foundation with ordinary business care and prudence. Reg. 53.4941(a)–1(b)(5).

  2. If a manager relies on the advice of counsel (expressed in a reasoned written legal opinion based upon full disclosure of the factual situation) that an act is not self-dealing and that act is later held to be an act of self-dealing, the manager’s participation in the act will ordinarily not be considered "knowing" or "willful" and will ordinarily be considered "due to reasonable cause" . Reg. 53.4943(a)–1(b)(6).

7.27.15.8  (04-26-1999)
Effective Dates

  1. In general, IRC 4941 and the applicable regulations apply to all acts of self-dealing engaged in after December 31, 1969, subject to the exceptions described in paragraphs (2) and (3) of this Section.

  2. Commitments made prior to January 1, 1970 between private foundations and government officials. IRC 4941 does not apply to a payment for one or more purposes described in IRC 170(c)(1) or (2)(B) (public or charitable purposes) made on or after January 1, 1970, by a private foundation to a government official pursuant to a commitment entered into prior to January 1, 1970. The commitment must have been made in accordance with the foundation’s usual practices and must be reasonable in amount considering the purposes of the payment. A commitment will be considered entered into before January 1, 1970, if, before that date, the amount and nature of the payments to be made and the name of the payee were entered on the records of the foundation, or were otherwise adequately evidenced, or the notice of the payment to be received was communicated to the payee in writing.

  3. Special transitional rule. IRC 4941 does not apply to acts of self-dealing engaged in prior to July 5, 1971, (the 30th day after the publication in the Federal Register of the notice of proposed rulemaking under IRC 4941) if the following conditions are met:

    1. the participation by the disqualified person is not willful and is due to reasonable cause;

    2. the transaction would not be a prohibited transaction if IRC 503(b) applied; and

    3. the act is acceptably corrected within a period ending July 15, 1973, extended by any period which the Service determines is reasonable and necessary under IRC 4941(e)(4)(B) and Reg. 53.4941(e)–1(d)(2).

7.27.15.9  (04-26-1999)
Digest of Published Rulings and Procedures

  1. Rental of Charter Aircraft. The rental of a charter aircraft by a disqualified person, the charter aircraft company, to a private foundation constitutes an act of self-dealing under IRC 4941(d)(1)(C) of the Code. Rev. Rul. 73–363, 1973–2 C.B. 383.

  2. Contribution; Publicity for Substantial Contributor. A contribution by a private foundation to a public charity made on the condition that the public charity change its name to that of a substantial contributor to the foundation and agree not to change the name again for 100 years does not constitute an act of self-dealing under IRC 4941(d)(1)(E). Rev. Rul. 73–407, 1973–2 C.B. 383.

  3. Service Fee for Overdrawn Checking Account. The payment by a private foundation to a bank, a disqualified person, of a service fee for an overdrawn checking account in an amount equal to the actual cost of processing the overdraft does not result in an act of self-dealing. Rev. Rul. 73–546, 1973–2 C.B. 384.

  4. Loss of Interest; Early Withdrawals. A transaction of a private foundation in which it deposited funds in a savings account maintained with a disqualified banking institution on the tenth day of a calendar quarter and withdrew the funds before the end of the next quarter thereby subjecting itself to a loss of interest for the entire period of deposit constitutes an act of self-dealing under IRC 4941(d)(1)(B). Rev. Rul. 73–595, 1973–2 C.B. 384.

  5. Legal Fees of Foundation Manager. Payment by a private foundation of legal fees awarded by a court to the counsel for its director-manager, a disqualified person who had filed suit against the remaining directors to require them to carry on the foundation’s charitable program, does not constitute an act of self-dealing. Rev. Rul. 73–613, 1973–2 C.B. 385.

  6. Insurance to Indemnify Disqualified Person. The payment of premiums by a private foundation for insurance indemnifying a disqualified person against liability for claims in connection with his/her assistance in preparing a registration statement and prospectus for the foundation’s public offering of stock issued by a corporation of which he/she was a principal officer are treated as part of his/her compensation for such services and do not constitute acts of self-dealing if the compensation is not excessive. Rev. Rul. 74–405, 1974–2 C.B. 384.

  7. Pension to Disqualified Person; Past Personal Services. A pension for past personal services paid by a private foundation to one of its directors, a disqualified person whose total compensation including the pension is not excessive, does not constitute an act of self-dealing. Rev. Rul. 74–591, 1974–2 C.B. 385.

  8. Paintings Placed in Disqualified Person’s Residence. The placing of paintings owned by a private foundation in the residence of a substantial contributor, a disqualified person, constitutes an act of self-dealing. Rev. Rul. 74–600, 1974–2 C.B. 385.

  9. U.S. Congressmen Reimbursed for Foreign Travel. Reimbursement by a private foundation for travel, meals, and lodging expenses incurred by U.S. Congressmen it chooses to participate in a conference it cosponsors in a foreign country does not come within the exception to self-dealing set forth in IRC 4941(d)(2)(G)(vii). Rev. Rul. 74–601, 1974–2 C.B. 385.

  10. Self-Dealing and Excess Business Holdings. The sale to a disqualified person of a private foundation’s 15 percent interest in a corporation in which the foundation and all disqualified persons have combined holdings of 45 percent of the voting stock as of May 26, 1969, would be self-dealing. However, in a similar situation in which the total combined holdings of the foundation and disqualified persons are 55 percent, the foundation has excess business holdings under IRC 4943(c)(4), and section 101(1)(2)(B) of the Tax Reform Act of 1969 would apply to except the sale from the self-dealing provisions. Rev. Rul. 75–25, 1975–1 C.B. 359.

  11. Grant by Foundation to Hospital—Common Trustees. A grant authorized by a private foundation to an exempt hospital for modernization, replacement, and expansion is not self-dealing even though two individuals serve as trustees of both organizations. The benefit received by the trustees is considered tenuous and incidental. Rev. Rul. 75–42, 1975–1 C.B. 359.

  12. Whose Taxable Year—Self-Dealer or Foundation. A disqualified person who engages in an act of self-dealing with a private foundation computes the initial tax on self-dealing based on his/her own tax year if it is different from the foundation’s tax year. Rev. Rul. 75–391, 1975–2 C.B. 446.

  13. Government Official‘s Use of Facility. The use of a private foundation library’s meeting room, which is functionally related to the foundation’s exempt purpose and is made available at no charge to members of the community-at-large, by a government official (a disqualified person) does not constitute an act of self-dealing within the meaning of IRC 4941(d)(1)(C). The room is made available to the government official on the same basis that it is made available to other community and civic groups, therefore the exception to self-dealing set out in IRC 4941(d)(2)(D) is applicable. Rev. Rul. 76–10, 1976–1 C.B. 355.

  14. Auction Sale to Disqualified Person. The sale of a private foundation’s art objects to a disqualified person at a public auction conducted by an auction gallery to which the items were consigned for sale constitutes an act of self-dealing under IRC 4941(d)(1)(A). Rev. Rul. 76–18, 1976–1 C.B. 355.

  15. Control by Foundation; Indirect Sales. A private foundation owns 35 percent of the voting stock of a corporation. A foundation manager personally owns the remaining 65 percent of the stock but does not hold a position of authority in the corporation by virtue of being a foundation manager. The foundation does not control the corporation for purposes of the self-dealing provisions of IRC 4941. Rev. Rul. 76–158, 1976–1 C.B. 354.

  16. Reimbursement of a Government Official; Travel From Puerto Rico to the U.S. The foundation reimbursed one of its trustees, who also was a Puerto Rico government official, for travel from Puerto Rico to the United States to attend its annual meeting. The payment was held to be self-dealing under IRC 4941(d)(2)(G)(ii). Rev. Rul. 76–159, 1976–1 C.B. 356.

  17. Exchange of Securities. An act of self-dealing will not result from the exchange of securities between a private foundation and a corporation that was previously a disqualified person by reason of the ownership of more than 35 percent of its total combined voting power by the former manager, who resigned 5 years prior to the exchange, and who did not participate in planning the exchange offer during the period of disqualification. Rev. Rul. 76–448, 1976–2 C.B. 368.

  18. Use of Private Road by Disqualified Person. The use of a private foundation museum’s private road for access to the adjacent headquarters and manufacturing plant of a corporation (a disqualified person) during the same hours the road is used by the general public as a thoroughfare connecting two public streets is not an act of self-dealing. The activity falls within the exception to self-dealing set out in IRC 4941(d)(2)(D). Rev. Rul. 76–459, 1976–2 C.B. 369.

  19. Bonds Guaranteed by a Private Foundation. The purchase of a portion of a hospital bond issue by a person disqualified with respect to the private foundation which guaranteed the bonds (except those sold to the disqualified person) is not an act of self-dealing. Because the guarantee does not apply to the bonds purchased by the disqualified person, there is no use of the foundation’s assets by the disqualified person for economic benefit. Rev. Rul. 77–6, 1977–1 C.B. 350.

  20. Payment of Church Membership Dues. The payment by a private foundation of a disqualified person’s church membership dues in order to maintain that person’s church membership is an act of self-dealing under IRC 4941(d)(1)(E). Rev. Rul. 77–160, 1977–1 C.B. 351.

  21. Per Diem Paid to a Government Official. A per diem allowance for travel inside the U.S. paid to a government official by a private foundation in connection with its educational and charitable purposes is excepted from the tax on self-dealing under IRC 4941(d)(2)(G)(vii) only if the allowance does not exceed 125 percent of the maximum authorized rate provided by section 5702(a) of title 5, U.S.C., notwithstanding the provision in section 5702(c) allowing higher rates in designated geographical areas. Rev. Rul. 77–251, 1977–2 C.B. 389.

  22. Purchase of a Mortgage from a Disqualified Person. The purchase by a private foundation of a mortgage from a bank, a disqualified person that in the normal course of its business acquires and sells mortgages, is not within the exception for general banking services and is an act of self-dealing under IRC 4941(d)(1)(A). Rev. Rul. 77–259, 1977–2 C.B. 387.

  23. Loss of Interest or Certificates of Deposit. The purchase by a private foundation from a banking institution, a disqualified person with respect to the foundation, of certificates of deposit with a maturity date one year from the date of issue and providing for a reduced rate of interest if they are not held to the maturity rate is an act of self-dealing under IRC 4941(d)(1)(B). Rev. Rul. 77–288, 1977–2 C.B. 388.

  24. Student Loan Guarantees. The guarantee of loans made to disqualified persons under a student loan guarantee program established by a private foundation for the children of the foundation’s employees constitutes an act of self-dealing within the meaning of IRC 4941(d)(1)(E). Rev. Rul. 77–331, 1977–2 C.B. 388.

  25. Attempted Correction; Repayment of Loan With Stock. A private foundation’s transfer of stock in repayment of an interest-free loan, made by a disqualified person and used exclusively for exempt purposes, is tantamount to a sale or exchange of property between the private foundation and the disqualified person and is an act of self-dealing under IRC 4941(d)(1)(A). Rev. Rul. 77–379, 1977–2 C.B. 387.

  26. "Foundation Manager’s" Sale of Property to Trust. The trustee of a trust that is a private foundation who, while representing both himself and the trust, willfully and without reasonable cause sells property he owns to the trust knowing that the sale is an act of self-dealing under IRC 4941(d)(1)(A) is liable for both the tax imposed on the act of self-dealing by IRC 4941(a)(1) and the tax imposed on the participation of foundation managers by IRC 4941(a)(2). Rev. Rul. 78–76, 1978–1 C.B. 377.

  27. Common Trustee of Private Foundation and a Testamentary Trust. The purchase of property by a private foundation from a testamentary trust is not an act of self-dealing under IRC 4941(d)(1)(A) merely because a banking institution is the trustee of both the purchasing private foundation and the selling trust. The trust is not a disqualified person with respect to the foundation within the meaning of IRC 4946(a) of the Code. Rev. Rul. 78–77, 1978–1 C.B. 378.

  28. Transfer of Property Subject to Lien. A disqualified person’s transfer to a private foundation of real property that is subject to a lien placed on the property by the disqualified person within the 10-year period ending on the transfer date is an act of self-dealing under IRC 4941(d)(1)(A), even though the loan was created merely as part of a multiphase financing plan begun more than ten years earlier. The exception in IRC 4941(d)(2)(A) does not apply. Rev. Rul. 78–395, 1978–2 C.B. 270.

  29. Office Space Rented to Disqualified Persons. An exempt private foundation conducts agricultural economics research and experimentation in part of an office building it owns, and rents the remaining spaces to disqualified persons who are engaged in agricultural business activities. The foundation does not utilize these businesses in its research. The rental of the office space is not functionally related to the foundation’s exempt purpose and constitutes an act of self-dealing under IRC 4941(d)(1)(C). Rev. Rul. 79–374, 1979–2 C.B. 387.

  30. Donation of Life Insurance Policy. A disqualified person donated a life insurance policy to a private foundation. The donated policy was subject to a significant outstanding loan made by the insurer to the donor disqualified person. The loan was made within a ten year period ending on the date of the policy’s transfer to the private foundation. Because Reg. 53.4941(d)–2(a)(2) treats transfers made within such a ten year period as sales or exchanges for purposes of IRC 4941(d), the donation of the policy was an act of self-dealing. Rev. Rul. 80–132, 1980–1 C.B. 255.

  31. Incidental Benefit to Disqualified Person. A private foundation made a grant to an exempt university to establish an educational program providing instruction in manufacturing engineering that would be useful to a corporation that is a disqualified person with respect to the private foundation. The corporation intends to hire graduates of the new program and encourage its employees to enroll in the program, but will not receive preferential treatment in recruiting graduates or enrolling its employees. The grant is not an act of self-dealing under IRC 4941, because the benefit to the disqualified person is incidental and tenuous. Rev. Rul. 80–310, 1980–2 C.B. 319.

  32. Attempted Correction by Transferring Substitute Property; Transfer of Real Property By Disqualified Person. A disqualified person’s attempt to correct an act of self-dealing (a loan) described in IRC 4941(d)(1)(B) by transferring to a private foundation real estate, the fair market value of which equals the amount of the loan made by the foundation to the disqualified person, is a second act of self-dealing. Rev. Rul. 81–40, 1981–1 C.B. 508.

  33. Grant by Foundation to a Second Foundation; Common Trustee. A grant by a private foundation to a second private foundation does not constitute an act of self-dealing within the meaning of IRC 4941 even though a banking institution serves as sole trustee of both foundations. Rev. Rul. 75–42 clarified in Rev. Rul. 82–136, 1982–2 C.B. 300.

  34. Indemnification of Foundation Manager. The treatment, under IRC 4941(d)(1)(E) and 4945(d)(5) of the Code, of indemnification amounts and of insurance premiums paid by a private foundation to or on behalf of a foundation manager who is a defendant in a proceeding involving state laws relating to the mismanagement of funds of charitable organizations is discussed in Rev. Rul. 82–223, 1982–2 C.B. 301.

  35. Loan Program; Incidental Benefit to Disqualified Person. A loan program of a private foundation that provides financing to publicly supported organizations for construction projects in disadvantaged areas does not result in acts of self-dealing within the meaning of IRC 4941 merely because certain individuals involved in the construction projects have ordinary banking and business relationships with a bank that is a disqualified person. Rev. Rul. 85–162, 1985–2 C.B. 275.

  36. Sale to Disqualified Person. The sale to a disqualified person is permissible under Regs 53.4941(d)–4(b)(1) and TRA section 101(1)(2)(B) to enable the foundation to rid itself of excess business holdings. Until 1985 the foundation was not in an excess business holdings position by reason of the fact its stock was excepted from the classification under IRC 4943(d)(3)(B) due to the nature of its income. After that, the source of its income changed so that the holdings were no longer excluded from the classification. The sale thereafter to the disqualified person did not result in self-dealing. Rev. Rul 86–53, 1986–1 C.B. 326.

  37. A so-called "accelerated" charitable remainder trust is a type of charitable remainder trust used to avoid income tax. It is characterized by a very high noncharitable payout amount (e.g. 75 percent per annum), a short term (e.g. a two year term), and the realization of substantial capital gain income. Depending on the facts of each particular case, the Service will challenge trusts of this type based on one or more legal doctrines including self-dealing under IRC 4941(d)(1)(E). Notice 94–78, 1994–2 C.B. 555.


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