7.27.20  Disqualified Persons as Defined in IRC 4946

7.27.20.1  (03-16-1999)
Overview

  1. The term "disqualified person" bears importantly upon the treatment and status of exempt organizations as private foundations in several situations. Whether a transaction between a private foundation and another party is a self-dealing act under IRC 4941 depends upon whether the other party is a disqualified person with respect to the foundation. In determining whether a private foundation has excess business holdings under IRC 4943 with respect to a business interest, the holdings of the foundation’s disqualified persons must be taken into account. The presence of contributions and patronage from disqualified persons is a factor that must be taken into account in deciding which IRC 501(c)(3) and IRC 4947(a)(1) organizations are not private foundations; this is because IRC 509(a)(2) employs a test requiring a certain level of support from persons other than disqualified persons. In like manner, the presence of control by disqualified persons is a matter that must be taken into account since IRC 509(a)(3) employs a test precluding control of an IRC 509(a)(3) organization by certain disqualified persons.

  2. There are five general categories and two special purpose categories of disqualified persons as shown in the following table:

    Category Discussed at
    Substantial contributor IRM 7.27.20.2
    Foundation manager IRM 7.27.20.3
    Owner of more than 20 percent interest of an organization that is a substantial contributor to the foundation. IRM 7.27.20.4
    Family members of persons described in (a) through (c) within the meaning of IRC 4946(d). IRM 7.27.20.5
    Organization in which persons described in (a) through (d) hold more than a 35 percent interest. IRM 7.27.20.6
    A private foundation which is effectively controlled by the person or persons in control of the foundation in question. (For purposes of IRC 4943 only) IRM 7.27.20.7
    A government official. (For purposes of IRC 4941 only) IRM 7.27.20.8

7.27.20.2  (03-16-1999)
Substantial Contributor General

  1. A person is a disqualified person with respect to a private foundation if he or she is a substantial contributor to the foundation.

  2. IRC 507(d)(2) states that any person who contributed or bequeathed an aggregate amount in excess of $5,000 to a private foundation is a substantial contributor to the foundation if such amount is more than 2 percent of the foundation’s total contributions and bequests received prior to the end of its taxable year.

  3. In the case of a trust, the creator is a substantial contributor even though his or her contributions may not have exceeded the $5,000–2 percent test.

7.27.20.2.1  (03-16-1999)
Rules for Application of the $5,000–2 Percent Test

  1. A person’s aggregate contributions and bequests with respect to an organization shall be determined as of the last day of its taxable year. That amount is compared with the organization’s total contributions and bequests received up to such date in determining whether it exceeded the $5,000–2 percent limit. See Regs. 1.507–6(b)(1).

  2. Generally, all contributions or bequests made before October 9, 1969, are deemed to have been made on October 9, 1969. However, when an organization’s support patterns in years prior to 1969 are material to an IRC 509(a)(2) determination, gifts in such years are counted in the year they were actually made. For that purpose only, a contributor may be classified as a substantial contributor in years prior to 1969. Regs. 1.507–6(b)(1) further provides that in order for a person to be a substantial contributor for purposes of IRC 509(a)(2) before October 9, 1969, the aggregate of his or her contributions and bequests must have exceeded the $5,000–2 percent limit both on the ending date of the organization’s taxable years in question and the organization’s year that includes October 9, 1969. Thus, if a person’s gifts exceeded the $5,000–2 percent limit as of one or more of the organization’s taxable years before October 9, 1969, but was less than the $5,000–2 percent limit as of the ending date of the year which included October 9, 1969, the person would not be a substantial contributor.

  3. A person is considered to be a substantial contributor with respect to a foundation from the first day the amounts the foundation received from him or her exceeded the $5,000–2 percent limit. This is so even though determination of the percentage of total contributions and bequests is not made until the end of the foundation’s taxable year. See Regs. 1.507–6(b)(1).

  4. These rules are illustrated by the following example: On January 1, 1968, A, an individual, gave $4,500 to M, a private foundation on a calendar year basis. On June 1, 1969, A gave M the further sum of $1,500. The total amount of contributions received by M throughout its existence as of December 31, 1968, was $100,000. The total amount of contributions received through December 3, 1969, was $250,000. A did not become a substantial contributor to M in 1968. As of June 1, 1969, A is a substantial contributor to M for purposes of IRC 509(a)(2). For all other purposes, A is a substantial contributor as of October 9, 1969.

  5. However, assume in the foregoing example that the total of M’s contribution and bequests received were as follows: December 31, 1967 — $230,000; December 31, 1968— $250,000; December 31, 1969— $350,000. Assume further that A gave M $4,500 on December 1, 1967; $1,500 on June 1, 1968; and made no gifts in 1969. Under such circumstances, A would not be a substantial contributor for any purpose.

7.27.20.2.2  (03-16-1999)
Persistence of Substantial Contributor Status

  1. With one exception, once a person becomes a substantial contributor with respect to a private foundation he or she remains a substantial contributor even though he or she might not be so classified if the determination were made at some later date. The aggregate contributions and bequests of a person to a foundation may become less than 2 percent of the total received by the foundation by reason of additional contributions and bequests made by other persons, yet such person remains a substantial contributor with respect to the foundation. See Regs. 1.507–6(b)(1).

  2. This quality of persistence is illustrated by the following example: On September 16, 1970, C, an individual, gave $10,000 to P, a private foundation on a calendar year basis. Throughout its existence, and through December 31, 1970, the close of its taxable year, P had received a total of $100,000 in contributions and bequests. On January 3, 1971, P received two bequests totalling $1 million. C is a substantial contributor as of September 16, 1970, and therefore remains one even though he or she no longer meets the 2 percent test on a later date after the end of the taxable year of the foundation in which he or she first became a substantial contributor.

7.27.20.2.2.1  (03-16-1999)
Cessation of Substantial Contributor Status

  1. A person’s status as substantial contributor may terminate, however, if certain requirements set forth in IRC 507(d)(2)(C) are met. IRC 507(d)(2)(C), which is effective for taxable years beginning after December 31, 1984, provides that a substantial contributor will cease to be treated as such if, as of the close of a taxable year of a private foundation, each of the following three requirements is satisfied:

    1. Neither the substantial contributor nor any "related person" made a contribution to the foundation at any time within the ten-year period ending at the close of the taxable year,

    2. Neither the substantial contributor nor any related person was a foundation manager of the private foundation during the ten-year period, and

    3. The Service determines that the aggregate contributions made by the substantial contributor and all "related persons" are "insignificant" when compared to the aggregate amount of contributions made to the private foundation by one other person.

  2. The term "related person" for this purpose means any other person who would be a disqualified person (within the meaning of IRC 4946) by reason of that person’s relationship to the substantial contributor. If the substantial contributor is a corporation, the term "related person" also includes any officer or director of the corporation.

  3. For purposes of the Service’s determination, the aggregate contributions must be adjusted for their appreciation while held by the foundation. Congress intended that, as a general rule, contributions from the substantial contributor and all related persons are to be treated as "insignificant" if, in the aggregate, such contributions (adjusted for appreciation) equal less than one percent of the contributions by the other person. See General explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 prepared by the staff of the Joint Committee on Taxation. (Joint Committee print, P. 701.)

  4. If a substantial contributor ceases to be treated as such because the requirements of IRC 507(d)(2)(C) have been met, then any other person who is treated as a disqualified person solely because of that person’s relationship (e.g., as a family member) to the substantial contributor also ceases to be treated as a disqualified person.

7.27.20.2.2.2  (03-16-1999)
Nonretroactivity of Substantial Contributor Status

  1. Although substantial contributor status persists through all subsequent periods, such status is not retroactive. Thus, for periods prior to the date a person first exceeded the $5,000–2 percent limit, he or she is not a substantial contributor.

7.27.20.2.3  (03-16-1999)
Rules for Contributions and Requests

  1. Regs. 1.507–6(c)(1) provides a very broad definition of "contribution." It says that for purposes of IRC 507(d)(2) the term shall have the same meaning as it does in IRC 170(c). The term thus includes bequests, legacies, devises, and transfers within the meaning of IRC 2055 or IRC 2106(a)(2).

  2. It follows that any payment of money or transfer of property without adequate consideration shall be considered a "contribution" for IRC 507 purposes both in determining what are the contributions of a person with respect to a private foundation and what are the total contributions of the foundation.

  3. Where payment is made or property transferred as consideration for admissions, sales of merchandise, performance of services, or furnishing of facilities to the donor, the qualification of all or any part of such payment or transfer as a contribution under IRC 170(c) shall determine whether and to what extent such payment or transfer constitutes a "contribution" under IRC 507(d)(2).

7.27.20.2.3.1  (03-16-1999)
Valuation of Contributions and Bequests

  1. Each contribution or bequest to a private foundation shall be valued at the fair market value of such contribution or bequest when actually received by the private foundation. See Regs. 1.507–6(c)(2).

  2. An individual shall be considered to have made all contributions and bequests made by his or her spouse during the period of their marriage. See IRC 507(d)(2)(B)(iii).

  3. The rule applies to the gifts of a deceased spouse, even if the spouse has died (or the marriage otherwise terminated) prior to October 9, 1969. See Regs. 1.507–6(c)(3).

  4. The point is illustrated in Regs. 1.507–6(c)(3) by the following example: W contributed $500,000 to P, a private foundation, in 1941, and that amount exceeded 2 percent of the total contributions received by P as of the end of P’s first taxable year ending after October 9, 1969. H (W’s spouse at the time of the 1941 gift) is considered to have made such contribution (even if W died prior to October 9, 1969, or if their marriage was otherwise terminated prior to such date).

7.27.20.2.4  (03-16-1999)
Special Rules for Certain Organizations Described in IRC 501(c)(3)

  1. For purposes of certain Code provisions specified in Regs. 1.507–6(a)(2), the term "substantial contributor" does not include an organization described in IRC 509(a)(1), (2), or (3), or a wholly owned subsidiary of such organization. Those Code provisions are: IRC 170(b)(1)(E)(iii), IRC 507(d)(1), IRC 508(d), IRC 509(a)(1) and (3), and Chapter 42 of the Code. See Regs. 1.507–6(a)(2).

  2. Since IRC 509(a)(2) is not included among the above cited provisions, the general principle is not applicable to contributions or grants to IRC 509(a)(2) organizations. Therefore, if IRC 509(a) organizations make contributions or grants to an organization claiming non private foundation status under IRC 509(a)(2), they will become substantial contributors to such organization if their contributions exceed the $5,000–2 percent limitation. Under such circumstances their contributions or grants generally would not constitute support from permitted sources to the organization claiming non-private foundation status for purposes of the support test under IRC 509(a)(2). However, as to what constitutes support from permitted sources where the grant is from a public charity described in IRC 509(a)(1), whether such organization is a substantial contributor or not, see Regs. 1.509(a)–3(j).

7.27.20.2.4.1  (03-16-1999)
Other Organizations Described in IRC 501(c)(3)

  1. For purposes of IRC 4941 only, the term "substantial contributor" shall not include any organization described in IRC 501(c)(3) (other than an IRC 509(a)(4) organization). See Regs. 1.507–6(a)(2). This exception also applies to organizations which are nonexempt charitable trusts described in IRC 4947(a)(1). See Rev. Rul. 73–455, 1973–2 C.B. 187.

  2. The regulations state that IRC 4941 was not intended to restrict the charitable grants of one IRC 501(c)(3) organization to another. Thus, if one private foundation makes a large grant to another private foundation, the grant would not prevent the latter foundation from ever making other grants or otherwise dealing with the former foundation. See Regs. 1.507–6(a)(2).

7.27.20.3  (03-16-1999)
Foundation Manager

  1. A person is a disqualified person with respect to a private foundation if he or she is a foundation manager of the foundation.

  2. An officer, director, or trustee of a private foundation (or a person having similar responsibilities) is a foundation manager with respect to the private foundation. Under Regs. 53.4946–1(f)(2) a person is considered an officer of a foundation if he or she is specifically so designated under the certificate of incorporation, bylaws, or other constitutive documents of the foundation. He or she is also considered an officer under the regulations if he or she regularly exercises general authority to make administrative or policy decisions on behalf of the foundation. Persons acting in the capacity of independent contractors are not "officers" and therefore are not considered as foundation managers.

7.27.20.4  (03-16-1999)
Owner of More Than 20 Percent Interest of an Organization that is a Substantial Contributor to a Foundation

  1. A person is a disqualified person if he/she owns more than 20 percent of the total combined voting power of a corporation, the profits interest of a partnership, or the beneficial interest of a trust or unincorporated enterprise which is a substantial contributor to the foundation in question.

  2. The profits interest of a partner shall be equal to his or her distributive share of income as determined by using the regulations under IRC 707(b)(3), modified by IRC 4946(a)(4). See Regs. 53.4946–1(a)(2).

  3. An individual’s beneficial interest in an unincorporated enterprise (other than a trust or estate) should be stated in terms of his or her distributive share of profits. If his or her share of distributions from profits is not fixed in an agreement among the participants, the individual’s beneficial interest should be stated in terms of his or her proportionate share of assets upon dissolution. If there is no agreement fixing the individual’s distributive share of assets upon dissolution, his or her beneficial interest should be stated as a fraction resulting from the amount of his or her investment divided by the total investment of all participants. See Regs. 53.4946–1(a)(3).

  4. In the determination of an individual’s interest in a trust, his or her beneficial interest should be stated according to actuarial valuation principles. If the resulting percentage exceeds 20 percent and the trust is a substantial contributor, the beneficiary of such trust will be a disqualified person. See Regs. 53.4946–1(a)(4).

7.27.20.4.1  (03-16-1999)
Attribution Rules

  1. The rules for constructive ownership under IRC 267(c) (other than paragraph (3) thereof) shall apply as though such ownership related to stockholdings. In applying IRC 267(c), the "family of an individual" in IRC 267(c)(4) shall be as defined in IRC 4946(d). See Regs. 53.4946–1(e)(1). See also, IRM 7.27.20.5.

  2. "Voting power" generally corresponds to the outstanding power of corporate stock. It does not include voting power which is "obtainable but not obtained" such as the potential voting power that would result if a holder of convertible securities were to convert his or her holdings into voting stock. Of course, any potential voting power actually converted into outstanding voting power would be considered "voting power" for purposes of IRC 4946(a)(1). See Regs. 53.4946–1(a)(6). The term does not include voting power which a person controls only in a fiduciary capacity (such as a director or trustee). See Regs. 53.4946–1(a)(5).

  3. The rules for constructive ownership of corporate stock under IRC 267(c) shall apply except that the "family of an individual" shall be as defined in IRC 4946(d). See Regs. 53.4946–1(d)(1).

7.27.20.5  (03-16-1999)
Family Member Within the Meaning of IRC 4946(d)

  1. A person is a disqualified person if he or she is a member of the family of any individual described in IRC 4946(a)(1)(A), (B), or (C).

  2. Under Regs. 53.4946–1(h), "members of the family" are limited to an individual’s spouse, ancestors, lineal descendants, and the spouses of his or her lineal descendants. Also, the legally adopted child of an individual is his or her child within the meaning of this regulation. IRC 4946(d) provides that the family of any individual shall include only his spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren. For years prior to January 1, 1985, members of the family includes all lineal descendants and their spouses.

  3. Regs. 53.4946–1(h) provides that the legally adopted child of an individual is his or her child within the meaning of IRC 4946.

  4. The surviving spouse of a child, grandchild, or great grandchild of a substantial contributor to a private foundation is a member of the family of the substantial contributor, and is, thus, a disqualified person with respect to the foundation until remarriage.

7.27.20.6  (03-16-1999)
Organizations in Which Certain Disqualified Persons Hold More Than a 35 Percent Interest

  1. A partnership is a disqualified person if more than 35 percent of the profits interest is owned by persons described in IRC 4946(a)(1)(A), (B), (C), or (D). Similarly, a trust or estate is a disqualified person if more than 35 percent of the beneficial interest is owned by persons described in IRC 4946(a)(1)(A), (B), (C), or (D). Determination of such ownership is made in the same manner as provided for determination of ownership of persons having more than a 20 percent interest in a partnership, trust, or unincorporated enterprise.

7.27.20.6.1  (03-16-1999)
Attribution Rules

  1. Generally, the rules for constructive ownership under IRC 267(c) (other than paragraph (3) thereof) shall apply as though such ownership related to stockholdings. In the application of such rules, the "family of an individual" in IRC 267(c)(4) shall be as defined in IRC 4946(d). See Regs. 53.4946–1(e)(1).

  2. Any profit or beneficial interest that has been counted once, whether by reason of actual or constructive ownership, shall not be counted a second time. See Regs. 53.4946–1(e)(ii).

  3. A corporation is a disqualified person if more than 35 percent of the total combined voting power of its corporate stock is owned by persons described in IRC 4946(a)(1)(A), (B), (C), or (D). Determination of such ownership is made in the same manner as provided for the determination of ownership for persons having more than 20 percent of the voting power of a corporation.

7.27.20.6.2  (03-16-1999)
Attribution of Stock Ownership

  1. Generally, the rules for constructive ownership under IRC 267(c) (other than paragraph (3) thereof) shall apply except that the "family of an individual" shall be as defined in IRC 4946(d). See Regs. 53.4946–1(d)(1)(i).

  2. Any stockholdings that have been counted once, whether by reason of actual or constructive ownership, shall not be counted a second time. See Regs. 53.4946–1(d)(1)(i).

7.27.20.7  (03-16-1999)
Certain Private Foundations

  1. For purposes of IRC 4943 only, a private foundation is a disqualified person with respect to the foundation in question if:

    1. it is effectively controlled by the same people who control the foundation in question, or

    2. substantially all the contributions to it were made by the people who make substantially all the contributions to the foundation in question and these people are described in IRC 4946(a)(1)(A), (B), (C), or (D) with respect to the foundation in question.

  2. Persons will be considered to have made substantially all of the contributions to a private foundation if they have made or bequeathed at least 85 percent of the total of contributions and bequests received by the foundation. Only persons who have contributed or bequeathed at least 2 percent of a foundation’s total contributions and bequests may be included among the persons considered to have made substantially all of the contributions to the foundation. See Regs. 53.4946–1(b)(2).

7.27.20.8  (03-16-1999)
Government Officials

  1. For purposes of self-dealing under IRC 4941, a government official (as described below) is a disqualified person. Under IRC 4946(c) a government official is one who:

    1. Holds an elective public office in the executive or legislative branch of the U.S. Government,

    2. Is appointed by the President to an office in the executive or judicial branch of the U.S. Government,

    3. Holds a position in the executive, legislative, or judicial branch of the U.S. Government which is listed in schedule C of rule VI of the Civil Service Rules, or for which compensation is at least equivalent to the lowest step of a GS–16,

    4. Holds a position under the U.S. House of Representatives or Senate as an employee with gross annual compensation at a rate of $15,000 or more,

    5. Holds an elective or appointive public office in the executive, legislative, or judicial branch of a State, possession of the United States, any political subdivision of such State or possession or the District of Columbia and whose gross annual compensation is at a rate of $20,000 (P.L. 99–514 changed the rate of compensation from $15,000 to $20,000 for compensation received after December 31, 1985.) or more, or

    6. Holds a position as personal or executive assistant or secretary to any of the above described government officials.

  2. IRC 7871(a)(7)(B), which was added by P.L. 97–473 on January 14, 1983, and made permanent by the Deficit Reduction Act of 1984, provides that an Indian tribal government shall be treated as a state for purposes of subchapter A of chapter 42. Consequently, Indian tribal officials described in 1(e) above are disqualified persons. IRC 7871(a)(7)(B) is effective beginning January 1, 1983.

  3. It follows that for purposes other than IRC 4941 a person would not be a disqualified person by virtue of being a government official.

7.27.20.8.1  (03-16-1999)
Meaning of "Public Office"

  1. “Public office” for purposes of IRC 4946(c)(5) must be distinguished from mere public employment. Not every position in the employ of a State, a governmental subdivision thereof, a U.S. possession, or the District of Columbia, is a "public office." Under Regs. 53.4946–1(g)(2) what constitutes public office, as distinguished from mere public employment, depends upon the facts and circumstances of the case. However, the essential element is whether a significant part of the employee’s activities consist of the independent performance of policymaking functions. Another factor is whether the position in question is created and its powers defined by the Congress, a State constitution, a State legislature, or by a municipality or other governing body pursuant to authority conferred by the Congress, State constitution, or State legislature.

  2. An example of public employees who generally are not public officials would be the members of municipal police and fire departments. However, the heads of those departments who have policymaking functions as a significant part of their activities would be public officials. Other examples of public employment not involving policymaking within the meaning of the regulations would be the professors of a State educational institution and the physicians employed at a State hospital. See Regs. 53.4946–1(g)(2)(ii).

7.27.20.8.2  (03-16-1999)
Government Employees on Leave of Absence

  1. If a person is on leave of absence without pay from his or her position or office in government as of December 31, 1969, for the purpose of working for a private foundation, he or she is not to be treated as a government official during any continuous period of employment with the foundation between December 31, 1969, and January 1, 1971. See Regs. 53.4946–1(g)(3). The rule is also applicable to persons who entered into a commitment with a foundation before December 31, 1969, to work during any period between December 31, 1969, and January 1, 1971.

7.27.20.9  (03-16-1999)
Digest of Published Rulings and Procedures

  1. Nonexempt Charitable Trust Not a Substantial Contributor. A nonexempt charitable trust described in IRC 4947(a)(1) that has made contributions to a private foundation in excess of the limitation in IRC 507(d)(2) is not a "substantial contributor" within the meaning of that section because the exception provided in Regs. 1.507–6(a)(2) for IRC 501(c)(3) organizations also applies to trusts described in IRC 4947(a)(1). Rev. Rul. 73–455, 1973–2 C.B. 187.

  2. Member of State Legislature. An elected member of a state legislature who receives a salary of less than $15,000 per year and an expense allowance of a fixed amount for the use of which no accounting need be made to the state, which together amount to more than $15,000 per year, is a disqualified person within the meaning of IRC 4946(a) by virtue of being a government official described in IRC 4946(c)(5). Rev. Rul. 77–473, 1977–2 C.B. 421.

    Note:

    For years after December 31, 1985, the rate of compensation for a government official described in IRC 4946(c)(5) is $20,000.

  3. Administration by Bank Employees. Employees of a bank designated as the trustee of a private foundation, who have been delegated the responsibility for the day-to-day administration and distribution of the trust funds, are foundation managers within the meaning of IRC 4946(b)(1) and are disqualified persons as defined in IRC 4946(a)(1)(B) even though they are ultimately responsible to the bank directors and officers for their actions with respect to the trust. Rev. Rul. 74–287, 1974–1 C.B. 327.

  4. Corporation Owned by Foundation and Foundation Manager. A private foundation, owning 35 percent of the voting stock of a corporation and having a foundation manager personally owning the remaining 65 percent but not holding a position of authority in the corporation by virtue of being foundation manager, does not control the corporation for purposes of the self-dealing provisions of IRC 4941. Rev. Rul. 76–158, 1976–1 C.B. 354.

  5. Former Manager-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 foundation 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.

  6. Purchase by Private Foundation from Trust— Same Manager. 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 the same person is the trustee of both the private foundation and the testamentary trust, since the trust is not a disqualified person within the meaning of IRC 4946(a) with respect to the foundation. Rev. Rul. 78–77, 1978–1 C.B. 378.

  7. Disqualified persons; employee stock ownership trust. An employee stock ownership trust holds 30 percent of the stock in a corporation on behalf of the corporation’s participating employees, who direct the manner in which the trust votes the shares. The trust will not be considered a disqualified person with respect to a private foundation merely because the corporation is a substantial contributor to the foundation. §53.4946–1. (IRC 4946) Rev. Rul. 81–76, 1981–1 C.B. 516.


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