Private Foundations – Self-Dealing IRC 4941(d)(1)(C)

 

An introduction to self-dealing, specifically IRC 4941(d)(1)(C), Furnishing of goods, services, or facilities between a private foundation and a disqualified person.

IRC Section and Treas. Regulation

IRC 4941 Taxes on Self-Dealing

IRC 4941(d)(1) Self-Dealing, in general

Treas. Reg. 53.4941(d)-1 Definitions of self-dealing

Treas. Reg. 53.4941(d)-2(d)(1) Furnishing goods, services, or facilities, in general

Treas. Reg. 53.4941(d)-2(d)(2) Furnishing of goods, services, or facilities to foundation managers and employees

Treas. Reg. 53.4941(d)-2(d)(3) Furnishing of goods, services, or facilities by a disqualified person without charge

Treas. Reg. 53.4941(d)-3(a) Exceptions to self-dealing, general rule

Treas. Reg. 53.4941(d)-3(b)(1) Furnishing of goods, services, or facilities to a disqualified person, in general

Treas. Reg. 53.4941(d)-3(b)(2) General Public

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

Rev. Rul. 73-363, 1973-2 C.B. 383 provides aircraft rental by a disqualified person to a foundation constitutes an act of self-dealing. Aircraft rental is analogous to the automobile rental and is a furnishing of goods, services, or facilities, and not the performance of personal services.

Rev. Rul. 76-10, 1976-1 C.B. 355 provides the use of a foundations 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. Generally, by furnishing a meeting room or other facility to a disqualified person, a foundation would be engaging in an act of self-dealing. However, in this situation, the room is available to the government official on the same basis it's available to other community and civic groups.

Rev. Rul. 76-459, 1976-2 C.B. 369 held the use of a 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. Generally, by permitting a disqualified person to use its private road, a foundation would be engaging in an act of self-dealing. However, in this situation, the road is made available to the disqualified person on a basis that is no more favorable than the basis on which it is made available to the general public. In addition, a substantial number of persons other than disqualified persons actually use the road. The fact the disqualified person has agreed to maintain the road doesn't entitle it to any special privileges to the use of the road not otherwise available to the general public. Further, the use of the road as an entrance to the foundation's museum is functionally related within the meaning of IRC 4942(j)(5) to the PF's exempt purpose of operating a museum for the general public's benefit.

Rev. Rul. 79-374, 1979-2 C.B. 387 describes a foundation that conducts agricultural economics research in part of an office building it owns and rents the remaining spaces to disqualified persons engaged in agricultural business activities. The foundation doesn't use these businesses in its research. Office space rental isn't functionally related to the foundation's exempt purpose and constitutes an act of self-dealing under IRC 4941(d)(1)(C). Generally, the renting of office space by a foundation to a disqualified person is an act of self-dealing. An exception to this rule is where office space rental is functionally related to a foundation's exempt purpose. Here, although the disqualified persons conduct business activities in the same general subject area of the foundation's research, the rental of office space to disqualified persons does not contribute importantly to the foundation's exempt purpose of conducting agricultural research and experimentation. Since the office space rental isn't functionally related to the foundation's exempt purpose, the exception to the self-dealing rules provided in IRC 4941(d)(2)(D) doesn't apply.

Acts of self-dealing by private foundation

Audit Technique Guidelines

Analysis

Generally, 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)(1)(C) is the furnishing of goods, services, or facilities between a private foundation and a disqualified person. We previously posted Issue Snapshots regarding IRC 4941(d)(1)(A) and 4941(d)(1)(B).

Section 4941(d)(2)(C) provides the furnishing of goods, services or facilities by a disqualified person to a foundation shall not be an act of self-dealing if the furnishing is without charge and if the goods, services, or facilities are used exclusively for purposes specified in IRC 501(c)(3). Section 4941(d)(2)(D) provides the furnishing of goods, services, or facilities by a foundation to a disqualified person shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public. However, Treas. Reg. 53.4941(d)-3(b)(1) provides that, after May 16, 1973, the exception set forth in IRC 4941(d)(2)(D) shall only apply if the goods, services, or facilities are functionally related within the meaning of IRC 4942(j)(5) to the exercise or performance by a private foundation of its charitable, educational, or other purpose or function constituting the basis for its exemption under IRC 501(c)(3).

In general, the furnishing of goods, services, or facilities between a foundation and a disqualified person shall constitute an act of self-dealing. See Treas. Reg. 53.4941(d)-2(d)(1). This applies to, for example, to the furnishing of goods, services, or facilities such as office space, automobiles, auditoriums, secretarial help, meals, libraries, publications, laboratories, or parking lots.

Example: If a foundation furnishes personal living quarters to a disqualified person, other than a foundation manager or employee, without charge such furnishing shall be an act of self-dealing.

Foundation Managers and Employees

Section 53.4941(d)-2(d)(2) provides the furnishing of goods, services, or facilities to a foundation manager in recognition of his services as a foundation manager, or to another employee, including an individual who would be an employee but for the fact that he receives no compensation for his services, in recognition of his services in such capacity, is not an act of self-dealing if the value of such furnishing, whether or not includible as compensation in his gross income, is reasonable and necessary to the performance of his tasks in carrying out the exempt purposes of the foundation and, taken in conjunction with any other payment of compensation or payment or reimbursement of expenses to him by the foundation, isn't excessive.

Example: If a foundation furnishes meals and lodging which are reasonable and necessary, but not excessive, to a foundation manager by reason of his being a foundation manager, then, without regard to whether such meals and lodging are excludable from gross income under IRC 119 as furnished for the convenience of the employer, such furnishing is not an act of self-dealing. For the effect of IRC 4945(d)(5) upon an expenditure for unreasonable administrative expenses. See Treas. Reg. 53.4945-6(b)(2).

Without Charge

Section 53.4941(d)-2(d)(3) provides the furnishing of goods, services, or facilities by a disqualified person to a foundation shall not be an act of self-dealing if they are furnished without charge.

Example: The furnishing of goods such as pencils, stationery, or other incidental supplies, or the furnishing of facilities such as a building, by a disqualified person to a foundation shall be allowed if such supplies or facilities are furnished without charge. Similarly, the furnishing of services, even though such services aren't personal in nature, shall be permitted if such supplies or facilities are furnished without charge. Similarly, the furnishing of services, even though such services aren't personal in nature, shall be permitted if such furnishing is without charge. A furnishing of goods shall be 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 isn't made directly or indirectly to the disqualified person.

General Public

The term general public shall include those persons who, because of the particular nature of the activities of the foundation, would be reasonably expected to use such goods, services, or facilities. See Treas. Reg. Section 53.4941(d)-3(b)(2). This paragraph shall not apply, however, unless there is a substantial number of persons other than disqualified persons who are actually using such goods, services, or facilities. Thus, a foundation which furnishes recreational or park facilities to the general public may furnish such facilities to a disqualified person provided they are furnished to him on a basis which is not more favorable than that on which they are furnished to the general public.

Example: The sale of a book or magazine by a foundation to disqualified persons shall not be an act of self-dealing if the publication of such book or magazine is functionally related to a charitable or educational activity of the foundation and the book or magazine is made available to the disqualified persons and the general public at the same price. In addition, if the terms of the sale require, for example, payment within 60 days from the date of delivery of the book or magazine, such terms are consistent with normal commercial practices, and payment is made within the 60-day period, the transaction shall not be treated as a loan or other extension of credit under Treas. Reg. 53.4941(d)-2(c)(1).

Issue Indicators or Audit Tips

Issue Indicators

Review other Chapter 42 code sections because Chapter 42 permits the assessment of excise taxes under different statutes for the same violation. For instance, a self-dealing transaction, IRC 4941, is frequently also a taxable expenditure, IRC 4945, that may also affect the net investment income, IRC 4940, and the qualifying distributions, IRC 4942.

IRC 4941 and IRC 4945 can commonly occur for the same transaction. Many self-dealing transactions aren't considered to be for IRC 170(c)(2)(B) purposes, thus becoming taxable expenditures. But note, a taxable expenditure isn't necessarily a self-dealing transaction.

Audit Tips

Ensure the self-dealer and, if applicable, foundation manager, not only reported the self-dealing transaction on the Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, but that the tax was paid, and correction has occurred. Remember each Chapter 42 excise tax requires correction of the act or failure to act that triggers the excise tax. Failure to make correction can result in the imposition of second-tier taxes. See our Issue Snapshot on Issues Encountered Once a Self-Dealing Transaction has Occurred.

Examine the Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation, to see if any rental payments are reported for use of the private foundation's facilities or if any income is derived from the sale of goods and if such rental payments or other income is derived from a disqualified person. Possible audit steps an agent should consider are:

  • Touring the foundation's facilities
  • Reviewing pertinent contracts such as lease agreements, if any
  • Examining purchase invoices
  • Interviewing relevant persons, including, officers and directors of the foundation
  • Generally, look for and question transactions that seem like they are out of place or unusual.