Article
Q&A: A legal perspective on self-dealing
Sept. 24, 2015 · Authored by Wendy Campos and Marisa Meltebeke of Davis Wright Tremaine LLP
While any Section 501(c)(3) organization must be cautious when entering into a business arrangement with a related party, it’s particularly true for private foundations in light of the federal tax law’s self-dealing rules. Under these rules, a private foundation is generally prohibited from engaging in a business or financial transactions with one or more “disqualified persons,” regardless of whether the self-dealing transaction is fair — or even more than fair — to the foundation.
Private foundations that engage in self-dealing can find themselves subject to hefty excise taxes, and even more important, they could put their exempt status in jeopardy and endanger their reputation with the public and regulatory agencies. For all of these reasons, it’s important to understand what constitutes self-dealing, including what kinds of transactions are prohibited, whom they’re prohibited with, and what the ramifications can be.
In the experience of professionals at the law firm Davis Wright Tremaine, the answers to the following questions should help your private foundation identify potential self-dealing transactions and avoid running afoul of these rules.
What is self-dealing?
Self-dealing is a prohibited business transaction between a private foundation and a disqualified person.
Who is a disqualified person?
The federal tax law defines disqualified persons broadly so that it captures a large group of persons who may have undue influence over a private foundation. This includes a private foundation’s officers, directors, trustees, key employees, substantial contributors, persons that own 20% or more of a business entity that’s a substantial contributor, and their immediate family members. Family members, by the federal tax definition, include spouses; ancestors (including parents, grandparents, and great-grandparents); children, grandchildren, and great-grandchildren; and the spouses of children, grandchildren, and great-grandchildren; but they don’t include siblings.
S Corp to c Corp conversion: Benefits and considerations
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.