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Warner Norcross + Judd LLP is a corporate law firm with over 230 attorneys serving clients in nine offices throughout Michigan. Among the largest law firms in Michigan, Warner works in virtually all areas of business law.

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To minimize opportunities for a person or entity to improperly benefit from a private foundation’s assets or philanthropic activities, foundations are restricted by federal tax laws from participating in certain transactions with foundation managers, contributors, certain family members and other foundation “insiders.”

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Restrictions on Private Foundation Transactions with Disqualified Persons

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These restrictions prohibit “disqualified persons,” meaning those in positions to control or otherwise influence the activities of a private foundation (such as a foundation manager or major contributor and certain family members), from benefiting from almost all business dealings with the foundation, whether accomplished directly or indirectly. &nbsp; The intent of this restriction is to prohibit “self-dealing,” which is broadly defined as payment or reimbursement of expenses to, or providing compensation to, a disqualified person. Generally, this means that disqualified people cannot receive monetary or non-monetary benefits from the foundation’s assets or activities. Subject to certain exceptions, transactions in the categories below would constitute self-dealing:

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A direct or indirect sale, exchange or lease of property

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The furnishing of goods, services or facilities

A transfer to, use of or benefit from foundation income or assets

Payment of compensation and reimbursement of expenses&nbsp;

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Earlier this month, the IRS issued guidelines for its auditors to use in identifying private foundations’ self-dealing transactions.

Why IRS Guidelines for Auditors Are Important for Private Foundations

These guidelines for auditors also provide a handy checklist for disqualified persons to work through to protect themselves from any costly self-dealing transactions. &nbsp; Assuming examiners follow the advice contained in the IRS guidelines to identify self-dealing, they will show up at your foundation audit with a to-do list something like the one below:

Identify any disqualified persons with respect to the foundation

Review the foundation’s transactions to see if any might warrant further review for self-dealing. Evidence they could use in this transaction review includes contracts, meeting minutes, interviews, and personnel and payroll records

Review a balance sheet listing of assets, including depreciation schedules

Establish the location of all assets, even fully depreciated ones, and identify who is using them

Examples of self-dealing given in the guidelines:Real property acreage being used by disqualified persons for hunting or other personal uses

A fully depreciated vehicle being driven by a disqualified person

Artwork owned by the foundation and listed in the books as “in storage” but it is actually hanging in a disqualified person’s home or business

Determine how fully depreciated assets (which may still have value) were disposed of by the foundation.&nbsp;Example:&nbsp;Were these assets given to a disqualified person?

Tour real estate to determine use of the property.&nbsp;Example: A building which is not generating rental income is actually being used by someone, such as a disqualified person.

Review rental agreements, sales contracts, other agreements and side deals

Knowledge Is Power When Avoiding Self-Dealing

It is important not only to identify the disqualified persons associated with your foundation, but also to keep track of how those people and entities are interacting with the foundation and its assets. There are ways to structure transactions that will allow you to avoid self-dealing as it relates to your foundation. Proper structure and care is important to avoid the excise taxes on both the foundation manager and the disqualified persons, as such taxes can be steep. &nbsp; If you have questions for your foundation about preventing or correcting self-dealing or about identifying disqualified persons, please contact&nbsp;Jennifer Remondino&nbsp;at 616.396.3243 or&nbsp;<a href="mailto:jremondino@wnj.com">jremondino@wnj.com</a>. &nbsp;

Legacy Matters

Private Client and Family Office

Executive Partner

Jennifer L. Remondino

Trusts and Estates

Auditors Now Have Guidance Regarding Private Foundation Self-Dealing Transactions

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Auditors Now Have Guidance Regarding Private Foundation Self-Dealing Transactions

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