Self-Dealing

Conflicts of Interest - Key Issues for Foundations

council-webteam — Sun, 09 Nov 2014 16:00:46 +0000

Conflicts of Interest - Key Issues for Foundations council-webteam Sun, 11/09/2014 - 11:00

Conflicts of Interest - Key Issues for Foundations

With Congress and the media focusing on corporate governance and foundation administration, now is the time to make sure that all grantmakers have a strong conflict of interest policy in place. Both private foundations and public charities (such as community foundations) should have clear guidelines on financial or other interests that must be disclosed and transactions that must be scrutinized or avoided. The policy should cover both board members and foundation staff. A robust conflicts policy can not only help a grantmaker stay on the right side of the law, but can also keep the organization from engaging in behavior that gives even the appearance of conflict.

While the Tax Code does not require that a charitable organization have a conflicts policy in place, it would be difficult to achieve or demonstrate compliance with applicable provisions of the law without such a document.

The Law on Conflicts

Board members or trustees of a charity have fiduciary duties to the organization. This means that they must be careful stewards of the charity's assets and must put the charity's interests first. On occasion, however, a board member's other involvements–business interests, family relationships, or political or other charitable activities–may make it impossible for him or her to provide disinterested advice to the charity. Especially when the matter affects the financial interests of a board member, this duality of loyalties may become a conflict of interest.

In addition, for private foundations, Section 4941 of the Tax Code prohibits a variety of financial transactions between the foundation and "disqualified persons." This category includes substantial contributors to the foundation and its managers, plus members of both those groups' families and businesses in which they have a large stake. Specifically barred transactions include rent payments to a disqualified person and loans from the foundation to a disqualified person, even when the terms of the deal would benefit the foundation substantially.

There's also a general prohibition on the use of a private foundation's income or assets "by or for the benefit of” a disqualified person. That means that a foundation's grants and other expenditures must not provide tangible economic benefits to disqualified persons. An exception to the bar on self-dealing allows foundations to pay disqualified persons reasonable compensation for very limited personal services that are necessary to the foundation's operation.

For public charities such as community foundations, financial transactions between the charity and its board members, as well as other "insiders,” are covered by the intermediate sanctions rules in Section 4958 of the Tax Code. Insiders also include major donors, charity executives, and their families. If any payments to such insiders, including salaries and payments for goods or services, exceed fair market value, the insiders, and possibly members of the organization's board, will be subject to penalty excise taxes.

In addition to those federal rules, some states have laws that regulate whether a board member or other charity official may participate in voting or other actions when the board member has a financial interest in the outcome.

Getting into Compliance

Legal rules help shape the outlines of the conflicts policy that a charity should have. Both private foundations and public charities should have written rules, approved by the board, that require board members and executives to disclose business or other ties that may result in a conflict of interest or bias (for or against) making a particular grant or investment. Ideally, this disclosure happens on a regular basis, say, at the beginning of the year or when a director's term begins. At the very least, foundation managers must be required to make full disclosure when a relevant matter is under consideration by the foundation.

Depending on what the manager's conflict is, it may be appropriate for him or her to abstain from voting on or even discussing the matter. For example, if a partner in the foundation's investment management firm serves on the board, he or she should not vote on any resolution to retain or dismiss the firm. The minutes of the board or committee meeting should note this abstention.

Foundation staff, too, should be required to disclose positions or interests that may give rise to conflicts. Does the program officer have a spouse who works at a potential grantee? Does the program officer personally receive consulting fees from nonprofits that may apply for funds? Depending on the size and activities of the foundation, it may be wise to have a parallel conflicts policy for staff members.

In addition, foundations should prepare themselves for situations where there may be no legal conflict but there may be the appearance of conflict. A board member's printing firm, for example, might seek the contract to produce the community foundation's annual report. One approach is to bar board members from doing business with the foundation. Another approach is to mandate a rigorous bidding process so that foundation managers can be confident that the best bid, even if it comes from a foundation insider, will win.

The stronger and more comprehensive a foundation's conflict of interest policy is, the easier it should be to spot conflicts and address them before they become a problem. Furthermore, when a foundation has evidence that it has gone through the procedures required by its conflicts policy, it will more easily be able to defend its actions to the media or government authorities.

Some conflicts, once disclosed, turn out not to be conflicts at all. Where a foundation board member serves on the board of an organization seeking a foundation grant, the foundation may generally make the grant without penalty. Disclosing this tie provides other board members with an opportunity to learn about the applicant charity from their colleague. Foundation policy may require that the board member abstain from voting on the grant, although there is no federal legal requirement that he or she do so. Because the board member's dual role has been disclosed, other board members may weigh his or her comments appropriately.

But some conflicts cannot be cured by disclosure. Where a community foundation proposes to pay above-market rates to a fundraising firm operated by the executive's spouse, no amount of disclosure can make the problem go away. Where a private foundation's investment manager uses foundation assets to manipulate the price of a stock held by disqualified persons, there's a genuine conflict (and probably an act of self-dealing, too).

Feeling Conflicted?

Conflicts of interest often give rise to interesting questions for the legal staff at the Council on Foundations. Members with a particular situation that they are uncertain of should not hesitate to contact Council legal staff at legal@cof.org.

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Webinar Recording: Self-Dealing Concerns for Corporate and Private Foundations

council-webteam — Tue, 19 Mar 2024 12:40:40 +0000

Webinar Recording: Self-Dealing Concerns for Corporate and Private Foundations council-webteam Tue, 03/19/2024 - 08:40

Webinar Recording: Self-Dealing Concerns for Corporate and Private Foundations

In this webinar, the Council’s Legal Resources team took an in-depth look at the self-dealing rules applicable to private foundations under section 4941 of the Internal Revenue Code. This webinar provided an analysis of the relevant rules and regulations governing transactions between private foundations and disqualified persons, including situations involving payment of compensation and expense reimbursement to disqualified persons, sharing employees between foundations and related companies, grants with the potential to benefit disqualified persons, and many more.

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Corporate Foundation Legal FAQ: Despite Benevolent Intent, Generating Business for Company is an Act of Self-Dealing

council-webteam — Fri, 27 Mar 2020 15:39:21 +0000

Corporate Foundation Legal FAQ: Despite Benevolent Intent, Generating Business for Company is an Act of Self-Dealing council-webteam Fri, 03/27/2020 - 11:39

Corporate Foundation Legal FAQ: Despite Benevolent Intent, Generating Business for Company is an Act of Self-Dealing

A business can generate goodwill through its philanthropic efforts, and such efforts can be good for business. For instance, the IRS has made clear that foundation expenditures that raise awareness of charitable causes can incidentally enhance the general reputation or prestige of its sponsoring company, and that this would not be an act of self-dealing.

A foundation’s program that generates business or results in an economic benefit for the company, however, regardless of charitable intent, will likely violate the self-dealing rules.

Recently, a manager of a utility company’s foundation contacted Legal Resources with a related question: to help alleviate suffering caused by the COVID-19 pandemic, could the foundation create a program to assist low-income utility customers in bill repayment?

The Council’s legal team advised the company foundation that the IRS may deem the program to be an act of self-dealing. When a company foundation expenditure results in a tangible economic benefit for the sponsoring company, an act of self-dealing has likely occurred. It can also occur when foundation assets have been used by or for the benefit of a disqualified person. This is because no grant or other activity of the foundation may directly produce sales or otherwise generate revenue for the company.

Here, the IRS may reasonably conclude that the foundation was creating a business opportunity for the utility company by paying outstanding customer bills with foundation money. This indirect benefit provided to the utility company is no less an act of self-dealing by the foundation with a disqualified person (the company) than if the foundation paid the company directly. Thus, the legal team cautioned that using foundation assets to generate business for the utility company would not only violate the self-dealing rules, but would also serve a substantial non-charitable purpose.

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Legal Considerations for Corporate Foundations

suzanne.friday@cof.org — Fri, 16 Feb 2018 18:08:06 +0000

Legal Considerations for Corporate Foundations suzanne.friday… Fri, 02/16/2018 - 13:08

Legal Considerations for Corporate Foundations

A Chapter in Mastering Foundation Law:
The Council on Foundations Compendium of Legal Resources

Many businesses set up related charitable organizations for the purpose of engaging in philanthropic endeavors supported by the company. Because the funding for these charitable organizations is derived primarily from contributions from the business, these entities typically are unable to qualify as public charities and instead qualify as private foundations. This chapter explores the special issues faced by corporate foundations as a result of their close relationship with their founding business.

This chapter is divided into five parts. Specifically:

Merits of a Separate Corporate Foundation

Part One explains the value of a separate corporate foundation as compared to direct corporate giving.

Formation of a Corporate Foundation

Part Two reviews the foundation formation process, legal entity status and related issues.

Funding the Corporate Foundation

Part Three discusses options and models for funding a corporate foundation.

Grantmaking and Scholarships by Corporate Foundations

Part Four examines grant making and scholarships by corporate foundations and the legal issues associated with these activities.

Transactions with or Involving the For-Profit Business

Part Five discusses legal issues associated with transactions between the corporation and the foundation and how the self-dealing rules apply.

Accessing this Chapter

As a benefit of Council membership, members can download this chapter for free. Nonmembers of the Council can purchase this chapter of the Legal Compendium in our store for $149.

Members Download for Free

Nonmembers Purchase from Store

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Scholarships & Grants to Individuals

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Starting & Ending Foundations

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Legal and Tax Compliance for Corporate Grantmakers: Self-Dealing & Conflicts of Interest

kelsey.gerber@cof.org — Wed, 13 Dec 2017 20:33:20 +0000

Legal and Tax Compliance for Corporate Grantmakers: Self-Dealing & Conflicts of Interest kelsey.gerber@… Wed, 12/13/2017 - 15:33

Legal and Tax Compliance for Corporate Grantmakers: Self-Dealing & Conflicts of Interest

Webinar Recording

In this third installment of the Legal and Tax Compliance for Corporate Grantmakers webinar, participants continue a review of the rules against self-dealing, where they come from and what they involve, as well as compare to rules regarding conflict of interest. We analyze a case study, a real life "corporate opportunity" fact pattern received by the Council’s legal team.

Topics Include:

A technical definition of “disqualified person”
The law of self-dealing under IRC § 4941
Comparison with conflict of interest rules
Expenditures that provide impermissible benefits to the sponsoring company
Expenditures that provide permissible, incidental and tenuous benefits to the sponsoring company
“Corporate opportunity” fact pattern analysis: Corporate Foundation Could be Whistled for Self-Dealing Foul

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A Compliance Checklist for Private Foundations

council-webteam — Mon, 16 Dec 2013 21:54:44 +0000

A Compliance Checklist for Private Foundations council-webteam Mon, 12/16/2013 - 16:54

A Compliance Checklist for Private Foundations

The persistent scrutiny of nonprofit governance has prompted leaders at many types of organizations to take steps to assure that their own houses are in good legal and financial order. This checklist is a good place for you as a private foundation to start.

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A Compliance Checklist for Private Foundations

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Sharing Office Equipment & Supplies

council-webteam — Tue, 19 Nov 2013 21:36:21 +0000

Sharing Office Equipment & Supplies council-webteam Tue, 11/19/2013 - 16:36

Sharing Office Equipment & Supplies

Office equipment and supplies may always be shared if the parent company provides the foundation with the equipment or supplies free of charge. It is also possible for the parent company and the foundation to share the cost of equipment and supplies, but great care needs to be taken to structure the arrangement in a manner that does not violate the prohibition against self-dealing.

Background: The self-dealing rules prohibit private foundations--including company foundations--from entering into a range of financial transactions with "disqualified persons." Among those considered disqualified persons are substantial contributors to the foundation. The parent company is virtually always a substantial contributor and thus a disqualified person in relationship to the company foundation.

Sharing Equipment and Supplies: It is not always necessary for the company foundation to buy their own printers or copiers. As mentioned above, if the parent company is supplying equipment and/or supplies free of charge, the equipment and supplies can be shared without concern. But, due to the prohibition against the self-dealing rules, the parent company may not charge the foundation for the use of goods and services even at below cost rates.

How can the parent company and foundation share the costs of equipment and supplies without violating the prohibition against self-dealing? According to several Private Letter Rulings issued by the IRS, two key factors in sharing equipment and supplies appear to be (1) maintaining detailed records of each entity's usage so that the private foundation only paid for its own usage and (2) paying for the services or supplies used directly to a third-party vendor (who is not a disqualified person). For example, one Private Letter Ruling held that it was not self-dealing if the private foundation, following the guidelines above, shared supplies such as refreshments and postage. While the Private Letter Ruling only applies to the parties who requested it, this and similar rulings suggest that there are methods to share equipment and supplies without violating the self-dealing rules. When contemplating sharing office equipment or supplies, it is always advisable to have an attorney who is familiar with all the details of the proposed arrangement examine the situation to ensure no inadvertent violations of the self-dealing rules.

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Tickets to Fundraisers

council-webteam — Tue, 19 Nov 2013 21:10:55 +0000

Tickets to Fundraisers council-webteam Tue, 11/19/2013 - 16:10

Tickets to Fundraisers

Question:

What should corporate foundations and their parent companies consider when purchasing tickets to fundraisers?

Response:

Whether they are tickets to a dinner, to a performance, or simply for general admission to a facility, tickets have an economic value. When a company or foundation purchases tickets, the first issue to consider is which entity is purchasing the tickets — is it the foundation or the parent company? If the parent company purchases the tickets, there is no concern about which individuals use the tickets. For this reason, the easiest way to handle the purchasing of fundraising tickets is to make the purchase through the corporate giving program.

If the corporate foundation purchases the tickets, the foundation must consider who uses the ticket. The basic rule is this: self-dealing rules bar disqualified persons (e.g., executives and board members of the parent company) from receiving tangible economic benefit as a result of foundation grants. Thus, even though it may be for a good cause, the corporation and its managers generally may not use tickets purchased by the foundation or other admissions provided on account of the company foundation grants. However, if a company executive is also a foundation board member, he or she may attend for reasons associated with their foundation work, such as monitoring a grantee. Spouses and other family members cannot attend using foundation-purchased tickets unless they, too, have legitimate foundation responsibilities.

In addition, foundation representatives, who are disqualified persons, may attend events that the corporate foundation has underwritten, so long as their attendance is reasonable and necessary to their performance of functions related to the foundation. For example, a foundation manager may use a ticket for the purposes of monitoring the work of an organization.

Finally, foundations may be asked to split the cost of tickets to events, with the foundation paying the charitable portion and the company paying the noncharitable portion of the ticket price. The IRS has taken the position that is not possible to split the price of a ticket in this manner to avoid that self-dealing prohibition.

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How to Avoid Self-Dealing for Family Foundations

council-webteam — Tue, 19 Nov 2013 17:22:31 +0000

How to Avoid Self-Dealing for Family Foundations council-webteam Tue, 11/19/2013 - 12:22

How to Avoid Self-Dealing for Family Foundations

Slide presentation reviewing the basics of avoiding self-dealing as a family foundation.

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How to Avoid Self-Dealing for Family Foundations

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Membership Dues and Self-Dealing

council-webteam — Sun, 17 Nov 2013 15:31:29 +0000

Membership Dues and Self-Dealing council-webteam Sun, 11/17/2013 - 10:31

Membership Dues and Self-Dealing

Question: Why do Council on Foundations membership materials and invoices state that if my foundation and corporate giving program share a membership, dues must be paid by the corporation? Is this true for other memberships as well?

Answer: IRS self-dealing rules prohibit private foundations (including company foundations) from entering into a range of financial transactions with disqualified persons, including transactions that provide a tangible economic benefit to a disqualified person.

Since a corporation is virtually always a substantial contributor to the foundation it sponsors, it is considered a disqualified person. For that reason, if the foundation and a corporate giving program share a membership in an organization where both could receive tangible benefits, such as the Council, the foundation cannot make the dues payment.

Instead, the Council states that where a corporate giving program and corporate foundation have a joint membership in the Council, the corporation should pay the membership dues. Having the corporation pay the dues avoids any potential self-dealing issues and allows both the foundation and the corporation to receive membership benefits.

Many membership organizations do not offer joint memberships. In that case, each entity (such as the foundation or the corporate giving program) can pay for its own membership since self-dealing is not a concern. If the foundation has its own membership, paying membership dues is not problematic since benefits flow only to the foundation.

Self-Dealing

Conflicts of Interest - Key Issues for Foundations

Conflicts of Interest - Key Issues for Foundations

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Webinar Recording: Self-Dealing Concerns for Corporate and Private Foundations

Webinar Recording: Self-Dealing Concerns for Corporate and Private Foundations

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Corporate Foundation Legal FAQ: Despite Benevolent Intent, Generating Business for Company is an Act of Self-Dealing

Corporate Foundation Legal FAQ: Despite Benevolent Intent, Generating Business for Company is an Act of Self-Dealing

Questions?

Related Events

Related Resources

Legal Considerations for Corporate Foundations

Legal Considerations for Corporate Foundations

A Chapter in Mastering Foundation Law: The Council on Foundations Compendium of Legal Resources

Merits of a Separate Corporate Foundation

Formation of a Corporate Foundation

Funding the Corporate Foundation

Grantmaking and Scholarships by Corporate Foundations

Transactions with or Involving the For-Profit Business

Accessing this Chapter

Questions?

Related Events

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Legal and Tax Compliance for Corporate Grantmakers: Self-Dealing & Conflicts of Interest

Legal and Tax Compliance for Corporate Grantmakers: Self-Dealing & Conflicts of Interest

Webinar Recording

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Related Events

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A Compliance Checklist for Private Foundations

A Compliance Checklist for Private Foundations

Download Document

Questions?

Related Resources

Related Events

Sharing Office Equipment & Supplies

Sharing Office Equipment & Supplies

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Tickets to Fundraisers

Tickets to Fundraisers

Question:

Response:

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How to Avoid Self-Dealing for Family Foundations

How to Avoid Self-Dealing for Family Foundations

Download Document

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Membership Dues and Self-Dealing

Membership Dues and Self-Dealing

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A Chapter in Mastering Foundation Law:
The Council on Foundations Compendium of Legal Resources