Foundations: IRS Launches Review Project

IRS Launches Change

About a decade ago, the Internal Revenue Service launched an initiative targeting “high net worth families.”  This project was designed to look well beyond just the individual 1040s of the nation’s very wealthy to their related entities including private foundations. It “lasted a little while and then fizzled out a few years later,” according to law professor Phil Hackney who was in the IRS Chief Counsel’s Office at the time. This push apparently ended “… without much to show for itself.” 

But Professor Hackney and others – including the IRS itself – now tell us that the agency had planned (even before COVID-19 shut down most of the agency’s operations for a few months) to “take another cut at this issue.”  

       Probes of Foundations: Reasons

This effort “appears to be in reaction to various factors” including criticism (from a number of quarters) to disclosures that the IRS had, for several years, focused much of its audit activity on lower-income taxpayers instead of on the much more productive target of the financial elite. 

In early March 2020, Treasury Secretary Steven Mnuchin appeared before the House Ways and Means Committee. Responding to questions by Rep. Judy Chu (D-CA) on this problem, Mnuchin said: “I have specifically directed the IRS commissioner to come up with a plan to increase the amount of funding so that we can audit more high-income earners, so that is specifically in our plan.” 

In addition to Congressional scrutiny of this odd audit strategy, there was a recommendation by a Treasury Department inspector general that the agency “… increase its focus on certain high-income taxpayers.”

The recently announced project has also been described as “complement[ing] other initiatives at the IRS focused on high-income individuals, and those aimed at better understanding taxpayer behavior to improve future audit practice.” 

During the COVID-19 quarantine,  enough activity continued – virtually – to produce  evidence that the Internal Revenue Service “… is making good on that promise” by Secretary Mnuchin.  At an NYU Tax Controversy Forum on June 18, 2020, Douglas O’Donnell, the Commissioner of the IRS Large Business and International (”LB&I”) Division, told conference attendees in cyberspace that the agency will open “several hundred new audits involving high-income individuals” beginning at the previously announced July 15th reopening date.

These tax examinations will focus on the wealthy “who have a connection with at least one pass-through entity such as a partnership or S-Corporation, or a connection with a private foundation.” The IRS’s Global High Wealth Industry Group – known more colloquially as the “Wealth Squad” and housed within the LB&I Division – will take the lead on these audits. The enterprises targeted by the Wealth Squad typically “are generally controlled by individuals with assets or earnings in the ten of millions of dollars.”

This new audit project will span several IRS divisions including the Tax-Exempt and Government Entities (TE/GE) Division that has responsibility for oversight of private foundations. Director Tamera Ripperda has announced that over “1,000 cases of private foundations that are connected to high income or high net worth individuals” have been identified and audit case files have been opened. 

       The Foundations Angle

So far, there seems to be “limited guidance” on the scope and extent of the examination of the private foundations connected with the targeted high-wealth individuals and families. But it’s been reported that the Internal Revenue Service is “particularly interested in auditing whether those private foundations have engaged in prohibited ‘self-dealing,’ such as making loans to a disqualified person.” 

Of course, the definition of “self-dealing” within the Internal Revenue Code includes acts far broader than insider loans. It can include as well transactions between a private foundation and a disqualified person involving – just to name some: (1) the sale, exchange, or leasing of property, (2) providing goods, services, or facilities, (3) paying compensation or reimbursing expenses, or (4) transferring foundation income or assets to, or for the use of benefit of, a qualified person.” There is also “indirect self-dealing” which includes transactions between organizations controlled by a private foundation. 


Of course, the examinations may go well beyond issues of direct and indirect self-dealing to matters otherwise regularly raised in audits of private foundation.

And those who receive audit letters in connection with this new initiative should also understand that the private-foundation element – even if conducted by TE/GE agents – will be just a part of a more comprehensive examination of a target individual’s financial picture.

Charity Conflicts, Self-Interest, and More

Charity Conflicts

Along with the hordes of ghosts and goblins roaming the American landscape on Halloween were altogether too many nonprofit organizations and leaders out in plain sight committing brazen acts of chicanery and impropriety. 

It’s probably no coincidence, then, that the folks at The Nonprofit Quarterly chose October 31st to launch its new Fall 2019 series on conflicts of interest and self-interest in the nonprofit sector. 

  Self-Interest in Charities: Good and Bad

In an introductory post, Exploring the Problems and Benefits of Self-Interest in Nonprofits (October 31, 2019), the NPQ editors ask and answer their own question; that is, why this prestigious publication would – right now – “prepare a special focus on self-interest both well and badly used in nonprofits.” 

First, they explain that “the opportunity to stray into dangerous territory in nonprofit life is omnipresent….”  Some instances of bad behavior involve “… the obvious types of conflicts” but “many are more subtle,” so a refresher course for all of us is in order. 

Second, it’s “because the topic of conflicts of interest has presented itself so often recently in investigations of large, well-known nonprofits, imbuing the sector with reasons for the public to be skeptical about its intentions.” In this regard, NPQ points to “some high-profile stories” these days “about conflicts of interest among board and staff leaders” including a “…bird’s eye view of the various ways in which executives and board members at the NRA have improperly profited from their leadership positions.” 

Of course, the National Rifle Association – a 501(c)(4) organization with four affiliated charities and a related political action committee – is just one of a number of headline-making spectacles in the last several months. But its shenanigans have been so “in-your-face” and outrageous that it’s hard to look away. Indeed, the NPQ editors note that “the defense posed in even the most egregious of cases was a kind of wide-eyed wonder at the fact that anyone would think such behavior was out of line.” 

           The Self-Interest Series 

The Nonprofit Quarterly series begins with the relatively brief overview published last week along with the first article in the series by Professor David O. Renz titled Charity Conflicts: A Guide. Coming up within the first two weeks of November will be two more articles. 

The first is by Vernetta Walker, president and CEO of Walker & Associates Consulting as well as senior advisor on diversity, inclusion, and equity (DI&E) at BoardSource. She is well-versed in the topic of conversation, and “…knows nonprofit boards like the back of her hand.” Her article will include an “astute and practical examination of why recusals and disclosures are inadequate to the problem.” 

The Renz and Walker pieces will be followed by NPQ’s editor-in-chief, Ruth McCambridge, writing about “the role self-interest plays in nonprofit life in—as Minnesota Council of Nonprofits’ Jon Pratt calls it—’the nonprofit wing of the nonprofit sector.’”

There are two key points to bear in mind right off the bat about this important series. First, the introductory article is titled “… Self-Interest in Nonprofits; there’s no mention, in the title at least, of “conflicts of interest” or the terms “self-dealing” or “private benefit” or “inurement.” The emphasis is on the “problems and benefits of self-interest.” Second, a recommendation by the NPQ editors in this overview appears to be just slightly at odds with an emphatic point made by Professor Renz in his outstanding treatise.

             Acceptable Self-Interest: Views

The NPQ editors note that the ever-present “opportunity to stray into dangerous territory” is a risk that “requires … strong ethical practices and protocols to identify and avoid problematic situations.” That’s why they explain, it’s a “slippery slope” and they “… have always suggested it is just better to steer clear of ‘…conflicts of interest…’ altogether.” 

On the other hand, a key argument of Professor Renz is that “…conflicts of interest abound in our sector, and they arise for logical and even beneficial reasons.” A problem is the lack of a nuanced approach to assess them from a “risk and reward perspective.” Some are “worth navigating ….” This point, though, is just the tip of the iceberg in this must-read article. In a separate post, we’ll explore his Charity Conflicts: A Guide as well as the soon-to-be-published third and fourth articles in NPQ’s timely series. 


There’s also a strong possibility that we’ll post a bit more in a later post or two about the remarkable, self-inflicted, carnage at the National Rifle Association – in case you managed to miss the glorious parade of misbehavior that was first widely exposed in the blockbuster Secrecy, Self-Dealing, and Greed at the NRA (April 17, 2019) [Former IRS exempt organizations director Marcus Owens: “The litany of red flags is just extraordinary.”]

Other tantalizing articles followed including – just to name a few:  WTF Is Up With the NRA, Explained (May 3, 2019); NRA Legal Bills Raise ‘All Sorts of Red Flags’ (May 14, 2019) [Stanford Law School legal ethics expert: “One hundred thousand dollars a day (in legal fees to a related law firm)? That’s just off the charts.”] NRA money flowed to board members amid allegedly lavish spending by top officials and vendors (June 9, 2019) [Noted D.C. exempt organizations attorney: “In 25 years of working in this field, I have never seen a pattern like this …. The volume of transactions with insiders and affiliates of insiders is really astonishing.”]


Attorney General of CA Targets Troop-Support Charity

Troop Related Charities

The Attorney General of California issued a July 24th press release announcing the lawsuit against Sacramento-based Move America Forward, Inc. beginning in a remarkably understated manner.

Xavier Becerra has moved against this nonprofit, formed in 2004, that “sends care packages to combat troops” and describes itself on its website as the “nation’s largest grassroots pro-troop organization dedicated to support the brave men and women” of the Armed Forces.

“The lawsuit alleges that Move America Forward’s marketing practices misled donors about the nonprofit’s affiliations and charitable outreach,” the Attorney General explains in the press release. “Further, … the charity used pictures and quotes of veterans without permission in order to seek donations.” AG Becerra won’t stand for “deceitful gimmicks” and “preying on donors’ support for military service members and veterans with deceptive marketing.” 

Of course, as the Attorney General mentions in succeeding paragraphs of the press release, there was much more to this enforcement action than allegations of stretching the truth in charitable solicitations. Allegedly, rampant self-dealing has occurred with affiliated for-profit companies, topped off by substantial involvement with the political action committees of the principals and in support of political campaigns.

Linked to the press release is a copy of the 25-page Complaint filed in Sacramento Superior Court by the Attorney General. That document opening the litigation describes how Move America Forward, Inc. (along with its officers and directors and their deeply interrelated for-profit affiliates) had been, from the earliest days, concocting a murky stew of almost everything a charity should not be doing.  

In a response posted on its website, Move America Forward, Inc. lashed out at the government action, calling the lawsuit a “disgraceful effort of far-left politicians to attack every conservative they can.”

But the allegations of rampant violations of the federal charity ban on political activity were the icing on an already rancid cake. 

   Grabbing the Attention of the AG

In one of our early posts describing how to get on the radar screen of the state Attorney General charity investigators, we first succumbed to overdone food metaphors.

A Recipe for How To Get Noticed by the California Attorney General (May 1, 2015) is one of our favorites, describing how two charity trustees in Napa, California, had been “cooking up a hearty feast of trouble.” The misdeeds, fraud, and self-dealing included everything from soup to nuts; resulting in a “distasteful scent … wafting out of the premises … all the way to Sacramento” whereupon the Attorney General “crashed the party, just in time for dessert!”  

Similarly, here, the range of alleged misconduct by Move America Forward, Inc. – and everyone and everything connected with it – is breathtaking. 

  The Attorney General’s Allegations Here 

The initial fact allegations in the Complaint by the Attorney General set the table, so to speak, of a carefully constructed facade by the principals. But it was a gloss of patriotic altruism masking a scheme to attract “charitable donations” to support not only a political agenda but also to generously enrich themselves and their politics-related business enterprises.  

Two of the four directors/officers were co-founders in 2009 of the Tea Party Express. The tea partiers and the interrelated business ventures and political action committees all dwelled together free of charge, courtesy of 501(c)(3) Move America Forward, Inc. The principals drew salaries while also invoicing the 501(c)(3) entity for some of the most creative array of up-front and back-end fees and commissions imaginable. 

As an example, there’s a tasty tidbit in the Attorney General’s Complaint about the key figure, Salvatore Russo, and his for-profit firm called The Campaign Store, LLC. Mr. Russo allegedly used this business to “intercept online donations, then charged fees ranging from 7.55% to 10.06% to transfer the remaining funds” back to Move America Forward’s bank account. “Campaign Store had no employees and did not add any value to the transactions”; it also enjoyed free rent until it was dissolved in 2016.

Between 2008 and 2014, Move America Forward, Inc. paid The Campaign Store, LLC, at least $492,485.00 for “bank service charges.” That business also charged the 501(c)(3) additional fees for “order fulfillment’ of the care packages for the troops. “The fees ranged from 7.95% to 13.15 percent of the order total” but did nothing other than act as an “online shopping cart.” It “added no value to the procurement, processing or shipping” of the care packages. In total, The Campaign Store, Inc. received about $505,722 in these order fulfillment fees.

Of course, the Attorney General noted that organization’s website along with its government filings omit details of these cozy arrangements or that a significant chunk of the charitable contributions solicited were improperly siphoned off from the supposed purpose of troop-support into the pockets of the principals and their affiliated businesses to advance their political causes. The deception started right away: on Move America Forward’s Form 1023 seeking tax exemption, the creators falsely asserted that the members of the board would be independent and would not have any dealings with any “disqualified persons.” 


So grab a cup of coffee and a chocolate-covered doughnut and peruse People v. Move America Forward, Inc., et al: the Complaint for “Civil Penalties, An Accounting, a Constructive Trust, Restitution, Removal of Directors, and For Other Relief Arising From: (1)Breach of Fiduciary Duty, (2) Aiding and Abetting a Breach of Fiduciary Duty, (3) Self-Dealing, (4) Unjust Enrichment, (5) Deceptive and Misleading Solicitations and (6) Failing to Comply with Statutes and Regulations of the Attorney General.”  

But munch quickly; by about halfway through the document, you’ll likely begin to feel a bit queasy – especially the bits about how they were too busy stuffing their own pockets to actually hold their own troop-support events, so they used photos of events held by other (legitimate) charities on their own (fraudulent) solicitation materials to grab more and more charitable dollars from unsuspecting donors. 


Disqualified Person: Why It’s Such a Big Deal

When an organization applies for tax exemption under Internal Revenue Code section 501(c)(3), the IRS assumes it is a private foundation unless the group can demonstrate enough “public support” to be classified as a public charity.
This classification matters because a private foundation is subject to greater scrutiny than a public charity and donors to a private foundation receive less generous tax benefits. There are also a series of excise taxes that may apply to a private foundation; they are designed to either encourage good behavior or discourage prohibited actions. For instance, there are self-dealing taxes under Code section 4941; a transaction may be an act of self-dealing if a party is a “disqualified person” with respect to the foundation.  Similarly, there are excess business holdings taxes under Code section 4943; the assets of any “disqualified person” are taken into account.
For these reasons, determining exactly who is and is not a “disqualified person” is a critical issue for private foundations and their directors and officers.

    Definition of Disqualified Person

Section 4946 of the Internal Revenue Code provides the definition of “disqualified person” by setting out a list:

  1. Substantial Contributors
  2. Foundation Managers
  3. Owner of more than 20 percent interest of certain organizations that are substantial contributors
  4. Family Members (of persons described in 1-3)
  5. Corporations in which persons described above (in 1-4) hold more than a 35 percent voting power
  6. Partnerships in which persons described above (in 1-4) hold more than a 35 percent profit interest
  7. Trusts or Estates in which persons described above (in 1-4) hold more than a 35 percent beneficial interest
  8. Certain Private Foundations which are effectively controlled by the person or persons in control of the foundation in question
  9. Governmental Officials

It’s not always self-evident from these categories alone whether or not a particular person is a “disqualified person” within the meaning of section 4946.

   Issues in Defining “Disqualified Person”

For instance, who – exactly – is a “family member”?  Under the Treasury regulations, that term is more specifically defined as: “spouses, ancestors, lineal descendants and spouses of lineal descendants of substantial contributors, foundation managers, and 20 percent owners. Legally adopted children of an individual are the lineal descendants of the individual under this definition.”
As another example, who exactly would be a “substantial contributor”? Is that a subjective matter, or are there particular rules?  Under Code section 507(d)(2), a “ubstantial contributor” is defined as –

any person who contributes or bequeaths an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequeaths received by the foundation before the close of its taxable year in which the contribution or bequest is received from such person.

Sometimes, a private foundation is funded by a family trust. In that case, the creator of the trust is considered to be the “substantial contributor,” even though that creator’s contributions “may not have exceeded the $5,000 and 2 percent limit.”
There are other tricky twists and turns. Among them, for example, is that a donor to a trust is “a substantial contributor as of the first date when he or she exceeded the $5,000 and 2 percent limit, even though the determination of the percentage of total contributions and bequests is not made until the end of the private foundation’s taxable year.” Also, “[o]nce a person is 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 a determination were first made at some later date.” But –

A person’s status as a substantial contributor will cease, however, if neither the substantial contributor nor his or her family member has made a contribution or bequest or been a foundation manager within a 10 year period ending at the close of the tax year, and the aggregate contributions or bequests by the substantial contributor are determined by the IRS to be insignificant when compared to the aggregate contributions or bequests by another person.

The point is not to set out here each and every issue that arises in determining who is or is not a “disqualified person”; rather, it’s to make clear how convoluted this inquiry can be.
For more specific guidance, see Treasury Regulation section 53.4946-1; IRS materials available online including Publication 578, Private Foundations; and revenue rulings and court cases.
For instance, in Rev. Rul. 74-287, certain employees of a bank were collectively designated as the trustee of a private foundation with delegated fiduciary responsibility for the administration of the trust. Despite this dual status as bank employees and fiduciaries of an independent trust, they are “disqualified persons” as to the trust.
In Rockefeller v. U.S., 572 F. Supp. 9 (E.D. Ark. 1982), aff’d, 718 F.2d 290 (8th Cir. 1983), a taxpayer was the lineal descendant (i.e., a family member) of a deceased substantial contributor. The court ruled that he is a “disqualified person” with respect to the private foundation on account of this tenuous connection.


An IRS agent conducting an audit of a private foundation will take a close look at various transactions including, for example, the sale, exchange, or leasing of property; the lending of money or extension of credit; the furnishing of goods, services, or facilities; and the payment of compensation or expenses reimbursements. Then the agent will explore how any or all “disqualified persons” have any connection with any such transactions.
In order to prevent the imposition of costly excise taxes, a private foundation’s directors and officers must take care to learn about and clearly understand these complex rules. 

Charity Shenanigans of the Billionaire-Philanthropist Doctor

In “Patient-Advocacy Nonprofits’ Dark Ties to Industry,” we examined some practices in the nonprofit sector that need a huge dose of sunlight on them to expose apparent conflicts of interest. Specifically, we referred to the often too-cozy relationships between patient-advocacy organizations and drug companies or other healthcare businesses that fund them.
This post tells the tale of  Patrick Soon-Shiang, M.D., a billionaire doctor and entrepreneur. He can’t seem to step away from the spotlight, attracting attention to unsavory charitable-giving practices for all the world to see. The title of a recent article about Dr. Soon-Shiong is:  “How the world’s richest doctor gave away millions — then steered the cash back to his company.” This gives a strong clue about the heap of trouble facing him.

   The Creation of the Philanthropist

In 2013, Fortune magazine ran a lengthy, highly revealing profile – “Who’s the Richest Guy in L.A?” – of this colorful character.  It’s a fascinating story of this now-60-something physician/entrepreneur, from his birth as the ninth of 11 children of  Chinese parents living in South Africa.
He moved to Los Angeles over 30 years ago, armed with a medical degree and “a plan to save the world.”  Dr. Soon-Shiong was “a pioneering transplant surgeon at UCLA in the 1980s, a widely published researcher, and the inventor of the cancer drug Abraxane.”
But there was always another side to Soon-Shiong,” recalls a friend. “You just meet some guys in your life who know how to make money….Patrick is one of those guys.”
In 1998, the enterprising physician-entrepreneur “cobbled together loans to buy a struggling generic drugmaker. He turned the company around, used the profits to develop Abraxane, preserved his equity, and cashed out a decade later with two spectacular deals that catapulted him into the upper reaches of the American plutocracy.”
He is brilliant and driven. He believes –

we are on the cusp of a transformative moment in medicine …., [c]onvinced that by leveraging all the cool stuff that’s happening right now in mobile technology, supercomputing, machine vision, artificial intelligence, cloud storage, mega-high-speed data transmission, genomics, and proteomics, medicine will emerge at long last from the Dark Ages. He sees paradigm-shifting implications for how researchers develop new therapies and doctors diagnose and treat even the most terrifying diseases — especially the terrifying ones….”

Patrick Soon-Shiang is very much a “self-promoter.”  Recently, he met twice with Donald Trump, actively seeking the job of the “nation’s health czar.” He and his wife, a former actress, are now “among L.A.’s newest A-list philanthropists.”

   The Undoing of the Philanthropist

Dr. Soon-Shiong is in the news right now because of some highly irregular “charitable” transactions revealed by “[a] bombshell investigative report.” That it took much digging at all seems doubtful because the man is notoriously public about everything he does.
“This looks like another ugly example of self-dealing philanthropy in the world of medicine—but this one comes with some unusual bells and whistles,” according to the editor of Nonprofit Quarterly.  
Reportedly, Dr. Soon-Shiong “…orchestrated a charitable donation in a way that would ensure almost all of the money would be funneled back into his own companies.” More specifically, he made a $12-million donation to the University of Utah that was “ostensibly meant to spur genetic research for a number of diseases.”
“Hidden in the wording of the University of Utah grant agreement,” though, was the  “requirement that had $10 million of that funneled back into NantHealth,” one of the multi-billionaire’s own companies.
There were additional oddities: “The money came through two private foundations controlled by him,” as well as via his NantHealth Foundation, ‘a type of public charity classified as a medical research organization.’” All NantHealth Foundation board members are “designated by Patrick Soon-Shion, who is neither a member or a stockholder.” These appointee-directors take office upon designation, “… serve at [his] pleasure, and “… hold office until a successor has been designated and qualified.”

The transaction landed him a tax deduction, the philanthropic halo, a stream of steady cash, and access to the university’s patient data, which he needed to build a new commercial product meant to assess patients’ risk of rare and inherited diseases. *** But, that’s not the end of it. Through its relationship with the university, the company then inflated the number of test orders it reported to investors late last year by more than 50 percent.

But wait! There’s more:

NantHealth, the Soon-Shiong company that markets GPS Cancer, appears to have misled investors in reporting its third-quarter earnings last November. The company said that during the quarter it had received 524 orders for the GPS Cancer test, which analyzes tumor genetics and recommends treatments for patients. One-third of those orders came from the University of Utah deal, a company representative told investors on the earnings call.

University of Utah representatives, though, told the media that “the work they ordered from NantHealth had nothing to do with GPS Cancer. They paid for straightforward genetic sequencing, meant strictly for preclinical research,” and “could not understand why NantHealth would count the work as orders for GPS Cancer.”
The author of the investigative report about these dealings asked four tax experts “to review the contracts.” They agreed that this Utah deal “did not pass a sniff test, as it appeared to violate rules concerning charity and self-dealing. To emphasize this point,  one of the experts – Marcus Owens, who formerly headed up the IRS’s Exempt Organizations Division – said “the University of Utah was essentially laundering  the money for Soon-Shiong.” And in an homage to understatement, another of the experts remarked that “[w]e pretty clearly have an optics problem.”


Remarkably, this is not Dr. Soon-Shiong’s first trip around the block. Some six months earlier than the Utah deal,  Soon-Shiong’s public charity –

announced it would donate $20 million to children’s hospitals in California and Pennsylvania for a research study on sequencing brain tumor samples. In the same press release …, , it [was] also announced that Soon-Shiong’s company NantHealth would be contracted under the grant. A later press release revealed that a portion of the grant would also go to buy NantHealth’s GPS Cancer tests.

Optics, indeed.

The Private Foundation: It's Not the Founder's Money Anymore

High-net-worth folks have lots of choices about what to do with their money – including how to give it away.
Many give outright, unrestricted contributions to existing public charities. Some make restricted gifts or create donor funds. Others are steered by professional and financial advisors toward establishing family (private) foundations, or decide on their own to take this route, without fully understanding the pros and cons. No one choice is the best or makes the most sense for any and all donors, but the family foundation remains a popular option.

A Private Foundation Isn’t Private

Perhaps the biggest lure of the family foundation format is having the family name connected with important charitable causes, and being able to continue these good works – with public recognition – through several generations.  
But many philanthropists misunderstand the nature of this form of tax-exempt organization: first, a private foundation’s operations are not secret or closed, and second, “[i]t’s not [the founders’] money anymore.

Private Foundation Duties

Somewhat counterintuitive to the label,  private foundations are not private. There is public oversight and scrutiny. There are filing and accountability requirements. There are tough, no-nonsense, restrictions on dealings with insiders.
Why? Because there are tax breaks and benefits. The perks for foundations are fewer and thinner than for public charities, but they are still substantial.  

Reporting and Accountability

Like all tax-exempt organizations, private foundations are subject to possible periodic audits by the Internal Revenue Service, and must file annual “information returns.” The Form 990-PF asks for detailed information, including names and addresses of substantial donors. Members of the public have the right to request and receive three years of these 990-PF’s, and charity watchdog groups like Guidestar  post these documents and other data on the internet.

Insider Prohibitions  

In the publication “Self-Dealing: A Concise Guide for Foundation Board and Staff,” the Forum of Regional Associations of Grantmakers explains an important point:

Whether the donor to a private foundation is an individual, a family, or a for-profit company, it is important to understand that once cash or other assets are gifted (or bequeathed) to a private foundation, those assets then belong to a separate legal entity that is subject to many restrictions. Said as plainly as possible:
It’s not your money anymore.’
Many donors … mak[e] the mistake of thinking that private foundation assets are simply another source of funds so long as any payment seems fair and charity benefits…. (emph. in orig.)

To be sure, the creators of private foundations have the ability to control and direct which causes to support and which charitable beneficiaries will receive funds. But, in return for the tax-exemption benefits, there are limits on too-cozy arrangements with insiders.
While public charities are not given unbridled discretion either, there are fewer prohibitions than for private foundations, because the former are supported broadly by public donations and grant money. The assumption is that this financial help from outside the circle of the organization’s founders and key movers and shakers will necessarily result in accountability and safety of the charitable funds.

A Little History

All of this came about by the Tax Reform Act of 1969. For many years, the feds had been watching private foundations abuse the generosity of the tax exemption for the benefit of their founders and their relatives, friends, and business interests. Under the 1969 law, “acts of self-dealing” are – with just a few exceptions – strictly prohibited.  
The concept is straightforward: The rules “prohibit any direct financial relationship between the foundation and virtually all persons closely related to the foundation.” (emph. in orig.)
It doesn’t matter if the foundation and its ultimate charitable beneficiaries are benefited.   For example, if “a member of the governing board rents out office space to the foundation at 50 percent below fair market value,” it’s still a prohibited act of self-dealing.
The reason for this harsh, black-and-white, rule is convenience: to avoid the problem of determining, on a case-by-case basis, whether a transaction between a foundation and an insider is truly fair or beneficial.

Key Concept: “Disqualified Person”

First things first. There must be two parties to any self-dealing transaction: the private foundation and a “disqualified person.”  A disqualified person or “insider” is a person that is “closely related” to the foundation. This definition includes certain legal entities (such as corporations, partnerships or trusts) in which these closely-related people have significant interests. That is to say, these persons (and legal entities) are “‘disqualified’ from entering into any financial transaction with the foundation.”

Key Concept: “Acts of Self-Dealing”

The 1969 Congress created a list of six categories of “acts of self-dealing,” impermissible transactions between private foundations and “disqualified persons.”
Under this statute, “‘self-dealing’ means any direct or indirect –

(A) sale or exchange, or leasing, of property between a private foundation and a disqualified person;

(B) lending of money or other extension of credit between a private foundation and a disqualified person;

(C) furnishing of goods, services, or facilities between a private foundation and a disqualified person;

(D) payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person;

(E) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and

(F) agreement by a private foundation to make any payment of money or other property to a government official (as defined in section 4946 (c)), other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period.”

There it is. The official list.
Except Congress added  a few exceptions to the list. Then the Treasury Department did what it’s legally required to do and issued lengthy regulations interpreting and applying this statutory list.  And, along the way, disputes arose. So the courts have had their say as well about what constitutes self-dealing within the meaning and intent of this landmark, 1969, overhaul of the private foundation rules.
So, there’s a list – but the devil is in the details.


There are draconian penalties for failure to abide by the family foundation restrictions, so everyone connected with creating or operating one (or advising others to do so)  should be thoroughly familiar with the pros and cons, and the ins and outs, of this charitable-giving format.