Tax Management Portfolio, Private Foundations — Self-Dealing (Section 4941), No. 470, discusses in detail the excise taxes imposed by §4941 on acts of self-dealing between private foundations and certain related persons. To
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Tax Management Portfolio, Private Foundations — Self-Dealing (Section 4941), No. 470, discusses in detail the excise taxes imposed by §4941 on acts of self-dealing between private foundations and certain related persons.
Section 4941 imposes an excise tax on any disqualified person who engages in an act of self-dealing with a private foundation, as well as on any foundation manager who participates in the act of self-dealing. An initial tax of 10% of the amount involved is imposed on the self-dealing person, while the participating foundation manager is subject to an initial tax of 5% of the amount involved. The failure to correct the act of self-dealing results in a 200% second-tier tax on the disqualified person and a 50% second-tier tax on the foundation manager.
This portfolio describes the disqualified persons who are subject to the tax, as well as specific acts of self-dealing. Among the self-dealing acts between a disqualified person and a private foundation that are subject to tax are: sales, exchanges, and leases of property; loans and extensions of credit; payment of unreasonable compensation; furnishing of goods, services, or facilities; transfers or the use of the income or assets of a private foundation; and payments to government officials. The excise taxes are also imposed on indirect acts of self-dealing, as explained in the portfolio. In addition, this portfolio discusses the method by which the first and second-tier taxes are imposed, with particular attention to the means of avoiding or abating the second-tier tax by correcting the act of self-dealing.
This portfolio may be cited as Berry, T.M., Private Foundations — Self-Dealing (Section 4941).
Turney P. Berry
Turney P. Berry, Esq., Wyatt, Tarrant & Combs, LLP; B.A. (with honors, 1983) and B.L.S. (with university honors, 1983), Memphis State University; J.D., Vanderbilt University (1986); Fellow, American College of Trust and Estate Counsel (Charitable and Exempt Organizations Committee); member, Legal Advisory Subcommittee of the Council on Foundations; listed in the publication, the Best Lawyers in America; frequent writer and speaker on the local, state, and national level.
Table of Contents
Detailed Analysis I. Introduction Introductory Material A. Self-Dealing Identification Checklist 1. Specific Acts of Self-Dealing a. Sale, Exchange or Leasing of Property b. Loans and Extensions of Credit c. Furnishing Goods, Services, or Facilities d. Compensating or Reimbursing a Disqualified Person e. Transfer or Use of Income or Assets f. Payment of Money or Other Property to a Government Official 2. Overall Exceptions to Self-Dealing a. Offer on Same Basis as to Public b. Compensation for Certain Personal Services c. Transactions Between Foundation and Corporation d. Correction e. Initiation of Disqualified Person Status f. Certain Indirect Transactions g. Transitional Rules Under the 1969 Tax Reform Act 3. Imposition of Self-Dealing Excise Taxes and Possible Relief a. First-Tier Tax b. Second-Tier Tax c. Joint and Several Liability B. History of Self-Dealing Legislation 1. Section 503 — Predecessor to §4941 2. Inadequacy of §503 3. Legislative Progression C. Effective Dates II. Acts of Self-Dealing A. Definitions 1. Disqualified Persons a. In General b. Exceptions 2. Substantial Contributors a. In General b. Contributions Defined c. Exceptions d. Termination of Substantial Contributor Status 3. Foundation Managers 4. Government Officials a. Specific Classifications b. Exceptions 5. Amount Involved 6. Taxable Period B. Acts of Self-Dealing Generally III. Specific Acts of Self-Dealing Introductory Material A. Sales, Exchanges, or Leases of Property B. Loans and Other Extensions of Credit 1. Loans as Self-Dealing 2. Loans in the Context of Estate Planning C. Furnishing of Goods, Services, or Facilities D. Payment of Compensation and Reimbursement of Expenses E. Transfer or Use of the Income or Assets of a Private Foundation 1. Transfer or Use Generally 2. Incidental and Tenuous Benefits 3. Scholarship and Fellowship Benefits 4. Indemnification of Foundation Managers 5. Potentially Abusive Self-Dealing Transactions Involving Private Foundations a. Income Deferral NIMCRUTs b. Accelerated Charitable Remainder Trusts c. A New Variety of Accelerated Charitable Remainder Trusts (Chutzpah Trusts) d. Charitable Split-Dollar Transactions e. Charitable Family Limited Partnerships (CharFlips) F. Payments to Government Officials G. Exceptions to Self-Dealing 1. Employer-Sponsored Private Foundation Disaster Relief Payments 2. Initiation of Disqualified Person Status 3. Indirect Self-Dealing a. Certain Business Transactions b. Controlled Organizations c. Grants to Intermediaries d. Transactions During the Administration of an Estate or Trust e. Transactions with Certain Organizations f. Certain Transactions Involving Limited Amounts g. Statutory Exceptions to Indirect Self-Dealing 4. Furnishing of Goods, Services or Facilities to a Disqualified Person 5. Payment of Compensation for Certain Personal Services 6. Certain Transactions Between a Private Foundation and a Corporation a. In General b. Application to Partnerships 7. Certain Payments to Government Officials 8. Correction as an Exception to Self-Dealing 9. Transitional Rules Under the 1969 Tax Reform Act a. Transactions Involving Securities Acquired by a Foundation Before May 27, 1969 b. Disposition of Certain Excess Business Holdings c. Leases and Loans Existing on October 9, 1969 d. Sharing of Goods, Services, or Facilities Before 1980 e. Use of Property Acquired Before October 9, 1969 f. Disposition of Leased Property g. Payments to Government Officials h. Acts Before July 5, 1971 IV. Taxes on Acts of Self-Dealing Introductory Material A. Initial Tax on Self-Dealer B. Initial Tax on Foundation Managers C. Knowing 1. In General 2. Advice of Counsel 3. Burden of Proof D. Inapplicability of Abatement of First-Tier Taxes E. Second-Tier Tax on Self-Dealers 1. Second-Tier Taxes Generally 2. Second-Tier Tax Correction Act F. Second-Tier Tax on Foundation Managers G. Correction 1. In General 2. Sale by a Foundation 3. Sale to a Foundation 4. Use of Private Foundation Property 5. Use of a Disqualified Person's Property 6. Transfer of the Assets of a Private Foundation to a Disqualified Person 7. Payment of Compensation to a Disqualified Person 8. Valuation Errors 9. Correction as a Question of Fact H. Supplemental Proceedings Concerning Abatement of Second-Tier Taxes I. Special Rules and Limitations 1. Joint and Several Liability 2. Limits of Management Liability J. Penalties with Respect to Liability for Tax K. Termination Tax for Willful Acts V. Additional Matters A. Constitutionality B. Bankruptcy C. Interest D. Drafting Considerations E. Forms, Filing and Tax Payment Requirements F. Statute of Limitations
Table of Worksheets Worksheet 1 Former Publication 578, Tax Information for Private Foundations and Foundation Managers, Chapter VIII, Taxes on Self-Dealing Worksheet 2 Internal Revenue Manual Part 7. Rulings and Agreements Chapter 27. Exempt Organizations Tax Manual Section 15. Taxes on Self-Dealing Worksheet 3 The Tax Reform Act of 1969, S. Rep. No. 552, 91st Cong., 1st Sess. 28–34 (1969) Worksheet 4 Problem Identification Checklist Private Foundations — Self-Dealing (Section 4941)
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