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2012-03-28 Tax Private Foundations
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2012-03-28 Tax Private Foundations

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  • 1. Self-Dealing and Compensation Related Issues for Private Foundations Frank H. Smith, Tax Partner and Simone Putnam, SPHR, HROS Partner March 28, 2012Thrive. Grow. Achieve.
  • 2. SELF-DEALINGSelf-Dealing Issues/ Page 2
  • 3. SELF-DEALING PROHIBITED TRANSACTIONS DIRECT OR INDIRECT DISQUALIFIED PERSONS (DISTINGUISHED FROM DISINTERESTED/INTERESTED PERSONS)Self-Dealing Issues/ Page 3
  • 4. DISQUALIFIED PERSONS Disqualified persons are individuals or organizations a private foundation is deemed to be related to and with which the private foundation is limited from engaging in transactions which may create self-dealing.Self-Dealing Issues / Page 4
  • 5. DISQUALIFIED PERSONS DISQUALIFIED PERSONS INCLUDE THE FOLLOWING: • Officers, directors or trustees of the foundation • A substantial contributor to the foundation • Companies or partnership substantially owned by disqualified persons • Spouse and families of any of the above (family in this instance includes ancestors, children, grandchildren, great-grandchildren and their spouses, but not siblings)Self-Dealing Issues / Page 5
  • 6. SELF-DEALING A DISQUALIFIED PERSON IS RESTRICTED IN THE TYPES OF TRANSACTIONS THAT CAN BE ENGAGE IN WITH A PRIVATE FOUNDATION. THESE TRANSACTIONS INCLUDE: • A sale, exchange, or leasing of property • Lending of money or other extension of credit • Furnishing of goods, services, or facilities • Payment of compensation • Transfer to or use of the income or assets of a private foundationSelf-Dealing Issues / Page 6
  • 7. SELF-DEALING EXCEPTIONS: • Payment of reasonable compensation for the performance of personal services • Provision of facilities by a disqualified person to a related private foundation without chargeSelf-Dealing Issues / Page 7
  • 8. DISCLOSURE REQUIREMENTS PRIVATE FOUNDATIONS ARE SUBJECT TO MANY DISCLOSURE AND REPORTING REQUIREMENTS, INCLUDING THE DISCLOSURE OF COMPENSATION OF BOARD MEMBERS AND OFFICERS AND OTHER HIGHLY COMPENSATED INDIVIDUALS.Self-Dealing Issues / Page 8
  • 9. CONTROLLED ORGANIZATIONS ACTS WITH CONTROLLED ORGANIZATIONS ARE GENERALLY TREATED AS THOUGH THE ACT WAS PERFORMED BY THE PRIVATE FOUNDATION ITSELF. AN ORGANIZATION IS TREATED AS CONTROLLED BY A PRIVATE FOUNDATION IF THE FOUNDATION, ONE OR MORE FOUNDATION MANAGERS, OR DISQUALIFIED PERSONS OF THE FOUNDATION CAN, BY AGGREGATING THEIR VOTES OR AUTHORITY, REQUIRE THE ORGANIZATION TO ENGAGE IN THE SELF-DEALING TRANSACTION.Self-Dealing Issues / Page 9
  • 10. SALE, EXCHANGE, LEASE OR FURNISHING PROPERTY ORGANIZATIONS THESE TYPES OF TRANSACTIONS BETWEEN A PRIVATE FOUNDATION AND A DISQUALIFIED PERSON IN REGARD TO THE FOUNDATION IS CONSIDERED SELF-DEALING. EXAMPLES INCLUDE: • Sale of incidental supplies by a disqualified person to a private foundation. • Sale of stock by a disqualified person to a private foundation for a bargain price (regardless of amount paid). • Purchase of a mortgage held by its bank trustee, who is a disqualified person.Self-Dealing Issues / Page 10
  • 11. SALE, EXCHANGE, LEASE OR FURNISHING PROPERTY ORGANIZATIONS • An exchange of property, such as transfer of shares of stock of an interest-free loan. • Transfer of real estate equal to the amount of the disqualified person’s loan. • Leasing of property between a private foundation and a disqualified person would be considered self-dealing unless it is without charge. • Direct or indirect furnishing of good, services, or facilities between a private foundation and disqualified persons.Self-Dealing Issues / Page 11
  • 12. LENDING OF MONEY OR OTHER EXTENSION OF CREDIT • Lending of money or extension of credit (direct or indirect) between a private foundation and a disqualified person would be considered self-dealing. • The transfer of a disqualified person’s obligation by an unrelated party to a foundation results in self-dealing if the foundation becomes a creditor under the note.Self-Dealing Issues / Page 12
  • 13. PAYMENT OF TRAVEL EXPENSES FOR A FAMILY FOUNDATION ASSETS OF A FAMILY FOUNDATION CANNOT BE USED TO FINANCE THE TRAVEL OF SPOUSES AND CHILDREN UNLESS: • Reimbursement of family can be used as a board member’s compensation, provided it is reasonable and it shows up as a reportable income on the board member’s Form 1099 or W-2. • Reimbursement can be made if costs were incurred to support legitimate and meaningful duties for the spouse and/or children that further the charitable purposes of the foundation.Self-Dealing Issues / Page 13
  • 14. PERSONAL FAMILY PLEDGES A LEGALLY BINDING PLEDGE IS A PERSONAL DEBT, AND IF A DISQUALIFIED PERSON MAKES SUCH A PLEDGE, IT IS AN ACT OF SELF-DEALING FOR A FOUNDATION TO PAY THAT DEBT.Self-Dealing Issues / Page 14
  • 15. ATTENDING FUNDRAISERS • If the foundation buys a ticket to a fundraising event and the ticket price includes payment for goods and services, the tickets cannot be used by a disqualified person unless that person attends the event as part of their foundation responsibilities. • Having the disqualified person personally pay for the benefit portion of the ticket does not resolve the self-dealing issue.Self-Dealing Issues / Page 15
  • 16. SHARING OFFICE SPACE AND PERSONNEL A NUMBER OF PRIVATE FOUNDATIONS SOUGHT AND RECEIVED APPROVAL FOR SHARED OFFICE SPACE AND PERSONNEL. • Separate contracts • Time sharing arrangement • Cost sharing arrangementsSelf-Dealing Issues / Page 16
  • 17. PAYMENT OF COMPENSATION • In general, the payment of compensation, including reimbursement of expenses to a disqualified person is considered self-dealing. • However, performance of personal services can be self-dealing unless the services are necessary to carry out the tax-exempt purpose of the foundation and the compensation is not excessive. A personal service would include legal, accounting, banking, and investment services as well as anything directly related to governance. It is confined to those services that “are essentially professional and managerial in nature.”Self-Dealing Issues / Page 17
  • 18. PAYMENT OF COMPENSATION • Hiring a family member as a staff and paying them in any form of compensation is allowed, but the compensation must be reasonable and the services must be necessary, personal, and charitable. • Board members can legally be compensated even though most foundations do not compensate them. The rules would be the same as for hiring a staff. The pay must be reasonable and the work must be necessary.Self-Dealing Issues / Page 18
  • 19. REASONABLE COMPENSATIONSelf-Dealing Issues / Page 19
  • 20. REASONABLE COMPENSATION • What is reasonable compensation? The IRS defines reasonable compensation as “the value that would ordinarily be paid for like services by like enterprises under like circumstances.”Self-Dealing Issues / Page 20
  • 21. REASONABLE COMPENSATION – 3 STEP PROCESS • The transaction is approved by an authorized body of the foundation. • The authorized body uses “appropriate data” to determine comparability prior to making a decision. • The authorized body documents the basis for its determination while making its decision.Self-Dealing Issues / Page 21
  • 22. REASONABLE COMPENSATION – BEST PRACTICES • Create a Position Description • Determine Your Compensation Policy/Philosophy • Identify Relevant Factors for Comparison • Identify and Obtain Appropriate Comparability Data • Assess All Components of Executive Compensation • Full Board Approval for Executive CompensationSelf-Dealing Issues / Page 22
  • 23. COMPENSATION POLICY/PHILOSOPHY • A compensation policy/philosophy serves as a long-term policy on executive compensation. • Provides consistency in setting executive compensation. • Articulates how the foundation links pay to performance, strategy, values and mission.Self-Dealing Issues / Page 23
  • 24. APPROPRIATE COMPARABILITY DATA COMPENSATION MUST BE COMMENSURATE WITH THE DUTIES AND RESPONSIBILITIES OF THE PERSON BEING COMPENSATED. APPROPRIATE DATA INCLUDES COMPENSATION LEVELS PAID BY SIMILARLY SITUATED FOUNDATIONS. CONSIDER THE FOLLOWING FACTORS TO DETERMINE SIMILARLY SITUATED FOUNDATION: • Individual’s duties and responsibilities. • Number of employees of the foundation. • Size of the foundation’s assets. • Type of foundation (operating, grant making, etc.). • Geographic location.Self-Dealing Issues / Page 24
  • 25. COF – SALARY SURVEY (SAMPLE PAGE)Self-Dealing Issues / Page 25
  • 26. COF – SALARY SURVEY (SAMPLE PAGE)Self-Dealing Issues / Page 26
  • 27. ASSESS ALL COMPONENTS OF COMPENSATION CONSIDER THE VALUE OF ALL BENEFITS BEING PROVIDED TO THE EXECUTIVE WHEN EVALUATING THE REASONABLENESS OF COMPENSATION.Self-Dealing Issues / Page 27
  • 28. FULL BOARD APPROVAL • Regardless of who conducts the preliminary research and makes recommendations for executive compensation levels, the ultimate responsibility for executive compensation falls to the entire board. • All board members must know the full details of the chief executive’s compensation package and have the opportunity to discuss and approve it.Self-Dealing Issues / Page 28
  • 29. COMPENSATION – OTHER CONSIDERATIONS • Consider equity and the perception of equity. Consider the implications of paying your chief executive at a disproportionate level than the rest of the staff. • Protect the board’s decision from undue influence by the chief executive. The chief executive should not recommend his/her own salary increase; if a compensation consultant is hired, he/she should be retained by the board and not by the executive.Self-Dealing Issues / Page 29
  • 30. COMPENSATION – OTHER CONSIDERATIONSCONT’D. • Remember that the compensation package is likely to become common knowledge. Each board member should be prepared to explain and defend the compensation package to many different constituencies.Self-Dealing Issues / Page 30
  • 31. PENALTIESSelf-Dealing Issues / Page 31
  • 32. CONSEQUENCES OF SELF-DEALING FIRST TIER TAX OF 10% • Self-assessed and nonwaivable • Undoing the transaction to the extent possible • Beware the correction does not create another self-dealing transaction • Assessed on the self-dealer • Participating managers may also be assessed if willful and not due to reasonable cause (5%) SECOND TIER TAX OF 200% (50% FOR MANAGERS) TERMINATION TAX IF SELF-DEALING IS NOT CUREDSelf-Dealing Issues / Page 32
  • 33. RESOURCES FORM 990-PF INSTRUCTIONS PUBLICATION 578 WWW.IRS.GOV 20 QUESTIONS PPC DESKBOOK BNA PORTFOLIOSSelf-Dealing Issues / Page 33
  • 34. Q&ASelf-Dealing Issues / Page 34
  • 35. THANK YOU!Self-Dealing Issues / Page 35